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In the underlying personal injury action, commenced in January 2011, Victor Gecaj sought to recover damages for injuries he allegedly sustained when he fell from a ladder at a property owned and operated by the insureds. The insureds failed to notify its insurance company about Gecaj’s accident until October 2014 more than four years after the incident, and after an inquest on damages had occurred, and judgment had been rendered against the insureds in the sum of $900,000. The insurance company denied coverage based on late notice. However, the default judgment was then vacated, and the insurance company agreed to provide a defense under a reservation of rights to deny coverage if the default judgment was later reinstated. When the default judgment was reinstated, the insurance company advised the insureds and Gecaj that it was denying coverage, and reserving its right to recover any fees and costs incurred in defending the insureds in the underlying action. The insurance company t
Tuesday, February 9, 2021
The Second Department, Appellate Division, for the Supreme Court of New York, recently held in a matter of first impression, that an insurance company with a duty to defend may not recover defense costs after a determination that no duty to indemnify or further defend exists even though the insurer expressly reserved its right to recoup such defense costs unless the policy explicitly provides for such recovery.
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In the underlying personal injury action, commenced in January 2011, Victor Gecaj sought to recover damages for injuries he allegedly sustained when he fell from a ladder at a property owned and operated by the insureds. The insureds failed to notify its insurance company about Gecaj’s accident until October 2014 more than four years after the incident, and after an inquest on damages had occurred, and judgment had been rendered against the insureds in the sum of $900,000. The insurance company denied coverage based on late notice
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Recoupment of defense costs (defense fees and costs) by insurers in the absence of a duty to indemnify under a liability policy is an unsettled issue in many states. In a
recent decision, a New York intermediate appellate court held that even though there was no duty to indemnify an underlying personal injury action under a CGL policy, the insurer could
not recoup the defense costs it had advanced under a reservation of rights (ROR) letter where the policy at issue provided for a duty to defend but did not contain an express contractual provision allowing for the recoupment of such defense costs. This decision, however, by a court for one of four judicial departments in New York, is contrary to other state and federal decisions allowing recoupment under New York law and should be limited to its facts.
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Given the breadth of the duty to defend, liability insurers often must defend insureds against claims that do not ultimately trigger the duty to indemnify. In some states, an insurer can offer a defense under a reservation of rights, to later withdraw and recover its defense costs once it is determined that there is no coverage for the claim.
New York may not permit this type of recovery. According to a recent New York appellate court decision of first impression, an insurer may not recover defense costs in the event that there are no covered claims, even if it has reserved the right to do so, unless the policy explicitly provides for such recovery. S