On March 20, 2017, a Superior Court judge sitting in the Suffolk County business litigation session, a special court set up to handle important business cases, entered a decision of first impression involving the right of the insurance carriers to recoup defense costs paid under a reservation of rights. Also, in the same decision, the judge refused to order the insurers involved to pay defense costs incurred by their insured but unpaid before a finding of no coverage.
The case before the business litigation session, Holyoke Mutual Insurance Company in Salem and Maryland Casualty Company v. Vibram USA, related to trademark infringement arising out of Vibram’s use of the name of Abebe Bikila, an Olympic marathoner, who won the 1960 Olympic Marathon in Rome running barefoot. Mr. Bikila repeated his Marathon victory in the 1964 Olympic setting an Olympic record. Mr. Bikila died in 1973, as the result of complications from a 1968 auto accident that has left him paralyzed.
Mr. Bikila’s singular accomplishment of winning a major marathon while running barefoot made him a legend in the running world that has continued to this day. The New York Marathon annually presents an “Abebe Bikila Award” to a person for their contribution to long-distance running.
Vibram USA trades on Mr. Bikila’s name and gets sued for $15 million
Vibram USA (“Vibram”) is has its office in Concord, Massachusetts, and markets “minimalist” running footwear intended to closely approximate barefoot running conditions. The company’s shoe products have thin, flexible soles contoured to the shape of the human foot that carry trade names referencing Mr. Bikila. These trade names include: “Bikila,” “Bikila EVO,” “Bikila EVO WP,” and “Bikila LS.”
Because of the popularity of these specialized running shoes and Mr. Bikila’s unique association with barefoot running, Vibram’s filed for a trademark of the name “Bikila” for footwear in 2009. The only problem with Vibram’s use of Mr. Bikila’s name for commercial purposes was that Vibram never obtained the consent of Mr. Bikila’s Family.
In 2015, Mr. Bikila’s family sued Vibram in federal court in Washington for $15 million (“Bikila suit”) alleging the “unauthorized commercial use of a deceased person’s name” under a statute unique to Washington state.
Vibram tendered the Bikila suit to its liability insurers, Holyoke Mutual and Maryland Casualty (“Insurers”).
The court ought not insert a policy provision that the parties did not agree upon.
Carriers fund Vibram’s defense but reserve right to recover paid costs if no coverage
The Insurers responded to Vibram’s tender of the Bikila suit by questioning coverage and issuing a “reservation of rights” letter to Vibram. In the reservation of rights letter, the Insurers agreed to provide a defense to the claims asserted in the Bikila suit. The Insurers’ reservation letters, however, reserved the Insurers’ right to file a declaratory judgment seeking a ruling that Vibrant had no coverage for the Bikila suit under their policies. The Insurers also reserved the right to seek reimbursement or recoupment from Vibram for any defense costs advanced if a declaratory judgment suit resulted in a finding of no coverage.
Vibram, for its part, after receiving the Insurers’ reservations of rights exercised its own right under Massachusetts law, to hire independent counsel at the Insurers’ expense to defend the Bikila suit.
Ruling by court of no coverage for Vibram leads to ruling on recouping defense costs
Soon after reserving their rights, the Insurers filed a declaratory judgment complaint against Vibram in Suffolk Superior Court’s Business Litigation Session seeking a ruling their commercial general liability (“CGL”) policies did not cover the Bikila suit. Their declaratory judgment action also sought a ruling, contingent upon the court finding no coverage, that the Insurers had the right to recoup from Vibram any defense costs paid.
The Insurers moved for a summary judgment declaring none of the claims in the Bikila suit were covered. Vibram filed a cross-motion for partial summary judgment asking the court to declare the Insurers had, at least, initially a duty to defend Vibram in the Bikila suit.
After analyzing the Bikila suit’s allegations, the court concluded that “[no loss alleged in the Bikila suit] fits the expectation of protective insurance reasonably generated by the terms of the policy.” The court entered summary judgment for the Insurers and found the Insurers had no duty to defend the Bikila suit. See Agency Checklists’ article of November 1, 2016, “Court Rules Commercial Use of a Person’s Name Not Within CGL’s Advertising Injury Coverage.”
At the time, the court issued its summary judgment decision in favor of the Insurers, Vibram had sent the Insurers invoices for defense costs in the Bikila suit totaling $1,272,212.57. The Insurers had paid Vibram $667,901.71 before the Superior Court’ decision found no coverage. Once the court found no coverage for Vibram, the Insurers refused to pay the remaining $604,310.86 in defense costs to Vibram .
Case of first impression as to right of carriers to recoup defense costs.
Following the finding of no coverage, the Insurers contended that since their CGL policies did not cover the Bikila suit, they should recoup the defense costs previously paid Vibram. Vibram, in turn, claimed it should recover the unpaid defense costs incurred before the court found no coverage.
The court first noted that whether the Insurers could recover from their insured paid defense cost on an uncovered claim was a matter of first impression in Massachusetts.
The Insurers argued that many state courts allowed defense cost recoupment where a court entered a judgment declaring a liability policy covered none of the claims alleged in a complaint.
