(Article from Insurance Law Alert, September 2026)
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Holding
The Delaware Superior Court, applying New York law, held that an insurer cannot recoup settlement payments made under a reservation of rights where the policies contained no express recoupment provision and the insured had not agreed to reimbursement. The court predicted that the New York Court of Appeals would adopt the same rule. Turner Corp. v. Lexington Ins. Co., 2026 WL 2227785 (Del. Super. Ct. Aug. 3, 2026).
Background
This insurance dispute arose from a lawsuit brought by New York University (“NYU”) against Turner Construction following Hurricane Sandy in 2012. NYU alleged that Turner failed to properly secure a ventilation shaft at NYU Langone Medical Center, allowing millions of gallons of water to enter the facility and damage multiple buildings. NYU sought more than $2.2 billion in property damage and business interruption losses.
Turner was insured under a $25 million commercial umbrella liability policy issued by National Union and a $25 million follow-form excess liability policy issued by Lexington. Neither policy contained a general provision allowing the insurers to recoup settlement payments, though both policies included endorsements expressly providing for recoupment of settlement advances in certain motorist-coverage situations.
Following years of litigation and an unsuccessful mediation—and with a trial date looming—NYU made a settlement demand in September 2022. NYU imposed an October 7 deadline for a response, and advised that this would be “Turner’s (and its insurers’) last opportunity to resolve NYU’s claims against it in an amount that does not exceed Turner’s available insurance coverage.” On October 7, the insurers agreed to contribute their full policy limits toward the settlement. The insurers expressly reserved their right to seek full recoupment, asserting that coverage was precluded by the policies’ non-cumulation and anti-stacking provisions. Turner acknowledged the insurers’ payment but expressly declined to consent to recoupment.
Decision
The Delaware Superior Court granted summary judgment in Turner’s favor on the recoupment issue, concluding that the insurers had no right to recover their settlement payments under New York law.
Finding that the New York Court of Appeals had not addressed whether an insurer may recoup settlement payments based solely on a reservation of rights, the Delaware Superior Court examined New York precedent, decisions from other jurisdictions, and the Restatement of the Law of Liability Insurance to predict how New York’s highest court would resolve the issue.
The court first observed that New York’s intermediate appellate courts are divided on whether an insurer may recoup defense costs based on a reservation of rights. It noted that New York’s Appellate Division, First Department has permitted recoupment in those circumstances, while the Second Department reached the opposite conclusion in Am. W. Home Ins. Co. v. Gjonaj Realty & Mgmt. Co., 138 N.Y.S.3d 626 (App. Div. 2020), holding that an insurer could not recoup defense costs absent an express policy provision authorizing reimbursement.
The court acknowledged that defense costs and settlement payments implicate different coverage obligations. It noted that, in Arrow Lighter, Inc. v. N. Am. Capacity Ins. Co., 2025 WL 4353603 (E.D.N.Y. Dec. 22, 2025), a federal court applying New York law had distinguished Gjonaj on that basis when considering an insurer’s claim for recoupment of settlement payments. The Delaware Superior Court, however, did not consider that distinction dispositive.
The court also considered Section 25(2) of the Restatement, which provides that, unless otherwise stated in the policy or agreed to by the insured, an insurer may not settle a legal action and subsequently demand reimbursement on the grounds that the action was not covered. Although the court acknowledged the absence of a clear nationwide consensus, it found the Restatement’s approach consistent with New York’s principles of contract law.
Turning to the specific policies at issue, the court emphasized that both policies expressly authorized recoupment of settlement advances in certain motorist-coverage circumstances but contained no comparable provision applicable to the settlement at issue. The court reasoned that the omission of a broader recoupment provision must be presumed intentional. The court further emphasized that the insured had expressly declined to consent to recoupment. Accordingly, it found that the insurers’ reservation of rights to seek recoupment of the settlement payments could not create a contractual right that the parties had not agreed upon. Having determined that the insurers lacked a right to recoupment, the court declined to decide whether the policies’ non-cumulation and anti-stacking provisions precluded coverage for the settlement.
Comments
Turner highlights the difficult position insurers may face when asked to fund a settlement while maintaining substantial coverage defenses. Here, the insurers contributed their full policy limits to protect their insured against a potential excess verdict, expressly reserving their right to seek reimbursement. Nevertheless, the court denied recoupment without reaching the merits of their coverage defenses. Although the decision represents a Delaware court’s prediction of New York law rather than binding New York precedent, it highlights the importance of considering recoupment rights when funding settlements involving disputed coverage.