The Implied Right to Recoupment--A Tale of Smoke and Mirrors
Most Commercial Liability Policies Do Not Include Any Right of Reimbursement
In recent years, more and more courts have recognized that, absent some bilateral agreement, insurers do not have the right to recoup costs spent defending a policyholder when it is later determined that no duty to defend existed.[1]
In Implying a Right to Reimbursement, Nevada Improperly Purported to Follow the Majority Rule
In Nautilus Ins. Co. v. Access Med., LLC,[2] the Nevada Supreme Court determined that Nevada law would permit recoupment where an insurer reserved its right to seek reimbursement in writing after defense had been tendered. Notably, the policy contained no reservation of rights. Even more critically, the insurer purportedly expended defense fees despite having no legal obligation to do so.
Determining that there was no covered claim for defamation under applicable California law in the underlying action absent an express false statement, Nautilus sought reimbursement of the defense fees it had advanced.[3] But no entitlement to reimbursement was evident under Nevada law, in the district court’s view. Claiming a split of authority among state courts, the Ninth Circuit certified the recoupment issue to the Nevada Supreme Court.[4]
Claiming that it was essential that it avoid unjust enrichment, even though there was no policy provision entitling the insurer to reimbursement where its agreement to defend was later reversed, the court determined that where an insurer performs a duty it did not owe, it should receive reimbursement, citing no cases.
The court cited the Restatement of Unjust Enrichment, not the more recently updated (and directly on point) Restatement of the Law of Liability Insurance. The latter treatise agreed that reimbursement claims were not permitted.[5]
The court purported to protect the enforceability of the contractual agreement between the insurer and the insured, but did so by adding words of limitation under the guise of interpretation by adding a reimbursement right where no such provision existed.[6] Insurers seek to imply the right of reimbursement, which is extra-contractual and redrafts the policy for the insurer’s benefit. Because insurers could include a provision for reimbursement and choose not to, other courts have recognized that to imply the right is unjustified.[7]
It Is Untrue, as the Court Presumed, that California Is in Accord with the Majority Approach
California law was never the majority approach. It was not true at the time Buss was issued; it is not true now. It is noteworthy that characterizations of recoupment as the “majority” rule persist. This is likely because of analyses that count the enforceability of an express policy provision or other bilateral agreement for recoupment as a type of recoupment right.[8] Such contractual possibilities are not in question; the issue is whether a right to recoup exists absent such provisions. Reliance on analyses that confuse the issue in this way seems to be at the root of the court’s mistaken “majority” claim.
Adopting the Majority Rule and Modern Trend, the Dissent Disagreed
A vigorous dissent joined by three Justices disagreed, concluding that the Scottsdale case cited by the majority was not consistent with the logic of previous Nevada cases nor that of the majority of cases nationwide, as the court erroneously assumed.[9] It determined that the application of the Restatement (Third) of Restitution and Unjust Enrichment Section 35 to the underlying dispute would be inappropriate.[10] The court adopted a strident tone by observing that, contrary to the majority’s statement, insurance policies are not treated like other contracts but are more akin to relationships of a fiduciary character.[11]
Importantly, the dissent points out that “under Nevada law, a theory of unjust enrichment is not available when there is an express, written contract,” nor is recovery under a quasi-contract theory.[12] Not only was there clearly an express contract in the form of an insurance policy, “the contract contained an integration clause, making it clear that the contract constituted the parties’ entire agreement governing their insurer-insured relationship.”[13] In light of this approach the dissent found reimbursement improper.
Buss Is Problematic and Has Not Been Followed
To justify its conclusion, the court adopts the reasoning that the California Supreme Court employed in Buss,[14] which is problematic in itself. Even courts following Buss’s right to reimbursement conclusion have declined follow its logic. Only Nevada does. But Buss is inconsistent with subsequent California law, which broadly defines the scope of policy provisions.[15] Courts in other jurisdictions, therefore, have reason to view Buss with skepticism as they reach their own conclusions on the issue of recoupment, as Buss is questionable law even in California.
Conclusion
The Supreme Court of Nevada is wrong to recognize the insurer’s right to recoupment for two main reasons: it is based on questionable authority from California, and it gives undue weight to the incorrect presumption that it is following a majority rule. In reality, the majority trend is to reject the right of recoupment, and rightfully so. Other courts will hopefully recognize the vicious cycle where the incorrect presumption perpetuates itself, and set the record straight as they encounter the issue of recoupment going forward.
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*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. He also serves as an expert witness on insurance coverage issues and represents policyholders and their counsel on a range of fee dispute issues with their insurers. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] David A. Gauntlett, Insurance Coverage of Intellectual Property Assets § 24.02 (2nd ed. Supp. 2021-2). There are 51 jurisdictions, of which only 13 have established such a right in binding precedent. 22, including 8 of the largest 10 states, have considered the issue and declined to establish the right. See, e.g., Gen. Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 828 N.E.2d 1092, 1097 (Ill. 2005); Westchester Fire Ins. Co. v. Wallerich, 563 F.3d 707, 719 (8th Cir. 2009); American and Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 505 Pa. 584, 614 (Pa. 2010); Nat'l Sur. Corp. v. Immunex Corp., 297 P.3d 688, 695 (Wash. 2013); Great Am. Assurance Co. v. PCR Venture of Phoenix LLC, 161 F.Supp.3d 778, 787 (D. Ariz. 2015); American Western Home Insurance Company v. Gjonaj Realty & Management Co., 192 A.D.3d 28, 42 (N.Y.A.D. 2 Dept., December 30, 2020).
[2] 482 P.3d 683 (Nev. Mar. 11, 2021).
[3] Id. at *686.
[4] Counsel representing the insurer included two major law firms, while the policyholder’s counsel was a small firm in Nevada with two attorneys.
[5] Restatement of the Law of Liability Insurance § 21 (Am. L. Inst. 2019).
[6] Id. at *691.
[7] See General Star Indem. Co. v. Driven Sports, Inc., 80 F.Supp.3d 442, 445-46 (E.D.N.Y. 2015) (stating that the “Court will not, in essence, create that recoupment agreement and rewrite the Policy by relying on a quasi-contract theory, when [the insurer] could have addressed recoupment in the Policy, but chose not to.”)
[8] See, e.g., Dennis Ventura & Dana Kanallakes, Tressler LLP, Recoupment of Defense Costs (June 2016).
[9] Id. (Cadish, J., dissenting).
[10] Id. at *692.
[11] Id. at *693 n.4.
[12] Id. at *692.
[13] Id. at *693.
[14] Buss v. Superior Ct., 16 Cal. 4th 35, 65 (1997).
[15] See Safeco Ins. Co. of Am. v. Robert S., 26 Cal. 4th 758, 763-64 (2001) (noting that “[a]ny ambiguous terms are resolved in the insureds’ favor, consistent with the insureds’ reasonable expectations” and that to read into the policy something the insurer omitted “would violate the fundamental principle that in interpreting contracts, including insurance contracts, courts are not to insert what has been omitted.”); Fireman’s Fund Ins. Co. v. Atlantic Richfield Co., 94 Cal. App. 4th 842, 852 (2001) (“[A]n insurance company’s failure to use available language to exclude certain types of liability gives rise to the inference that the parties intended not to so limit coverage.”).