On March 11, 2021, the Supreme Court of Nevada issued an order answering a certified question posed by the United States Court of Appeals for the Ninth Circuit regarding the insurer’s right to seek reimbursement from the insured for defense costs associated with uncovered claims. Specifically, the question was:
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?
Grounding its answer in Section 35 of the Restatement (Third) of Restitution and Unjust Enrichment, the Court announced that “when a court finally determines that the insurer had no contractual duty to defend, the insurer may ordinarily recover in restitution if it has clearly reserved its right to do so in writing.” 137 Nev. Adv. Op. 10 at 10. It did so recognizing that there exists “significant disincentive” under Nevada law for the insurer to deny a defense outright (Century Surety Co. v. Andrew, 134 Nev. 819, 432 P.3d 180)(holding that “an insurer’s liability where it breaches its contractual duty to defend is not capped at the policy limits plus the insured’s defense costs, and instead, an insurer may be liable for any consequential damages caused by its breach”). The Court reasoned, “[a]s our law has more forcefully encouraged insurers to offer to defend doubtful claims, see Century Sur., 134 Nev. at 822 n. 4, 432 P.3d at 184 n.4, it is only fair to permit those insurers to recover costs that they never agreed to bear.”
Reimbursement gives effect to (rather than modifies) the parties’ agreement, and the Court declined to “force upon parties contractual obligations, terms or conditions which thy have not voluntarily assumed.” 137 Nev. Adv. Op. 10 at 14. This squares with generally applicable principles of unjust enrichment and restitution. The insurer conferred a benefit on the policyholder and the policyholder enjoyed that benefit. The insurer was reasonable in acceding to the policyholder’s demand, and it is equitable to require the policyholder to pay.
The Court also briefly clarified the nature of the duty to defend, acknowledging that on one occasion, it had described this duty as a “legal duty that arises under the law, as opposed to a contractual duty arising from the policy” (Allstate Ins. Co. v. Miller, 125 Nev. 300, 318, 212 P.3d 318, 330 (2009)). Footnote 3 addresses this statement as conflating the duty to defend with the implied covenant of good faith and fair dealing, and concludes: “When an insurer has a contractual duty to defend, the law implies a duty to do so in a reasonable manner. But the duty to defend arises, in the first place, from the contract.”
