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December 15, 2021 Feature

Courts Split: Nautilus and the Right to Reimbursement of Defense Costs

Bryana L. Blessinger
Goodlifestudio/iStock via Getty Images Plus

Goodlifestudio/iStock via Getty Images Plus

Insurers and policyholders should be aware of individual jurisdictional rulings regarding recoupment of defense costs upon a finding of no duty to defend.

The situation is a common one: An insured seeks coverage under its liability policy, and its insurer agrees to defend the insured subject to a full reservation of its rights. The reservation of rights letter includes language indicating that the insurer may seek reimbursement of defense costs if it is subsequently determined that there is no coverage. But what is the significance of such language, and can it be enforced absent a policy provision expressly providing for reimbursement of defense costs? According to the Nevada Supreme Court’s recent holding in Nautilus Insurance Co. v. Access Medical, LLC, the answer is “yes.” Yet, courts across the country remain divided, with no bright-line rule.

The Nautilus Case Allows for Reimbursement of Defense Costs

In Nautilus, the Ninth Circuit Court of Appeals certified the following question to the Nevada Supreme Court:

Is an insurer entitled to reimbursement of costs already expended in defense of its insureds where a determination has been made that the insurer owed no duty to defend and the insurer expressly reserved its right to seek reimbursement in writing after defense has been tendered but where the insurance policy contains no reservation of rights?1

The Nevada Supreme Court, in a 4–3 decision, answered “yes,” holding:

When a court determines that an insurer never owed a duty to defend, the insurer expressly reserved its right to seek reimbursement in writing after defense was tendered, and the policyholder accepted the defense from the insurer, then the insurer is entitled to that reimbursement. Under generally applicable principles of unjust enrichment and restitution, the insurer has conferred a benefit on the policyholder; the policyholder appreciated the benefit; and, because it is reasonable for the insurer to accede to the policyholder’s demand, it is equitable to require the policyholder to pay. This result gives effect to the parties’ agreement, as well as the court’s judgment, by recognizing that the insurer was never contractually obligated to furnish a defense.2

Background. Nautilus’s insured sought coverage for a claim brought by its former business partner for “interference with prospective economic advantage.”3 During discovery, the insured uncovered an email in which the insured’s representative made statements against the former business partner. Coverage under the policy turned on whether (1) the former business partner’s claim alleged libel or slander, or (2) the statements in the email were false and would support a libel or slander claim that might implicate the policy’s personal injury and advertising injury coverage. Because Nautilus could not determine whether the email contained a false statement, it agreed to defend the insured under a reservation of rights, including the right to disclaim coverage, withdraw from the defense, and recoup defense fees if a court determined that no potential for coverage existed. The insured did not object to the letter.

Nautilus simultaneously filed an action in Nevada district court seeking a declaratory judgment that it had no duty to defend. The district court agreed and held that Nautilus’s duty to defend under the insurance policy was never triggered because the business partner’s cross-complaint did not allege—and the email did not support—a claim for defamation, libel, or slander under California law. When Nautilus moved for reimbursement of its defense costs, however, the district court, applying Nevada law, concluded that it was not entitled to reimbursement. On appeal, the Ninth Circuit affirmed the district court’s ruling that Nautilus did not owe a duty to defend, and certified the question of whether Nautilus was entitled to reimbursement of defense costs to the Nevada Supreme Court.4

Supreme court’s majority opinion. In a narrow decision, the four-justice majority held that an insurer may recoup defense costs upon an ultimate determination that it had no duty to defend its insured. First, it explained that when neither the allegations of the complaint nor the facts known to the insurer show any possibility of coverage, the insurer owes no duty to defend and “the insurance policy simply does not apply.”5 The majority rejected the dissent’s argument that reimbursement modified the insurance contract, stating that reimbursement could not modify the contract because the contract did not govern Nautilus’s defense. It further held that reimbursement did not erode the duty to defend because “the parties bargained for Nautilus to defend against certain kinds of allegations, and the federal courts . . . determined that [the business partner’s] allegations were not of that kind.”6

