Recoupment Revisited: Why the Majority Should Adopt the Minority Position

As a matter of contract law, there is typically no language in the insurance policies giving an insurer a right to obtain reimbursement of costs incurred in defending claims that may or may not be covered. The problem with allowing an insurer to use a reservation of rights letter to assert potential recoupment of defense costs is that the duty to defend, unlike the duty to indemnify, is determined at the outset of the litigation. A “reservation of rights” is a document sent by the insurer to the insured stating that a defense of a lawsuit will be provided, but that the insurer has questions concerning coverage and will withdraw from the defense in the event facts come to light showing that the claims at issue are not within the policy's scope. See, e.g., First Ins. Co. of Hawaii, Inc. v. State, by Minami, 665 P.2d 648, 649 (Haw. 1983) (“A reservation of rights agreement is notice by the insurer to the insured that the insurer will defend the insured but that the insurer is not waiving any defenses it may have under the policy.”). Thus, the reservation of rights letter deals with defenses to coverage ' in other words, to the ultimate duty to indemnify. If a claim clearly is outside the scope of coverage, the insurer has no need to reserve its rights in the first place. Conversely, if the insurer believes coverage is questionable enough that it feels the need to defend subject to a reservation of a right to assert recoupment, the claim must be at least “potentially” within coverage ' and, therefore, the duty to defend is triggered.