Answering a certified question regarding a matter of first impression, the Nevada Supreme Court has held that an insurer is entitled to reimbursement of defense costs expended in defense of an insured where a determination is made that the insurer owed no duty to defend and the insurer has clearly and expressly reserved the right to seek reimbursement in writing. See Nautilus Ins. Co. v. Access Med, LLC, 2021 WL 936076 (Nev. Mar. 11, 2021) (en banc).
A policyholder sought coverage for a claim alleging that the policyholder had made false statements about a former business partner in an email to a customer. Coverage under the policy turned on whether the email actually made false statements that would support a libel or slander claim that might implicate the policy’s personal injury and advertising injury coverage. Because the insurer could not determine whether the email contained a false statement, the insurer agreed to defend the policyholder under a reservation of rights, including the right to disclaim coverage, withdraw from the defense, and to recoup defense fees if a court determined that no potential for coverage existed.
On appeal in later coverage litigation, the United States Court of Appeals for the Ninth Circuit affirmed the district court’s ruling that the email did not trigger the insurer’s duty to defend, but it determined that whether the insurer could recoup defense costs was an unresolved issue of Nevada state law. The Ninth Circuit certified the question to the Nevada Supreme Court.
A majority of the Nevada Supreme Court rejected an argument espoused in a dissenting opinion that an insurer may not recoup amounts paid absent a provision in the policy permitting it to do so. Relying on the federal courts’ opinions that the duty to defend had never been triggered, the court held that the policy did not apply and no contract governed the dispute before the court. Accordingly, the court held, permitting the insurer to recoup defense costs did not alter any contract. Indeed, the court concluded, refusing to permit the insurer to recoup costs paid when no duty to defend existed would “provide the insured more, and the insurer less, than the parties’ bargain contemplated.”
The court then held that a general principle of contract law – that a party that performs a disputed obligation under protest and does not in fact have a duty to perform, is entitled to reimbursement – applies to insurance policies. Expressly agreeing with California caselaw and rejecting contrary rulings in other jurisdictions, the Court reasoned, “[w]hen 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.’” Accordingly, the court concluded 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.”