Reservation of rights agreements, whether by letter or formal agreement, occasionally grant the insurance carrier the right to seek recoupment or reimbursement of the expenses incurred in the defense, if it is determined that a claim is not covered by the policy. In most jurisdictions, insurers rarely avail themselves of such a provision given the sparse case law on the issue. Recently, however, a federal court in Atlanta ruled that Georgia law would permit an insurance carrier to recover from the insured the costs and fees incurred in the defense of the case where the reservation letter provided the insured the right “to seek recoupment of any expenses incurred in the defense.” In Illinois Union Insurance Company v. NRI Construction, Inc.
, the court observed that there is a split in the jurisdictions as to the right of reimbursement of defense fees. The majority view, which the court accepted, affords the insurer such a right where (1) it timely and explicitly reserves the right to recover the costs and (2) provides specific and adequate notice of the possibility of reimbursement. The theory is that if the insured is determined not to have coverage, then he or she would be unjustly enriched by the insurance carrier having paid the defense costs. The court explained the options available to an insured when faced with a reservation of rights: (1) to decline the offer, pay for the defense costs, and then seek recovery on the policy; (2) to decline the offer and file an action for declaratory judgment to determine the rights and obligations of the parties; or (3) to accept the offer subject to the reservation of rights. In the latter instance, an insured may be obligated by contract, express or implied, to reimburse the insurance carrier for the defense costs where there is no coverage.
When confronted with a reservation of rights, the insured is usually willing to accept the offer of a defense because he or she avoids paying the attorney’s fees, expert witness fees, and other costs with the hope that the case will settle. There now looms the real possibility that not only will the insured have no coverage, but that it will be liable for the defense costs in the event it is later determined that there is no coverage under the policy. Accordingly, reservation of rights agreements and letters should be examined in a new light by both the insurers and the insureds.
For more information, contact Bart Gary
at 770.818.1403 or [email protected]