Federal Court Predicts Georgia Will Deny Insurers Right to Reimbursement of Defense Costs

    Predicting Georgia law, the Eleventh Circuit affirmed the district court’s decision that Georgia would not allow insurers to seek reimbursement of defense costs. Continental Cas. Co., et. al v. Winder Laboratories, LLC, et. al, 2023 U.S. App. LEXIS 17852 (11th Cir. July 13, 2023).

    Winder Laboratories held two policies, a primary policy issued by Valley Forge Insurance Company and an umbrella policy from Continental Casualty Company. Neither policy included a reimbursement provision allowing the insurers to recoup defense costs. 

    Concordia Pharmaceuticals Inc. sued Winder, asserting various claims under the Lanham Act and Georgia law. The complaint alleged that Winder “falsely or misleadingly advertised their B-Donna product, and subsequently their Phenohytro product, as generic equivalents to Concordia’s product Donnatal directly to the pharmaceutical industry.” The insurers agreed to defend under a reservation of rights, which included a right to seek reimbursement of defense costs incurred on the insured’s behalf for all claims which were not potentially covered by the Valley Forge policy. 

    The insurers filed suit seeking a declaratory judgment that they had no duty to defend and were entitled to reimbursement of legal costs and fees spent in providing the insured’s defense in the underlying suit. The district court granted the insurers’ motion for summary judgment, agreeing Concordia did not allege a “personal or advertising injury.” The district court denied a subsequent motion on the insurers’ right to reimbursement. 

    On appeal, the Eleventh Circuit affirmed. First, the insurers did not have a duty to defend. Concordia’s contributory false advertising claim rested on Winder’s false and misleading representations. The allegations in the complaint did not arise out of a “personal and advertising injury” stemming from “the use of another’s advertising idea”- i.e., Concordia’s labels- that would have required the insurers to defend the insureds.  

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    Next, the Eleventh Circuit considered whether the Supreme Court of Georgia would recognize a right to reimbursement absent a contractual right to such reimbursement. In their reservation of rights letters, the insurers included terms that were not part of the original policies. Critically, the letters specified that Valley Forge “specifically reserves its right to seek reimbursement of defense costs incurred on the insureds’ behalf for all claims which are not potentially covered by the policy.” The court held that because the parties’ contracts already required the insurers to defend the insureds against certain third-party lawsuits, there was no new consideration for the reimbursement provision in the reservation of rights letters and thus no new contract under Georgia law. The letters were the promise to perform a preexisting contractual obligation that did not constitute consideration for a new agreement. 

    The insurers argued that the insureds were unjustly enriched because they retained the benefit of an expensive defense to which they knew they were not entitled. There was nothing unjust, however, about requiring the insurers to fulfil their contractual obligations and imposing such a requirement would not confer a “windfall” on the insureds. 

    The court also disagreed with the insurers’ argument that there was a clear “majority” rule favouring recoupment across the nation. The insurers’ position may have been the “majority rule” in the past, but it was not an accurate depiction of the current case law, which appeared to be more-or-less in line with the trend favoring the “no recoupment” rule. The most recent decisions and the Restatement of the Law of Liability reflected the no recoupment position. The Eleventh Circuit was persuaded by the recent trend of state high courts holding that there was no right to reimbursement in similar cases.

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    While the insurers could contract for a right to reimbursement, they could not do so in a subsequent reservation of rights after a reimbursement-less bargain had been struck. 

    The issue of the insurer’s right to reimbursement of defense costs is currently pending before the Hawaii Supreme Court. St. Paul Fire and Marine Ins. Co., et a. v. Bodell Construction Co., et al., No. SCCQ22-0000658 (Haw.).