Attorneys Liability Protection Society, Inc. v. Ingaldson Fitzgerald, P.C. ( 2016 )

Notice: This opinion is subject to correction before publication in the PACIFIC REPORTER.
Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts,
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THE SUPREME COURT OF THE STATE OF ALASKA
ATTORNEYS LIABILITY )
PROTECTION SOCIETY, INC., ) Supreme Court No. S-15683
a Risk Retention Group, )
) 9th Cir. Case Nos. 13-35115/
Plaintiff ) 13-35172
Cross-Appellant/Appellee, ) U.S. District Court No.
) 3:11-cv-00187-SLG
v. )
) OPINION
INGALDSON FITZGERALD, P.C., )
f/k/a Ingaldson, Maassen & )
No. 7095 – March 25, 2016
Fitzgerald, P.C., )
)
Defendant )
Appellee/Cross-Appellant. )
)
Certified Question from the United States Court of Appeals
for the Ninth Circuit on Appeal from the United States
District Court for the District of Alaska, Sharon L. Gleason,
District Judge.
Appearances: Kendra E. Bowman and Scott J. Gerlach,
Delaney Wiles, Inc., Anchorage, and Kevin D. Hartzell and
Angela Probasco, Kutak Rock LLP, Omaha, Nebraska, for
Plaintiff–Cross-Appellant/Appellee. William H. Ingaldson
and Jim M. Boardman, Ingaldson Fitzgerald, P.C.,
Anchorage, for Defendant–Appellee/Cross-Appellant.
Daniel Wilkerson, Assistant Attorney General, Anchorage,
and Craig W. Richards, Attorney General, Juneau, for
Amicus Curiae State of Alaska.
Before: Stowers, Chief Justice, Fabe and Bolger, Justices,
and Matthews and Eastaugh, Senior Justices.* [Winfree and
Maassen, Justices, not participating.]
FABE, Justice.
I. INTRODUCTION
Today we resolve two questions certified to us by the United States Court
of Appeals for the Ninth Circuit:
1. Does Alaska law prohibit enforcement of a policy
provision entitling an insurer to reimbursement of fees and
costs incurred by the insurer defending claims under a
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 the defense subject to the reservation of rights, and
(3) the claims are later determined to be excluded from
coverage under the policy?
2. If the answer to Question 1 is “Yes,” does Alaska law
prohibit enforcement of a policy provision entitling an insurer
to reimbursement of fees and costs incurred by the insurer
defending claims under a 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 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?[1]
The answer to both questions is “yes.”
*
Sitting by assignment made under article IV, section 11 of the Alaska
Constitution and Alaska Administrative Rule 23(a).
1
Attorneys Liab. Prot. Soc’y, Inc. v. Ingaldson Fitzgerald, P.C. (ALPS 9th
Cir.), 766 F.3d 1180, 1181 (9th Cir. 2014).
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II. FACTS AND PROCEEDINGS
The facts of this case are not in dispute for the purpose of resolving the
certified questions.2 Ingaldson Fitzgerald is an Alaska law firm. Attorneys Liability
Protection Society, Inc. (ALPS) is a Montana insurance company and risk-retention
group. From April 29, 2007, to April 29, 2008, ALPS insured Ingaldson Fitzgerald.
Ingaldson Fitzgerald’s insurance policy with ALPS insured the firm against
claims arising from “an act, error or omission in professional services that were or should
have been rendered by [Ingaldson Fitzgerald].” The policy expressly excluded from
coverage any claims arising from conversion or disputes over fees. The policy also
contained a provision providing that Ingaldson Fitzgerald would reimburse ALPS for
fees and costs ALPS incurred in defending non-covered claims.
In 2008 the bankruptcy trustee for the bankrupt estate of a former client of
Ingaldson Fitzgerald, in conjunction with a separate former client of the firm, brought
a claim against the firm in the U.S. Bankruptcy Court for the District of Alaska. The suit
concerned Ingaldson Fitzgerald’s actions in disbursing from and withdrawing fees and
costs against a retainer. The former client and the trustee sought recovery of that
retainer,3 and asserted claims against Ingaldson Fitzgerald for, among other things,
restitution, disgorgement, and conversion.4
2
Attorneys Liab. Prot. Soc’y, Inc. v. Ingaldson & Fitzgerald, P.C. (ALPS D.
Alaska), No. 3:11-cv-00187-SLG, 2012 WL 6675167, at *1 (D. Alaska Dec. 21, 2012).
