Jenner & Block

Insurance Law Update: "New York Federal Court Rules Insurer Cannot Recoup Defense Costs"

The duty of an insurer to defend its policyholder is construed broadly, while a policyholder’s reimbursement of defense costs paid by its insurer where an insurer is later deemed not liable for coverage (i.e., recoupment) is viewed narrowly.  A recent New York federal court decision (General Star Indemnity. Co. v. Driven Sports, Inc.) demonstrates yet another instance of a court requiring that recoupment must be bargained-for and agreed to by both the insurer and its policyholder.  New York courts will permit recoupment only if (a) the policy contains specific language providing for recoupment or (b) the policyholder agrees to an insurer’s request for recoupment.  Not all courts, however, take such a policyholder-friendly view of recoupment.  If an insurance policy does not contain a recoupment provision, many insurers will issue a reservation of rights letter asserting a right of recoupment or seeking a policyholder’s approval of the right to recoupment.  A policyholder should thus be sure to clearly and explicitly reject such an attempt in writing when confronted with it.