The majority also agreed with Nautilus that its insured would be unjustly enriched if Nautilus did not recover its defense costs. Relying on the Restatement (Third) of Restitution and Unjust Enrichment, the majority stated:

When time is precious, it makes sense for the parties to decide quickly what to do, and to litigate later who must pay. Because an insurer risks unbounded liability if it loses the coverage dispute after refusing to defend a suit, it is generally “reasonable [for the insurer] to accede to the demand rather than to insist on an immediate test of the disputed obligation.” Under these circumstances, we conclude that when a court determines that the insurer never had a duty to defend, and the insurer clearly and expressly reserved its right to seek reimbursement, it is equitable to require the policyholder to pay. Therefore, we hold that when a court finally determines that the insurer had no contractual duty to defend, the insurer may ordinarily recover in restitution if it has clearly reserved its right to do so in writing.7

In so holding, the majority rejected the Restatement of Liability Insurance section 21, which provides that “an insurer may not obtain recoupment of defense costs from the insured, even when it is subsequently determined that the insurer did not have a duty to defend or pay defense costs,” unless the right to recoupment is “stated in the insurance policy or otherwise agreed to by the insured.”8 The majority asserted, “[T]he Restatement of Liability Insurance justifies its departure from the usual rule by reference to ‘special considerations of insurance law’ that make insurance policies fundamentally different from other contracts. That reasoning is inconsistent with our precedent that ‘legal principles applicable to contracts generally are applicable to insurance policies.’”9

Dissent. Three justices dissented, alleging that the majority’s holding ran contrary to Nevada precedent and long-standing legal principles. The dissent stated that the majority’s view that no contract governed the right to reimbursement was “simply incorrect.”10 It continued:

The insurance contract governs the parties’ entire relationship, including the duty to defend, and the fact that this recoupment remedy is not provided means it is not available, not that there is no applicable contract. The conclusion by the federal court that there is no duty to defend, which we must accept, does not lead to the conclusion that there is no contract.11

The dissent asserted that Nautilus was not entitled to enforce its reservation of rights letter to “unilaterally create new rights for itself at the expense of the insured” for three reasons: (1) reimbursement for costs an insurer expended defending a claim is “inconsistent with the broad duty to defend”; (2) when an insurer chooses to defend a claim, it is doing so to protect itself from potential liability for breaching the duty to defend; and (3) allowing an insurer to reserve its right to reimbursement while controlling the defense “does not comport with [the court’s] long-standing recognition of the inherent power disparity between insurers and insureds.”12

Courts Are Split as to Whether Reimbursement Is Allowed

Although historically the majority of states have permitted reimbursement of defense costs when the insurer did not ultimately owe a duty to defend, a growing number of states have held that defense cost reimbursement is not permitted. Although some states hold that reimbursement is not permitted absent policy language permitting reimbursement, other states hold that reimbursement is not permitted regardless of policy language.

States allowing reimbursement. Courts in states such as California,13 Florida,14 Tennessee,15 Georgia,16 Ohio,17 Alaska,18 Connecticut,19 Michigan,20 and Hawaii21 have held in favor of allowing insurers to recoup defense costs.

In Buss v. Superior Court,22 the California Supreme Court became the first court to thoroughly explore whether insurers are entitled to recovery of defense costs when a court determines that the insurer never owed a duty to defend. In Buss, although the policy covered one claim against the insured, the remaining claims were not covered by the policy. The court held that an insurer may recover defense costs attributed to uncovered claims if it properly reserved its right to do so in a reservation of rights letter. The court stated that because the insurer did not bargain with its insured to cover defense costs for claims not covered by the policy, shifting the defense costs to the insurer would alter the bargain between the insurer and its insured. In reaching its conclusion, the Buss court did not analyze whether the applicable policy contained language permitting the insurer to recover defense costs. The Buss court also limited its holding to reimbursement of defense costs for claims that were not potentially covered, and noted that the insurer bears the burden of proving the allocation by a preponderance of the evidence.

