Not a Lexis+ subscriber? Try it out for free.

Insurance Law

The Continuing Debate Over an Insurer's "Right" to Reimbursement: The Pennsylvania Supreme Court Weighs in Against Reimbursement in a Newly-Decided Case

   By Sherilyn Pastor and Alissa Pyrich, Attorneys, McCarter & English, LLP

Insurance companies often provide or pay for the defense of a insured before questions of coverage under the policy are resolved. In some instances, this practice results in an insurer's paying for the defense of claims that are not within the scope of its indemnity obligation. Courts across the country have taken two distinctly different views about whether an insurer in that situation is entitled to be reimbursed for some or all of the costs of the defense in such instances.

 

Some courts permit insurers to recoup defense costs from their insured. These courts reason that the insurer did not bargain for (or charge premiums for) the obligation to defend uncovered claims. Allowing insureds to receive a benefit they did not bargain or pay for is, in the view of these courts, unjust enrichment. A related line of thinking treats the insurer's reservation of rights letter as creating a new contract for the defense of uncovered claims. If the insurer offers to undertake the defense subject to its right to demand reimbursement of the cost of defending uncovered claims, and the insured accepts the defense, some courts treat this as a separate binding contract that permits the insurer to obtain reimbursement.

 

An increasing number of courts are rejecting the majority view of the insurer’s right to reimbursement. A new decision from the Pennsylvania Supreme Court, American & Foreign Ins. Co. v. Jerry's Sport Ctr., Inc., 2010 Pa. LEXIS 1803 (Pa. Aug. 17, 2010), is the latest in this line of cases. These cases reject an insurer's right to reimbursement because such a right is found nowhere in the policy itself. Moreover, such a right is inconsistent with the broad duty to defend established under the law. Insurers are well aware that the law requires them to defend the entire case so long as there is at least one potentially covered claim. Although that duty expires when the covered claims are eliminated, courts that hold against reimbursement take the position that this expiration should function only prospectively, not retroactively. Finally, several courts have noted that the insurer benefits from assuming the defense of an action at least as much as the insured, making the application of an unjust enrichment theory inappropriate.

 

Lexis.com subscribers can access the complete commentary, The Continuing Debate Over an Insurer's "Right" to Reimbursement: The Pennsylvania Supreme Court Weighs in Against Reimbursement in a Newly-Decided Case. Additional fees may be incurred. (approx. 26 pages)

 

If you do not have a lexis.com ID, you can purchase Emerging Issues Analysis content through our lexisONE Research Packages.

_____________________________

 

Sherilyn Pastor is a partner at McCarter & English LLP, where she is the Practice Group Leader of the Firm's Insurance Coverage and General Litigation Team. Alissa Pyrich is a senior associate in the same group. The Insurance Coverage Group has secured billions of dollars in insurance assets for policyholder clients throughout the country and counsels policyholders assessing their potential risks, new insurance products and their insurance programs.

_____________________________