Eleventh Circuit Finds Insurers Have No Right to Recoup Defense Costs Absent Policy Provision

gavel with money

On July 13, 2023, the Eleventh Circuit issued its decision in Continental Cas. Co. v. Winder Laboratories, LLC, holding insurers do not have a right to recoup their litigation defense costs when the underlying insurance policy does not provide for reimbursement, even when a reservation-of-rights letter includes such a right.  In its decision, the Eleventh Circuit Court of Appeals backed the lower court finding that Valley Forge Insurance Co. and Continental Casualty Co. had no duty to defend Winder Laboratories LLC against claims that it falsely advertised its products. On a question of first impression, the panel also held that the insurers are not entitled to reimbursement of the costs they incurred in defending Winder because their insurance contract “did not contemplate a right to recoupment.”

In the underlying action, Concordia Pharmaceutical SARL sued Winder and its manager, Steven Pressman, in the U.S. District Court for the Northern District of Georgia for “falsely or misleadingly” advertising two of its products as generic equivalents of Concordia’s intestinal drug Donnatal.  Valley Forge and Continental sent a reservation of rights letter agreeing to defend Winder under their respective primary general liability and umbrella policies subject to a “fairly standard reservation of rights.” According to the Eleventh Circuit’s opinion, the letter included a “not-so-standard reimbursement provision” stating that the insurers reserved the right to seek recoupment of defense costs incurred for uncovered claims. Pressman signed and returned an acknowledgment of the insurers’ reservation of rights.

The insurers later sued Winder and Pressman in the Northern District of Georgia, seeking a declaration that they had no duty to defend or indemnify them because Concordia did not allege a covered “personal or advertising injury.” The lawsuit also alleged that a “failure to conform” exclusion barred coverage for injuries arising from “the failure of goods, products or services to conform with any statement of quality or performance made” in an insured’s advertisement. Additionally, the insurers alleged they were entitled to reimbursement of the legal costs they had spent in defending Winder and Pressman in the underlying litigation.

In granting the insurers’ motion for judgment on the pleadings in June 2020, U.S. District Judge Richard W. Story agreed that Concordia’s underlying claims were precluded by the “failure to conform” exclusion. In a subsequent ruling, however, the judge said the insurers could not recoup their defense costs because their right to do so was included only in their reservation-of-rights letter and not in the parties’ insurance contract.  The panel agreed with Judge Story, finding the insurers could not recoup their defense costs given that they did not reserve this right in their insurance contract.

The insurers argued that their reservation-of-rights letter created a new contract in which the insureds “implicitly and explicitly” agreed to the reimbursement provision, which ultimately failed to convince the Appellate panel. The panel disagreed, finding the letters were the quintessential “promise to perform a preexisting contractual obligation” that “does not constitute consideration for a new agreement.” The court noted that allowing the insurers to recoup their costs in the absence of any contractual provision giving them such right would unfairly “collapse” their duty to defend into a duty to indemnify. The panel held that in Georgia, a wide-ranging reimbursement is necessarily inappropriate in a system that is predicated on a broad duty to defend and a more limited duty to indemnify.

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