Howard on Missing The "Buss": Pennsylvania Supreme Court Refuses to Recognize Insurers' Right to Recover Defense Costs Expended With Respect to Non-Covered Claims

   By Ted Howard, Partner, Wiley Rein LLP

Addressing an issue of substantial current interest and broad disagreement as between liability insurers and policyholders on a nationwide basis, the Supreme Court of Pennsylvania, in its recent decision captioned American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., held that an insurer that assumes the defense of its insured in connection with underlying claims with respect to which the insurer challenges the existence of a coverage obligation, has no entitlement to seek or obtain recovery of any of the defense costs incurred and paid once a judicial determination confirms that no coverage is owed, even if the insurer expressly reserved its right to reimbursement and the insured knowingly accepted the defense subject to this reservation of rights.

Although the weight of case authority, as reflected by Buss v. Superior Court, a decision of the California Supreme Court, and its progeny, appear to support recognition of a right of reimbursement on the part of insurers under circumstances such as those presented in Jerry’s Sport Center, the Pennsylvania Court adopted a contrary view, holding that denial of the insurer’s defense cost reimbursement claim was required by:  (i) the broad conception of the duty to defend mandated by Pennsylvania law; (ii) the absence of any express provision in the policy at issue establishing any basis for the insurer’s right to reimbursement; and (iii) recognition that an insurer’s decision to defend its insured is as much for the protection of the insurer’s own interests as it is for the benefit of the insured.

This Commentary focuses on each of these three principal considerations accorded decisional significance by the Court in Jerry’s Sport Center and suggests that the reasoning employed by the Court in rejecting the reimbursement claim is highly suspect if not clearly incorrect.  It suggests that the likely consequence of the Court’s flawed reasoning and result is that in cases involving facts and circumstances analogous to those presented in Jerry’s Sport Center, insurers may be less inclined, rather than more inclined, to defend their policyholders subject to reservations of rights -- a consequence at odds with the broad conception of the duty to defend, as a matter of insurance law and public policy -- that the Court purportedly intended to vindicate.

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Ted Howard is a partner in the Insurance and Litigation Practice Groups of Wiley Rein LLP in Washington, D.C. Since 1986, the principal focus of Ted's practice has involved the counseling and representation of large domestic and international property/casualty insurers in regard to complex insurance coverage claims and disputes and interrelated litigation.

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