Wednesday, September 15, 2010

Tougher for Insurance Carriers to Reserve the Right to Recoup Litigation Costs in Wyoming.

The United States Court of Appeals for the Tenth Circuit, interpreting Wyoming law, recently held that a reservation-of-rights letter from an insurance company to its insured was not sufficient to allow the insurer to recoup the costs of defending the insured in construction litigation.  Rather than relying on a reservation-of-rights letter to seek recoupment of defense costs, an insurance company subject to Wyoming law should deny defense of companies at the outset if they do not agree to bear the costs.

In Emp’rs Mut. Cas. Co. v. Bartile Roofs, Inc., 2010 WL 3473382 (C.A.10 (Wyo.)), the insurance company (“EMC”) agreed to defend Bartile based on the commercial general liability (“CGL”) insurance policy it issued to Bartile.  At the same time, EMC reserved its right to “recoup defense costs from Bartile should it be determined that EMC had no duty to defend Bartile in this litigation.”

Ruling on EMC’s motion for summary judgment, the District Court for Wyoming determined that EMC had no duty to defend Bartile. However, the court also held EMC could not recover its costs of defending Bartile. The 10th Circuit Court of Appeals affirmed the decision.[1]  The Court of Appeals first noted that the CGL insurance policies issued to Bartile contained no provision for recovering defense costs from Bartile. The court then pointed to Wyoming case law that supported its decision. In Shoshone First Bank v. Pac. Emp’rs Ins. Co., 2 P.3d 510 (Wyo. 2000), the court held that a reservation letter cannot unilaterally change an insurance contract. Further, "if an insurance carrier believes that no coverage exists, then it should deny its insured a defense at the beginning instead of defending and later attempting to recoup from is insured the costs of defending the underlying action."  Am. States Ins. Co. v. Ridco, Inc., No. Civ. 95CV158D, 1996 WL 334001184.

Wyoming follows the minority position regarding reservation letters and recoupment of costs. EMC attempted to change that in its reply brief. First, EMC argued that its reservation letter is enforceable because it was immediate, explicit, and provided adequate notice of the possibility of reimbursement. Next, EMC argued for enforcement because it was an implied-in-fact contract. Last, it argued for enforcement because the defense was provided under the reservation letter, not the CGL policy.

Unfortunately for EMC, the court did not weigh in on these issues because EMC waived them by not raising them at the District Court level.  Also worth mentioning, the term “accident” (the event that triggered EMC’s duty to defend under the CGL) was not defined in the CGL policy. The court looked to state law for the definition and found that Wyoming and Utah define the term “accident” differently when interpreting CGL policies. “Wyoming law focuses on the unexpectedness of the event, while Utah law focuses on the unexpectedness of the result or injury.” Emp’rs, at 15. Nonetheless, the court held that difference immaterial because neither definition would have triggered coverage under the CGL policy.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at

[1] The Court of Appeals also went into detail about the procedural issues raised by Bartile. Those issues were personal jurisdiction, venue, and choice of law. However, the most noteworthy issues for purposes of this blog are the recoupment-of-costs and “accident” issues.

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