Breaking Down Insurers' Improper Recoupment Efforts

When an insurance company defends a policyholder in litigation, the client or its counsel does not expect the insurance company to demand defense expenses back.

In a recent trend, however, insurance companies have sought to recoup defense costs from their policyholders, arguing retrospectively that the underlying litigation was not eligible for coverage. Shockingly, insurance companies bring recoupment actions despite the absence of a recoupment agreement written into the policy or a bilateral nonwaiver agreement agreed to by the policyholder.

Even worse, insurance companies sometimes argue that a policyholder's acceptance of a defense under a reservation of rights somehow amounts to an implied contract favoring recoupment.

Efforts at recoupment are contrary to an insurance company's duty to defend and constitute an improper attempt to have their cake and eat it too by choosing to collect premiums for an insurance policy without a recoupment clause and then seeking repayment of defense costs.

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