The Michigan Supreme Court in Hastings Mutual Insurance Co. v. Mosher Dolan Cataldo & Kelly, Inc., No. 149201, peremptorily reversed the decision of the Court of Appeals and held that an insurer has a duty to defend, despite theories of liability asserted against the insured that are not covered under the policy, if there are theories of recovery that fall within the policy.  The Court further held that where this duty to defend exists, an insurer is not entitled to restitution of erroneously paid benefits.
 
Hastings Mutual Insurance Co. issued defendant Mosher Dolan Cataldo & Kelly, Inc. (MDCK) commercial general liability insurance.  MDCK sought defense and indemnity coverage under the policy in relation to an arbitration proceeding brought by defendants Lisa and David Feinbloom against MDCK.  The Feinblooms claimed that their custom home built by MDCK became infested with mold due to MDCK’s negligent construction.  However, Hastings asserted that because the damage occurred in 2003, and because the policy for 2003-2004 included a Fungi Exclusion, there was no duty to defend.  The Court of Appeals agreed with Hastings and found Hastings entitled to judgment as a matter of law on the issue of duty to defend because the Feinblooms’ claims for fungi damage were excluded from coverage.  Moreover, the court found Hastings had a right to restitution of benefits erroneously paid to MDCK as defense costs when Hastings had no duty to provide a defense.
 
The Supreme Court peremptorily reversed and remanded the case reasoning that the claimants alleged water damage in the underlying arbitration case and that water damage to personal property was not excluded from coverage by any of the exclusions in Hastings Mutual’s policy.  Therefore, although the Fungi Exclusion excluded coverage for some claims, Hastings had a duty to defend MDCK.  And because Hastings had a duty to defend, it is not entitled to restitution.