I've often spoken on and written about responding to reservation of rights letters from insurance carriers. I strongly advocate responding to insurance carrier reservation of rights letters, even if it is as simple as saying “I object to your reservation of rights and coverage defenses and preserve all rights to coverage.” Objecting to a reservation of rights letter is even more important when insurance carriers acknowledge a duty to defend, but assert the right to recoup any defense costs that they will pay.
Some courts, including the Sixth Circuit, have held that an insurance company can obtain reimbursement of the defense costs it paid on behalf of its policyholder. See United National Insurance Co. v. SST Fitness Corp., 309 F.3d 914 (6th Cir. 2002). In United National Insurance the Sixth Circuit found that a few courts in other jurisdictions permitted such a recovery when the insurance carriers provided a defense subject to a reservation of rights letter that asserted a right to seek reimbursement of defense costs paid, and the policyholder accepted the defense without objecting to the reservation of rights letter. The Sixth Circuit court held that this was an implied-in-fact contract and permitted the insurance carrier to recoup the defense costs it had paid. Courts in other jurisdictions have not followed the Sixth Circuit’s rationale, and the Ohio Supreme Court has not ruled on this issue.
In the last several years, because of victories obtained in cases like United National Insurance, insurance companies have begun inserting language in their reservation of rights letters claiming that they could recover any defense costs paid if it is subsequently determined that there was no coverage for the claim. They also send the policyholder non-waiver agreements to sign. Policyholders BEWARE! There is no language in the insurance policy that permits such a recovery. In fact, insurance carriers generally are required to provide a defense as long as there is potential coverage for the underlying claim in the applicable insurance policies. Policyholders should not sign the non-waiver agreements, but if they are required to do so in order to get a defense to their underlying claim, they should sign it with an explanation that it was signed under duress. Moreover, it is important that the policyholder object in writing to coverage defenses raised in insurance carrier reservation of rights letters and particularly any attempts on their part to recover defense costs paid.