Liability Risk Retention Act Preempts Alaska Statute Prohibiting Insurers From Seeking Reimbursement of Defense Fees

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In Attorneys Liability Protection Society, Inc. v. Ingaldson Fitzgerald, P.C. (Sept. 23, 2016) 2016 WL 5335036, Attorneys Liability Protection Society (ALPS), a risk retention group chartered in Montana, provided malpractice insurance coverage to an Alaskan law firm, Ingaldson Fitzgerald, P.C.  A former client sued Ingaldson relating to the withdrawing of fees and costs against a retainer, alleging claims for restitution, reimbursement, disgorgement and conversion.  ALPS agreed to provide a defense to Ingaldson subject to a reservation of rights, including an explicit reservation of the right to seek reimbursement of defense fees for claims not covered under the malpractice policy, and the insured accepted the defense subject to the reservation of rights and retained independent counsel.  ALPS filed a declaratory relief action in the United States District Court for the District of Alaska, seeking a declaration that the claims in the underlying lawsuit were not covered under the malpractice policy and for reimbursement of the defense fees. The District Court agreed that the policy did not cover the underlying action, but denied ALPS reimbursement, finding that the reimbursement provision in the malpractice policy did not comply with Alaska Statute § 21.96.100(d). The Alaska statute provides that, in furnishing independent counsel to an insured, 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.” The District Court held that Alaska law prohibited the inclusion of a reimbursement provision in an insurance policy that contradicts Alaska law.

The District Court rejected ALPS’s argument that the Liability Risk Retention Act (LRRA), 15 U.S.C. §§ 3901-3906, preempted the Alaska statute.

On appeal, the Ninth Circuit certified two questions to the Alaska Supreme Court. The Alaska Supreme Court answered both questions in a published opinion on the subject in Attorneys Liab. Prot. Soc’y, Inc. v. Ingaldson, Fitzgerald, P.C. (Alaska 2016) 370 P.3d 1101, 1112. The Alaska Supreme Court held that Alaska law prohibits enforcement of a reimbursement provision in an insurance policy even where the insurer has expressly reserved its rights, the insured accepted the reservation of rights, and it is subsequently determined that there was no duty to defend or the claims were excluded under the policy.

After receiving the answers from the Alaska Supreme Court, the Ninth Circuit addressed ALPS’s sole viable argument on appeal, the preemption argument. The Court concluded that the LRRA leaves regulation of a risk retention group to the state in which it is chartered and contains a broad preemption provision that prohibits any state law, rule, regulation or order that regulates, directly or indirectly, any risk retention group.  Montana, ALPS’s chartering state, permits insurers to seek reimbursement of defense costs expended in defending a non-covered claim pursuant to a reservation of rights, but the Alaska statute does not. The Ninth Circuit thus held that the Alaska statute “regulates” ALPS’s operations in Alaska and impermissibly conflicts with the LRRA. The Court found that there was no exception in the LRRA that saved section 21.96.100(d) from preemption.

The Ninth Circuit also rejected Ingaldson’s cross-appeal asserting that ALPS was estopped to deny coverage because it failed to attend settlement conferences in the underlying action. The Court concluded that there was no indication that Ingaldson was prejudiced by ALPS’s conduct because ALPS informed Ingaldson at the outset of its reservation of rights, appointed independent counsel, and acted consistently with its view that coverage did not exist.

Standard insurance companies should now take note that the Alaska Supreme Court has held that Alaska law, unlike California law, prohibits enforcement of a reimbursement provision in an insurance policy for the costs of defense even where there is an express reservation of rights and a determination of no coverage under the insurance policy.  ALPS only escaped the prohibition because it is a risk retention group.

Cheryl A. Orr is a partner with Musick, Peeler & Garrett in its Los Angeles office.  Her full bio and contact information can be found at: