Insurance companies routinely send reservation of rights letters in response to a policyholder’s demand for coverage. Policyholders, for their part, routinely ignore those reservations. That’s a mistake. While it may be tempting to let reading and responding to a reservation of rights letter slide to the bottom of the endless to-do list, policyholders who do so may find themselves on the receiving end of an enforceable obligation to repay their own insurance company for amounts the insurance company paid in defense of a claim.
An insurance company’s request that the policyholder pay money to the insurance company is antithetical to the insurance company’s promise to defend the policyholder and pay, on the policyholder’s behalf, a settlement or judgment entered. While there is a growing trend for courts to refuse an insurance company’s request for reimbursement of defense costs, there still remain a number of states that have upheld such requests. Given the tension and conflict of interest that exist when an insurance company provides a defense, controls the defense, and simultaneously asserts a right to be reimbursed for sums paid in that defense, it is important for policyholders to understand how to forestall an insurance company’s ability to seek—and obtain—reimbursement of defense costs.
The following discussion is intended to assist policyholders in understanding the import of an insurance company’s request for reimbursement of defense costs, how to respond to it, and what action to take in order to protect policyholder rights.