Additionally, when answering certified questions we “rely . . . on the federal court’s fact
statements and the excerpt. We make no independent fact determinations.” C.P. ex rel.
M.L. v. Allstate Ins. Co., 996 P.2d 1216, 1218 n.1 (Alaska 2000).
3
ALPS D. Alaska, 2012 WL 6675167, at *1.
4
Id.-3- 7095
Ingaldson Fitzgerald notified ALPS of the underlying suit. ALPS
responded by accepting Ingaldson Fitzgerald’s tender of the defense in the underlying
suit, but with the caveat that ALPS “reserved ‘all rights.’ ”5 In its reservation of rights
letter, ALPS explained that the underlying suit made allegations of activities that “d[id]
not appear to implicate the provision of services or activities by [Ingaldson Fitzgerald]
as an attorney in an attorney-client relationship,” and thus “d[id] not appear to be
professional services within the Policy’s coverage.” The letter also asserted that the
claims in the underlying suit sought restitution that was not within the policy’s definition
of covered “damages” and that the policy did not cover claims related to disputes over
fees, dishonest or criminal acts, or the conversion of trust account funds. ALPS’s
reservation of rights letter also specifically included the right to be reimbursed for the
portion of fees incurred in the defense of claims that were deemed not covered under the
policy.
Ingaldson Fitzgerald then retained independent counsel to defend against
the former client and the trustee’s claim, and ALPS paid the fees incurred by that
attorney.6 During adversary proceedings in the underlying suit, the bankruptcy court in
the District of Alaska twice granted partial summary judgment against Ingaldson
Fitzgerald.7 The trustee then dismissed the remaining cause of action, sought entry of
final judgment, and moved for attorney’s fees and costs.8
5
Id.6
Id.7
See In re Avery, No. A06-00455-DMD, 2011 WL 4474927, at *4-6 (Bankr.
D. Alaska July 19, 2011); In re Avery, 461 B.R. 798, 816-20 (Bankr. D. Alaska 2011).
8
See In re Avery, No. A06-00455-DMD, 2011 WL 5330789, at *2 (Bankr.
D. Alaska Nov. 4, 2011).
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In September 2011 ALPS filed suit against Ingaldson Fitzgerald in the
United States District Court for the District of Alaska. ALPS sought declarations that
its policy did not cover the underlying claims and that it was not obligated to furnish an
appeal bond, as well as a monetary award reimbursing it for the cost of defending
Ingaldson Fitzgerald. The district court determined that Ingaldson Fitzgerald did not
meaningfully contest either of the first two requests for declaratory relief and thus
granted ALPS its desired declarations on summary judgment.9 But Ingaldson Fitzgerald
did contest ALPS’s claim for reimbursement of the cost of defense in the underlying suit,
and it moved for partial summary judgment on this point. ALPS opposed Ingaldson
Fitzgerald’s motion and cross-moved for summary judgment.
The district court granted Ingaldson Fitzgerald’s motion for partial
summary judgment.10 The district court noted that the policy provided ALPS with a right
to reimbursement11 but concluded that the reimbursement provision was not in
compliance with Alaska insurance law and that the provision was therefore
unenforceable.12 Specifically, the district court concluded that the reimbursement
provision was inconsistent with AS 21.96.100(d), which provides that in furnishing the
insured with independent counsel, an insurer “shall be responsible only for the fees and
costs to defend those allegations for which the insurer either reserves its position as to
9
Attorneys Liab. Prot. Soc’y, Inc. v. Ingaldson & Fitzgerald, P.C., No.
3:11-cv-00187-SLG (D. Alaska Jan. 24, 2013).
10
See ALPS D. Alaska, 2012 WL 6675167, at *2-5.
11
Id. at *2.
12
Id. at *4.
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coverage or accepts coverage.”13 The district court also determined that “Alaska law
prohibits the inclusion of a right to reimbursement in insurance policies in the state and
does not allow ALPS to provide insurance policy coverage that contradicts this
prohibition.”14 The district court therefore granted Ingaldson Fitzgerald partial summary
judgment on ALPS’s claim for reimbursement.15
ALPS appealed to the Ninth Circuit.16 The Ninth Circuit certified two
questions to this court, distinguishing between situations in which an insurer has a duty
to defend but ultimately faces no liability and situations in which the duty to defend
never arises.17 We granted the Ninth Circuit’s request that we answer the certified
questions. The parties provided full briefing of the issues, and the Alaska Division of
Insurance filed an amicus brief at our request. Oral argument was held before this court
on December 15, 2015.
