To date, an apparent minority of courts has held that liability insurance carriers cannot recover defense fees and costs even when the policyholder agrees and there is a judicial determination that no possibility of coverage ever existed for the defended claims, summarized in detail in Attorneys Liability Protection Society, Inc. v. Ingaldson Fitzgerald, P.C., 370 P.3d 1101, 1112 (Alaska 2016) :
The answer to both certified questions is “yes”: Alaska law prohibits enforcement of a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending claims under a reservation of rights, where (1) the insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted the defense subject to the reservation of rights, and (3) the claims are later determined to be excluded from coverage under the policy; and, Alaska law also prohibits enforcement of a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending claims under a reservation of rights, where (1) the insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted the defense subject to the reservation of rights, and (3) it is later determined that the duty to defend never arose under the policy because there was no possibility of coverage.
In this case, the Supreme Court of Alaska based its answer to certified questions on the wording of Alaska's independent counsel statute. It was interpreted to bar all such reimbursement claims, contrary to the interpretation of similar statutes in other States such as the interpretation of the California independent counsel statute in the California Courts including the California Supreme Court. Attorneys, 370 P.3d at 1108-09.
This decision has been rejected by name by a federal court applying Washington law in a case which was the subject of an earlier article on this blog, Massachusetts Bay Insurance Co. v. Walflor Industries, Inc., 383 F. Supp. 3d 1148, 1168-69 (W.D. Wash. 2019).
The issue of a liability carrier's right to reimbursement of defense expenses for defending noncovered claims, as well as the carrier's right to reimbursement of indemnity for noncovered claims, is discussed at length in 1 DENNIS J. WALL, LITIGATION AND PREVENTION OF INSURER BAD FAITH § 3:6, Informing the Insured: Insurer Assertion of Rights to Reimbursement From the Insured of Clearly Noncovered Indemnity and Defense Expense (Thomson Reuters West 3d ed, 2020 Supplements in process). The Attorneys Liability Protection Society case and the Massachusetts Bay Insurance Co. cases are among the cases discussed there, both in print and online.
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