Likewise, in Colony Insurance Co. v. G&E Tires & Service, Inc.,23 the insurer issued a reservation of rights letter to the insured, reserving its rights “with respect to defense costs incurred or to be incurred in the future, to be reimbursed and/or obtain an allocation of attorney’s fees and expenses if it is determined that there is no coverage.” The Florida District Court of Appeal held that, in accepting the insurer’s defense, the insured “manifested acceptance of the terms on which [the insurer’s] offer to pay for the defense was tendered.”24 Therefore, the insurer was entitled to reimbursement, regardless of whether the policy language contained a reimbursement provision.

In RLI Insurance Co. v. Grand Pointe, LLC,25 the Eastern District of Tennessee concluded that the insurer had adequately reserved its right to reimbursement for defense costs, holding that “the Supreme Court of Tennessee would follow the majority position and recognize reimbursement is available to an insurer when an adequate reservation of rights has been made even if the policy contains no express reimbursement position.” There, the insurer had issued a letter to its insured stating that it reserved the right to “seek reimbursement from [the insured] for counsel fees and costs incurred by [the insurer] if it is determined the subject claims are not within policy coverage.”26 In a subsequent letter, the insurer noted that it had “provided its insureds with a defense under a reservation of rights for approximately six months . . . and its insureds have benefited from that defense. By accepting a defense from [the insurer] under [those] circumstances, an implied contractual right exist[ed] for [the insurer] to seek reimbursement.”27

States not allowing reimbursement. By contrast, states such as Iowa,28 Maryland,29 Idaho,30 Illinois,31 Texas,32 Pennsylvania,33 Washington,34 and Minnesota35 have denied insurers’ requests for reimbursement.

For instance, in Matagorda County v. Texas Ass’n of Counties County Government Risk Management Pool,36 the Texas Court of Appeals held that the insurer was not entitled to reimbursement of defense costs because the reservation of rights letter did not include a reservation of the insurer’s right to later seek recovery. In affirming the lower court’s decision, the Texas Supreme Court clarified that the insurer would not have been entitled to reimbursement even if such language was contained in the reservation of rights letter, absent the inclusion of such language in the policy itself.

Similarly, in American & Foreign Insurance Co. v. Jerry’s Sport Center, Inc.,37 the Pennsylvania Supreme Court held that because the insurance policy at issue did not contain a reference to reimbursement of defense costs, allowing the insurer to rely on its reservation of rights letter was equivalent to permitting the insurer to unilaterally amend the policy. And in National Surety Corp. v. Immunex Corp.,38 the Washington Supreme Court held that unless the policy unambiguously included a right to reimbursement of defense costs, the insurer could not seek reimbursement of defense costs even if it defended its insured under a reservation of rights.

New York divided. Although a number of states have reached differing conclusions regarding reimbursement of defense costs, still others have reached differing conclusions within the same state. Historically, a number of New York federal courts and courts of appeal affirmed orders allowing insurance companies to recoup their defense costs upon a determination that no duty to defend or indemnify existed. These decisions were based on an insurer’s reservation of its right to seek reimbursement of defense costs,39 an insured’s lack of objection to an award in favor of recoupment,40 and an insured’s failure to refuse to consent to an insurer’s reservation of rights letter.41 Notably, none of these cases addressed whether the insurance policies at issue expressly permitted recoupment of defense costs.

