An insurer that paid defense costs for a policyholder involved in a liability dispute can recoup those costs if it is later determined that it did not owe a duty to defend the case, a divided Nevada Supreme Court ruled Thursday.

The Nevada high court ruling in Nautilus Insurance Co. v. Access Medical LLC et al stemmed from a certification order from the 9th U.S. Circuit Court of Appeals, which noted that the Nevada Supreme Court had not ruled on the issue and that other state courts were inconsistent on the issue of reimbursement of defense costs.

In the underlying case, which was filed in a Nevada federal court, Nautilus, an excess and surplus lines insurance unit of W.R. Berkley Inc. in Scottsdale, Arizona, sought to recoup defense costs it had paid in a dispute over a soured business partnership. Chicago-based Access Medical faced allegations that it had interfered with the business relationships of a former medical device sales partner.

According to court documents, Nautilus initially declined to defend the suit but later agreed while reserving its rights to disclaim coverage and seek reimbursement of defense fees if a court later determined that it did not owe coverage for the underlying claim. A federal court later ruled that coverage was not triggered under the policy. A lower court then ruled that Nautilus should not be reimbursed defense costs because, among other things, it could not establish that it was entitled to reimbursement under Nevada law.

In its 4-3 ruling on the reimbursement issue, the Nevada Supreme Court noted that an insurer who refuses to defend a claim and then loses a coverage dispute may be subject to significant liability.

“This creates a significant disincentive for the insurer to deny a defense outright when there is any possibility — even a relatively remote one — that the claim may turn out to be covered,” the ruling stated.

When there is limited time available “it makes sense for the parties to decide quickly what to do, and to litigate later who must pay,” the court said. “Under these circumstances, we conclude that when a court determines that the insurer never had a duty to defend, and the insurer clearly and expressly reserved its right to seek reimbursement, it is equitable to require the policyholder to pay.”

The three dissenting justices said that the insurance policy that Nautical provided Access Medical covered their “entire insurer-insured relationship,” court papers say.

“The contract did not contain any provision allowing for the recoupment of costs expended if a court later determined that Nautilus never had a duty to defend Access Medical,” the dissenting opinion said.