The Superior Court, however, found nothing in the Insurers’ policies gave the Insurers’ any right to recoup defense costs. Instead, the judge found that the Insurers had advanced defense costs because they acted in their own economic interests.
The judge explained that even where the insurer may believe that coverage for a suit is unlikely, it has financial incentive to provide a defense. If an insurer denied a defense and a separate action ruled coverage existed, the insurer would have to pay the underlying defense costs and the insured’s legal costs in establishing the insurer’s duty to defend. If a court found the insurer’s refusal to defend were an unfair claim practice the insurer could have liability for multiple damages. Thus, the court reasoned when in doubt, an insurer had an economically sound and self-interested reason to provide a defense under a reservation of right until a coverage issue could be resolved.
The Insurers also argued that to deny recovery of defense costs would give insureds more than they bargained for: partial payment for the cost of defending claims not covered by the policies they purchased.
The court rejected this argument reasoning the Insurers knew the risk of providing a defense to protect their economic interest where coverage was uncertain and the Insurers could have added a right of recoupment in their policies. Since the Insurers did not add such a provision, the court declined to do so, stating:
The court ought not insert a policy provision that the parties did not agree upon.
There is nothing inherent in an insurer’s initial decision to provide a defense that precludes it from changing its mind.
The Insurers finally argued that they could recover their paid defense costs because Vibram had been unjustly enriched. The court noted that the Insurers to assert a claim for unjust enrichment had to establish not only that the Vibram had received a benefit, but also that such a benefit was unjust.
To prove that it was unjust for an insured to retain defense costs advanced by an insurer for defense of a third-party claim under a reservation of rights, the court ruled an insurer had to do more than prove a court ultimately held that the claims were uncovered. Here, the court found the Insurers had shown no injustice sufficient to warrant the court ordering Vibram to repay the defense costs paid under the Insurers’ reservations of rights.
Insurers not liable to pay Vibram’s unpaid defense costs incurred before no coverage found
In its counterclaim against the Insurers, Vibram sought to recover the unpaid defense costs totaling $604,310.86, it submitted to the Insurers before the summary judgment finding no coverage.
Vibram’s position, quoting a Massachusetts Supreme Judicial Court case, was that since the Insurers offered a defense under a reservation of rights, their duty to defend and pay continued “until a declaratory judgment of no coverage is entered and that it does not retroactively disappear, even if no coverage is found.”
The court instead interpreted the case cited by Vibram to mean that “the duty to defend ends when there is no longer any chance that the facts alleged in an underlying action can support a covered claim.” That, according to the court, “will often, but certainly not always, be when a declaratory judgment resolves a coverage dispute.”
The court in ruling on Vibram’s summary judgment motion focused on the fact that the Insurers could have always declined to provide a defense if they believed there was no coverage for the Bikila suit under their policies. If the insurer’s decision to deny a defense proved correct, then there could not have been a duty to defend or any liability for the Insurers refusing a defense.
The judge found the relevant question in deciding Vibram’s right to payment to be:
[W]hether having initially agreed to pay for Vibram’s defense, while prosecuting [their] declaratory judgment action, the Insurers were bound to continue to advance defense costs until this case is resolved.
The judge found that the Insurers did not have to continue payment until the declaratory judgment of no coverage entered.
The court found the Insurers could change their mind regarding advancing defense costs, as they were under no contractual obligation to pay them. The court further found that Vibram had neither a contractual or equitable claim for payment of unpaid defense costs incurred up to the date the summary judgment decision issued finding no coverage.
In sum, the court found that “There is nothing inherent in an insurer’s initial decision to provide a defense that precludes it from changing its mind, even while the declaratory judgment action is still pending.”
Court issues split decision: Vibram cannot collect unpaid legal costs and the Insurers cannot recoup paid legal costs
The final order from the Superior Court denied the claim of the Insurers seeking to recoup the $667,901.71, they had advanced Vibram for legal costs in defending the Bikila suit. However, the final order also denied Vibram’s motion for summary judgment seeking $604,310.86 in unpaid legal costs incurred before the court decided the Insurer’s CGL policies provided no coverage for the Bikila suit.
Cross-appeals filed by parties may clarifying law on defense cost recoupment.
The judge’s decision left both Vibram and the Insurers unsatisfied.
On April 10, 2017, Vibram filed a notice of appeal seeking a reversal of the business litigation session’s adverse decision that Vibram had no coverage under the Insurer’s CGL policies and that Vibram had no right to collect from the Insurers the unpaid defense cost of $604,310.86 incurred before summary judgment entered on coverage.
On April 24, 2017, Holyoke Mutual and Maryland Casualty filed their notice of appeal seeking review of the Business Litigation Session’s ruling denying them recoupment of the $666,901.71 in defense costs they paid on the uncovered Bikila claim.
Until an appellate court decides whether liability insurers can recoup defense costs paid under a reservation of rights for a claim ultimately determined to be uncovered or whether liability insurers must instead pay defense costs under a reservation of rights until a court finds no coverage, Massachusetts law on the subjects will remain unclear.
Agency Checklists will monitor this appeal and update its readers.