In today’s blog post, Miller Friel attorney Miles Karson addresses an alarming insurance trend, namely, the increased frequency of insurance companies seeking to recoup defense costs under duty to defend insurance policies. Even more alarming is the fact that a right to reimbursement doesn’t typically exist, unless the insurance carrier does certain things, and the policyholder fails to properly object. Policyholders should apply the strategies discussed herein from the moment they receive a reservation of rights letter. Although the deck is stacked against insurance carriers when it comes to the recoupment of defense costs, policyholders can turn a good situation into a potential problem. Please watch the video to learn more.
We have included a transcript of the video below:
Policyholder Guide to the Recoupment of Defense Costs
There’s a growing trend in the insurance industry of insurers trying to recoup their defense costs, even when they have a duty to defend. This is one more example of insurers trying to erode policyholder’s rights under duty to defend policies. Duty to defend policies are critical, crucial to a company’s risk management program. In fact, courts throughout the country refer to duty to defend insurance policies as litigation insurance policies because they’re counted on to provide coverage for defense costs when the companies face litigation. Insurers are reserving their right to recoup defense costs even in the context of these duty to defend policies.
Policyholders need to be aware of the consequences of agreeing to a defense under such a reservation. Sometimes this reservation to recoup defense costs appears as simple boilerplate at the end of a coverage letter, almost appears as a throwaway and sometimes gets overlooked by a policyholder. But it’s critical and important to understand the consequences of that type of reservation of rights.
Effectively what it means is that policyholder could accept a defense from an insurer and the insurer down the road, if it’s found that there wasn’t a duty to defend at any time throughout the course of that underlying litigation, can come back to the policyholder and say, “All those defense costs we paid for, we want you to reimburse us for those.” For an insurer to have a right of recoupment, either one the policy has to expressly provide that right, or two, three things have to happen.
One, the insurer has to provide a defense pursuant to an express reservation of rights to recoup defense costs. Two, the policyholder has to accept that defense under that reservation. And three, a court at some point down the road has to rule that either there was no potential for coverage at the onset of the underlying litigation, or that facts came to light at some point during the course of the underlying litigation that took away the potential for coverage.
Again, the consequence of this is that a policyholder accepting such a defense is potentially setting itself up to have to repay defense costs to the insurer down the road. What can a policyholder do to protect itself? One, it’s common for insurers to approach their policyholder with a defense funding agreement or some type of defense agreement that is extra-contractual, outside of their insurance policy. Don’t sign any type of defense agreement. There’s case law precedent showing that where the policy owner refuses to sign that type of an agreement that the insurer’s reservation of rights is inadequate because it shows that the policy holder did not agree to a defense under such a reservation of rights.
A second possibility is to seek clarity from the outset. That could be in the form of filing a coverage action against your insurer to get a declaration that they owe you a defense without subject to a reservation of rights. Another alternative would be to refuse the insurer’s defense under such a reservation, hire your own defense counsel and proceed. Then down the road you would file a breach of contract action, a declaratory judgment action against your insurer for the defense costs.
Again, this is a growing trend that we’ve seen in a number of cases where insurers are trying to reserve their right to recoup defense costs. Most would consider it an untraditional setting, where they have a duty to defend. It’s important for policy holders to recognize that this is a growing issue and that it can from a financing perspective make things difficult. They could be faced with unwittingly a situation where they accepted defense for a lawsuit and then down the road have to repay or reimburse their insurer for those defense costs.