(September 2019) - In Nautilus Ins. Co. v. Access Medical, LLC at el,______ F.3d __________ (9th Cir. July 2, 2019), the United States Court of Appeals for the Ninth Circuit certified the following question to the Nevada Supreme Court based on the absence of any Nevada law addressing whether an insurer may seek reimbursement of defense costs incurred in connection with an uncovered claim:
Is an insurer entitled to reimbursement of costs already expended in defense of its insured where a determination has been made that the insurer owed no duty to defend and the insurer expressly reserved its right to seek reimbursement in writing after defense has been tendered but where the insurance policy contains no reservation of rights?
The question relates to a lawsuit filed by Nautilus Insurance Company ("Nautilus") against its insured, Access Medical, LLC, seeking a declaration that potential coverage was not afforded under its policy in connection with an underlying cross-complaint alleging 31 claims, including a claim for interference with prospective economic advantage because of Access Medical, LLC’s ("Access") alleged interference with relationships with hospitals with which cross-complainant, Ted Switzer, enjoyed long-standing and mutually beneficial relationships. Switzer alleged that Access “acted to disrupt the relationship between Switzer and various hospitals, and engaged in wrongful acts which resulted in injury to the personal business reputation of Switzer. Such wrongful acts caused various vendors to stop using Switzer's business and to use Access instead.”
Access tendered the defense of the Switzer cross-complaint to Nautilus contending that the cause of action for interference with prospective economic advantage “triggered personal and advertising injury” coverage under the Nautilus policy, i.e., defamation and disparagement. In response, Nautilus agreed to defend Access against the Switzer cross-complaint subject to a reservation of rights to file a declaratory relief action establishing that potential coverage was not afforded under its policy and to recover all defense costs incurred in defending Access against the Switzer cross-complaint. Nautilus issued four different letters to Access advising that it intended to seek reimbursement of defense costs incurred in connection with defending Access against the Switzer cross-complaint.
Subsequently, on February 24, 2015, Nautilus filed a declaratory relief action in Nevada United States District Court arguing that it never had a duty to defend or indemnify Access. Nautilus filed a motion for summary judgment arguing that potential coverage was not afforded under its policy for the Switzer cross-complaint. The district court granted such motion. However, neither the Nautilus complaint, nor the motion for summary judgment requested reimbursement of defense costs incurred by Nautilus on behalf of Access in connection with the Switzer cross-complaint.
Nautilus then brought a motion for relief seeking reimbursement of defense costs incurred in defending Access in the Switzer cross-complaint. In response, Access filed a motion for reconsideration arguing that Nautilus had a duty to defend Access against the Switzer cross-complaint. The district court denied both motions in the same order. On the reimbursement issue, the district court concluded Nautilus was not entitled to further relief because:
- Nautilus did not include a claim for reimbursement of damages in its complaint;
- Nautilus did not show it was entitled to relief as a matter of law; and
- Nautilus did not establish it was entitled to reimbursement under Nevada law.
On appeal, the Ninth Circuit Court of Appeals affirmed the district court's determination that Nautilus did not owe a duty to defend Access and reserved judgment on whether Nautilus could seek further relief under 28 U.S.C. Section 2202 with respect to its claim for reimbursement of defense costs.
The Court of Appeals determined that Nevada state courts do not appear to have addressed directly the issue of reimbursement of defense costs. In certifying the question of reimbursement to the Nevada Supreme Court, the Court of Appeals noted as follows:
“Our understanding of Nevada law is that a reservation of rights letter can generally be valid. See, Havas v. Atl. Ins. Co., 614 P.2d 1, 1 (Nev. 1980) (per curiam) (insurer “agreed to investigate validity of the claim while specifically reserving all defenses available to it”). The federal district court in Nevada determined that insurers have a right to reimbursement if there is an “understanding” between the parties that the insured would be required to reimburse costs if it is later determined that the insurer had no duty to defend. Capitol Indem., Corp. v. Blazer, 51 F.Supp. 2d 1080, 1090 (D. Nev. 1999). This understanding can exist outside the terms of the policy. For example, acceptance of money from the insurer can constitute an implied agreement to the reservation of rights. Probuilders Specialty Ins. Co., 116 F. Supp. 3d at 1182.
Here, Nautilus advised Insureds on at least four occasions that it was reserving all rights, including the right to seek reimbursement. In each of the letters sent to Insureds, Nautilus stated that it “further reserves the right to seek reimbursement for any and all attorney fees, expert fees, defense costs, indemnification payments, and any other litigation-related expenses that it pays in connection with its defense and indemnification.”
To be sure, several courts have held that a unilateral reservation of rights letters cannot itself create rights not contained in the policy. See, e.g., Shoshone First Bank v. Pac. Emp’rs Ins. Co., 2 P.3d 510, 515-16 (Wyo. 2000) (opting to follow minority rule that insurer cannot recover defense costs because “insurer is not permitted to unilaterally modify and change policy coverage”). The Illinois Supreme Court explained the difference between the majority and minority rules:
In general then, the decisions finding that an insurer is entitled to reimbursement of defense costs are based upon a finding that there was a contract implied in fact or law, or a finding that the insured was unjustly enriched when its insurer paid defense cots for claims that were not covered by the insured’s policy.
Gen. Agents Ins. Co. of Am. V. Midwest Sporting Goods Co., 828 N.E.2d 1092, 1101 (I11.2005). In adopting the minority rule, the Illinois Supreme Court explained that in paying defense costs pursuant to a reservation of rights:
[T]he insurer is protecting itself at least as much as it is protecting its insured. Thus, we cannot say that an insured is unjustly enriched when its insurer tenders a defense in order to protect its own interests, even if it is later determined that the insurer did not owe a defense.
Id. at 1103.
Courts that follow the majority rule, however state that it is in the best interest of both parties to allow insurers to recoup their defense costs under a reservation of rights. “Without a right of reimbursement, an insurer might be tempted to refuse to defend an insurer might be tempted to refuse to defend an action with many claims that are not even potentially covered and only a few that are-lest the insurer give, and the insured get, more than they agreed.” Buss. V. Superior Court, 939 P.2d 766, 778 (Cal. 1997).
We understand that “[w]here Nevada law is lacking, its courts have looked to the law of other jurisdictions, particularly California, for guidance.” Eichacker v. Paul Reverse Life Ins. Co., 354 F.3d 1142, 1145 (9th Cir. 2004) (internal quotation marks omitted). Under California law, “the insurer can reserve its right of reimbursement for defense costs by itself, without the insured’s agreement.” Buss, 939 P.2d at 784 n.27. “If that conclusion is reached, the insurer, having reserved its right, may recover from its insured the costs it expended to provide a defense, which, under its contract of insurance, it was never obligated to furnish.” Scottsdale Ins. Co. v. MV Transp., 115 P.3d 460, 468 (Cal.2005).
Because the Nevada Supreme Court has not spoken directly on the issue of an insurer’s entitlement to reimbursement of defense costs under a reservation of rights and because such issues involve matters of state law and policy best resolved by the highest court of Nevada, certification of a question to the Nevada Supreme Court is appropriate. We recognize that “[t]he written opinion of the Supreme Court stating the law governing the questions certified… shall be res judicata as to the parties.” Nev. R. App. P. 5(h).”
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