(Article from Insurance Law Alert, July/August 2023)
For more information, please visit the Insurance Law Alert Resource Center.
Holding
The Eleventh Circuit ruled that insurers were not entitled to recoup their defense costs when the insurers had no duty to defend an underlying lawsuit against the insureds, notwithstanding a reservation of rights letter that included a right to reimbursement acknowledged by the policyholders. Continental Cas. Co. v. Winder Labs., LLC, 73 F.4th 934 (11th Cir. 2023).
Background
A lawsuit against the policyholder alleged false and misleading advertising of a pharmaceutical product. The insurance policies at issue did not contain language conferring a right to reimbursement of defense costs and did not specify whether the insurer could select defense counsel. The insurers agreed to defend the suit subject to a reservation of rights, which included a provision that stated: “VFI specifically reserves its right to seek reimbursement of defense costs incurred on [the insureds’] behalf for all claims which are not potentially covered by the VFI Policy.” The policyholder signed and returned an “Acknowledgement of Defense under a Reservation of Rights.”
While the underlying action was pending, the insurers sought a declaratory judgment that they had no duty to defend or indemnify, and that they were entitled to reimbursement of defense costs. A Georgia district court agreed only with respect to the absence of a duty to defend, concluding that the underlying lawsuit fell within a “failure to conform” exclusion. Thereafter, the insurers stopped paying defense costs and sought to recoup costs previously incurred on behalf of the insureds. The district court ruled in favor of the policyholder on this issue, finding that the reservation of rights letter did not entitle the insurers to recoup their defense costs. The Eleventh Circuit affirmed.
Decision
The question of whether an insurer may seek reimbursement of defense costs pursuant to statements in a reservation of rights, where the insurance contract is silent on the issue, is a matter of first impression under Georgia law. The Eleventh Circuit predicted that the Georgia Supreme Court would not recognize such a right.
The Eleventh Circuit rejected three arguments advanced by the insurers in support of their claim for reimbursement: (1) the reservation of rights letter created a new contract because the insureds were provided a defense and allowed to choose their own defense counsel, (2) the insureds were unjustly enriched because they retained the benefit of a defense to which they were not entitled, and (3) under Georgia law, an insurer can recoup defense costs when such a right is provided for in a reservation of rights letter, but not the parties’ operative insurance contract.
First, the court held that the reservation of rights, which included a reimbursement provision, did not create a new binding contract between the parties, notwithstanding the policyholder’s acknowledgment of its terms. The court explained that the contractual requirement of consideration was absent, since the reservation of rights did not provide any additional benefits, as the insurance policies, at least initially, required the insurers to defend the insureds in the underlying lawsuit.
Second, the court rejected the insurers’ contention that the policyholders were unjustly enriched by receiving the benefit of a defense to which they were not entitled. The court explained that the unjust enrichment argument failed both because there was a written contract (the policy) and because there was nothing “unjust” about requiring the insurers to fulfill their contractual defense obligations.
Finally, the court ruled that the overall “structure of Georgia’s insurance law” mitigated against finding a right of reimbursement absent a contractual provision in the insurance policy. In particular, the court emphasized the broad duty to defend and the insurer’s ongoing defense obligations until a court rules otherwise. The court stated: “we have concluded that the insurers no longer have a duty to defend . . . but that does not mean that the insurers never had a duty to defend at earlier stages of the case.”
Comments
There is no judicial consensus across jurisdictions as to whether an insurer is entitled to recoup defense costs pursuant to a provision in a reservation of rights where there has been a subsequent judicial ruling that the insurer has no duty to defend. As the Eleventh Circuit observed, pro-recoupment cases have previously been viewed as the majority position, but the more recent trend “appears to be in more-or-less equipose, with several current cases favoring a ‘no recoupment’ rule.” Some pro-recoupment decisions have held that an express statement in a reservation of rights, if unopposed or acknowledged by the insured, constitutes a quasi-contract regarding reimbursement. In still other cases, courts have ruled that a reservation of rights is sufficient even without the insured’s express consent.