Insurance industry seeks reimbursement after disputed claim


Business policyholders generally know that liability insurance is an essential part of any risk management program, not only in settling a claim, but also in defending the business. But they may not know that the insurance industry is now asking policyholders to reimburse their insurers at the end of a disputed claim. Indeed, insurance companies are pushing to recoup defense costs – a trend that deserves close scrutiny from businesses and risk management personnel.

In doing so, they must understand that an insurer’s obligation to defend is broader than its obligation to indemnify. More specifically, an insurer must defend its insured against the claims for which it potential, rather than the actual coverage. Thus, in many cases, an insurer must defend its insured, even if it considers that some or all of the claims are not covered by the policy.

But what if, in its letter of reservation of rights, the insurer tries to “reserve” the right to recover the defense costs? Such attempts were common in the late 1990s and early 2000s, as some state courts accepted an implicit, quasi-contractual and / or unjust enrichment theory. This had changed in recent years, restoring the confidence of policyholders that defense cost recovery was not an option. But as a 2021 case and the culmination of consequences, insurers are resuming new tactics and policyholders must be prepared.

History of recovery of defense costs

In 1997, the California Supreme Court ruled that an insurer can recover defense costs for claims that are not potentially covered by the policy by Buss v. Superior court, 939 P.2d 766, 778 (Cal. 1997), noting that in order to seek such reimbursement as part of a “mixed action” – involving potentially covered claims and others not potentially covered – the insured has the burden of proving by a preponderance of evidence that defense costs are attributable to claims that are not even potentially covered. The Bus court recognized that an insurer has no obligation to defend claims that are not potentially or probably not covered by the policy. Username. at 776. The court held that “[t]the insurer is therefore entitled to reimbursement [for the defense costs for such claims] which is implicit in law as a quasi-contractual, whether or not there is one which is in fact implicit in the policy as a contractual. ” Username. at 776. According to the California Supreme Court, the implied right of reimbursement works to prevent unjust enrichment of the insured. See username. to 777.

Insurers urged courts in other states to follow Bus and its justification. For example, some Florida decisions have allowed insurers to recover defense costs on the basis of a unilateral reservation of rights and the implicit and quasi-contractual right to reimbursement discussed in Buss when the policyholder accepts the defense under reserve of this right of recovery. See Colony Ins. Co. v G & E Tires & Serv., Inc., 777 So. 2d 1034, 1039 (Fla. App. 2000), which held that the insured “the acceptance of the defense [the insurer] offered to finance the manifest acceptance of the conditions under which [the insurer]the offer to pay for the defense has been filed ”, including the insurer’s reservation of the right to claim reimbursement of defense costs.

“Recently, however, courts at first instance whether insurers can recover defense costs have generally concluded that they cannot.” See A m. W. Home Ins. Co. v Gjonaj Realty & Mgt. Co., 192 AD3d 28, 36 (NY App. Div. 2020) acknowledging the trend against collection and refusing to follow cases in which other New York State and federal courts have authorized collection because ‘none of these cases’ addresses[ed] whether the recovery of defense costs is appropriate or permitted ”. These courts reject Bus‘quasi-contractual, implicit right of recovery in favor of an approach based on the language of the police. For example, in West American Home Insurance, the court ruled that an insurer cannot recover defense costs solely on the basis of the insurers’ unilateral reservation of the right to do so. Username. to 39. According to the New York court, the justification for his detention is simple: “Clearly, a unilateral reservation of rights letter cannot create rights not contained in the insurance policy. Username.

In 2021, a federal district court in Georgia agreed. See A m. Ins. de famille Cie c. Almassud, 2021 US Dist. LEXIS 58620, __ F. Supp. 3d __ (ND Ga. February 17, 2021). According to Almassud court, its decision “follows directly from the notion of reserve of rights: the right must be pre-existing to be reserved; otherwise, an entirely new right is created. Almassud, 2021 US Dist. LEXIS 58620, * 10. In accordance with Almassud, an insurer is not entitled to recover defense costs unless there is a policy provision or other express agreement between the insurer and the insured which grants the insurer the right to recover .