III. STANDARD OF REVIEW
Alaska Appellate Rule 407(a) permits us to accept certified “questions of
law of this state which may be determinative of the cause then pending in the certifying
court and as to which it appears to the certifying court there is no controlling precedent
in [this court’s] decisions.” We have explained that “[i]n deciding a certified question
of law, we must ‘stand in the shoes of the certifying court, yet exercise our independent
13
Id.
14
Id. at *5.
15
Id.
16
ALPS 9th Cir., 766 F.3d 1180 (9th Cir. 2014).
17
Id. at 1181.
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judgment.’ ”18 This entails “selecting the rule of law that is most persuasive in light of
precedent, reason, and policy.”19
We interpret statutes “according to reason, practicality, and common sense,
considering the meaning of the statute’s language, its legislative history, and its
purpose.”20 We “use a sliding scale approach to statutory interpretation, in which ‘the
plainer the statutory language is, the more convincing the evidence of contrary legislative
purpose or intent must be.’ ”21
IV. DISCUSSION
A. When An Insurer Has A Duty To Defend, Alaska Law Prohibits
Enforcement Of A Policy Provision Entitling That Insurer To
Reimbursement Of Fees And Costs Incurred During The Defense Of
Claims Under A Reservation Of Rights.
Answering the first certified question requires us to answer two
sub-questions. First, does Alaska law generally require insurers to pay defense costs,
without reimbursement, when they reserve rights? And second, if so, does Alaska law
bar attempts to contract around this requirement? The answer to both questions is yes,
even in circumstances where (1) an 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) the claims are
later determined to be excluded from coverage under the policy.
18
Schiel v. Union Oil Co. of Cal., 219 P.3d 1025, 1029 (Alaska 2009)
(quoting Edenshaw v. Safeway, Inc., 186 P.3d 568, 569 (Alaska 2008)).
19
Id. (citing Kallstrom v. United States, 43 P.3d 162, 165 (Alaska 2002)).
20
Municipality of Anchorage v. Stenseth, 361 P.3d 898, 905 (Alaska 2015)
(citing State, Div. of Workers’ Comp. v. Titan Enters., 338 P.3d 316, 320 (Alaska 2014)).
21
Id. (alteration omitted) (citations omitted) (quoting McDonnell v. State
Farm Mut. Auto. Ins. Co., 299 P.3d 715, 721 (Alaska 2013)).
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1. Alaska case law
Before turning to the text of AS 21.96.100, we first survey the common law
context in which the statute was passed. Our examination of an insurer’s options in
policy defense situations begins with Continental Insurance Co. v. Bayless & Roberts,
Inc.22 In Continental an insured was sued, and its insurer became convinced that the
insured had breached the insurance contract.23 The insurer informed the insured that it
would only continue to defend the case subject “to a reservation of [the insurer’s] right
to later deny liability on the ground of the alleged breach.”24 We rejected this approach
and held that in policy defense situations “the insured has a right to demand an
unconditional defense.”25 We further recognized three options for an insurer seeking to
meet this right: “affirm the policy and defend unconditionally,” “repudiate the policy
and withdraw from the defense,” or “offer its insured the right to retain independent
counsel to conduct his [or her] defense, and agree to pay all the necessary costs of that
defense.”26
22
608 P.2d 281 (Alaska 1980). Policy defenses arise when “the insurer
claims that the policy has been breached by the insured,” CHI of Alaska, Inc. v. Emp’rs
Reinsurance Corp., 844 P.2d 1113, 1115 (Alaska 1993), and were at issue in
Continental. 608 P. 2d at 283. Coverage defenses, like those at issue in this case, arise
when the insurer asserts that “a particular claim [in the underlying suit] does not come
within the coverage of the policy.” CHI of Alaska, Inc., 844 P.2d at 1115.
23
Continental Ins. Co., 608 P.2d at 283.
24
Id.
25
Id. at 291.
26
Id. at 291 & n.17.
