HNRK Coverage Corner

On July 13, 2023, the Eleventh Circuit issued a decision in Continental Casualty Co. v. Winder Laboratories, LLC, Case No. 21-11758, resolving an issue of first impression under Georgia law—whether an insurer can recoup defense costs it paid under a duty to defend policy upon a finding that the insurer has no duty to indemnify the insured.  The Court ruled that such recoupment is not permitted unless the policy expressly provides for it, explaining:   

As an initial matter, we disagree with the insurers’ argument that there is a clear “majority” rule favoring recoupment across the nation.  This description of a “majority rule” may have been correct in the past, but it is not an accurate depiction of the current case law, which appears to be more-or-less in equipoise with the recent trend favoring the “no recoupment” rule. . . .

Jurisdictions not allowing recoupment tend to focus on the deleterious effect that such a rule would have on the distinction between the duty to defend and the duty to indemnify.  We are persuaded by the recent trend of state high courts holding that there is no right to reimbursement in similar cases.

. . .

If we were to adopt a rule allowing for broadscale reimbursement without any contractual provision securing that right, the duty to defend would collapse into the duty to indemnify. That is, if the duty to defend required insurers to mount a defense but the defense was widely reimbursable upon a court’s determination that no ongoing duty to defend exists, the duty to defend would simply become the duty to indemnify. Simply put, wide-ranging reimbursement is necessarily inappropriate in a system—like Georgia’s—that is predicated on a broad duty to defend and a more limited duty to indemnify.  We find the logic of the “no recoupment” cases that illustrate this point persuasive, and we predict that the Supreme Court of Georgia would follow that logic to adopt a “no recoupment” rule to protect its insurance system.

As previously discussed on this blog, New York has a split of authority on this issue.  The Second Department, like the Eleventh Circuit, rejected an extra-contractual right of recoupment, while the First Department appears to have permitted such recoupment, at least where the insurer reserves the right to do so in a reservation of rights letter (albeit in brief decisions without much analysis). 

Stay tuned for more developments in this area of the law.  As the Eleventh Circuit recognized, the national trend is clearly headed in the anti-recoupment direction.