As I discussed in Coverage Opinions not long ago, there was a recent trio of decisions, over a three-day period, that looked to the American Law Institute’s Restatement of the Law, Liability Insurance for substantive guidance.  I made much of this for two reasons.

First, for the near-three years since the Restatement has been adopted, courts’ citations to it had mainly been for benign reasons.  In general, the ALI’s work played no real role in the decision except in a handful of instances.  But then this February hattrick came along and I asked this question: Are courts’ use of the RLLI changing?

Second, throughout its long and contentious drafting process, there were numerous concerns raised by insurers, and their counsel, that the ALI was seeking to adopt positions in the RLLI that would lead to all manner of detrimental outcomes for insurers in coverage disputes.  The RLLI was predicted by some to lead to cataclysmic consequences for liability insurers.   After nearly three years, and several dozen decisions citing the RLLI, that had not come to pass.  The sky was still in the sky. 

And there was nothing in the February trifecta that changed that.  The courts did not use the decisions to change existing law, but, rather, as a resource where their own state lacked guidance.  The RLLI was used to fill that crevice.  And, given how well-developed coverage law is on so many of the key issues, there aren’t a huge number of places where these voids exist.

Nautilus Ins. Co. v. Access Med

Afew days after that CO piece came out, the Supreme Court of Nevada issued its decision in Nautilus Ins. Co. v. Access Med, No. 79130 (Nev. Mar. 11, 2021).  The court, with several nods to the RLLI, answered the following certified question from the Ninth Circuit:  

“Is an insurer entitled to reimbursement of costs already expended in defense of its insureds where a determination has been made that the insurer owed no duty to defend and the insurer expressly reserved its right to seek reimbursement in writing after defense has been tendered but where the insurance policy contains no reservation of rights?”

The Silver State high court, in a 4-3 decision, answered “yes.” 

Once again, the court used the RLLI simply in the context of filling a hole in its own law and not to upset existing jurisprudence.  And, notably, it was the court’s rejection of the RLLI-adopted rule that was part of its reasoning for the insurer winning the case.  The dissent, by contrast, used the RLLI to support its position.  Coming from a state supreme court, Access Med is the first decision to use the RLLI in the process of making new law.

The reimbursement of defense costs tune has been sung many times by courts.  The arguments for and against it are a broken record – and Access Med is no exception (although the decision does a good job of laying out the competing arguments).  So I’ll skip that part here.  Instead, I address where the RLLI played a part in the decision.

By way of very brief background, Nautilus undertook it insured’s defense, under a reservation of rights, for a CGL claim with a possible allegation of “personal injury.”  The ROR included the right to seek reimbursement of defense costs, if a court determined that no potential for coverage existed.  The insureds did not object. Simultaneously, Nautilus filed an action, in Nevada federal court, seeking a declaratory judgment that it had no duty to defend.  Nautilus succeeded, obtaining a determination that the complaint against the insured did not allege defamation, libel, or slander under California law.

Now Nautilus sought reimbursement of its defense costs.  Nautilus lost at the District Court.  The Ninth Circuit certified the reimbursement question to the Nevada Supreme Court, which answered as follows:

“When a court determines that an insurer never owed a duty to defend, the insurer expressly reserved its right to seek reimbursement in writing after defense was tendered, and the policyholder accepted the defense from the insurer, then the insurer is entitled to that reimbursement. 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. This result gives effect to the parties’ agreement, as well as the court’s judgment, by recognizing that the insurer was never contractually obligated to furnish a defense.”

Where the RLLI Comes Into the Access Med Decision

In reaching its decision, to allow for insurer reimbursement of defense costs, the Access Med court noted that the RLLI adopted a rule against reimbursement, but the ALI also recognized that a “slight greater number of state courts” have permitted reimbursement.  The fact that the majority rule nationally is to allow for reimbursement of defense costs certainly did not carry the day for the insurer, but it seems to have given it a little boost.    

In addition, the Access Med court made this important point in the context of discussing the reimbursement scoreboard: “We note that the Restatement of Liability Insurance justifies its departure from the usual rule by reference to ‘special considerations of insurance law’ that make insurance policies fundamentally different from other contracts. Restatement of Liability Insurance, § 21, cmt. b. That reasoning is inconsistent with our precedent that ‘legal principles applicable to contracts generally are applicable to insurance policies.’ Century Sur., 134 Nev. at 821, 432 P.3d at 183.”

The significance of this statement is that the Nevada high court declined the follow the RLLI in the face of contrary home-state precedent.  This supports an argument that the RLLI’s role is to fill voids in state law and not overturn existing law. 

Three Justices, noting that the RLLI rule does not permit reimbursement, used that as support in their dissenting opinion.  The dissent noted that the RLLI favors the argument that an insurer’s unilateral reservation of rights, giving itself a right to reimbursement, is an impermissible modification of the policy.  The insurer’s right to reimbursement, as the RLLI sees it, must be stated in the policy -- for both legal and practical reasons.