The Eleventh Circuit recently clarified, as a matter of first impression under Georgia law, that insurers cannot obtain reimbursement of defense costs from their insureds where the policy itself does not require such reimbursement.
In Continental Casualty Co. et al v. Winder Laboratories, the insurers defended the insureds against a third-party lawsuit pursuant a reservation of rights, including the right to seek reimbursement of defense costs incurred for claims not covered by the policies. After finding that the insurers did not have an ongoing duty to defend the insureds, the Eleventh Circuit turned to the question of reimbursement of defense costs.
The insurers argued that the insureds implicitly and explicitly agreed to the terms of the reservation of rights letters, which included the reimbursement provision. The Eleventh Circuit rejected that argument, finding that the reservation of rights letters did not create a new contract between the insurers and the insureds because there was no new consideration for the reimbursement provision in the reservation of rights letters. In other words, the reservation of rights letters were a promise to perform a preexisting contractual obligation that did not constitute consideration for a new agreement.
The Eleventh Circuit also rejected the insurers' argument that the insureds were unjustly enriched because they retained the benefit of an expensive defense to which they knew they were not entitled. The Court explained that there was nothing unjust about requiring insurers to fulfill their contractual obligations and imposing such a requirement would not confer a windfall on the insureds, as was argued by the insurer.
On these bases, the Eleventh Circuit predicted that the Georgia Supreme Court would not allow an insurer to recoup its expenses based on a reservation of rights letter without any contractual provision allowing for reimbursement. Although this decision technically is not binding on Georgia state courts, it is likely to be cited as persuasive authority for the argument that an insurer, which provides a defense in Georgia cannot recover defense costs from its insureds unless the insurance policy explicitly provides for such recovery.
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