Hunton Insurance Recovery Blog

A federal court decision in Navigators Specialty Insurance Company v. SVO Building One, LLC emphasizes the breadth of the duty to defend under California law and the difficulty insurers face when attempting to allocate defense costs between covered and uncovered claims. The insurance dispute between Navigators and SVO arose from a lawsuit by an equipment manufacturer, Vertiv, against SVO, a data center designer, involving a data center project.

Navigators agreed to defend SVO after a defamation claim was brought against it by Vertiv. After the defamation claim was voluntarily dismissed, Navigators tried to withdraw its defense but ultimately continued defending SVO through resolution. Navigators then sued SVO, seeking reimbursement for defense costs, arguing that upon dismissal of the defamation claim, there could be no coverage for the remaining claims.

The court rejected Navigators’ position and reinforced California’s longstanding principle that factual allegations that present a potential for coverage trigger the insurer’s broad duty to defend. Thus, even though the underlying defamation claim was dismissed, the factual allegations that created the potential for coverage—that SVO caused third parties to issue false reports about Vertiv and that SVO disparaged Vertiv’s work—remained. Thus, Navigators remained obligated to provide a defense.

The decision is also significant for its analysis of defense cost allocation between covered and non-covered claims. While California law permits insurers to seek reimbursement for defense costs attributable solely to allegations that had no potential for coverage, the court emphasized the high burden insurers bear in attempting to segregate those costs. In complex litigation, defense activities typically are not claim or allegation specific making it difficult if not impossible to delineate defense activity for covered and non-covered claims. Here, the court found that Navigators could not adequately tie defense work exclusively to non-covered claims.

The ruling reinforces California courts’ broad view of the duty to defend where even limited potentially covered allegations are present. Claim labels are not dispositive; it is the allegations that determine whether a defense is owed. The decision is also a reminder of the high burden an insurer faces to seek reimbursement, which imposes a significant practical challenge to establish that defense costs are allocable exclusively to uncovered claims.

Practical Implications for Policyholders

The Navigators v. SVO decision offers several concrete takeaways for policyholders:

1. Do not accept premature defense withdrawals. If factual allegations that could trigger coverage remain in the case, the duty to defend continues—even if a covered count is dismissed.
2. Push back on reimbursement demands. Insurers often threaten reimbursement as leverage. This case underscores how difficult it is for insurers to meet the “solely allocable” standard required for recovery.
3. Focus on facts when tendering and re‑tendering. Policyholders should highlight specific factual allegations supporting potential coverage, especially when complaints are amended.
4. Be skeptical of insurer allocation analyses. High‑level or comparative fee analyses are unlikely to satisfy Buss. Insurers must tie costs to discrete, non‑covered work with precision.
5. Preserve coverage arguments throughout the case. The court credited the insured’s consistent invocation of embedded disparagement facts, reinforcing the value of maintaining a clear coverage record.