Recently, the Supreme Court of Nevada, in Nautilus Ins. Co. v. Access Med., LLC, No. 79130 (Nev. Mar. 11, 2021), ruled an insurer is entitled to reimbursement when it is determined the insurer never owed a duty to defend its insured and the insurer expressly reserved its right to seek reimbursement. This ruling is a major win for insurers and is significant because it represents a shift away from legal principles supporting the insured. In particular, this ruling rejects the American Law Institute’s (ALI) Restatement of the Law of Liability Insurance (RLLI).
In a Winter 2019 feature titled, “Restate That Again?” Construction Claims covered concerns about the RLLI from interests in and beyond the construction insurance industry. That feature noted that the RLLI had received backlash from state governors, legislatures, insurance professionals, and attorneys; and the article stated that the question going forward will be who will apply the RLLI and how it will be referenced in accordance with established law. This decision provides some answers in the state of Nevada.
The RLLI states that, even if it is subsequently determined the insurer did not have a duty to defend, an insurer may not be reimbursed for defense costs unless such reimbursement is provided for in the insurance policy. The RLLI is unfavorable for insurers because they must choose between refusing to defend and risking a bad faith lawsuit or defending and risking not being reimbursed for defense costs.
The dissenting opinion defended the RLLI’s position and argued an insurer may not recover defense costs if such reimbursement was not provided for in the policy. This is because a reservation of rights letter may not unilaterally amend the contract, providing new rights to the insurer. Further, the insurer has a self-interest in defending a claim where coverage is unclear because the insurer is protecting itself from greater liability in a bad faith claim. The dissent contends the majority’s position should not be the rule in Nevada because it is contrary to basic contractual principles. Several jurisdictions have expressed rationales similar to that of the above referenced dissenting opinion and concluded reimbursement is inconsistent with the broad duty to defend imposed on insurers.
However, in a 4-3 decision, the Supreme Court of Nevada was persuaded by arguments that encouraged the court to reject the ALI position in the RLLI and follow precedent set by the Supreme Court of California, which has historically been the majority approach [see Buss v. Superior Court 939 P.2d 766, 776–778 (Cal. 1997), which held an insurer is allowed to recover defense costs if it is determined the insurer had no duty to defend].
Further, the Supreme Court of California, in Scottsdale Ins. Co. v. MV Transportation P.3d 460, 465 (2005), ruled that the insurer had never had a duty to defend the insured in the underlying action, and that the insurer was therefore entitled to reimbursement of the costs and expenses of defense advanced to the insured. Specifically, the court held that the duty to defend is contractual, and that the insurer “has not contracted to pay defense costs for claims that are not even potentially covered.”
The Supreme Court of Nevada noted, “Our law has more forcefully encouraged insurers to offer to defend doubtful claims” and “it is only fair to permit those insurers to recover costs that they never agreed to bear.” Time is often of the essence in these sorts of cases, and insurers are forced to make quick decisions. It is most efficient to encourage the insurer to act quickly about what to do and later determine who must pay.
Nautilus also argued that, in accordance with the principles of restitution:
- An insured who is defended for non-covered claims is unjustly enriched by that defense.
- The right to reimbursement is implied in the contract.
- The insured acquiesces to reimbursement by accepting the defense pursuant to the reservation of rights letter.
- Allowing reimbursement encourages insurers to defend in borderline cases, which promotes judicial efficiency and the state’s interest in protecting insureds.
Nautilus urged the Supreme Court of Nevada to reject the position in the RLLI because, by receiving a defense for which it did not pay premiums, an insured receives a windfall subsidized by the premiums paid by other policyholders. The insurer conferred a benefit on the insured, the insured appreciated the benefit, and it is equitable to require the insured to pay for that benefit. The insured did not pay premiums for the defense of uncovered claims, and neither the insured nor Nautilus bargained for the defense of uncovered claims.
The Supreme Court of Nevada accepted such arguments as accordant with existing Nevada law and concluded that, in fairness, the insurer was entitled to reimbursement as long as the insurer expressly reserved its right to seek reimbursement. The court noted the duty to defend never arose if the claims were not covered by the policy. Therefore, the reservation of rights was not a modification of the policy because there was no contract governing the defense of an uncovered claim. The Supreme Court of Nevada refused to impose contractual obligations not bargained for by the parties and analyzed the case under principles of unjust enrichment.
The court’s departure from the RLLI signifies a win for insurers because they may now defend marginal cases without risk of a bad faith lawsuit or fear of defense costs being unrecoverable. At the time of the decision, there was no existing state law in this area, and Nevada had not previously addressed the ALI position.
Rather than following the RLLI, the Supreme Court of Nevada applied basic principles of contract interpretation and followed the majority approach in California. The ruling is undesirable for policyholders who will be required to reimburse their insurer if it is determined coverage was not afforded for the defense under the policy. Overall, this result denotes a significant victory for insurers seeking reimbursement, as well as their counsel. Insurers will surely rely on this decision in future coverage cases.