The duty to defend is broad, as established, for example, in the California Supreme Court decision in Buss v. Superior Court, but is it possible to be even broader?  The Alaska Supreme Court recently answered yes, handing a win to policyholders in that state.

The duty to defend—a promise by the insurer to pay for the policyholder’s defense against claims brought by a third party—appears in many liability policies and can be very helpful for a policyholder. Under the duty to defend, the insurer must defend both claims that are within the scope of the policy and those that may be covered by the policy—at least unless and until a court determines that those claims are not. Where there is a dispute between the insurer and policyholder as to whether certain claims are covered, to avoid a conflict of interest, a policyholder typically may choose to have the insurer pay for independent defense counsel.

Insurers that have paid for the defense of claims later determined not to be covered frequently demand repayment of their expenses. Of late, they have run into some difficulty trying to do so.

For example, as we previously reported, in recent years, several state and federal courts have rejected insurers’ attempts to recoup defense costs for non-covered claims absent express contractual language requiring the insured to repay those costs.

In answering questions posed by the Ninth Circuit, the Supreme Court of Alaska recently held that Alaska law goes further.

The Court found that Alaska’s insurance statutes prohibit an insurer from obtaining reimbursement of costs paid for independent counsel to defend a policyholder for non-covered claims even where:

  1. the insurer expressly reserved the right to seek such reimbursement at the time it offered the defense to the policyholder; and
  2. the policyholder accepted that defense subject to the insurer’s reservation of rights.

The Court determined that reimbursement is not permitted under Alaska law both where the claims are later found to be excluded under the policy as well as where it is later determined that there was no possibility the claims were covered in the first place.

In the underlying case before the Court, the policyholder’s professional services liability policy imposed on the insurer a duty to defend, but expressly excluded coverage for fee disputes. When claims were brought against the policyholder related to a dispute over the handling of a former client’s fees, the insurer agreed to provide a defense, but reserved its right to contest coverage. The policyholder accepted the defense, and the insurer later sued the policyholder to recover the costs it had paid for the non-covered claims.

In reaching its decision, the Court noted that the relevant statutes require an insurer to pay for independent counsel where there is a dispute as to whether a claim is covered. It also observed that the law requires the insurer to pay “only for the fees and costs to defend the allegations for which the insurer either reserves its position as to coverage or accepts coverage”—and that the law requires independent counsel to carefully allocate costs between those claims, on one hand, and any claims for which there is no coverage, on the other. (Separately, an Alaska insurer is free to repudiate the policy and refuse to provide a defense, but could then be liable for breach of contract or bad faith claims.)

The Court rejected the insurer’s argument that it should follow the California Supreme Court’s Buss decision.Buss held that under certain circumstances, an insurer may seek reimbursement of defense costs for claims the insurer establishes are not even potentially covered. The Alaska Supreme Court found that, unlike California, Alaska’s statutes expressly require payment for both covered and potentially covered claims, and also that California’s statutes expressly stated its statutes did not invalidate policy provisions relating to reimbursement—which Alaska’s do not.

While this decision provides clarity to Alaskan policyholders and insurers on this significant issue, it is important to keep in mind that the decision was based on a close read of Alaska’s case law, statutes and legislative history. It is not clear whether other state high courts would reach a similar conclusion based on their own laws, but we will track this area of law and report new developments to you here.