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Insurers Cannot Unilaterally Reserve the Right to Recoup Defense Costs in a Reservation of Rights Letter, Eleventh Circuit Holds


Liability insurers defending under a reservation of rights (ROR) often include in their RORs that the insurer may recoup defense costs from the insured if a court later determines the insured’s claims were never covered. Until recently, a split of authority existed in the Georgia federal courts as to whether an insurer can unilaterally reserve the right to recoup in an ROR, such that the insurer can later sue the insured to recoup the costs to defend.  The Eleventh Circuit recently addressed this question and answered in the negative: they cannot.

In Continental Cas. Co. v. Winder Labs., LLC, 73 F.4th 934 (11th Cir. 2023), the Eleventh Circuit held that an insurer cannot recoup its costs to defend the insured based on a unilateral ROR.  The court noted: (1) a “national trend” disfavoring recoupment; (2) an ROR presents no “new” consideration to the insured in exchange for the insured’s agreement to a new contractual right of recoupment; and (3) a unilateral right to recoupment risks collapsing the duty to defend into the duty to indemnify, contrary to Georgia law’s pronouncement that the former is broader than the latter.

An insurer’s right to recoup has not yet been addressed by the Georgia Supreme Court, and thus the law may further change.  In the meantime, under the Eleventh Circuit’s opinion, liability insurers operating in Georgia must be aware that if they are to recoup defense costs from the insured incurred under an ROR, then the insurer must (1) include a right to recoupment in the policy itself, or (2) at the time of the ROR, enter into a contract with the insured – not a unilateral ROR – granting the insurer the right to recoupment and including some new consideration for the insured.  

In coverage litigation, a complete understanding of the costs associated with providing a defense is crucial.  Retaining experienced counsel to review your insurance policies and assist in coverage disputes can help you avoid needless costs.  If you would like to speak to an attorney about a coverage matter, or if you have questions about the content of this update, please contact Seslee Smith, Ryan Burke, or Nathan Miles.