Insured Not Prejudiced by Insurer’s Failure to Attend Settlement Meetings; Alaska Law Precluding Recoupment of Defense Costs Preempted by Federal Risk Retention Group Statute

The Ninth Circuit Court of Appeals has reversed a district court’s denial of an insurer’s motion for summary judgment and held that the insurer, which was organized as a risk retention group, was entitled to reimbursement of defense costs incurred in defense of a non-covered claim because Alaska’s statutory bar against recoupment conflicts with the federal statute pursuant to which the risk retention group was formed.  Attorneys Liability Protection Society, Inc. v. Ingaldson Fitzgerald, P.C., 2016 WL 5335036 (9th Cir. 2016).  The court also rejected the policyholder’s argument that the insurer should be estopped from asserting defenses to coverage because it acted in bad faith by failing to attend settlement meetings.

The law firm policyholder was sued by a bankruptcy trustee for the estate of a former client regarding the firm’s handling of a $150,000 retainer.  The law firm notified its professional liability insurer, which agreed to defend under a reservation of rights and specifically reserved the right to recoup fees incurred in defense of claims that were found not covered under the policy.  The law firm retained independent counsel, and the insurer paid the defense fees and sought a declaration that the policy did not cover the claims against the law firm and to recover the expenses incurred defending the law firm.

The district court held that the policy did not cover the claim, but concluded that the policy’s reimbursement provision did not comply with Alaska law and was therefore unenforceable.  The Ninth Circuit then certified two questions to the Alaska Supreme Court, which held that an insurer is not entitled to reimbursement, even where it explicitly reserved the right to seek reimbursement and the insured accepted the defense subject to a reservation of rights, regardless whether the claims are later determined to be excluded from coverage or it is later determined that the duty to defend never arose because there was no possibility of coverage.  The Ninth Circuit then held that that the Alaska statute prohibiting reimbursement, § 21.96.100(d), as applied to risk retention groups, was preempted by the federal Liability Risk Retention Act of 1986.  The court found that § 21.96.100(d) conflicted with the Act governing insured-owned risk retention groups, and that none of the exceptions—regarding unfair claim settlement laws, deceptive trade practices laws, taxes levied against other insurers, registration requirements and financial stability regulations—applied.

The court of appeals also held that the insurer was not estopped from denying coverage under Alaska law due to its failure to attend settlement meetings in connection with the underlying claim.  The court concluded that the law firm could not establish that it was prejudiced by the insurer’s failure to attend settlement meetings, noting that the group informed the law firm from the outset that it intended to assert coverage defenses, provided independent counsel, and acted consistently with its view that coverage did not exist.  The court also noted that the law firm was never at risk of an excess judgment based on the amount at issue.  The insurer therefore would not be estopped from asserting its defenses to coverage.