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Because there is no contractual entitlement to
a defense on claims that are not possibly covered by the policy, the courts
are giving the insured a benefit the insured’s never bargained for and never
paid for, a form of unjust enrichment of the insured. As such, some courts have decided that the
insurer should be able to seek reimbursement: “as to claims that are not even
potentially covered, …the insurer may indeed seek reimbursement for defense
costs… The “enrichment” of the
insured by the insurer through the insurer’s bearing of unbargained-for
defense costs is inconsistent with the insurer’s freedom under the policy and
therefore must be deemed “unjust”. Buss,
939 P.2d at 776-777, 65 Cal.
Rptr. At 376-377. see also Morgan,
Lewis & Bockius, LLP v. Hanover Insurance Company, 929 F.Supp. 764
(D.N.J. 1996); Liberty Mutual Ins. Co. v. Metropolitan Life Ins. Co.,
260 F.3d 54, 63-64 (1st Cir. 2001); Grinnell Mutual Reinsurance
Co. v. Shierk, 996 F.Supp. 836 (S.D.Ill. 1998); Knapp v. Commonwealth Land
Title, 932 F.Supp. 1169 (D.Minn. 1996); Security Ins. Co. of Hartford
v. Lumbermen’s Mutual, 826 A.2d 107 (Conn. 2003); SL Industries v. American
Motorists, 607 A.2d 1266, 1280 (N.J. 1992).
Nonetheless,
a number of courts have indicated that the insurer’s obligation to defend
covered and uncovered claims does not give rise to any reimbursement of claim costs or expenses. Rather, the insurer must simply absorb the
cost as part of the risk it has undertaken to write. Federal Ins. Co. v. Southwestern Wire
Cloth, 1999 Westlaw 33544427 (N.D. Okla.
1999); Farmington
Cas. Co. v. United Educators Insurance,
117 F.Supp. 2d 1022, 1029-1030 (D. Colo. 1999) (insurer tried to collect
costs from another insurer); Shoshone First Bank v. Pacific Employers,
1 P.3d 510, 514-515 (Wyo. 2000).
Although these courts have refused reimbursement in principle, they
sometimes also point to the fact that the insurer breached it duty to defend
or failed to send an adequate reservation of rights letter on the
reimbursement issue. Consequently, it
may be possible to argue that, in the right circumstances, the carrier may be
able to obtain reimbursement in these states.
While recognizing that the courts are
imposing a duty on an insurance carrier outside its policy obligations,
courts have required that the insurer reserve its rights to recover the
defense costs it incurs on uncovered claims, if the insurer is defending the
case. Knapp, 932 F.Supp. at
1170; Buss, 939 P.2d at 774, 65 Cal.
Rptr. 2d at 374; Flannery v. Allstate Ins. Co., 49 F.Supp. 2d 1223,
1231-1232 (D. Colo. 1999); Texas
Assoc. of Countries v. Matagorda County, 52 S.W. 3d 128 (Tex. 2000). It is important that the letter make a
specific reference to the right of reimbursement as to the attorney’s fees;
general language simply stating that the insurer is defending under a
reservation of rights may not be sufficient.
Moreover, in some states, a unilateral reservation of rights by the
insurer is not binding on the insured and there needs to be a specific
agreement between the parties with respect to the reservations. It is important to know that law in the
applicable jurisdiction so that an insurer can preserve their rights.
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