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In the matter of Massachusetts Bay Ins. Co. v. Walflor Industries, Inc. et al, 2:18-cv-00791-JLR (W.D. Wash., April 17, 2019), the Washington federal district court upheld a defense cost reimbursement provision, rejecting the argument that such provisions are void as a matter of public policy.

The provision, contained in a separate endorsement titled “WASHINGTON CHANGES – DEFENSE COSTS,” provides:

    The following applies to any provision in this Policy, or in any endorsement attached to this Policy that sets forth a duty to defend:

    If we initially defend an insured or pay for an insured’s defense but later determine that none of the claims, for which we provided a defense or defense costs, are covered under this insurance, we have the right to reimbursement for the defense costs we have incurred.

    The right to reimbursement under this provision will only apply to the costs we have incurred after we notify you in writing that there may not be coverage and that we are reserving our rights to terminate the defense or payment of defense costs and to seek reimbursement for defense costs.

The court found support for the reimbursement provision in Nat’l Sur. Corp. v. Immunex Corp., 176 Wn.2d 872, 297 P.3d 688 (2013), noting that the Immunex Court stated that to “allow[] recoupment to be claimed in a reservation of rights letter would allow the insurer to impose a condition on its defense that was not bargained for.”

The court found no basis for invalidating the endorsement on public policy grounds and held that Massachusetts Bay is entitled to recoup the defense costs it paid in the underlying lawsuit pursuant to the endorsement.