A federal court in Georgia recently held that an insurer’s reservation of rights did not adequately reserve the insurer’s right to recoup defense costs even if there had been no duty to defend because the reservation of rights was not based upon allegations in a complaint. Evanston Ins. Co. v. Sandersville R.R. Co., 2017 WL 3166730 (M.D. Ga. Jul. 25, 2017).

Upon receiving notice of a claim and demand made against the insured, an insurer reserved its right to deny coverage and to recoup defense costs if it established it “owe[d] no coverage.” A lawsuit was subsequently filed against the insured, and after the insured exhausted its self-insured retention, it tendered the lawsuit to the insurer. The insurer supplemented its reservation of rights letter, which was nearly identical to the first reservation of rights and did not address the complaint’s allegations. The insurer filed this declaratory judgment action seeking a determination that the policy did not cover the lawsuit against its insured and that it was entitled to recoup defense costs paid. After the insured settled the underlying lawsuit with no contribution from the insurer, both parties filed cross-motions for summary judgment in the declaratory judgment action. The district court granted the insurer’s motion, in part, holding that the insurer had no duty to indemnify the insured and no further duty to defend. However, the district court denied recoupment of defense costs because the parties failed to address whether the insurer had a duty to defend solely based upon the allegations of the underlying complaint.

The insurer again moved for summary judgment as to its duty to defend and its entitlement to recoup defense costs. In denying the insurer’s motion for summary judgment, the court held that although coverage for the claim was ultimately excluded, the insurer had not shown as a matter of law that it did not owe a duty to defend based upon the allegations of the complaint. The court further held that even assuming the insurer had no duty to defend, the insurer’s reservation of rights letters were ineffective to entitle the insurer any right to recoup defense costs because they did not fairly inform the insured of the bases for the insurer’s position as they did not mention the underlying complaint’s allegations.