On November 17, 2020, in Certain Underwriters at Lloyd’s London Subscribing to Policy No. PGIARK 01449-05 v. Advance Transit Co., New York’s Appellate Division, First Department, affirmed an order of the Supreme Court, New York County, granting the plaintiff insurer’s cross-motion for summary judgment declaring: (1) it was not obligated to defend or indemnify its insured in the underlying personal injury action; (2) it was entitled to withdraw its defense of the insured in the underlying action; and (3) the insured was obligated to reimburse the insurer for defense fees, costs, and expenses incurred in the defense.42 The First Department noted that “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.’”43 The court also noted that “[i]n its reservation of rights letter, [the insurer] reserved the right to recover payments made by [the insurer] including payments for defense costs and expenses, attorneys’ fees, and costs of suit.”44 Yet, as with the other New York cases granting reimbursement, the First Department did not indicate whether the right to recoupment was provided for in the policy itself.

On December 30, 2020, the Appellate Division, Second Department, addressed whether insurers have a right to reimbursement of defense costs absent affirmative language in the policy, and determined the answer to be “no.” In American Western Home Insurance Co. v. Gjonaj Realty & Management Co.,45 the court noted that the case presented a novel issue of law that the court had not addressed: “whether an insurance company . . . may recover the costs of defending its insureds . . . in an underlying personal injury action against those insureds where there has been a reservation of rights by the insurance company and a determination by the court that the insurance company has no obligation to defend.”

The court stated, “To the extent that certain federal courts interpreting New York law and our sister appellate courts in New York have held that an insurer may recover its defense costs when there has been a determination that no duty to indemnify exists, for the reasons that follow, we decline to adopt that view.”46 As the court explained:

A trend allowing insurance companies to recoup defense costs in actions where no duty to indemnify has been found began in state courts in the United States in 1997, after the California Supreme Court, in Buss v. Superior Court, held that a liability insurer has a right of recoupment against its insured for the costs of defending an underlying action where most or all of the claims are later found to be outside of the policy coverage. Recently, however, courts deciding in the first instance whether insurers can recover defense costs have generally concluded that they cannot.47

The court found critical that the policy did not contain any provisions expressly granting the insurer the right to recoup defense costs and stated that if the insurer wanted to reserve its rights to recoup defense costs, it could have included such a provision in the policy. The court explained that a unilateral reservation of rights letter to the insured could not create rights not contained in the insurance policy. The court further rejected the insurer’s argument that the insured would be unjustly enriched without the right to recoupment. The court asserted that allowing recoupment would actually result in unjust enrichment to the insurer because it would provide the insurer with the ability to avoid bad faith claims and control the insured’s defense.

Thus, it appears that New York courts may be moving away from the right of reimbursement and, at minimum, limiting that right to cases in which the policy contains an express right to reimbursement of defense costs.

The Insurance Services Office Has Developed Defense Costs Endorsements

In response to cases denying reimbursement without express policy language to the contrary, the Insurance Services Office (ISO) has developed state-specific endorsements providing for reimbursement of defense costs. The ISO’s interline form for all primary level coverage—including, but not limited to, commercial auto, commercial general liability, commercial liability umbrella, employment-related practices liability, farm coverage, and liquor liability—provides, in relevant part:

If we initially defend an insured (“insured”) or pay for an insured’s (“insured’s”) defense but later determine that none of the claims (“claims”), for which we provided a defense or defense costs, are covered under this insurance, we have the right to reimbursement for the defense costs we have incurred.

The right to reimbursement under this provision will only apply to the costs we have incurred after we notify you in writing that there may not be coverage and that we are reserving our rights to terminate the defense or the payment of defense costs and to seek reimbursement for defense costs.48

The ISO has also developed endorsements specific to certain types of policies. For example, an Illinois excess liability endorsement, Illinois Changes – Defense Costs (CX 01 22 09 08) provides similar but slightly different language:

If we initially defend an insured or pay for an insured’s defense but later determine that the claim(s) is (are) not covered under this insurance, we will have the right to reimbursement for the defense costs we have incurred.

The right to reimbursement for the defense costs under this provision will only apply to defense costs we have incurred after we notify you in writing that there may not be coverage, and that we are reserving our rights to terminate the defense and seek reimbursement for defense costs.

