A Georgia district court recently denied an insurer’s attempt to recoup defense costs, holding that even where the court previously determined that coverage was barred under the policy’s pollution exclusion, the insurer could not “rewrite the record” or clarify its “defective” reservation of rights letters to show that it fairly informed the policyholder of its coverage position, which is a prerequisite to recoupment of defense costs.

In Evanston Ins. Co. v. Sandersville R.R. Co., No. 5:15-CV-247 (MTT), 2017 WL 3166730 (M.D. Ga. July 25, 2017), the insurer filed a declaratory judgment action to determine what, if any, obligations it owed to its insured, Sandersville Railroad, under a general liability policy in connection with a federal workers’ compensation claim brought by a Sandersville employee. After receiving pre-suit notice of the claim, Evanston sent a seven-page reservation of rights letter to Sandersville, asserting that the pollution exclusion barred coverage and reserving the insurer’s rights as to the applicability of the exclusion and “with respect to the investigation, settlement, and defense of the claim.” Evanston, however, agreed to provide a defense upon exhaustion of the self-insured retention, subject to the right to withdraw the defense and to recoup defense costs if it was later established that no coverage existed.

Several months later, the employee filed suit against Sandersville. After Sandersville exhausted its self-insured retention and tendered the defense to Evanston, Evanston issued a second reservation of rights letter that was, with minor exception, a “cut-and-paste” of the first. Notably, Evanston’s second letter did not supplement its coverage position in light of the specific facts alleged in the complaint.

The district court ultimately agreed with Evanston that Sandersville’s claim was barred under the policy’s pollution exclusion and that Evanston did not have a duty to indemnify or provide any further defense. But when the insurer moved for summary judgment seeking a declaration that it never owed a duty to defend based on the allegations of the complaint and that it had adequately reserved its rights to recover defenses costs paid to date, the court found that Evanston’s coverage letters were “ineffective” to support any right of recoupment.

First, the court rejected Evanston’s attempt to “massage” and “supplement” the record in support of its claim by, for example, asserting that the complaint “specifically” alleged certain facts that did not exist. Acknowledging that the complaint was “not a model of clarity,” the court highlighted that Evanston was only relieved of its duty to defend where the allegations “unambiguously” excluded coverage. Given the lack of clarity in the underlying allegations, the court refused to find that the complaint established as a matter of law that Evanston did not owe Sandersville a duty to defend.

The court likewise rejected Evanston’s attempt to recoup defense costs on the basis of its reservation of rights letters, which failed to take a clear position on Evanston’s duty to defend or clearly explain Evanston’s recoupment rights. Evanston argued that its two letters “conspicuously and unambiguously” stated that it owed no duty to defend or indemnify. But the court found this statement to be “astonishing” and “blatantly wrong” based on the plain language of the letters, which “never state[d] a position that Evanston did not owe Sandersville . . . a defense, let alone why.” It was incumbent upon Evanston to inform Sandersville that it would be able to recoup defense costs it is was later established that coverage was excluded, but Evanston failed to do so and could not correct such deficiencies after the fact.

The Sandersville decision is one of several recent cases—some of which have been discussed in recent Client Alerts—where courts have rejected insurer positions that are contrary to established case law or the underlying record. In addition to taking a duty to defend position that was “blatantly wrong” based on the facts alleged, the insurer in Sandersville asserted a right to recoupment that was referenced superficially in prior communications, but that, upon closer inspection, was not adequately preserved in light of the insurer’s unclear coverage position. The decision serves as a reminder to policyholders that they need not—and should not—simply accept an insurer’s reservation of rights as a correct statement of their contractual or legal rights. Rather, carriers should be required to explain, with appropriate detail, how the facts or allegations of a claim apply to the terms of the applicable policy to support the carrier’s stated position.