Academic journal article Defense Counsel Journal

Insured's Reimbursement of Insurer's Defense Expenses: Some Practical Steps

Academic journal article Defense Counsel Journal

Insured's Reimbursement of Insurer's Defense Expenses: Some Practical Steps

Article excerpt

If there is a judicial determination of noncoverage, insurers stand to get reimbursement, but there are pitfalls to be avoided

COURTS are allowing liability carriers to recover their defense expenses from their own insureds in certain cases. The approach taken in this article is a practical one, examining alike the reported cases that allow or reject reimbursement. The practitioner can pull from those cases the practical steps courts have looked for when they have faced the issue.


Courts that deal with the issue of the recovery by an insurer of its defense expenses from its insured are often careful to distinguish the fact that they are dealing with the issue of insureds' reimbursement of insurers' defense expenses. Cases that deal with insureds' reimbursement to their insurance carrier of payments made by the carriers in settlement or indemnity generally require four things: (1) an agreement by the carrier with the insured. (2) reserving the defense of noncoverage, (3) full recovery of a reasonable settlement made by the insurer on behalf of the insured with the injured claimant, and (4) the carrier's subsequent establishment of noncoverage.(1)

Such cases include at least one holding that the requirement of an "agreement" was satisfied where the insured refused to agree but its insurance carrier obtained court approval to make the settlement. The carrier in that case was entitled to seek reimbursement.(2) The practical steps necessary for an insurance carrier to obtain reimbursement from its insured of defense expenses, are different.


In general terms, it is useful to examine the available causes of action by looking first at cases allowing various causes of action and then at cases not allowing them. In cases allowing recovery for defense expenses, the insurers' chosen cause of action most often has been "reimbursement,"(3) The "reimbursement" cause of action has allowed recovery of some significant sums, varying, for example, from the recovery in California state court of $14,294.45 in 1981.(4) to the recovery of $96,627.00, again in California state court in 1994.(5) to the recovery in federal court in California in 1988 of $495,754.13.(6)

In addition, there is some authority allowing recovery in a suit "for declaratory relief and restitution of the sums it [a general liability insurer] paid in defending and settling" the underlying liability suit.(7) There is also some authority that Texas law may allow a cause of action for such "reimbursement" if it is stated in the insurance policy, or arguably if such a fight is clearly stated in a reservation of rights letter and the record reflects "an agreement or understanding that the insured would reimburse if later it was determined that there was no duty to defend."(8)

There may also be a possibility of recovery under a theory of "recoupment" under Pennsylvania law, a U.S. district court noted in a case that apparently did not directly involve the issue of reimbursement. The court's decision in Federal Insurance Co. v. Susquehanna Broadcasting Co.(9) apparently allowed the recovery of defense expenses in that case, but only after the underlying liability case had terminated. The court stated:

We note that the claim for counsel fees is for fees

expended in defense of non-covered claims so the

merits of this claim are not connected to the early

failure to assert the damages defense. The two issues

are simply not relevant to each other. What is

important is that plaintiff did defend under a

reservation of rights. We do note our agreement

with defendant that plaintiff is not entitled to

reimbursement of any of its defense costs incurred

until the time of the termination of the Fishel

[underlying] action. …

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