The First Circuit will face a formidable task when it addresses whether a policyholder can recover the costs it incurred defending and settling a personal injury suit, experts say, as it must decide if a federal judge's decision in favor of the carrier aligns with a Massachusetts high court ruling.

During oral arguments Tuesday, a three-judge panel will question Berkley National Insurance Co. and Granite Telecommunications LLC on whether a policy expressly allowed the carrier to recoup its costs after the settlement of an underlying suit lodged by Stephen Papsis, who developed a foot infection after being exposed to sewage backup.

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William G. Passannante, a shareholder at Anderson Kill PC in New York who represents policyholders, told Law360 that he believes Granite and Atlantic-Newport have a good chance of convincing the First Circuit to reverse Judge Stearns' ruling.

The facts of the case, the Goldberg decision and the restatement could be persuasive to the federal appeals court panel, he said.

"The fact pattern gives the First Circuit, if it chooses to do so, the ability to reaffirm what's clear law in Massachusetts that, in the absence of a right in the policy, insurance companies don't have a right to the reimbursement of defense costs," Passannante said.

He also pointed out that even though the First Circuit's ruling in Ken's Foods v. Steadfast Insurance Co. last month went against the policyholder, the panel importantly held that an extracontractual obligation cannot be imputed into a policy. In Ken's Foods, the salad dressing maker sought coverage from its insurance company for the costs of keeping its Georgia facility open following a 2018 wastewater spill.

In upholding Steadfast's win, the First Circuit was persuaded by the Massachusetts high court's finding that the carrier was not obligated to pay for costs not covered by the policy.

Passannante said that if the First Circuit applies Massachusetts law along with the holdings in Goldberg and Ken's Foods, "it really should reject the attempt to claw back defense costs."

"If the insurance company wants the right to reimbursement, it should put it in the insurance policy contract so when the policyholder is paying its premiums, it knows what it's buying," he said.

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