It remains to be seen how effective these ISO endorsements will be, although it appears promising for insurers. In Massachusetts Bay Insurance Co. v. Walflor Industries, Inc., the United States District Court for the Western District of Washington upheld a commercial business owner policy defense costs endorsement (BP 06 12 11 13) that had been developed in response to the Immunex ruling, and granted the insurer summary judgment on its right to reimbursement of defense costs.49 Holding that Immunex “narrowly defined the issue before it as ‘whether [an] insurer may unilaterally condition its reservation of rights defense on making the insured absorb the defense costs if a court ultimately determines there is no coverage,’” the Walflor court concluded that no public policy reason existed to not enforce the provision as written.50

Anticipated Trends and Practical Considerations

The impact of Nautilus remains to be seen, particularly in light of recent cases to the contrary in New York and other jurisdictions. Nevertheless, it provides a reminder that courts—determining matters of first impression—may still uphold the long-standing majority rule that insurers are entitled to reimbursement of defense costs upon a finding of no coverage, regardless of policy language.

Insurers and policyholder attorneys, however, should keep in mind that states continue to be divided in the right to reimbursement, with an increasing number of states holding that reimbursement is not permitted absent an express policy provision. As such, more insurers are likely to begin including defense costs endorsements such as the ones set forth above in primary and excess liability policies.


1. Nautilus Ins. Co. v. Access Med., LLC, 482 P.3d 683, 685–86 (Nev. 2021).

2. Id. at 691–92.

3. Id. at 686.

4. Id. at 686–87.

5. Id. at 688.

6. Id. at 691.

7. Id. at 689 (alteration in original) (footnote omitted) (citation omitted).

8. Restatement of Liab. Ins. § 21 (Am. L. Inst. 2019).

9. Nautilus, 482 P.3d at 689 n.7 (citation omitted).

10. Id. at 693 n.3 (Cadish, J., dissenting).

11. Id.

12. Id. at 694–96.

13. Buss v. Superior Court, 939 P.2d 766 (Cal. 1997); see also Scottsdale Ins. Co. v. MV Transp., 115 P.3d 460 (Cal. 2005) (an insurer may obtain reimbursement of defense expenses “when it is ultimately determined, as a matter of law, that the policy never afforded any potential for coverage, and that a duty to defend thus never arose”).

14. Colony Ins. Co. v. G&E Tires & Serv., Inc., 777 So. 2d 1034 (Fla. Dist. Ct. App. 2000).

15. RLI Ins. Co. v. Grand Pointe, LLC, No. 1:05-cv-157, 2007 U.S. Dist. LEXIS 53058 (E.D. Tenn. June 12, 2007).

16. Ill. Union Ins. Co. v. NRI Constr. Inc., 846 F. Supp. 2d 1366 (N.D. Ga. 2012) (an insurer was entitled to reimbursement when the reservation of rights letter was timely and expressly advised the insured of the insurer’s right to recoup any expenses incurred in the defense).

17. United Nat’l Ins. Co. v. SST Fitness Corp., 309 F.3d 914 (6th Cir. 2002) (an insured entered into an implied-in-fact contract when it accepted defense costs subject to a reservation of right to recoupment).

18. UnionAmerica Ins. Co. v. Gen. Star Indem. Co., No. A01-0317-CV, 2005 U.S. Dist. LEXIS 46337 (D. Alaska Mar. 7, 2005) (an insurer may recoup defense expenses paid under a reservation of rights upon a determination of no coverage).

19. Sec. Ins. Co. of Hartford v. Lumbermens Mut. Cas. Co., 826 A.2d 107 (Conn. 2003) (recognizing a right to recoupment where coverage was uncertain due to unsettled law).

20. NCMIC Ins. Co. v. Dailey, No. 267801, 2006 Mich. App. LEXIS 2260 (July 20, 2006) (allowing recoupment of reasonable—but not actual—defense costs).

