The body of California law standing for the general proposition that insurers may be able to recoup defense costs expended for non-covered claims continues to grow. In a December decision, a federal judge in San Jose granted an insurer’s request for reimbursement of approximately $11 million that the insurer had paid to its insured under a reservation of rights. Hewlett Packard Co. v. ACE Property & Casualty Ins. Co., No. 99-cv-20207-JW (N.D.Cal. Dec. 15, 2010). A copy of the decision is available here.

The case had its roots in a patent-infringement action that commenced in 1994. In 1998, the insured tendered the defense of the suit’s counterclaims to its general liability carrier, which disclaimed any coverage obligation. The insured sued and won an order requiring the carrier to provide a defense. In 2003, following reassignment of the case to a new judge and a motion for reconsideration, the court reaffirmed its holding. That October, the insurer mailed a check for $11,067,717 to its insured. Accompanying the check was a letter, in which the carrier expressly reserved its rights under the policy and asserted its right to seek reimbursement of the payment if it were later determined that the carrier, in fact, never had a duty to defend.

The coverage litigation continued. In May 2010, the Ninth Circuit reversed the district court, holding that the insurer never had a duty to defend the counterclaims. The carrier promptly served a motion for reimbursement, reasoning that it was entitled to restitution under 22 USC § 2202 and controlling California law.

The district court agreed, finding generally that Buss v. Superior Court, 16 Cal.4th 35 (1998), provided the carrier with the right to reimbursement of defense costs paid under a reservation of rights for claims that are “not even potentially covered” by the policy. The court noted that this was a case where the carrier had consistently asserted that none of the counterclaims were even potentially covered, so the carrier was under no obligation first to furnish a complete defense of the claims before it could seek restitution, as might be required under other portions of the Buss decision.

The judgment in favor of the insured was for repayment of the $11,067,717.00, plus prejudgment interest at the rate of 7% per annum.