-8- 7095
We elaborated upon our conclusion in Continental when we decided CHI
of Alaska, Inc. v. Employers Reinsurance Corp. in 1993.27 In CHI an insured was sued
under multiple theories, and its insurer agreed to defend on all claims, “conditional on
reserving its rights to disclaim coverage” with respect to one of the claims that it believed
might be excluded under the policy.28 Because the reservation of rights created a conflict
of interest, the insured demanded that the insurer pay for independent counsel.29 The
insured then sued for a declaration that it was entitled to select independent counsel and
have that counsel defend both the claim as to which the insurer had reserved its rights
and the claims as to which the insurer had accepted coverage.30
In CHI we held that the same rights and options that existed in policy
defense situations under Continental also applied in coverage defense situations.31 In so
doing, we explicitly held that where the injured third party’s allegations state a claim
within an exception to policy coverage, but facts known or ascertainable to the insurer
also disclose a claim within or potentially within the policy’s coverage, the insurer must
still provide the insured with independent counsel.32 We have therefore confirmed an
27
844 P.2d 1113.
28
Id. at 1114.
29
Id.
30
Id.
31
Id. at 1118 (“We conclude that the right to independent counsel recognized
in Continental should also apply to cases involving coverage defenses.”).
32
See id. at 1118-19 (stating that we adhere to the dicta in National Indemnity
Co. v. Flesher, 469 P.2d 360, 367 n.22 (Alaska 1970) that reached the same conclusion).
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insurer’s obligation to provide and “pay all the necessary costs of” independent counsel
when reserving the right to assert a later coverage defense.33
2. Statutory text
Soon after we issued our decision in CHI, the Alaska Legislature passed a
statute that codified the requirements that bind insurers as set out in Continental and
CHI. The text of that statute, AS 21.96.100, reads in relevant part as follows:
Subpart (a) provides:
If an insurer has a duty to defend an insured under a policy of
insurance and a conflict of interest arises that imposes a duty
on the insurer to provide independent counsel to the insured,
the insurer shall provide independent counsel to the insured
unless the insured in writing waives the right to independent
counsel.
Subpart (c) requires:
[I]f the insurer reserves the insurer’s rights on an issue for
which coverage is denied, the insurer shall provide
independent counsel to the insured as provided under
[subpart] (a) of this section.
Subpart (d) specifies that if the insured selects independent counsel, the
insurer may require that the independent counsel have adequate experience and may limit
the independent counsel’s rates to the rate the insurer would pay an attorney in a similar
case. It also stipulates:
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 independent counsel
33
Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 291 n.17
(Alaska 1980).
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shall keep detailed records allocating fees and costs
accordingly.
Finally, subpart (f) provides that an insured may waive the right to select
independent counsel if the insured signs a waiver that includes, among other things, a
section reading, “I have been advised of my right to select independent counsel to
represent me in this lawsuit and of my right under state law to have all reasonable
expenses of an independent counsel paid by my insurer.”
As the Ninth Circuit recognized, this statute “does not squarely address
whether the insurer can later seek reimbursement of fees assumed under a reservation of
rights” where “the parties agreed to a policy that allows reimbursement, and the insurer
reiterated the possibility it would seek reimbursement in its reservation of rights letter.”34
Thus, the question before us is whether the statute is correctly read as a prohibition on
reimbursement. To resolve this question, we take a “sliding-scale approach [to statutory
interpretation] where ‘[t]he plainer the statutory language is, the more convincing the
evidence of contrary legislative purpose or intent must be.’ ”35 A review of the statutory
text indicates that reimbursement is prohibited, and because there is no evidence of
contrary legislative purpose or intent, we conclude that the statute prohibits
reimbursement provisions.
Language in subsections (a) through (d) of the statute leads us to this
conclusion. The discussion throughout those subsections focuses on the mandatory
requirement that insurers pay for the cost of independent counsel. The statute details the
34
ALPS 9th Cir., 766 F.3d 1180, 1183 (9th Cir. 2014).
35
Ayres v. United Servs. Auto. Ass’n, 160 P.3d 128, 129 (Alaska 2007)
(alteration in original) (quoting Muller v. BP Exploration (Alaska) Inc., 923 P.2d 783,
787-88 (Alaska 1996)).
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circumstances under which “the insurer shall provide independent counsel.”36 It
discusses what happens when the insurer provides “independent counsel at the insurer’s
expense.”37 And it articulates the parameters of “the obligation of the insurer to pay the
fee.”38 Thus, the statute regulates the relationship between insurer and insured when
independent counsel is provided and clearly allocates to the insurer the responsibility to
pay the fees and costs of such counsel. Any effort by the insurer to shift such expenses
to an insured would violate the allocation that the statute requires and would therefore
be invalid.
ALPS reads those clauses to mean that an insurer can fulfill its statutory
obligations by paying fees and costs, while explicitly reserving the right to recoup money
for those payments should the claims turn out to be uncovered claims under the policy.
