As noted by well-respected commentators, Hon. Barry Ostrager and Thomas R. Newman, in their excellent Handbook on Insurance Coverage Disputes (Aspen Publishers), at §5.07, “Authority is divided as to whether an insurer may reserve its right to recover defense costs in the event it is subsequently determined that there is no coverage.” Indeed, independent research on this issue has revealed a significant number of decisions—mostly from the federal courts acting in their role of interpreters of New York state law and predictors of how the New York state courts would rule—with apparently conflicting and fact-based results. My wish, therefore, for a thorough and detailed analysis of the issue by a New York state court recently has been granted with the Appellate Division, Second Department’s Dec. 30, 2020 decision in American Western Home Ins. Co. v. Gjonaj Realty & Management Co., 192 A.D.3d 28 (2d Dep’t 2020).
As described by the author of the opinion and order, Justice Colleen Duffy, American Western “presents a novel issue of law that this court has not yet addressed—whether an insurance company … may recover the costs of defending its insureds … in an underlying personal injury action against those insureds where there has been a reservation of rights by the insurance company and a determination by the court that the insurance company has no obligation to defend and provide insurance coverage to the insureds in an underlying personal injury action commenced against them.”