The duty of the insurer to defend the insured under the terms ofthe commercial general-liability coverage form is an accepted partof the form's insuring agreement.

Insurers have generally had no problem with the judicialinterpretation that this duty to defend is separate from andbroader than the duty to indemnify. And, insureds take it forgranted that once the insurer assumes the defense of the insured,the insurance company will pay the legal expenses involved indefending the insured.

What may surprise an insured is that the insurer can getreimbursement from the insured for some of those legal costsexpended.

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A majority of jurisdictions that have faced the reimbursementissue have decided that the insurer does have a right ofreimbursement against the insured; examples come from California,Florida, Montana and the 6th Circuit. These courts have found acommon thread in their pro-reimbursement decisions: The claimagainst the insured is one that is not covered under the terms ofthe policy, and the insurer has told the insured up front that ithas the right to seek reimbursement of certain defense costs.

In addition, these courts have said that if the insurer did notget reimbursement, the insured, who did not bargain for a defenseof noncovered claims, would receive a windfall and would beunjustly enriched.

Of course, the minority position also exists.

These courts say that a rule permitting recovery of defensecosts would be inconsistent with the legal principles that inducean insurer's offer to defend under a reservation of rights. Thereasoning is this: Faced with uncertainty as to its duty toindemnify, an insurer offers a defense under a reservation ofrights to avoid the risks that an inept or lackadaisical defense ofthe underlying action may expose it to if it turns out that thereis a duty to indemnify. At the same time, the insurer wishes topreserve its right to contest the duty to indemnify if the defenseis unsuccessful. Thus, such an offer is made at least as much forthe insurer's own benefit as for the insured's.

If the insurer could recover defense costs,the insured would be required to pay for the insurer's action inprotecting itself against the estoppel to deny coverage that wouldbe implied if it undertook the defense without reservation. Inother words, the insurer is protecting itself as much as theinsured by providing a defense, so there is no reason why theinsurer should get any reimbursement; it is benefitting as much asthe insured.

More recent court rulings on the subject have centered on thepoint that, absent an express provision in the insurance policythat the insurer is entitled to reimbursement of defense costs inthe event that a court determines that the insured has no coverage,the insurer has no right to later attempt to amend the insuringcontract by claiming a right to reimbursement in a reservation ofrights letter. Cases from Illinois, Pennsylvania, Minnesota and the4th Circuit Court of Appeals support this idea.

Regardless of the legal view of reimbursement of defense costs,those in the insurance industry have to consider a nonlegal issue:the attitude of the insured. Not many insureds expect to pay apremium for insurance coverage, and then pay again to reimburse theinsurance company for defending the insured. Insureds couldconsider this a double hit—just another tactic by insurancecompanies to get more money out of the insurance consumer. In sucha case, the insured would either file a lawsuit or drop theinsurer, either way a losing course for the insurance industry.

Is there a way to avoid this problem? The answer, as with somany other things, is education.

If it has decided to seek reimbursement as a matter of business,the insurer has to take the responsibility to inform the insured ofthis decision. And, this disclosure should be within the insuringagreement of the policy. The insurer should tell the insured beforea claim or lawsuit arises that any money spent on defense costs forlosses that are not covered by the policy will have to be paid backto the insurer. This may not make the insureds think better of theinsurance industry, but it certainly would remove the surprise ofreimbursement—and thus, maybe avoid more resentment (and morelawsuits).