But that reading is inconsistent with the legislature’s general approach to insurance
regulations. The insurance industry is a “highly regulated industr[y].”39 In a number of
other contexts, we have held unenforceable insurance policy provisions that have run
afoul of applicable regulations or statutes. For example, we have invalidated policy
provisions that were not in compliance with applicable regulations and had not been
approved by the Division of Insurance;40 provisions that were not in compliance with
36
AS 21.96.100(a) (emphasis added); see also AS 21.96.100(c).
37
AS 21.96.100(d) (emphasis added).
38
Id. (emphasis added).
39
A. Fred Miller, Attorneys at Law, P.C. v. Purvis, 921 P.2d 610, 613 (Alaska
1996).
40
See Therchik v. Grant Aviation, Inc., 74 P.3d 191, 195-200 (Alaska 2003).
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applicable statutes but had been approved by the Division of Insurance;41 and provisions
that unambiguously attempted to modify a statutorily mandated accrual date.42 In light
of that history, the statute’s silence on the question of reimbursement is instructive:
There is no provision suggesting that AS 21.96.100 permits reimbursement, so we must
conclude that the statutory scheme prohibits reimbursement.
And subsection (f), the waiver provision, further clarifies that to enforce a
reimbursement provision would be inconsistent with the purpose of the statute.
Subsection (f) specifies that “[a]n insured may waive the right to select independent
counsel by signing a statement” that includes, among other things, acknowledgment that
the insured understands his or her “right under state law to have all reasonable expenses
of an independent counsel paid by my insurer.” Nowhere in the waiver provision is the
possibility of reimbursement mentioned. It is difficult to believe that the legislature
would have drafted a waiver provision that did not at least mention the possibility of a
contractual right to reimbursement if the legislature had contemplated a scenario in
which an insurance policy could obviate the insured’s right to have all reasonable
expenses of independent counsel paid for.
We have previously held that insurance policies are contracts of adhesion
and must be interpreted according to the reasonable expectations of the insured.43 “In
other words, ‘[t]he objectively reasonable expectations of . . . beneficiaries regarding the
terms of insurance contracts will be honored even though painstaking study of the policy
41
See Ennen v. Integon Indem. Corp., 268 P.3d 277, 288 (Alaska 2012).
42
See McDonnell v. State Farm Mut. Auto. Ins. Co., 299 P.3d 715, 732-33
(Alaska 2013).
43
See C.P. ex rel. M.L. v. Allstate Ins. Co., 996 P.2d 1216, 1222 (Alaska
2000) (citing Jones v. Horace Mann Ins. Co., 937 P.2d 1360, 1362 n.3 (Alaska 1997)).
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provisions would have negated those expectations.’ ”44 In AS 21.96.100(f), the
legislature provided detailed waiver language that informs an insured’s expectations.
And it is objectively reasonable for an insured party to base its expectations on that
language. That the waiver provision omitted any discussion of the insured’s possible
liability for reimbursement of attorney’s fees is yet another compelling indication that
the statute precludes reimbursement.
Contrary to this interpretation, ALPS argues that we should adopt the
position taken by the California Supreme Court. California has similarly imposed
“limits on the ability of liability insurers to control third-party litigation against the
insured” through both “case and statutory law.”45 And California appears to be the only
jurisdiction with an independent counsel statute to have evaluated insurers’ ability to
seek reimbursement for the costs of defending claims that are ultimately excluded from
coverage. ALPS therefore urges us to follow the path set by Buss v. Superior Court, in
which the California Supreme Court rejected the argument that enforcement of
contractual reimbursement rights conflicted with California’s statute.46
But as the Division of Insurance argues in its amicus brief, Buss is
inapposite because the California statute “contains no equivalent to the language in
AS 21.96.100(d) that states the insurer ‘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.’ ” ALPS maintains that Buss remains instructive because
44
Id. (alteration in original) (quoting Bering Strait Sch. Dist. v. RLI Ins. Co.,
873 P.2d 1292, 1295 (Alaska 1994)).
45
Buss v. Superior Ct., 939 P.2d 766, 785 (Cal. 1997) (citing CAL. CIV. CODE
§ 2860; San Diego Navy Fed. Credit Union v. Cumis Ins. Soc’y, Inc., 208 Cal. Rptr. 494,
501-02 (Cal. App. 1984)).
46
Id. at 783 & n.25.
