Alaskan Law Prohibits Recoupment of Non-covered Defense Costs
On a certified question from the United States Court of Appeals for the Ninth Circuit, the Alaska Supreme Court has held that an insurer is not entitled to reimbursement of defense costs for non-covered claims and that policy provisions allowing for such reimbursement are unenforceable under Alaskan law. Attorneys Liab. Prot. Soc’y, Inc. v. Ingaldson Fitzgerald, P.C., No. 7095 (Alaska Mar. 25, 2016).
The case arose from a demand for coverage under a professional liability policy by a law firm for a suit concerning its disbursement and withdrawal of fees against a client’s retainer. The insurer accepted the defense of the claim subject to a reservation of rights, including the right to deny coverage on the grounds that the suit included allegations of activities that did not constitute covered professional activities, as well as allegations that implicated the policy’s exclusion for claims arising from conversion or disputes over fees. The insurer’s letter to the insured also reserved rights under the provision in the policy providing that the insured would reimburse the insurer for fees and costs incurred defending non-covered claims. The insured retained independent defense counsel, whose fees were paid by the insurer.
After the resolution of the underlying lawsuit against the insured, the insurer sought a judicial declaration of no coverage and sought reimbursement of defense costs from the insured. The insured did not contest the declaration of no coverage, but it argued that the insurer was not entitled to reimbursement. The federal district court agreed. The insurer appealed the ruling to the court of appeals, which certified two questions to the state high court, distinguishing between the situation in which an insurer has a duty to defend because of the possibility of covered loss but ultimately faces no liability and the situation in which the duty to defend never arises because there never was a possibility of coverage. In both instances, the court concluded that reimbursement is not available under Alaska law.
The court based its conclusions in large part on the state’s independent counsel statute—Alaska Stat. § 21.96.100—which provides that an insurer required to provide independent counsel because of a conflict of interest “shall be responsible for the fees and costs of defending those allegations for which the insurer either reserves its position as to coverage or accepts coverage.” According to the court, because the statutory scheme mandates payment and does not expressly provide for reimbursement of fees and costs, reimbursement is prohibited and cannot be avoided by a contract provision to the contrary. The court further held that this same conclusion applies to the situation where the duty to defend never actually arises but the insurer nonetheless provides a defense subject to a reservation of rights “out of an abundance of caution” because there should be no incentive for an insurer “to automatically reserve rights in hopes of obtaining reimbursement for attorney’s fees and to protect itself from claims of bad faith or breach that could result from a repudiation of the policy.”