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Insurers' Rights to Recoup Defense Costs
Commercial General Liability (“CGL”) policies typically provide two distinct benefits to policyholders: defense against potentially covered claims, and indemnity against covered claims. Because the duty to defend is broader than the duty to indemnify, it is as important, if not more important, than the duty to indemnify. See, e.g., Buss v. Los Angeles Superior Court, 65 Cal.Rptr.2d 366, 373, 939 P.2d 766, 773 (1997). Insurers often accept their defense obligations, however, subject to reservation of their rights to assert non-coverage. Now, with increasing frequency, insurers also are demanding reimbursement if it turns out that the liability claim was not covered.
When an insurer is presented with a claim, it may (if appropriate) deny coverage, and advise the policyholder of the basis for its non-coverage position. If a claim is indisputably covered, the insurer must accept its coverage obligations. If it is unclear to the insurer whether a claim is covered, the insurer may (and in some states must) either: 1) defend the suit; 2) defend the suit under a reservation of rights; or 3) seek a timely declaratory judgment of no coverage. See, e.g., Employers Ins. of Wausau v. Ehlco Liquidating Trust, 708 N.E.2d 1122, 1134-35 (Ill. 1999); Shell Oil Co. v. AC&S, Inc., 649 N.E.2d 946, 949 (Ill. App. Ct. 1995). If the insurer fails to take one of these three steps and is later found to have had a duty to defend, the insurer then may be estopped from raising any policy defenses to coverage. Employers Ins. of Wausau v. Ehlco Liquidating Trust at 1122, 1135; Korte Construction Co. v. American States Ins., 750 N.E. 2d 764, 769 (Ill. App. Ct.), appeal denied, 763 N.E. 2d 319 (Ill. 2001); Shell Oil v. AC&S, Inc., 649 N.E.2d 946, 949-50 (Ill. App. Ct. 1995).
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