Ceres Environmental Services, Inc. v. Arch Specialty Insurance, 853 F. Supp. 2d 859

Ceres tendered Alabama State Action defense to Arch and incurred about $1.7M; Arch eventually defended under reservation of rights and settled with Arch contributing ~ $3M, then reimbursed just over $1M, leaving ~ $600k unpaid.
Alabama Federal Action determined the reasonable defense costs were $1,118,293, not the $1.7M expended, and Arch reimbursed around $1,026,867.
Ceres filed this action on November 16, 2010 seeking breach of contract, bad faith, and related claims; Arch counterclaims for subrogation and related relief.
The court previously held Arch collateral estopped from relitigating reasonableness, but left open the effect on this case; summary judgment now addresses that impact.
Arch argues Ceres cannot recover more than reasonable defense costs; Ceres argues no such limitation exists and contends Arch authorized and failed to object to costs.
The policy contains a New York choice-of-law clause, and the court must predict New York law applicability to the disputed issues.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Can Ceres recover more than reasonable costs?	Ceres: no express limitation to reasonable costs; seeks full recovery.	Ceres: policy language allows recovery of all defense costs; no explicit cap to reasonableness.	Ceres cannot recover more than reasonable defense costs; $91,426 remaining awarded.
Scope of choice-of-law clause for non-contract claims	New York clause may not reach non-contract claims.	Minnesota law governs breadth; clause reaches Counts 2 and 4.	Minnesota law applies the clause to Counts 2 and 4; New York limits independent insurer bad-faith claims; those claims fail.
Counterclaims for subrogation	Subrogation improper under make-whole doctrine/waiver concerns.	Contractual subrogation applies; Arch is subrogated to Ceres’s rights after payment.	Arch entitled to contractual subrogation; however, funds from CMT must be split with Arch until Ceres’s deductible is repaid; then remaining funds go to Arch.

Fin. One Pub. Co. Ltd. v. Lehman Bros. Special Fin., Inc., 414 F.3d 325 (2d Cir. 2005) (choice-of-law scope applied to contract-based claims)
Urban Resource Inst., Inc. v. Nationwide Mut. Ins. Co., 191 A.D.2d 261 (N.Y. App. Div. 1993) (breach of duty to defend; costs recoverability)
George Muhlstock & Co. v. Am. Home Assurance Co., 117 A.D.2d 117 (N.Y. App. Div. 1986) (reasonable counsel fees and necessary expenses)
Pub. Serv. Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392 (N.Y. 1981) (no independent bad-faith tort for insurer denial)
1010 Tenants Corp. v. Atl. Mut. Ins. Co., 146 A.D.2d 471 (N.Y. App. Div. 1989) (coverage and breach/defense cost recovery principles)
Winkelmann v. Excelsior Ins. Co., 85 N.Y.2d 577 (N.Y. 1995) (contractual subrogation priority over equitable subrogation)