When a policyholder tenders a claim to its insurance carrier, the insurance carrier must provide a defense for any claim potentially covered by the insurance policy. The insurance carrier will sometime agree to provide a defense subject to a reservation of rights and assert that it will seek reimbursement of defense costs paid if it is determined that there is no coverage for a claim. The courts are split regarding whether an insurance company may seek recoupment of defense costs.
The California Supreme Court in Buss v. Superior Court, 16 Cal. 4th 35 (1997) held that if an insurance carrier is tendered a defense of a claims, including claims both covered or potentially covered and clearly not covered, an insurance carrier may be reimbursed for the payment of those defense costs related to the claims not covered. Several courts have followed the Buss case, but many have held that defense costs could be recovered under a reservation of rights, but only if the policyholder did not object to the reservation of rights. See United National Insurance v. SST Fitness Corp., 309 F.3d 914 (6th Cir. 2002).
Other courts have specifically rejected the Buss decision. In 2013, the Washington Supreme Court in National Surety v. Immunex, 176 Wn.2d 872 (2013) rejected Buss and held that in order for an insurer to obtain the reimbursement of defense costs, the insurance policy must allow it. The Supreme Court of Pennsylvania in Am. and Foreign Ins. Co. v. Jerry's Sport Center, Inc., 2 A.3d 526 (Pa. 2010) held that the right to recoupment is inconsistent with the insurer's broad duty to defend. See also the Illinois Supreme Court's decision in General Agents Ins. Co. Of Am. Inc. v. Midwest Sporting Goods Co., 828 N.E.2d 1092 (Ill. 2005); and Liberty Mutual Ins. Co. v. FAG Bearings Corp., 153 F.3d 919 (8th Cir. 1998).
The policy language should dictate whether an insurance carrier is entitled to recoup any defense costs paid. When a policyholder receives a reservation of rights letter from an insurance carrier with the insurance carrier agreeing to defend, but asserting a right to seek reimbursement of defense costs, the policyholder should object in writing to that reservation of rights letter, especially if there is no language in the insurance policy that permits such recoupment.