In a 4-3 decision filed on March 11, the Nevada Supreme Court responded to a certified question from the United States Court of Appeals for the Ninth Circuit. In Nautilus Insurance Company v. Access Medical, LLC; Robert Clark Wood, II; and Flournoy Management LLC, 137 Nev. Adv. Op. 10 (Nev. 2021), the court held that an insurer that reserves its right to seek reimbursement of defense costs paid to defend an insured may recover those defense costs from the insured upon a showing that the claim was not covered. The court held, "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 the right to do so in writing."
The coverage dispute arose out of underlying litigation between former business partners that worked together selling medical devices. "After the partnership soured," one of the former business partners alleged in a lawsuit that his former business partners (the insureds, in the coverage dispute) intentionally interfered with his new business, including by allegedly telling a prospective client that he was "banned" from selling medical devices. The former business partner-insureds tendered the intentional interference claim to their insurance carrier.
The insurer initially declined to defend the former business partner-insureds, but eventually decided to defend under reservation of rights. As explained by the court, "in multiple letters, [the insurer] reserved the right to disclaim coverage, withdraw from defense, and obtain a reimbursement of defense fees if a court determined that no potential for coverage existed for the claims." The insureds did not object and the insurer began to defend the insureds in the underlying litigation brought by their former business partner. In Nevada federal district court, the insurer simultaneously sought a declaration that it owed no duty to defend the insureds in the underlying litigation.
After the insurer prevailed and obtained a declaration that it did not owe a duty to defend the insureds, the insureds appealed to the Ninth Circuit. Before resolving all of the issues presented on appeal, the Ninth Circuit 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?" The Nevada Supreme Court answered, "yes." The Nevada Supreme Court explained, "[w]hen 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."
The court based its holding on theories of restitution and unjust enrichment, not the explicit terms of the insurance policy at issue. In this way, the court sought to distance its holding from other jurisdictions that have declined to allow insurers the ability to seek reimbursement for defense costs incurred to defend a non-covered claim.
Originally Published by Duane Morris, March 2021
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