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AS 21.96.100(d) does not actually address reimbursement at all, so provisions within the
policy contract may fill the gaps on the reimbursement issue. But unlike our statute, the
California statute is not silent on the issue of reimbursement. To the contrary, the
California statute provides that “[t]his subdivision does not invalidate other different or
additional policy provisions pertaining to attorney’s fees or providing for methods of
settlement of disputes concerning those fees.”47 The Alaska Statutes contain no similar
provision, so Buss does not assist us.
3. Legislative history
Legislative history bolsters our conclusion that the statute allocates
responsibility to pay for independent counsel to the insurer when the insurer reserves
rights. In 1994 the legislature considered two bills with identical provisions relating to
the appointment of independent counsel, and those provisions largely tracked the
language now found in AS 21.96.100.48 The minutes of the House Rules Committee
indicate that the Commissioner of the Department of Commerce and Economic
Development described those provisions as “codification[s] of a court case . . . in which
the policyholder is entitled [to] representation [by independent counsel], proposed by
the insurer defending the case on behalf of the insured.”49 Neither bill passed, but in
1995 the legislature considered a bill that an officer of the Division of Insurance
described as “the successor bill” to those failed bills.50 An assistant attorney general
47
CAL. CIV. CODE § 2860(c).
48
See House Bill (H.B.) 534, 18th Leg., 2d Sess. § 88 (1994); Senate Bill
(S.B.) 362, 18th Leg., 2d Sess., § 88 (1994).
49
Minutes, H. Rules Comm., Hearing on S.B. 362, 18th Leg., 2d Sess.
(May 9, 1994) (testimony of Paul Fuhs, Comm’r, Dep’t of Commerce & Econ. Dev.).
50
Minutes, Sen. Labor & Commerce Comm. Hearing on S.B. 53, 19th Leg.,
(continued...)
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testified before the House Labor and Commerce Committee that the independent counsel
provision “implements an Alaska Supreme Court decision from 1993, which is called
CHI of Alaska v. Employers Reinsurance,” and he characterized CHI as standing for the
proposition that “a purchaser of insurance has a unilateral right to select independent
counsel to represent them, and they can do that at the insurance compan[y’s] expense.”51
The legislature’s understanding of the statute’s effects was illuminated two
years later, when the statute was amended.52 As originally enacted, the statute did not
include the following two sentences that are currently incorporated in the text of
AS 21.96.100(d): “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 independent
counsel shall keep detailed records allocating fees and costs accordingly.”53 The
sponsoring Representative, Brian S. Porter, explained that he had proposed the
amendment in an effort to clarify that insurers were not responsible for fees and costs to
defend those allegations for which it denied claims.54 Representative Porter’s discussion
50
(...continued)
1st Sess. (Mar. 2, 1995) (testimony of Joan Brown, Admin. Officer, Div. of Ins.).
51
Minutes, H. Labor & Commerce Comm. Hearing on S.B. 53, 19th Leg., 1st
Sess. (May 5, 1995) (testimony of Dave Stebing, Assistant Attorney Gen.).
52
See ch. 26, § 34, SLA 1997.
53
Compare ch. 62, § 107, SLA 1995, with AS 21.96.100(d).
54
Minutes, H. Judiciary Comm. Hearing on H.B. 58, 20th Leg., 1st Sess.
(Feb. 21, 1997) (testimony of Rep. Brian S. Porter) (explaining that the amendment
combated a “practice” that “had made it seem apparently required that [insurers] also
(continued...)
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of the amendment provides insight into his understanding that insurers were “required
to provide a defense” for covered claims, and “where they had a reservation of right[s],
they were also required to provide a defense.”55
In other words, the amendment did not seek to abrogate what one testifying
attorney described as a rule from “the Supreme Court and the legislature” that
“individuals who have purchased insurance are entitled to independent counsel when
there was a [r]eservation of [r]ights letter submitted.”56 Importantly, the same testifying
attorney described the amendment as an attempt to clarify that insurers were not
responsible for the defense of non-covered claims as imposing a “fiscal check” on
insured parties, who would “act reasonably” now that they “ha[d] to pay their
attorney.”57 If reimbursement had been generally available when reserved-right
situations turned out to involve non-covered claims, then insured parties would already
be subject to the “fiscal check” the amendment sought to impose. This further suggests
that the legislature understood the requirement imposed by AS 21.96.100(a)-(d) that
54
(...continued)
cover the third area, denied claims”); see also H. Judiciary Comm., S.S.H.B. 58 Bill File,
Sectional Summary, 20th Leg., 1st Sess. at 9177 (containing Rep. Porter’s summary of
the amendment) (“This section makes an insurer responsible only for the costs and
attorney fees incurred by an independent counsel defending against claims for which the
insurer has either accepted coverage or reserved it[s] right to deny coverage. The insurer
is not responsible for costs and attorney fees incurred in defending against claims for
which the insurer has denied coverage.”).
