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Insurer Not Permitted to Recoup Defense Costs Absent Express Reservation of the Right to Do So

On January 9, 2023, Justice Lebovits of the New York County Supreme Court issued a decision in Peleus Ins. Co. v RCD Restorations Inc., 2023 NY Slip Op 50034(U), holding that an insurer could not recoup defense costs from its insured, without an express reservation of the right of recoupment.  The Court explained:

Although Peleus provided RCD with coverage in the underlying action/third-party action under a reservation of rights (see NYSCEF No. 17 [reservation of rights letter]), the letter notifying RCD of Peleus’s coverage position did not reserve the right "to recoup expenses [Peleus] incurred that are not covered by the polic[y]." (American Home Assur. Co. v Port Auth. of NY & N.J., 166 AD3d 464, 465 [1st Dept 2018] [permitting recoupment pursuant to plaintiff-insurer’s reservation of rights]; accord Certain Underwriters at Lloyd's London Subscribing to Policy No. SYN-1000263 v Lacher & Lovell-Taylor, P.C., 112 AD3d 434, 435 [1st Dept 2013] [same]; cf. American W. Home Ins. Co. v Gjonaj Realty & Mgt. Co., 192 AD3d 28, 36-41 [2d Dept 2020] [holding that an insurer may recoup defense costs upon a no-coverage determination only if recoupment is permitted under the terms of the policy itself, not merely the insurer's reservation of rights letter].)

Absent a reservation of Peleus’s right not merely to later deny coverage but also to obtain recoupment, this court sees no basis to permit recoupment now. (Cf. BX Third Ave Partners, LLC v Fidelity Natl. Tit. Ins. Co., 112 AD3d 430, 431 [1st Dept 2013] [denying recoupment when, among other things, the insurer "undertook the defense of the . . . action without a reservation of rights"].) Nor do Peleus's motion papers identify such a basis.

There is a split of authority in the appellate divisions concerning the right of an insurer to recoup defense costs under a duty to defend policy, upon a finding that the insurer has no duty to indemnify.  While the First Department appears to have permitted such recoupment where the insurer reserves the right to do so, the Second Department, in a decision cited by Justice Lebovits, and previously covered on this blog, rejected this position, holding that recoupment is permitted only where expressly authorized by the policy.  This issue may one day make its way to the Court of Appeals.  Until then, the Second Department has the better argument.  An insurance policy is a contract between the insurer and the insured.  A unilateral reservation of rights by the insurer cannot modify the terms of the parties’ agreement. 


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