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Answering questions certified by the Ninth Circuit, the Alaska Supreme Court ruled that state statutory law prohibits enforcement of a policy provision entitling an insurer to reimbursement of defense costs, even where (1) the insurer specifically reserved the right to seek reimbursement; (2) the insured accepted the defense subject to the reservation of rights; and (3) it was later determined that there was no coverage.  Attorneys Liability Protection Society, Inc. v. Ingaldson Fitzgerald, P.C., 2016 WL 1171299 (Alaska Mar. 25, 2016).

Alaska statutory law provides that in furnishing a policyholder with independent counsel, an insurer “shall be responsible” for the fees and costs associated with potentially covered claims.  AS 21.96.100(d).  Although the statute does not specifically address whether an insurer can later seek reimbursement of defense costs, the court interpreted the statute to prohibit such reimbursement.  The court reasoned that the statute focuses on the “mandatory requirement that insurers pay for the cost of independent counsel,” using terms such as “shall” and “obligation.”  The court therefore concluded that the statute “clearly allocates to the insurer the responsibility to pay” defense costs and that “[a]ny effort by the insurer to shift such expenses to an insured would violate the allocation that the statute requires and would therefore be invalid.”  The court held that the prohibition against reimbursement applies not only in cases where it is subsequently determined that a policy exclusion bars coverage, but also to cases where it is determined that there was “no possibility of coverage” in the first place.  The court stated that “even if it were later determined that there was no possibility of coverage, that denial has no retroactive effect on the duty to defend.”   In so ruling, the court expressly distinguished California statutory and common law in this context, which allows for reimbursement of defense costs.