Recoupment of defense costs where defense is under a reservation of rights
In Valley Forge v. Health Care Management, the insureds were sued for medicare fraud and asked their insurers for a defense. The insurers agreed, but told the insureds that it was under a reservation of rights and that if there was no duty to defend, the insurers would ask the court to make the insureds pay the insurers for the defense costs. The court previously held there was no duty to defend (see Zurich Am. Ins. Co. v. O’Hara Reg’l Ctr. for Rehab., 529 F.3d 916 (10th Cir. 2008)) and sent it down to determine the amount of fees owed. The trial court gave the insurers all their fees but no interest and both parties appealed. The Tenth Circuit affirmed in a wonderfully written opinion by Judge Gorsuch.
The insureds claimed that the insurers cannot recover the defense costs they expended for the simple reason that no provision in the parties’ insurance contracts contemplates that possibility. The insurers argued, however, that Colorado law requires an insurer to pay defense costs, but at the same time provides the insurer with this assurance: if it pays defense costs pursuant to a reservation of rights letter, the insurer may later seek and obtain recoupment of its defense costs if the facts at trial prove the claim against the insured wasn’t covered by the policy. The court notes it must follow Colorado law on the issue and sides with the insurers – and cites Sherlock Holmes! (See below) The court also finds that the insurers need not wait until the underlying action is completed before seeking a declaration of no coverage.
Having decided that the insurers were entitled to recover the defense costs, the next question is are they entitled to all of their defense costs or might the amount be limited in some way? The court says it does not matter since the case was decided on summary judgment and no factual issues are presented. The insured’s expert affidavit was not quite sufficient under Rule 56(f) to get them more discovery. As to prejudgment interest, the statute talks about money wrongfully withheld, not wrongfully paid, and there are no cases awarding insurers interest on recoupment.
Here is the part that cites to Sherlock Holmes:
The fact that the [Hecla decision] did not mention any other comparable condition — such as specific contractual language — cannot be so easily ignored. It’s the dog that didn’t bark. Cf. Chisom v. Roemer, 501 U.S. 380, 396 n.23 (1991) (noting that silence on the issue can be probative evidence of legislative intent); United States v. Lopez, 518 F.3d 790, 798 n.2 (10th Cir. 2008); Sir Arthur Conan Doyle, Silver Blaze, in The Memoirs of Sherlock Holmes (1894).
