Arizona Court recognizes an insurer's right to reimbursement

Phillips & Associates, P.C. v. Navigators Ins. Co., 764 F. Supp. 2d 1174, 2011 WL 537509

D. Ariz.

Type of Case: Insurance Coverage

Practice Area(s): Insurance Coverage

Lawyer(s): Kurt M. Zitzer

Office(s): Chicago

Date: Feb 11 2011

The District Court of Arizona held that under either California or Arizona law, a carrier that reserves the right to seek reimbursement of defense and indemnity payments may recover those payments from its insured if it is adjudicated that the policy of insurance ultimately did not cover the claim.

In Phillips, the carrier provided the insured law firm with errors and omissions coverage. A suit was filed against the insured, and the carrier agreed to defend the insured subject to a reservation of rights that included issues of whether the claim had first been made against the insured during the policy period, whether the insured had prior knowledge of the existence of the claim before the carrier issued the policy, and whether the insured failed to disclose a potential claim to the carrier when the application for insurance was made. The carrier subsequently settled the suit against the law firm, under reservation of rights, and with the consent to the insured. The insurer client moved for judgment on the pleadings, requesting that the court determine whether the carrier has a right of reimbursement from the insured if the policy ultimately did not cover the claim. The court found that because the carrier had reserved its rights to include the right to seek reimbursement, and because the insured had consented to the settlement with the prior knowledge that the carrier had reserved its rights, the carrier was entitled to be reimbursed from the insured for the defense and indemnity paid to settle an uncovered claim. In so holding, the court noted that public policy favors such a result:

“If an insurer waived its coverage position simply by settling a claim for the insured, the insurer would be forced either to refuse to settle and face a bad faith claim, or to settle the lawsuit and lose its coverage defenses. [citation omitted] The ‘resulting Catch-22 would force insurers to indemnify non-covered claims,’ violating ‘basic notions of fairness.’ Permitting an insurer to make a reservation of rights not only protects against unjust enrichment of the insured, but also ‘advances significant public policy considerations.”

Kurt M. Zitzer represented Navigators Insurance Company as counsel along with co-counsel from the firm of Wiley Rein.

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