21. Scottsdale Ins. Co. v. Sullivan Props., Inc., No. 04-00550 HG-BMK, 2007 U.S. Dist. LEXIS 57021 (D. Haw. Aug. 2, 2007) (predicting that Hawaii courts would recognize the right of an insurer to recoup defense costs when defending under a reservation of rights letter expressly reserving a right to reimbursement).

22. 939 P.2d 766 (Cal. 1997).

23. 777 So. 2d 1034, 1036 (Fla. Dist. Ct. App. 2000).

24. Id. at 1039.

25. No. 1:05-cv-157, 2007 U.S. Dist. LEXIS 53058, at *41 (E.D. Tenn. June 12, 2007).

26. Id. at *11.

27. Id. at *12.

28. Pekin Ins. Co. v. Tysa, Inc., No. 3:05-cv-00030, 2006 U.S. Dist. LEXIS 93525 (S.D. Iowa Dec. 27, 2006) (an insurer cannot unilaterally modify the policy terms through a reservation of rights letter).

29. Perdue Farms, Inc. v. Travelers Cas. & Sur. Co. of Am., 448 F.3d 252 (4th Cir. 2006) (a partial right to reimbursement would serve as “a backdoor narrowing of the duty to defend,” particularly when permitting a defense under a reservation of rights benefits both the insured and the insurer).

30. Blue Cross of Idaho Health Serv., Inc. v. Atl. Mut. Ins. Co., 734 F. Supp. 2d 1107 (D. Idaho 2010) (no right to reimbursement absent such right in the policy).

31. Gen. Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 828 N.E.2d 1092 (Ill. 2005) (no right to reimbursement absent express policy language because an insurer may not unilaterally modify policy coverage).

32. Matagorda County v. Tex. Ass’n of Cntys. Cnty. Gov’t Risk Mgmt. Pool, 975 S.W.2d 782 (Tex. App. 1998), aff’d, 52 S.W.3d 128 (Tex. 2000).

33. Am. & Foreign Ins. Co. v. Jerry’s Sport Ctr., Inc., 2 A.3d 526 (Pa. 2010).

34. Nat’l Sur. Corp. v. Immunex Corp., 297 P.3d 688 (Wash. 2013).

35. Westchester Fire Ins. Co. v. Wallerich, 563 F.3d 707 (8th Cir. 2009) (absent an express agreement in the policy authorizing reimbursement, an insurer cannot create rights in a unilateral reservation of rights letter).

36. 975 S.W.2d 782.

37. 2 A.3d 526.

38. 297 P.3d 688.

39. Am. Home Assurance Co. v. Port Auth. of N.Y. & N.J., 89 N.Y.S.3d 81 (App. Div. 2018).

40. Max Specialty Ins. Co. v. WSG Invs., LLC, No. 09-CV-05237, 2012 WL 3150577 (E.D.N.Y. Aug. 2, 2012).

41. Gotham Ins. Co. v. GLNX, Inc., No. 92 Civ. 6415, 1993 WL 312243 (S.D.N.Y. Aug. 6, 1993).

42. 132 N.Y.S.3d 621 (App. Div., 1st Dep’t 2020).

43. Id. at 621.

44. Id. at 622.

45. 138 N.Y.S.3d 626, 628 (App. Div., 2d Dep’t 2020).

46. Id. at 631.

47. Id. at 632 (emphasis added) (citations omitted).

48. Examples of this endorsement language can be found at IL 01 23 11 13 (Washington Changes – Defense Costs), IL 01 14 11 06 (Wyoming Changes – Defense Costs), and IL 01 62 10 13 (Illinois Changes – Defense Costs).

49. Mass. Bay Ins. Co. v. Walflor Indus., Inc., 383 F. Supp. 3d 1148 (W.D. Wash. 2019).

50. Id. at 1167–69 (alteration in original).

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Bryana L. Blessinger is a partner at Goldberg Segalla LLP in Portland, Oregon, where she focuses her practice on insurance coverage and defense in Oregon and Washington.