Nevada Supreme Court: Insurer May Recover Defense Costs from its Policyholder

In a 4-3 split decision, the Nevada Supreme Court sided with insurance companies in Nautilus Ins. Co. v. Access Medical, LLC, et al., 137 Nev. Adv. Op. 10 (March 11, 2021), ruling that they may obtain reimbursement from individuals and policyholders. This decision was issued in response to the following certified question from the Ninth Circuit:

Is an insurer entitled to reimbursement of costs already expended in defense of its insureds 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?

In answering this question, the Nevada Supreme Court held that “it is equitable to require the policyholder” to reimburse the insurer for defense fees and costs incurred by the insurer “when [1] a court determines that the insurer never had a duty to defend, and [2] the insurer clearly and expressly reserved its right to seek reimbursement.” The court stated that this decision is consistent with the majority rule and based on an unjust enrichment theory, as described in the Restatement (Third) of Restitution & Unjust Enrichment (2011), which states:

If one party to a contract demands from the other a performance that is not in fact due by the terms of their agreement, under circumstances making it reasonable to accede to the demand rather than to insist on an immediate test of the disputed obligation, the party on whom the demand is made may render such performance under protest or with reservation of rights, preserving a claim in restitution to recover the value of the benefit conferred in excess of the recipient’s contractual entitlement.

For its part, the three-justice dissent pointed out that the majority rejected the reasoning and concerns expressed by “a growing number of jurisdictions” and ignored well-settled legal principles, including that unjust enrichment is not available when there is an express contract that governs the parties’ relationship. Thus, in this case, since the insurance contract governed the parties’ relationship, and because the insurance contract did not state that the insurer may obtain reimbursement, the dissent reasoned that unjust enrichment did not apply.[1]

The dissent also noted that the insurance contract in this case contained an integration clause, which stated that the insurance contract constituted the entire agreement governing the insurer-insured relationship. Accordingly, the dissent concluded that courts should not allow an insurance company to deny the applicability of the insurance contract after the company already agreed to provide a defense pursuant to that very same insurance contract. As the majority acknowledged, “the duty to defend arises, in the first place, from the contract.”            

Last, the dissent determined that allowing insurance companies to obtain retroactive reimbursement from a policyholder undermines notions of equity and fairness. The dissent recognized that by agreeing to provide a defense, an insurance company makes a calculated business decision based on the adhesion contract that it prepared and issued. Thus, according to the dissent, courts should not further tip the balance of power away from individuals and policyholders by giving insurance companies an extra-contractual means of escaping their calculated business decision. The dissent warned that this would enable an insurance company to “defend [under the contract and] under a reservation of rights, amass a substantial legal bill [under its contractual right to control the defense], and then seek to recoup the defense from the insured” by arguing that the insurance contract was never applicable in the first place. Such results, the dissent concluded, are inequitable and “utterly inconsistent with our established Nevada law.”

[1] For support, the dissent cites the new Restatement of Liability insurance (2019), which provides “that ‘an insurer may not obtain recoupment of defense costs from the insured, even when it is subsequently determined that the insurer did not have a duty to defend or pay defense costs,’ unless the right to recoupment is ‘stated in the insurance policy or otherwise agreed to by the insured.’”