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Articles

New York Courts Reject Insurance Companies’ Attempts to Recoup Defense Costs

New York Law Journal

  • Published On: May 24, 2024

Under a liability insurance policy, an insurance company promises to defend its policyholder and provide “litigation insurance” Continental Casualty v. Rapid-American, 80 N.Y.2d 640, 648 (1993). Thus, when an insurance company defends a policyholder in litigation, the policyholder does not expect the insurance company to demand that the policyholder pay it back.

In recent years, however, insurance companies have increasingly sought to “recoup” defense costs paid for their policyholder’s defense, arguing retrospectively that the litigation was not actually covered by the policy. Surprisingly, the insurance companies often seek recoupment, while ignoring the purpose of the duty to defend, and when their policies do not include any contractual provision allowing for recoupment. They often base recoupment on a reservation of rights letter. These letters, which the insurance company sends in response to a policyholder’s notice of a claim, acknowledge the insurance company’s duty to defend, but then purportedly reserve the option to recoup defense costs if the insurance company later determines that the underlying claim was not covered.

Recently, several New York federal and state courts have held that an insurance company has no right to recoup defense costs where the insurance policy includes a duty to defend, but does not include an express contractual provision allowing for recoupment. These decisions correctly recognize that recoupment of defense costs violates New York law on contracts and the duty to defend, which is useless if the defense is not provided unequivocally at the time of litigation. Here, we discuss these recent New York decisions.
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