Reimbursing Defense Costs Under Alaska Law: A Request for Clarity

The United States Court of Appeals for the Ninth Circuit recently certified to the Alaska Supreme Court the question of whether an insurance company can seek reimbursement of the costs for independent counsel’s defense of the insured when the insurance company issued a reservation of rights defense, and it was later determined there was no coverage. Certifying the questions was appropriate because the two federal district courts in Alaska had reached conflicting interpretations on Alaska law regarding reimbursement of defense costs in reservation of rights situations. Attorneys’ Liability Prot. Soc’y, Inc., v. Ingaldson Fitzgerald, P.C., 766 F.3d 1180, 1182 (9th Cir. 2014) (citing Unionamerica Ins. Co. Ltd. v. Genstar Indem. Co., No. A01-0317-CV (HRH), 2005 WL 757386 at *8 (D. Alaska, March 7, 2005); Attorneys Liability Prot. Soc’y, Inc. v. Ingaldson & Fitzgerald, P.C., No. 3:11-cv-00187-SLG, 2012 WL 6675167 at *4 (D. Alaska, Dec. 21, 2012)).

The certified question was “whether Alaska law prohibited enforcement of policy provisions entitling insurer to reimbursement of fees and costs incurred by insurer defending claims under reservation of rights, where: (1) the insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted defense subject to the reservation of rights, and (3) the claims are later determined to be excluded from coverage under the policy.”

As part of the certified inquiry, the Ninth Circuit also asked that if Alaska law did prohibit enforcement of policy provisions entitling the insurer to reimbursement of fees and costs, whether Alaska law would prohibit such reimbursement “where: (1) the insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted the defense subject to the reservation of rights, and (3) it is later determined that the duty to defend never arose under the policy because there was no possibility of coverage.”

The facts before the Ninth Circuit Court of Appeals in Attorneys’ Liability Prot. Soc’y, Inc. v. Ingaldson Fitzgerald, involved a risk retention group chartered in Montana bringing suit against a law firm located in Alaska for which the risk retention group had provided legal malpractice insurance coverage. The risk retention group sought reimbursement of the costs of retaining independent counsel to defend the law firm when the risk retention group reserved its rights to contest coverage and seek reimbursement. Under the facts presented, the insurance policy excluded coverage for disputes concerning the law firm’s trust account funds and client fees. The claims that were brought against the law firm involved funds held in the law firms trust account. Under those circumstances it was possible that the duty to defend might not arise and reimbursement of the risk retention pools defense costs might not violate any prohibition on reimbursement under ALASKA STAT. § 21.96.100(d).

Accordingly, the Ninth Circuit Court of Appeals stayed the pending appellate proceedings until the Alaska Supreme Court decided the certified questions. Most of the jurisprudence involving the question of reimbursement did not involve an underlying statutory requirement for the provision of a defense in reservation of rights situations. This is a ripe issue. We will have to wait to see if the Alaska Supreme Court will accept the Ninth Circuit’s invitation to weigh in on the issue.

ALASKA STAT. § 21.96.100(d) states: “In providing independent counsel, the insurer is not responsible for the fees and costs of defending an allegation for which coverage is properly denied and shall be responsible only for the fees and costs to defend those allegations for which the insurer either reserves its position as to coverage or accepts coverage.”

The Court of Appeals noted that if § 21.96.100(d) was the only Alaska authority on the subject, the statute would prohibit reimbursement due to the statute’s mandatory language. However, under the facts of the case at issue, the parties had agreed to the purchase of an insurance policy that allowed reimbursement. The risk retention group reiterated the possibility that it would seek reimbursement in its reservation of rights letter prior to initiating a reservation of rights defense, which was accepted by the insured. According to the Ninth Circuit Court of Appeals, § 21.96.100(d) did not address the situation of whether the insurance company could later seek reimbursement of fees assumed under a reservation of rights where the policy created a reimbursement right, and where the insurer had reserved its rights on the issue and provided a reservation of rights defense accepted by the insured.

Under Alaska law, the insured has a right to independent counsel where the insurance company defends the insured under a reservation of rights to disclaim coverage at a later time. See, e.g., CHI of Alaska, Inc. v. Employers Reins. Corp., 844 P.2d 1113, 1115 (Alaska 1993). Under Alaska law, the insured has the unilateral right to select independent counsel, subject only to the insurance policies’ covenant of good faith and fair dealing.

Another aspect of the certified question posed by the Ninth Circuit Court of Appeals to the Alaska Supreme Court addressed a follow up issue regarding § 21.96.100(d). The Ninth Circuit queried that if the statute prohibited reimbursement in the event of non-coverage, a related question arises as to whether reimbursement is precluded even where the duty to defend never arose. A duty to indemnify and the duty to defend are two distinct and separate obligations. Under Alaska law, insurance companies have a duty to defend their insureds where “vagaries of law and fact are sufficient to create the potential that an insured will incur covered liability . . . .” Makarka ex. rel. Makarka v. Great American Ins. Co., 14 P.3d 964, 969 (Alaska 2000).