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Recouping Defense Costs From Insurers in Third-Party Claims 

David H. Schwartz, INC Dec. 7, 2022

Businesses will generally purchase liability insurance to protect themselves against lawsuits and other liability claims. These policies can fall under different categories or names such as general liability insurance, professional liability insurance, and product liability insurance.  

The policyholder then expects the insurer to go to battle for them when a lawsuit arrives on their doorstep, but even when the insurer does cover the legal costs involved, sometimes at a later date, they may demand repayment of these costs. 

This practice of what is called recoupment in legal or industry terms is a contentious one that courts have not always recognized. However, a recent California ruling opened a broader window for insurance companies to seek recoupment of defense expenses, but with certain caveats and limitations. 

If your business in or around the Greater San Francisco Bay Area has received a recoupment demand from your liability insurer after they defended your interests in court, contact the Law Offices of David H. Schwartz, INC. Attorney David Schwartz has more than four decades of experience in defending the interests of businesses and is fully up-to-date on insurance industry practices. 

The Law Offices of David H. Schwartz, INC. proudly serves clients not only in San Francisco, but also in San Mateo, San Jose, Santa Clara, Oakland, and throughout Alameda County. 

What Is General Liability Insurance? 

Depending on the structure of your business, your personal assets may or may not be exposed to liability to claims and lawsuits by customers, clients, contractors, and more. A sole proprietorship and even some forms of partnerships expose the owners to threats of losing personal property to settle a claim. A limited liability company and a corporation (traditional or Subchapter S) mostly shield the founders from personal asset seizure. 

In all cases, however, the business entity can be liable when something happens, whether it’s a customer who slips and falls on the business premises, a client who suffers financial harm, or a contractor who feels slighted.  

For this reason, anyone in business needs to purchase liability insurance, which can take on different purposes and names, such as general or commercial liability insurance, professional liability insurance, and product liability insurance. These policies are designed to pay legal defense expenses and cover any damages awarded to the party suing the business. 

Recoupment and the Recent California Court Decision 

Insurance companies can sometimes dutifully defend against a claim or lawsuit and then at a later date, choose to demand repayment of the expenses involved in a process known as recoupment. Courts have been split on whether this is allowable, but starting in 1997, the California Supreme Court held in Buss v. Superior Court that an insurer may recoup expenses for claims that are not “potentially” covered by the policy. 

More recently and more broadly, a federal judge in California reaffirmed that insurers have the right to seek reimbursement if they issue a reservation of rights letter to the policyholder, reaffirming their right to recoup defense costs. The issue in Evanston Insurance Co. v. Winstar Properties, Inc. was whether Winstar actually received the letter of reservation of rights. The judge in a “close call” ruled that Evanston actually sent the letter, and thus, Winstar owed $83,000 plus interest in defense fees. 

In other words, the judge reaffirmed and strengthened the evolving pro-insurer stance of California courts. 

Factors to Consider When Purchasing Liability Insurance 

Since California court precedents do not require the issuers of liability insurance to include recoupment clauses in their policies, businesses that are seeking liability coverage should be extra vigilant. Not only should they carefully read the language in their policy, they should also enquire about the company’s recoupment policy, and be especially vigilant if they receive after-purchase communications from the insurer. Such communication might well be a reservation of rights notification. 

Rely on Trusted Legal Counsel 

The Law Offices of David H. Schwartz, INC. stands ready to help you in any dispute with your insurance company. Attorney David Schwartz has a broad knowledge of business liability insurance and business liability claims and can advise and guide you on the proper course of action. Reach out today with all your business law needs if you’re located in the Greater San Francisco Bay Area.