May Insurer Recover Funds Advanced to Defend an Insured?
The courts are split over whether a insurer defending under a reservation of rights may recoup defense costs from its insured if it turns out none of the claims being defended are covered by the policy reports the Insurance Scrawl.
The post highlights conflicting 2005 decisions from Montana and Illinois. The Montana court held the insured created a new contract when the insured accepted a defense under a reservation of rights letter without objecting to a provision permitting the insurer to require the insured to reimburse defense costs if it's later determined there is no coverage. The Illinois court held creating this new right of reimbursement without an express acceptance by the insured offended public policy.
My Take: Insureds routinely accept defenses tendered by insurers under reservation of rights letters without giving conscious thought to (i) the serious conflict of interest created when the insurer controls the defense and at the same time says it does not agree there is defense or indemnity obligation under the policy, and (ii) the risk that the insured might later be asked to pay back defense costs. An insured should assert its own right to control the defense and to having independent counsel if the insurer reserves its rights. And the insured should object to any provision in the reservation of rights letter purporting to give the insurer the right to recover its defense costs from the insured.