Why Insurance Companies Should Lose the Battle over Recoupment of Defense Costs

DRI : For The Defense

PUBLISHED ON: November 15, 2023

Download PDF

Defense counsel are often pleased that a liability insurance company is paying for the defense of their client. Conversely, defense counsel are often discomfited after a defense has been waged and the defense client is the target of a recoupment claim by the insurance company for past defense costs.

Some insurance companies recently have argued to recoup the defense expenses they incur while defending their policyholder against lawsuits. They make these attempts even in the absence of: (1) an agreement regarding such recoupment written into the insurance policy, (2) a bilateral non-waiver agreement signed by the policyholder, and (3) suitable recognition of the nature of the duty to defend.

Current Recoupment Appeals

Indeed, this recoupment argument has become so widespread that at the time of this writing, one state high court and one United States Court of Appeal have this very issue before them. St. Paul Fire and Marine Ins. Co v. Bodell Construction Co., No. 20-cv-00288 DKW-WRP (Hawaii Supreme Court, argued 2023) (certified question currently sub judice); and Berkley National Ins. Co. v. Atlantic-Newport Realty LLC, No. 22-1959 (United States Court of Appeals for the First Circuit, to be argued during October 2023). 

How Did Policyholder-Defendants Get Here?

Policyholders purchase liability insurance as protection from litigation and loss.

The promise of liability insurance is in large part litigation insurance. A lawsuit naming the policyholder as a defendant including claims that might fall within the insurance policy’s coverage triggers the duty to defend. Evanston Ins. Co. v. Law Office of Michael P. Medved, P.C., 890 F.3d 1195, 1198 (10th Cir. 2018). The insurance company must provide a complete defense, which includes payment of the policyholder’s legal fees for defending the lawsuit. Cal. Ins. Co. v. Stimson Lumber Co., 325 F. App’x 496, 499 (9th Cir. 2009). Most general liability insurance policies do not mention recoupment of defense costs.

...

To read this full article, click here or download PDF.