When the insured was sued for allegedly engaging in Medicare and Medicaid fraud, a defense was sought from the insurer.  See Valley Forge Ins. Co. v. Zurich Am. Ins., 2010 U.S. App. LEXIS 17098 (10th Cir. Aug. 16, 2010).  Once it was determined there was no duty to defend, was the insurer entitled to reimbursement of defense costs?

   The insured operated a long-term care facility.  An audit revealed substandard care to Medicare and Medicaid patients and that the insured had submitted false and fraudulent claims for the care provided.  When the federal government brought suit, the insured sought a defense from its insurer.  The insurer agreed to defend, but subject to a reservation of rights including the right to seek reimbursement for all expenses incurred in defending the insured should it later be determined there was no duty to defend.  The insured accepted the defense without objecting to the reservation of rights.

   The insurer eventually brought suit seeking a declaration it had no duty to defend the insured against the government claims.  The insurer also sought reimbursement of the defense costs already expended.   The district court determined there was no duty to defend and that the insurer was entitled to recoup all costs expended in defending the insured.

   The Tenth Circuit affirmed.  Two Colorado Supreme Court cases were persuasive and controlling.  These cases recognized the insurer's entitlement to reimbursement of defense costs if it was determined there is no duty to defend.  These cases allowed the insurer to reserve a right to reimbursement even though the policy itself did not provide for reimbursement.  This result protected the insureds because the insurers had to defend even though it may eventually determined there was no duty to defend.  On the other hand, the insurer could obtain reimbursement when coverage was found not to exist so long as they reserved the right to do so.