Court Finds Insurer Entitled to Recoupment, Declines to Follow ALI Restatement on the Law of Liability Insurance

A Delaware trial court, applying Tennessee law, has ruled that an insurer was entitled to recover defense costs it advanced under a reservation of rights for a non-covered claim.  Catlin Specialty Ins. Co. v. CBL & Assocs. Props., 2018 WL 3805868 (Del. Super. Ct. Aug. 9, 2018).  In so doing, the court cited the American Law Institute Restatement on the Law of Liability Insurance (Restatement), but it ultimately refused to follow the Restatement, concluding that it did not accurately reflect Tennessee law.

The dispute arose from an underlying class action filed against the insured.  The insurer initially denied coverage, but after an amended complaint was filed, the insurer agreed to defend the insured under a reservation of rights, which included the right to recoup any amounts the insurer advanced in connection with the defense.  The day after reserving rights, the insurer filed a declaratory judgment action against the insured seeking a ruling that there was no coverage under its policy.  The court in the coverage action ultimately found in favor of the insurer, holding that it owed no duty to defend the insured.  The insurer then moved for supplemental relief, seeking recoupment and prejudgment interest on the amounts it advanced.  The insured argued, in response, that the insurer was not entitled to such relief.

In ruling on the insurer’s motion and noting that Tennessee substantive law controlled the recoupment issue, the court observed the absence of a Tennessee state court decision addressing recoupment in this context.  The court cited a decision from a federal district court, Cincinnati Insurance Co. v. Grand Pointe, LLC, 501 F. Supp. 2d 1145 (E.D. Tenn. 2007), which allowed an insurer to seek recoupment, but it also discussed a “more recent trend” described in the Restatement.  Ultimately, however, the court ruled that the Grand Pointe court “got it right” by finding that the insurer had established a quasi-contractual right to reimbursement, and the court refused to follow the Restatement rule on that issue, finding that it did not accurately reflect Tennessee law.  In addition to concluding that the insurer was entitled to recoupment, the court ruled that the insurer could recover prejudgment interest from the date the court initially found that the insurer had no duty to defend.