In American and Foreign Insurance Co. v. Jerry’s Sport Center, Inc., No. 88 MAP 2008, 2010 Pa. LEXIS 1803 (Pa. Aug. 17, 2010), the Supreme Court of Pennsylvania refuted the reasoning under which some courts have allowed insurers to seek reimbursement of defense costs pursuant to a reservation of rights and instead joined the growing number of courts to hold that an insurer is not entitled to reimbursement of defense costs where the policy does not include an express reimbursement provision. The insured in Jerry’s Sport Center was one of several firearms wholesalers-distributors sued by the NAACP and the NSCIA for negligent creation of a public nuisance. While there was some question as to whether the suit alleged bodily injury insured by the policy, the insurer elected to provide a defense pursuant to a reservation of rights and then, after winning a declaratory judgment that it had no duty to defend or indemnify, moved for reimbursement of defense
The Supreme Court of Pennsylvania held that allowing the insurer to recoup defense costs absent a reimbursement provision in the policy would amount to a retroactive erosion of the broad duty to defend. Under basic rules of contract interpretation, because the policy contained no reimbursement provision, the insurer had no right to reimbursement under the policy and without that right, could not create a contract by virtue of a reservation of rights letter. Nor did the insurer have an equitable right to reimbursement, since the insurer’s exercise of its right and duty to defend did not unjustly enrich the insured. Instead, it was the insurer who benefited by exercising control over the defense of a potentially covered claim and thus insulating itself from bad faith liability. The Court’s ruling not only prohibits an insurer who elects to control an insured’s defense from handing its insured the bill, it also prevents an insurer from walking away from a defense it has assumed by making clear that a resolution of the question of coverage does not retroactively eliminate the insurer’s duty to defend during the period of uncertainty.
Free download of American and Foreign Insurance Co. v. Jerry’s Sport Center, Inc..
See the following Emerging Issues Commentary:
McCarter & English on Pennsylvania Supreme Court Joins Growing Ranks Of Courts In American And Foreign Insurance Company v. Jerry’s Sport Center, Inc. By Holding Insurer Is Not Entitled To Reimbursement Of Defense Costs Where Policy Does Not Include An Express Reimbursement Provision.
Howard on Missing The "Buss": Pennsylvania Supreme Court Refuses to Recognize Insurers' Right to Recover Defense Costs Expended With Respect to Non-Covered Claims.
The Continuing Debate Over an Insurer's "Right" to Reimbursement: The Pennsylvania Supreme Court Weighs in Against Reimbursement in a Newly-Decided Case.
SNR Denton LLP on Insurer Recoupment of Noncovered Defense Costs and Settlements.