Insurers and Policyholder have for decades contested whether the typical general liability policy requires policyholders to reimburse insurers for defense costs where a claim is ultimately held not to be one for which a defense is required. Although a slight majority of decisions favors insurers, the recent trend has favored policyholders, as reflected in §21 of the American Law Institute Restatement of the Law, Liability Insurance (“RLLI”), one of several contested portions of the RLLI. In Nautilus Insurance v. Access Medical, the Nevada Supreme Court provided the most extensive post-RLLI analysis of the dispute, ruling in favor of the insurer and seemingly rejecting the ALI approach. As the most sophisticated post-RLLI examination of the issue, Nautilus deserves particular attention. The majority opinion, although sophisticated and reasonable, makes analytical errors that caution against unquestioning adoption of its rhetoric while the dissenting opinion, which invoked RLLI §21 favorably, remains the better analysis of the matter.
Unduly overlooked to date is the degree of apparent support for the RLLI position in “mixed” actions combining covered and uncovered claims in which a single potentially covered claim. In these cases, the ALI RLLI position is logically unassailable. Insurers should not be able to recoup defense costs pursuant to policies that promise to defend “suits” and not merely “claims” and to pay “defense costs” without any limiting language that would give fair notice to a purchasing policyholder.
A lawsuit where a court ultimately finds no duty to defend any aspect of the matter presents a much closer case but, as per RLLI §21 and the Nautilus Dissent, remains a situation where recoupment should be refused absent specific agreement by insurer and policyholder (rather than the vulnerable policyholder’s mere acceptance of a defense subject to reservation of rights).
Nautilus is also worth attention in that its answer to a federal court’s certified question stems from a questionable underlying decision of no potential for coverage. Nautilus also illustrates the institutional advantages held by insurers and the practical problems faced by policyholders when the insurance industry deploys its disproportionate resources.
57 Tort Trial & Ins. Prac. L.J. 57 (2022).
Stempel, Jeffrey W., "A Deeper Dive into Nautilus: Differentiating Insurer Efforts to Recover Defense Costs and Assessing Recoupment in the Wake of the ALI Restatement" (2022). Scholarly Works. 1358.