In the recent decision of Miller v. Zurich American Ins. Co. (In re WL Homes LLC, et al.), Adv. No. 11-50839 (BLS) (Bankr. Del. Jan. 10, 2017), the Delaware Bankruptcy Court addressed the affirmative defense of recoupment asserted by an insurer in defense of an adversary proceeding seeking the return of insurance premium overpayments.

Background

The Trustee determined that WL Homes had overpaid its premium obligations for the 2007 to 2009 term by roughly $2.2 million.  The Trustee filed an adversary proceeding against Zurich, asserting that he is entitled to turnover of approximately $2.2 million in insurance premium overpayments – called a “return premium” – from Zurich American Insurance Company (“Zurich”).  The Trustee also brought preference claims and sought to disallow claims of defendant.

Zurich defended against turnover by asserting the affirmative defense of recoupment for amounts actually spent defending and settling construction defect claims against WL Homes as insured, and Zurich as insurer.  The Trustee moved for partial summary judgment.

Analysis

Judge Shannon denied the Trustee’s motion.  To start, the Court provided a concise summary of the law of recoupment. “Recoupment is an equitable remedy that permits the offset of mutual debts arising from the same transaction or occurrence.” Slip op. at 5, citing In re Communication Dynamics, Inc., 300 B.R. 220, 225 (Bankr. D. Del. 2003).

The Trustee argued that recoupment did not apply because the respective debts arose from different parts of the Zurich policy, and because the policy did not contain an express reimbursement clause.

The Court disagreed with the Trustee’s contentions, and found that recoupment applied to the Trustee’s claims.  The Court held that the SIR amount and the premium “are interdependent economic features of the insurance contract[]”, and “form the economic basis of the insurance contract formed between Zurich and WL.”  In addition, the Court found it was unnecessary for the policy to contain an express reimbursement clause for recoupment to apply.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.