Nevada Supreme: Insurer Entitled to Reimbursement for Defense Costs if No Coverage Owed

An insurer that paid to defend a policyholder against a lawsuit, but determined later that no coverage was owed, is entitled to reimbursement for its costs, a divided Nevada Supreme Court said.

In a 4-3 decision on Thursday, the high court answered a certified question by the US 9th Circuit Court of Appeals to clarify a point of Nevada law that up to now had not been addressed. The majority ruled that a carrier has a right to seek reimbursement if it reserved its rights in writing.

The majority opinion notes that an insurer can be exposed to liability for damages far beyond the limits in an insurance policy if it refuses to defend an insured against a lawsuit and a court determines that coverage was owed.

“Under these circumstances, we conclude that when a court determines that the insurer never had a duty to defend, and the insurer clearly and expressly reserved its right to seek reimbursement, it is equitable to require the policyholder to pay,” the opinion says.

The question came to the Nevada Supreme Court because of a 2014 lawsuit filed in California state court by Ted Switzer against his former business partner Robert Clark Wood II. Switzeraccused Wood and his businesses, Access Medical and Flournoy Management, of taking money and customers that belonged to his own spinal implant distributorship.

Wood asked Nautilus to pay for the cost of defending the lawsuit because one of Switzer’s 31 claims was based on an allegedly false statement made by an agent for Woods’ businesses, Jacqueline Weide. She allegedly told a hospital administrator that Switzer had been banned from selling spinal implants. The policy issued by Nautilus covered damages caused by libelous or slanderous statements.

Nautilus filed its own lawsuit in Nevada federal court seeking a declaration that it had no duty to defend Wood and his companies from Switzer’s lawsuit. The federal court complied, finding that the Weide email did not contain a false statement that would support a defamation, slander or libel claim under California law.

Nautilus asked the district court to order Wood and his companies to reimburse it for the costs incurred, but the court refused. It found that the carrier had not shown that it was entitled to reimbursement under Nevada law.

On appeal, the 9th Circuit affirmed the decision that Nautilus had no duty to defend, but it punted the question of whether the insurer was entitled to reimbursement to the Nevada Supreme Court.

The Supreme Court’s majority opinion says that some state courts have held that an insurer cannot seek reimbursement for defense costs from an insured unless the policy expressly requires it. But the majority of jurisdictions have adopted the view that insurers can recover defense costs once a determination that no duty to defend existed.

“Under generally applicable principles of unjust enrichment and restitution, the insurer has conferred a benefit on the policyholder; the policyholder appreciated the benefit; and, because it is reasonable for the insurer to accede to the policyholder’s demand, it is equitable to require the policyholder to pay,” the majority said.

The three dissenting justices said the majority opinion contradicts prevailing Nevada case law. They said Nautilus had agreed to a lengthy contract that covered the entire insurer-insured relationship. It did not contain any provision allowing for the recoupment of costs should a court determine Nautilus had no duty to defend.

Wood, Flournoy and Access Medical are on the hook for far more than Nautilus’ legal costs. They lost the lawsuit filed by Switzer and a jury awarded $2.8 million in damages.

Switzer appealed, arguing that the trial court erred by failing to award treble damages for violations of Penal Code 496, which allows for enhanced civil penalties to recover money that was stolen. The 5th District Court of Appeals agreed and ordered that the damages resulting from theft be tripled, increasing the amount of the award to more than $6 million.

Wood appealed to the California Supreme Court, but the court refused to hear the case.