In 2001, the California Supreme Court gave its definitive answer (definitive certainly in California) to a certified question concerning recoupment or reimbusement of settlement and defense of covered claims. First, the California Supreme Court gave a fact-specific answer to the question as follows:
Here, at the time it accepted defense of the insureds, the insurer reserved its right to dispute coverage for any settlement contribution made to the injured third party. However, when a reasonable settlement offer was subsequently tendered, the insureds refused to agree the insurer could settle if the insureds would be liable for reimbursing the insurer for any noncovered claims. They also refused to either assume their own defense, or agree the settlement offer was unreasonable, and hence could not be the basis for a later bad faith action based on the failure to settle. Under such circumstances, we conclude an insurer may be reimbursed for a reasonable settlement payment made over the objection of its insureds.FN1
The California Supreme Court considered the matter thoroughly in the case presented, and concluded its answer once again much in the same fact-specific way:
As noted, the issue here is whether Blue Ridge may seek reimbursement for the settlement paid on the Jacobsens' behalf even in the absence of the Jacobsens' express agreement. We conclude it may. Here, the Jacobsens were on notice both by the policy language and by Blue Ridge's express reservation of rights when it assumed the defense that Blue Ridge might seek reimbursement from them for what were ultimately determined to be noncovered claims. Moreover, Blue Ridge notified the Jacobsens of its intention to accept what was ultimately determined to be a reasonable settlement offer, and offered the Jacobsens the opportunity to assume their own defense. Under such circumstances, Blue Ridge satisfied the prerequisites for seeking reimbursement for noncovered claims included in a reasonable settlement payment: (1) a timely and express reservation of rights; (2) an express notification to the insureds of the insurer's intent to accept a proposed settlement offer; and (3) an express offer to the insureds that they may assume their own defense when the insurer and insureds disagree whether to accept the proposed settlement.FN2
FN1 Blue Ridge Ins. Co. v. Jacobsen, 25 Cal. 4th 489, 492-93, 22 P.3d 313, 314, 106 Cal. Rptr. 2d 535, 536 (2001).
FN2 Blue Ridge Ins. Co. v. Jacobsen, 25 Cal. 4th 489, 502, 22 P.3d 313, 320-21, 106 Cal. Rptr. 2d 535, 544 (2001). [Emphasis added.]
Reprinted with the permission of Thomson Reuters and the author from the manuscript of the author's 2015 Supplement chapters in “Litigation and Prevention of Insurer Bad Faith, 3d” ©2015 by Thomson Reuters.