The Massachusetts Appeals Court closed out March of 2023 with a decision discussing a commercial general liability (“CGL”) insurer’s obligations when it agrees to defend subject to a reservation of rights.  The Appeals Court concluded that: (1) an insured states a valid claim to recover its costs to prosecute an action against the insurer when the insurer admits its duty to defend an underlying claim but refuses to do so; and (2) an insurer’s refusal to defend while admitting it owes a duty to defend can give rise to a claim for violation of Chapter 93A.

The case arose out of a project for the construction of a new college residence hall.  The general contractor engaged a subcontractor to perform waterproofing work.  The subcontract included an indemnity provision and required the subcontractor to maintain a CGL insurance policy and include the general contractor as an additional insured.  During the course of the project, the subcontractor’s foreman was injured while walking to the roof of the building.  The foreman commenced an action against the general contractor as well as the scaffolding subcontractor.

The general contractor demanded that its waterproofing subcontractor satisfy its indemnification and insurance obligations.  After a back-and-forth with the subcontractor’s CGL insurer, the CGL insurer acknowledged its duty to defend, subject to a reservation of rights.  As a result, the general contractor transmitted its legal bills to the insurer.  Despite its agreement to defend the general contractor, the insurer did not pay the bills.  This prompted the general contractor to bring an action against the insurer.

The CGL insurer moved to dismiss.  The CGL insurer later paid the general contractor’s underlying legal bills.  Although the insurer paid the legal fees incurred to defend against the foreman’s claims, the insurer did not pay the legal fees that the general contractor incurred in its action against the CGL insurer.  The Superior Court granted the insurer’s motion to dismiss and the general contractor appealed.

The Appeals Court disagreed with the lower court’s decision.  There was no dispute that the foreman’s complaint was potentially covered under the CGL policy, triggering the insurer’s duty to defend.  And because the insurer had issued a reservation of rights, the general contractor was entitled to retain counsel of its choice and the insurer was required to reimburse the general contractor’s reasonable attorneys’ fees.  Because the insurer failed to do so, the general contractor made out a proper claim for breach of contract.  The fact that the insurer subsequently paid the general contractor’s bills did not justify dismissal.  The Appeals Court noted that “where an insurer wrongfully refuses to defend, the insured is deprived of the benefit of the contractual bargain for which it paid, namely, to shift the responsibility to defend a potentially covered claim to the insurer.”  As a result, even if the insurer subsequently pays the underlying legal bills, the insured would remain “permanently uncompensated” for the costs associated with the action that it was forced to initiate against the insurer to compel compliance with its duty to defend.  As a result, the Appeals Court stated that if the general contractor proves a violation of the duty to defend, it may recover its attorneys’ fees and costs incurred to “compel [the insurer’s] compliance” with its duty.

Lastly, the Appeals Court noted that the general contractor stated a claim for violation of Chapter 93A by alleging that the insurer had inexcusably failed to pay defense costs for seven months after receiving invoices from the general contractor.  Whether an insurer can ultimately recoup payments made to the insured under a reservation of rights remains an open question.

The case serves as a good reminder to carefully examine insurer responses to claims, particularly when the insurer issues a reservation of rights.   This can trigger certain rights and obligations among the parties.  Among other things, a reservation of rights typically enables a contractor to retain its own counsel with a right of reimbursement from the insurer for the reasonable attorneys’ fees it incurs in connection with the defends of the underlying claim.  An insurer’s failure to perform its obligations in these circumstances can give rise to direct claims against the insurer.