55
Minutes, H. Judiciary Comm. Hearing on H.B. 58, supra note 54 (testimony
of Rep. Brian S. Porter).
56
Minutes, H. Judiciary Comm. Hearing on H.B. 58, 20th Leg., 1st Sess.
(Feb. 24, 1997) (testimony of Mike Barcott, Attorney, Faulkner, Banfield, Doogan &
Holmes).
57
Id.
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insurers reserving rights “shall provide” and “be responsible . . . for the fees and costs”
of independent counsel not to include an implied right of reimbursement.58
4. The position of the Division of Insurance
The Division of Insurance has authority to regulate insurance forms under
Title 21 of the Alaska Statutes.59 Although we interpret statutes using our independent
judgment,60 we also afford “some weight” to an agency’s interpretation of the statute,
“especially where the agency interpretation is longstanding.”61 The Division has
“approved some policies containing reimbursement provisions, but . . . has not
specifically considered whether they conflict with AS 21.96.100.”62 The Division
contends that these past approvals are “not dispositive” and maintains that, contrary to
its past practice, “[a] policy provision entitling an insurer to reimbursement of fees and
costs for defending claims under a reservation of rights when the claims are ultimately
denied would be counter to . . . AS 21.96.100.”
We agree that the past practice of the Division is not dispositive: In Ennen
v. Integon Indemnity Corp., we held that in a bad-faith action, an insurance company was
58
AS 21.96.100(a), (d).
59
See, e.g., AS 21.42.130 (“The director [of the Division of Insurance] shall
disapprove a form . . . if the form . . . is in any respect in violation of or does not comply
with this title. . . .”).
60
Municipality of Anchorage v. Stenseth, 361 P.3d 898, 904 (Alaska 2015).
61
Nelson v. Progressive Cas. Ins. Co., 162 P.3d 1228, 1238 (Alaska 2007)
(quoting Gov’t Emps. Ins. Co. v. Graham-Gonzalez, 107 P.3d 279, 286 (Alaska 2005)).
62
The Division has approved “at least six policies . . . that contain a provision
requiring the insured to reimburse the insurer for fees and costs incurred by the insurer
in defending claims that are later determined not to be covered.” Because risk retention
groups are not subject to state regulation that would require prior approval, the Division
has not specifically reviewed contracts issued by risk retention groups.
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not entitled to rely on the Division’s approval of policy language when that language did
not comply with applicable insurance statutes.63 We come to the same conclusion in this
case, particularly because the Division has effectively disavowed its past practice in
favor of the more considered interpretation it advances in its amicus brief. We therefore
do not afford any weight to the Division’s past practice.
Instead, we afford some deference to the interpretation of AS 21.96.100 that
the Division has advanced in its briefing.64 The Division, noting that AS 21.96.100
recognizes an “inherent conflict of interest between an insured and [an] insurer defending
under a reservation of rights and resolves it by requiring an insurer to provide
independent counsel and pay for it,” concludes that “[a] policy provision allowing for
reimbursement of these costs would undermine the statutory requirement that the insurer
pay them in the first place.” The Division therefore concludes that “under AS 21.96.100,
if an insurer has a duty to defend and elects to reserve its rights on an issue, it is
obligated to provide and pay for independent counsel.”
Because all evidence of statutory purpose and legislative intent aligns with
the Division’s interpretation of the statute, we must conclude that the reimbursement
provision in this case is unenforceable. Thus, the answer to the first question is “yes”:
When an insurer has a duty to defend, Alaska law prohibits enforcement of a policy
63
268 P.3d 277, 288 (Alaska 2012).
64
See, e.g., State v. Dupier, 118 P.3d 1039, 1050 n.62 (Alaska 2005) (“The
weight accorded to opinions of the Attorney General is largely within our discretion. In
general, they are not controlling but are entitled to some deference.” (citing State v.
Kenaitze Indian Tribe, 83 P.3d 1060, 1066 n.22 (Alaska 2004))); Bullock v. State, Dep’t
of Cmty. & Reg’l Affairs, 19 P.3d 1209, 1216 (Alaska 2001) (“When an executive
interprets legislation, that interpretation ‘is entitled to be given weight by the court in
construing the intent of the statute.’ ” (quoting Flisock v. State, Div. of Ret. & Benefits,
818 P.2d 640, 645 (Alaska 1991))).
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provision entitling that insurer to reimbursement of fees and costs incurred during the
defense of claims under a reservation of rights. We come to this conclusion even in
cases where, as is true here, (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) the claims are
later determined to be excluded from coverage under the policy.
