Hunton Insurance Recovery Blog

The Northern District of California recently rejected an insurer’s attempt at avoiding its duty to defend the insured based on erroneous application of a prior knowledge exclusion. The case highlights the breadth of an insurer’s duty to defend and reiterates that to avoid this duty, “it is the insurer’s burden to demonstrate there is no possible theory that would bring a single issue within coverage.”

While millions have been captivated by Wayfarer Studio’s production of “It Ends With Us,” a lesser-known but real-life insurance drama is unfolding off-screen. Last week, Harco National Insurance Company found itself in the spotlight when it filed a declaratory judgment action against its insureds, including, among others, Wayfarer Studios LLC, It Ends With Us Movie LLC and Justin Baldoni (jointly “Defendants”) asserting it has no obligation to defend the claims brought against Defendants by Blake Lively in Lively v. Wayfarer Studios, et al., U.S.D.C., S.D.N.Y. Case No. 1:24-cv-10049-LJL (the “Underlying Action”). 

A New York federal court recently held that an insurance company was entitled to recoup legal fees paid under a directors and officers liability policy in defense of a criminal action against an ex-CEO who was convicted of bribery. On a motion for reconsideration, the court affirmed its earlier ruling that the CEO’s conduct fell within the policy’s “Dishonest and Willful Acts Exclusion,” reasoning that the criminal case had been finally adjudicated despite a pending appeal. Because there was no coverage, the insurer could seek repayment of all defense costs it had paid to date. Not only is the court’s recoupment decision potentially inconsistent with New York law, but it also raises thorny questions regarding just when a judgment is “final” for the purpose of triggering D&O policy exclusions.

One of the most valuable aspects of liability insurance is defense coverage, which protects policyholders from significant costs to defend against and litigate claims that may never result in a judgment or settlement. Companies and their directors and officers can incur thousands or even millions of dollars in defending against claims that are resolved long before trial. Even after purchasing robust defense coverage and getting an insurer to defend a claim, however, companies may be surprised when months or even years later the insurer reverses its position and not only withdraws from the defense but also demands repayment of all defense costs paid to date. A recent case, Evanston Insurance Co. v. Winstar Properties, Inc. No. 218CV07740RGKKES, 2022 WL 1309843 (C.D. Cal. Apr. 14, 2022), shows the perils of insurer “recoupment” and underscores the importance of assessing insurer recoupment rights, if any, throughout the claims process.