Recouping Defense Costs for Third-Party Claim Settlement
May 15, 2023
Businesses face liabilities on several different fronts depending on the nature of their business. If you operate a retail establishment, customers can injure themselves while shopping in your store, for instance, by slipping and falling. If you operate an accounting firm, you can face professional claims, which often fall under the category of errors and omissions. In any kind of business, if you do advertising, a competitor may assert that you falsely represented them and harmed their business.
For this reason, businesses usually invest in what is called commercial or business liability insurance. This type of policy generally comes in three different forms or purposes – general liability insurance, professional liability insurance, and product liability insurance. The latter protects the business if claims are made because a product they manufacture or market results in harm or loss to a customer.
Sole proprietors and partnerships are at the most risk since their owners are personally liable for any claims made against their operations. Limited liability companies (LLCs) mostly protect the owners – known as members – from direct liability, as do corporations, whether traditional or Subchapter S.
While these liability insurance instruments are purchased to cover the cost of any claim against the business and legal defense fees involved, insurers often turn to use recoupment clauses in their policies or as riders. Recoupment means that after a third-party claim settlement has been reached, the insurer can demand of the policyholder that the defense costs – legal fees – be repaid.
Arizona has a statute to cover this practice, which is full of clauses that the average business owner would probably find hard to decipher, but allows the practice to continue. If your business in or around Chandler, Arizona, is facing a recoupment attempt by your commercial liability insurer, contact us at Arnett & Arnett, PC.
We are insurance attorneys who have more than 30 years of experience in dealing with insurance companies and their bad faith or questionable tactics. We also proudly serve clients in Phoenix, Tucson, Flagstaff, and throughout Arizona.
What Is Business Liability Insurance?
As described above, business or commercial liability insurance covers business owners from liability and legal costs in third-party claims made against them. Depending on the nature of the business, the policy can cover general liability, professional liability, or product liability.
A business liability policy comes in two versions – “occurrence” and “claims made.” Occurrence policies cover any injury or damage that occurs during the term of the policy. Claims made covers only incidents that occur and are reported during the time the policy is in effect.
What Is Recoupment?
State and federal courts don’t always agree on an insurer’s right to recoup defense costs from a settled claim. Recoupment, as a general principle springs from a California Supreme Court decision in 1997 that ruled an insurer, may recoup costs that are not potentially covered by the policy. A handful of states, including California and Florida, recognize recoupment. Others, like Texas and Pennsylvania, do not.
Business liability insurers have been known to ask policyholders to sign an agreement with wording similar to this when negotiating a settlement: “The insured agrees that the insurer has reserved its right to deny coverage and to seek recovery of any settlement or defense costs paid on behalf of the insured.” Note that this clause even includes recovery of the settlement amount.
Arizona’s Law on Recoupment and Defenses to the Practice
Arizona Revised Statutes Section 47-3305 covers “Defenses and claims in recoupment.” As mentioned earlier, the statute contains many clauses, generally outlining under which circumstances the policyholder, or obligor in legal terms, can assert a defense against recoupment.
These defenses include, for instance, “Fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms.” Another defense is “Duress, lack of legal capacity or illegality of the transaction which, under other law, nullifies the obligation of the obligor.”
Protect Yourself in Advance
When purchasing a business liability policy, be sure to read the fine print and ask the broker about any recoupment practices by the insurer. If you see any wording like that in the reservation clause cited above, then you may want to shop around for another provider.
Discuss Your Options with Us
If you find yourself in a situation where your business liability insurer is seeking recoupment or asking you to agree to a reservation clause before taking on a third-party claim, contact us immediately at Arnett & Arnett, PC.
We have prior experience defending insurance companies but now work for the other side, so we know how insurers operate. We will bring our knowledge and experience to your situation and provide you with the best options to counter any insurer’s adverse actions.
Arnett & Arnett, PC is located in Chandler but serves clients throughout Arizona, including Phoenix, Tucson, and Flagstaff.