B. Alaska Law Prohibits Enforcement Of A Policy Provision Entitling An
Insurer To Reimbursement Of Fees And Costs Incurred During The
Defense Of Claims Under A Reservation Of Rights Even When It Is
Later Determined That There Was No Possibility Of Claim Coverage.
The duty to defend and the duty to indemnify are independent obligations.65
In CHI we articulated the scope of the duty to defend in circumstances where an
insurance company contests coverage: The duty arises “if the complaint on its face
alleges facts which, standing alone, give rise to a possible finding of liability covered by
the policy or, if the complaint does not contain such allegations, where ‘the true facts are
within, or potentially within, the policy coverage and are known or reasonably
ascertainable to the insurer.’ ”66 In other words, the duty to defend attaches, if at all, on
65
Afcan v. Mut. Fire, Marine & Inland Ins. Co., 595 P.2d 638, 645 (Alaska
1979).
66
CHI of Alaska, Inc. v. Emp’rs Reinsurance Corp., 844 P.2d 1113, 1115 n.5
(Alaska 1993) (emphasis in original) (citation omitted) (first quoting Afcan, 595 P.2d at
645; then quoting Nat’l Indem. Co. v. Flesher, 469 P.2d 360, 366 (Alaska 1970)). That
the complaint may allege causes of action beyond the scope of the policy is immaterial:
“The duty to defend is triggered if there is at least one cause of action alleged in the
complaint for which there is a possibility of coverage under the policy. The presence of
additional causes of action not covered by the policy does not defeat the duty to defend.”
State, Dep’t of Transp. & Pub. Facilities v. State Farm Fire & Cas. Co., 939 P.2d 788,
792 (Alaska 1997) (citation omitted) (citing Sauer v. Home Indem. Co., 841 P.2d 176,
181 (Alaska 1992)).
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the basis of the complaint and known or reasonably ascertainable facts at the time of the
complaint.67 Even if coverage is ultimately denied, and even if it were later determined
that there was no possibility of coverage, that denial has no retroactive effect on the duty
to defend.
But what about a circumstance, ALPS asks, in which “the insurer, in an
abundance of caution, provides independent defense counsel regardless of whether the
insurer has a duty to defend?” This “abundance of caution” hypothetical only
underscores the importance of preserving the balance we struck in Continental: An
insurer may “affirm the policy and defend unconditionally[,] . . . repudiate the policy and
withdraw from the defense,” or reserve rights and “offer its insured the right to retain
independent counsel to conduct his [or her] defense, and agree to pay all the necessary
costs of that defense.”68 To allow insurance companies to disavow the duty to defend but
provide independent defense counsel out of “an abundance of caution” gives the insurer
an incentive to automatically reserve rights in hopes of obtaining reimbursement for
attorney’s fees and to protect itself from claims of bad faith or breach that could result
from a repudiation of the policy. Such a result is inconsistent with AS 21.96.100: Under
the statute the determinative event giving rise to the insurer’s duty to pay independent
counsel is not the often-difficult determination as to the possibility or impossibility of
coverage, but the objective act of the insurer taken when reserving its position as to
coverage. And it is certainly inconsistent with our previous decisions on this issue. We
conclude that Alaska law prohibits reimbursement of fees and costs incurred by the
67
In answering the second certified question, we are asked to assume that the
duty to defend never arose under the policy. We therefore do not need to discuss ways
in which a duty to defend might arise for the first time after an insurer correctly denies
a defense.
68
608 P.2d 281, 291 & n.17 (Alaska 1980).
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insurer defending claims under a reservation of rights, even in circumstances where it is
later discovered that there was “no possibility of coverage” under the policy. The answer
to the second certified question is therefore “yes.”
V. CONCLUSION
The answer to both certified questions is “yes”: Alaska law prohibits
enforcement of a policy provision entitling an insurer to reimbursement of fees and costs
incurred by the insurer defending claims under a 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 the defense subject
to the reservation of rights, and (3) the claims are later determined to be excluded from
coverage under the policy; and, Alaska law also prohibits enforcement of a policy
provision entitling an insurer to reimbursement of fees and costs incurred by the insurer
defending claims under a 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 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.
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