Arkansas Supreme Court Holds Insurer Cannot Recover Defense Costs From Insured Based on Unilateral Reservation of Rights

July 21, 2008

The Supreme Court of Arkansas has held that an insurer obtaining a declaration of no coverage may not recover defense costs spent on the insured's behalf even though it reserved its right to do so. Medical Liability Mutual Ins. Co. v. Alan Curtis Enterprises, Inc., et al., 2008 WL 2205868 (Ark. May 29, 2008).

The administrator of the estate of a deceased nursing home resident sued the nursing home operator for negligence and wrongful death. The operator tendered the defense of the suit to its insurer, which agreed to defend but advised that it believed there was no coverage and reserved its rights to recoup costs and expenses incurred in providing a defense. The insurer filed suit seeking, and obtained, a declaratory judgment that it did not owe a duty to defend or indemnify because the damages and/or conduct complained of in the underlying lawsuit occurred after the policy had expired. However, the court declined to answer whether the insurer could recoup its defense costs, certifying the question to the Arkansas Supreme Court.

The Arkansas Supreme Court first observed that recovery of attorneys' fees is not allowed in Arkansas except where expressly provided by statute. The Supreme Court considered the only two possible Arkansas statutes that allow for attorneys' fees and found that there is no provision for the award of attorneys' fees to an insurer under either statute. One statute provides for the recovery of attorneys' fees only to the insured in a declaratory judgment action. The other statute allows recoupment of fees and costs only in breach of contract actions. Thus, the Court held that an insurer may not recoup attorneys' fees under a unilateral reservation of rights without statutory or rule authority allowing for recovery of attorneys' fees.