Posted In: Insurance Recovery & Litigation

Insurance Blog: Reimburse Your Insurer? Look to the Recent Decision by the Nevada Supreme Court

on May 6, 2021

The Nevada Supreme Court recently found, under certain circumstances, an insurance company can obtain reimbursement of defense costs from its policyholder if it was later determined no coverage was afforded – even when the insurance policy does not allow for such recoupment.

More and more insurance company reservation of rights letters state that the insurer will provide a defense, subject to a reservation of rights including the right to recoup defense costs if coverage is later determined not to be afforded. Not only is such recoupment not stated in the policy language drafted by the insurers, but these holdings conflate the duty to defend – which is much broader than – the duty to indemnify. Policyholders may be able to avoid this trap; however, careful attention and diligence is required.

Recently, the Ninth Circuit Court of Appeals certified a first impression insurance question to the Nevada Supreme Court: 

Is an insurer entitled to reimbursement of costs already expended in defense of its insureds where a determination has been made that the insurer owed no duty to defend and the insurer expressly reserved its right to seek reimbursement in writing after defense has been tendered but where the insurance policy contains no reservation of rights?

In a four to three decision, the Nevada Supreme Court held that a policyholder can be required to reimburse an insurer who covers its defense if the court later determines that the insurance policy did not provide coverage for the claim under the theory of unjust enrichment – despite the fact that recoupment of the fees is not provided for under the policy.

In Nautilus Ins. Co. v. Access Medical, LLC, the policyholder was sued for intentional interference with a prospective business advantage. The policyholder tendered the defense of the suit to its insurer as a “personal and advertising injury” based on slander or libel. The insurer initially declined coverage but later accepted with a reservation of rights to disclaim coverage, withdraw from defense, and obtain reimbursement of attorneys’ fees. The policyholder did not object to the insurer’s reservation and the insurer provided a defense while contemporaneously filing for a declaratory judgment that the policy did not provide coverage for the claim in Nevada Federal District Court. 

In the declaratory judgment action, the federal district court held that the policy did not cover the underlying claim but declined to award the insurer reimbursement of the defense costs it had incurred in defending the claim. On appeal, the Ninth Circuit affirmed the district court’s holding that the underlying claim was not covered under the insurance policy, but reserved judgment on the question of whether the insurer was entitled to reimbursement as the Nevada Supreme Court had yet to decide the issue and other states were split on the decision.  Thus, it certified the question to the Nevada Supreme Court.

Applying the Restatement (Third) of Restitution and Unjust Enrichment, the Nevada Supreme Court held that in matters where an insurer provides a defense with a reservation of the right to seek reimbursement and the policyholder accepts the defense, the insurer may recover the defense costs it incurred if it is later determined that it never had a duty to defend. This decision is in line with other lower state court decisions in California and Ohio and with the Sixth Circuit Court of Appeals decision.

Policyholders need to be wary when accepting defense coverage from their insured or they may be required to reimburse their insurers. Policyholders should adopt the following best practices:

1. Object. A policyholder should always object to a reservation of rights wherein the insurance company reserves the right to later seek reimbursement of defense costs
2. Know your law. Different jurisdictions may require more stronger objections than others. For example, some may hold that a simple objection is sufficient. Others may require the policyholder to reject the defense and file a declaratory judgment action.
3. Get help. Engage coverage counsel to determine the best path forward. In many situations, policyholders can convince the insurer to withdraw the reimbursement demand. Or, counsel can advise the policyholder of the likelihood that coverage is applicable, thereby, assessing the likelihood of a recoupment or a successful unjust enrichment claim.

This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2023 Brouse McDowell. All rights reserved.

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