Hawaii Supreme Court Rules Insurers Have No Right to Reimbursement of Defense Costs

    Facing an issue of first impression in Hawaii, the Supreme Court held that insurers have no right to reimbursement of defense costs unless the policy specifically provides for reimbursement. St. Paul Fire and Marine Ins. Co., et al. v. Bodell Construction Co., et al., 2023 Haw. LEXIS 194 (Haw. Nov. 14, 2023). [Full disclosure – our firm represented Bodell].

    The issue came to the Supreme Court via a certified question from the Federal District Court: does Hawaii authorize the equitable reimbursement of defnes fees and costs incurred by an insurer in litigation on behalf of its insured? The Hawaii Supreme court answered, "No." The Court stated,

We reject a putative right to reimbursement for defense fees and costs. Hawaii's stout duty to defend clashes with repayment. So we side with policyholders and hold that insurers do not have a right to reimbursement of defense costs.

    The Court initially determined that the policy language governed. Insurers can reserve contractual rights, but not create new ones. This was supported by Hawaii law. Under Haw. Rev. Stat. 431:10-220 (a), "No agreement in conflict with, modifying, or extending any contract of insurance shall be valid unles in writing and made a part of the policy." The Insurance Code also instructed, "No insurer or its representatives shall make any insurance contract or agreement relative thereto that is not plainly expressed in the policy." Haw. Rev. Stat. 431:10 220 (b). 

    The Court also determined that reimbursement eroded the duty to defend. The Court explained,

If insurers recover for defending uncovered claims, our law flips: the duty to defend may be determined after the insurer tenders a defense. Not only does this sequence narrow the broad duty to defend, it dilutes an insurer's good faith duty to tak on a defense: worse it may bring on bad faith.

Reimbursement for defense costs would undercut the duty to defend.    

    Finally, the Court rejected the insurers' argument that the insureds are unjustly enriched if there is no right to reimbursement. Instead, allowing reimbursement could unjustly enrich the insurer. If the insured paid back defense costs, it would pay for the insurer to protect itself. If a court later determined there was no duty to defend, then reimbursement would protect the insurer from bad faith or breach of contraction actions, without any responsiblity for defense costs. While the insured received a benefit from defense costs, it was not unjust.

    Therefore, the Court hold that an insurer may not seek reimbursement from an insured for defending claims when the policy contained no express provision for reimbursement.