Whether an insurer has a right to reimburse defense costs after a finding that it has no duty to defend remains an open question in Georgia. However, in Continental Casualty Co., et al. v. Winder Laboratories, LLC, et al., Case No. 21-11758 (11th Cir. Jul. 13, 2023), the Eleventh Circuit Court of Appeals has weighed in with its prediction on the likely answer. Persuaded by the logic of other jurisdictions that, “wide-ranging reimbursement is necessarily inappropriate in a system—like Georgia’s—that is predicated on a broad duty to defend and a more limited duty to indemnify,” the Eleventh Circuit predicted that, “the Supreme Court of Georgia would follow that logic to adopt a ‘no recoupment’ rule to protect its insurance system.”  

The Eleventh Circuit affirmed a Georgia federal district court decision holding that insurers Continental Casualty Company and Valley Forge Insurance Company did not have a duty to defend Winder Laboratories, LLC and its manager, Steven Pressman, in an underlying lawsuit alleging that Winder falsely or misleadingly advertised a generic pharmaceutical. The operative claim fell within a “failure to conform” exclusion within the policies; thus neither insurer had an ongoing duty to defend because of the district court’s ruling. 

More significantly, the Eleventh Circuit also ruled on a matter of first impression under Georgia law: whether a reservation of rights letter that includes a right to reimbursement entitles an insurer to recoup defense costs even though the policy does not include that right. The court held that it did not.

The insurance policies at issue did not contain language conferring a right to reimbursement of defense costs and did not specify who would choose defense counsel. However, after they received notice of the underlying lawsuit, the insurers sent a series of reservation of rights letters that included a provision stating that the insurers reserved the right to seek reimbursement of defense costs incurred on behalf of the insureds for all claims that were not covered under the policies. The letters also gave the insureds a choice to retain their own defense counsel, or to have the insurers choose defense counsel. In response, the insureds signed an “Acknowledgment of Defense under a Reservation of Rights” and said that the insureds would retain their own defense counsel. After the district court found they had no duty to defend, the insurers stopped paying defense costs and sought to recoup costs previously incurred on behalf of the insureds. 

The Eleventh Circuit affirmed the district court’s ruling that the insurers did not have a right to reimbursement of defense costs incurred prior to the district court’s duty to defend ruling, where the purported reimbursement right was asserted in the reservation of rights letters but was not a contractual provision of the parties’ insurance policies. As an initial matter, because insurers have an “extremely” broad duty to defend under Georgia law, the Eleventh Circuit noted that based on the allegations in the complaint the insurers had a defense obligation until the district court ruled otherwise. The court then rejected two arguments advanced by the insurers in support of their phantom right to reimbursement: (1) the reservation of rights letters created a new contract because the insureds were provided a defense and were allowed to choose their defense counsel, and (2) the insureds were unjustly enriched because they received a defense through the insurers despite the district court ultimately finding no duty to defend. 

The Eleventh Circuit held that the insurers’ new contract argument failed for lack of consideration. The insurance policies already required the insurers to defend (at least initially) the insureds in the underlying lawsuit. Thus, there was no new consideration received for the agreement to pay for the defense stated in the reservation of rights letters. The reservation of rights letters merely reiterated a promise to perform a preexisting contractual obligation under the policies. Similarly, because the insurance policies did not specify who would choose defense counsel, the insurers did not give up any explicit right by allowing the insureds to choose their defense counsel. The key takeaway is that reservation of rights letters do not create new rights or duties or alter the insurance policy—their purpose is to inform the policyholder about the insurer’s coverage position and issues that may exist based on the policy. The policy itself dictates the respective rights and duties under the policy.

Regarding the insurers’ unjust enrichment argument, the Eleventh Circuit questioned whether it failed at the outset because unjust enrichment is an equitable claim precluded by the existence of a written contract. Of course, there were written insurance policies here. Even on the merits, though, the Eleventh Circuit concluded that there is nothing unjust about requiring insurers to fulfill their contractual obligation to provide a defense until the district court ruled that there was no duty to defend.

Ultimately, on this matter of first impression, the Eleventh Circuit predicted that, “the Supreme Court of Georgia would not allow an insurer to recoup its expenses based on a reservation of rights without any contractual provision allowing for reimbursement.” The Eleventh Circuit also noted that it believed “this position comports with the national trend that disfavors recoupment in similar circumstances.” The Eleventh Circuit cited the following language from the Restatement of the Law of Liability Insurance as confirming the national trend disfavoring recoupment:

Over the past few decades, the pro-recoupment cases have been viewed as stating the majority position, while anti-recoupment cases have been labeled the minority. But in recent years, several state courts, including several state high courts, have faced recoupment of defense costs as an issue of first impression and have rejected a right of recoupment for the insurer, unless that right is established expressly by contract.

Restatement of the Law of Liability Insurance § 21, cmt. a (Am. L. Inst. 2019).

This issue is one that coverage counsel are monitoring nationwide because insurers are pushing to create this implicit phantom right to reimbursement. There is currently a case before Hawaii’s Supreme Court where the insurer is seeking to recoup defense costs based on similar arguments about reservation of rights letters and unjust enrichment. See St. Paul Fire & Marine Ins. Co., et al. v. Bodell Construction Co., et al., Case No. SCCQ-22-0000658 (Sup. Ct. Haw.).