New trends in the conduct of insurers

One would think that an avalanche of court decisions concluding that an insurer cannot reserve a right of recovery that does not exist in the policy would be the end. But consider the following: An insurer defends its insured under a reservation of rights. The underlying defense attorney, hired by the insurer, negotiates a settlement with the underlying claimant on behalf of the insured. The insurer refuses to contribute to the settlement unless the insured signs the following agreement: “The insured acknowledges that the insurer has reserved the right to refuse coverage and to request recovery of any settlement or charge. defenses paid on behalf of the insured.

This is not a hypothetical scenario. This sample agreement is quite similar to the ones that insurance companies started sending to their policyholders in Georgia after Almassud. It is not clear whether the courts will enforce such agreements. Certainly, there are arguments against the application, in particular the fact that the insurer always tries to unilaterally impose a change in the policy on the insured. However, insurers are beginning to require express agreements allowing collection in order to participate in settlement negotiations.

Company policyholders should be on the lookout for such provisions and be aware of their implications. In particular, such provisions can lead to coverage disputes following the settlement of the underlying claims and prevent the full release that a policyholder requests when settling a claim. Currently, many disputes between an insured, the insurer, and an underlying claimant are resolved through a comprehensive resolution, which resolves the underlying action, as well as the coverage dispute between the insurer and the underlying claimant. ‘assured. But if insurers start demanding contracts that allow them to recoup defense costs, global resolutions may become less common. More importantly, business policyholders should be on the lookout for new policy provisions when renewing the policy that would allow an insurer to recoup its defense costs.

Any policy provision to this effect would considerably modify the offer of insurance products to the insured. A policy that allows an insurer to subject its policyholders to years of collection litigation is much worse for the policyholder than any other. Annual audits of new insurance policies, as well as hiring a cover lawyer at the reservation of rights stage, are two recommendations that could help protect against attempts by an insurer to recover costs. defense.

Competency table – Reimbursement of defense costs

The following table shows some of the main jurisdictions in which courts have dealt with the reimbursement of defense costs.

Allow reimbursement of defense costs

Do not authorize reimbursement of defense costs

Inconsistent opinions

California [1]

Illinois [2]

new York [3]

Florida [4]

Texas [5]

Georgia [6]

New Jersey [7]

Pennsylvania [8]

Connecticut [9]

Arkansas [10]

Nevada [11]

Washington [12]

This article originally appeared in the 2021 edition of Corporate Policyholder Magazine.

[1] Buss v. Superior court, 16 cal. 4th 35, 61, 939 P.2d 766, 784 (1997).

[2] General Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 828 NE2d 1092, 1101, 215 Ill. 2d 146, 160 (2005).

[3] See Am. W. Home Ins. Co. v Gjonaj Realty & Mgt. Co., 192 AD3d 28, 36 (NY App. Div. 2020)

[4] Colony Ins. Co. v G & E Tires & Serv., Inc., 777 So. 2d 1034, 1039 (Fla. App. 2000).

[5] Lloyd’s excess underwriters v. Frank’s Casing Crew & Rental Tools, Inc., 246 SW3d 42, 54 (Tex. 2008).

[6] See Am. Ins. de famille Cie c. Almassud, 2021 US Dist. LEXIS 58620, __ F. Supp. 3d __ (ND Ga. February 17, 2021).

[7] Hebela v. Healthcare Ins. Co., 851 A.2d 75, 86, 370 NJ Super. 260, 278-279 (2004).

[8] A m. & Ins. Aliens Co. v Jerry’s Sport Ctr., Inc., 606 Pa. 584, 618, 2 A.3d 526, 546 (2010).

[9] Second. Ins. Co. v. Lumbermens Mut. Case. Co., 826 A.2d 107, 124, 264 Connecticut 688, 716 (2003).

[10] Medical Liab. Mut. Ins. Co. v. Alan Curtis enters., 373 Ark. 525, 529, 285 SW3d 233, 237 (2008).

[11] Nautilus Ins. Co. v. Med access., SARL, 2021 Nev. LEXIS 11, * 18, 137 Nev. Adv. Rep. 10, 2021 WL 936076.

[12] Nat’l Sur. Corp. vs. Immunex Corp., 176 Wn.2d 872, 884, 297 P.3d 688, 693 (2013).

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