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Insurance companies can recoup legal costs if they defend their clients when they didn’t have to, the California Supreme Court affirmed Monday. The unanimous ruling led by Justice Marvin Baxter reverses a 2nd District Court of Appeal decision that an insurance company was not entitled to reimbursement, even though it reserved its rights and then brought a successful declaratory relief action. In Scottsdale Insurance v. MV Transportation, 05 C.D.O.S. 6495, the policyholder, a provider of transportation services to local governments, was sued by a competitor for allegedly stealing trade secrets and engaging in fraud. Scottsdale Insurance agreed to defend MV under a reservation of rights to avoid a bad-faith suit. The court’s opinion generally affirms Buss v. Superior Court, 16 Cal.4th 35, which ruled that insurers can recoup costs if there was never any duty to defend the client. The decision could boost the confidence of insurers facing the decision of whether to defend a client when they don’t believe they need to. “The rule that the court adopted in Buss will apply to insurance cases generally,” said William Baron, an attorney with Hancock Rothert & Bunshoft who represented an amicus curiae insurer. Baron added that the claim in the Scottsdale case was “not even partially covered.” But David Goodwin, a Heller Ehrman partner who represented MV Transportation, said such situations are rare. “Normally, if the insurer thinks it’s right on a legal matter, they don’t defend,” he said. Scottsdale incurred $340,000 in legal fees and costs defending MV Transportation. The 2nd District ruled that Scottsdale could not recover its expenses because it did not deny MV Transportation a defense and did not get a “prompt declaration of its rights and duties” when MV Transportation was sued by its competitor, Laidlaw Transit Services, for trade secret theft and fraud. Goodwin said insurers should be allowed to recoup expenses but shouldn’t be able to reserve their rights to do so without an agreement with their clients. “The insurer can’t do it unilaterally,” he said.

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