Addressing an issue not yet decided in Kentucky, the Sixth Circuit predicted Kentucky courts would grant the insurer's right to seek reimbursement for settlement costs paid in the underlying litigation. See Travelers Property Cas. Co. of Am. v. Hillerich & Bradsby Co., Inc., 2010 U.S. App. LEXIS 5288 (6th Cir. March 12, 2010).
The insured sought a defense and indemnity from Travelers when sued in the underlying litigation. Travelers agreed to defend. While a settlement of the underlying litigation was being negotiated, Travelers informed the insured it would only fund the settlement while reserving a right to seek reimbursement for any contribution to fund non covered claims. The insured acknowledged Travelers' claim of a right to seek reimbursement, but expressly objected to this right. The district court ruled Travelers had a right to seek reimbursement for settlement costs it paid for uncovered claims.
On appeal, the Sixth Circuit noted the majority of jurisdictions determined an insurer defending under a reservation of right can seek reimbursement of funds expended on non covered claims based on an implied contract. After surveying the cases, the court decided Kentucky would follow the majority rule. Because none of the claims raised in the underlying litigation were covered under the policy, Travelers was entitled to reimbursement of settlement funds paid on the insured's behalf. The court noted, however, this case addressed settlement funds or the duty to indemnify, rather than defense costs.
