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New York Court Discusses Appellate Division Split Over Recoupment of Defense Costs Under a Duty to Defend Policy
Posted in Duty to Defend

On March 31, 2023, Justice Cohen of the New York County Supreme Court, Commercial Division issued a decision in Liberty Ins. Underwriters Inc. v. Plaza Condominium, 2023 NY Slip Op 31035(U), granting an insurer’s motion to recoup defense expenses from the insured, after the Court found that there was no duty to indemnify.  The Court explained: 

Liberty established in its original summary judgment papers that it defended the Underlying Action subject to a reservation of rights, which included (implicitly at first, then explicitly) a right to recoup expenses if it were later determined that the Policy did not cover the Underlying Action or was rescinded.  Liberty relied on several First Department cases for the proposition that once it had established lack of coverage it was entitled to a declaration of entitlement to recoup all payments that had been made to defend the [insureds]. . . . ([] Certain Underwriters at Lloyd’s London v Advance Transit Co., 188 AD3d 523, 524 [1st Dept 2020] [“New York law . . . permits insurers to provide their insureds with a defense subject to a ‘reservation of rights to, among other things, later recoup their defense costs upon a determination of non-coverage’”); Am. Home Assurance Co. v Port Authority of N.Y. & N.J., 166 AD3d 464, 465 [1st Dep’t 2018]; Certain Underwriters at Lloyd’s London v. Lacher & Lovell-Taylor, P.C., 112 AD3d 434, 434-35 [1st Dep’t 2013]). . . .

Defendants’ belated reliance upon Am. W. Home Ins. Co. v. Gjonaj Realty & Mgt. Co., 192 AD3d 28, 35-37 [2d Dept 2020] to obtain a different result is unavailing.  In that case, decided more than a year before Defendants’ opposition to summary judgment here, the Second Department held that recoupment of defense costs is available only if it is provided for under the terms of the insurance policy itself, and a reservation of rights is insufficient to create such an entitlement.  In doing so, the court noted the contrary First Department cases upon which Liberty relies and expressly “decline[d] to follow them.”

Given the diverging New York appellate decisions on the right to recoup defense costs, this issue will have to be resolved by the Court of Appeals.  Justice Cohen’s statement that Liberty’s initial reservation of rights letter reserved the right to recoup defense costs only “implicitly” would appear to conflict with other authorities, previously discussed on this blog, requiring an express reservation of the right to recoup.

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