Reservation of Rights Requires Reimbursement of Settlement Paid

Duty to Defend is Less than Duty to Indemnify

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Massachusetts Bay Insurance Company (MBIC) sought reimbursement of $2 million that it paid under a reservation of rights to settle litigation brought against its insured, Neuropathy Solutions, Inc. (Neuropathy).

In Massachusetts Bay Insurance Company v. Neuropathy Solutions, Inc., dba Superior Health Centers, and Rigoberto Bernal, an individual; et al., No. 22-55272, United States Court of Appeals, Ninth Circuit (April 3, 2023) the Ninth Circuit determined who owed the settlement payment.

The District Court Decision

On cross-motions for judgment on the pleadings, the district court held that MBIC had a duty to defend and indemnify Neuropathy in the underlying case (the Bernal action), and that MBIC was thus not entitled to any reimbursement.

MBIC satisfied the prerequisites for seeking reimbursement of the amount it paid to settle the Bernal action on Neuropathy’s behalf. To seek reimbursement under California law, an insurer must provide (1) a timely and express reservation of rights; (2) an express notification to the insured of the insurer’s intent to accept a proposed settlement offer; and (3) an express offer to the insured that it may assume its own defense in the event that the insured does not wish to accept the proposed settlement.

The Reservation of Rights

MBIC provided a timely and express reservation of rights and informed Neuropathy of its intention to settle the claims for the $2 million policy limit, subject to Neuropathy’s approval and MBIC’s reservation of rights. This letter also informed Neuropathy of its “right to assume the further handling of this matter going forward” if Neuropathy did not wish to settle the claims for $2 million. Neuropathy signed the settlement agreement on May 28, 2021. Contrary to Neuropathy’s argument, MBIC gave Neuropathy sufficient time to consider the proposed settlement.

Under California law, the insurer’s duty to indemnify runs to claims that are actually covered, in light of the facts proved. By contrast, the insurer’s duty to defend runs to claims that are merely potentially covered, in light of facts alleged or otherwise disclosed. Thus, the insurer’s duty to defend is broader than its duty to indemnify.

The District Court Erred

The Ninth Circuit concluded that the district court erred by invoking the broader duty-to-defend standard (potentiality of coverage) to require MBIC to cover not just the cost of defending the underlying Bernal suit but also the $2 million paid to settle it.

To the extent that the underlying Bernal action falls within the coverage provisions of the insurance policy coverage is excluded under the policy’s “Professional Services” exclusion. That provision excludes: “’Bodily injury’, ‘property damage’, [and] ‘personal and advertising injury’ caused by the rendering of or failure to render any professional service, advice or instruction: (1) By [the insured]; or (2) On [the insured’s] behalf; or (3) From whom [the insured] assumed liability by reason of a contract or agreement, regardless of whether any such service, advice or instruction is ordinary to any insured’s profession.”

Then Ninth Circuit concluded that based on California case law, the insurance policy’s text, and the operative complaint in the Bernal action, Neuropathy’s liability in Bernal fell within the “Professional Services” exclusion.

The “Professional Services” exclusion extends to wrongdoing in the supervision and monitoring of others in the provision of professional services, and Neuropathy incurred liability because of its provision of professional advertising and medical services, not inadequate recordkeeping or poor customer service. Finally, the complaint’s allegation that Neuropathy engaged in discriminatory marketing techniques and high-pressure sales tactics falls within the Professional Services exclusion for advertising services and health advice or instruction.

Neuropathy’s liability in the Bernal action was thus excluded from coverage, and MBIC is entitled to reimbursement of the $2 million it paid to settle that lawsuit.


Liability insurance provides a very broad duty to defend an insured that is more than the duty to indemnify. In this case MBIC paid to defend its insured and properly gave the insured to take over the defense if it did not want to settle. It refused and the Ninth Circuit required the insured to reimburse the insurer for the $2 million paid to settle.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at and

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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