No Right of Reimbursement for Insurer Defending under Reservation
May 2008
A Pennsylvania appeals court in
American and Foreign Ins. Co. v. Jerry's Sport Center,
Inc. (May 5, 2008) considered whether an insurer retains the right to
seek reimbursement for defense costs after it undertakes the defense of its
insured with an express reservation to seek reimbursement if it is later determined
that the policy does not afford coverage for the claim.
by Kevin
Merriman
Ward Norris Heller
& Reidy LLP
The court held that no right of reimbursement exists under the terms of the
policy, and could not be pursued in an action for quantum meruit.
The Facts
The insured, a firearms wholesaler-distributor of firearms, was among several
manufacturers and distributors sued by the National Association for the Advancement
of Colored People (NAACP) and the National Spinal Cord Injury Association (NSCIA) in an action that sought to hold the industry liable for its alleged failure
to reasonably and safely distribute firearms. In response to the suit, the insurer
retained counsel to defend the insured, and advised the insured that it was
defending the suit under a reservation of rights, including the right to seek
reimbursement of defense fees.
The insurer advised its insured that defense fees would be advanced until
the insurer determined its coverage obligations, and that if it determined that
the policy did not afford coverage for the claim, it would seek reimbursement
of the fees it incurred from the date of that determination.
Several months later, the insurer denied coverage for the claim, and advised
its insured that it was commencing a declaratory judgment action. The insurer
once again informed the insured that it would “advance” defense fees in the
underlying litigation, but that it would seek reimbursement from the date of
its coverage denial if it prevailed in the declaratory judgment action.
The Ruling
In an earlier appeal, the court determined that the claim was not covered
by the policy because the underlying action did not seek compensation for “bodily
injury.” At issue on this appeal was whether the insurer was entitled to reimbursement
for the fees incurred in defending the action from the date the insurer denied
coverage for the claim.
Relying on the leading case, Buss v. Superior Court,
939 P.2d 766 (Cal. 1997), the insurer argued that the right of reimbursement
was based on the existence of an implied contract created by the reservation
of rights letter, and under a theory of unjust enrichment for fees paid for
claims that were not covered by the policy.
In this Pennsylvania case of first impression, the court rejected both theories,
and declined to recognize the right in the absence of language expressly permitting
reimbursement in the insurance contract. Citing Terra
Nova Ins. Co. Ltd. v. 900 Bar, Inc., 877 F.2d 1213 (3d Cir. 1989), and
General Agents Ins. Co. of America, Inc. v. Midwest
Sporting Goods Co., 828 N.E.2d 1092 (Ill. 2005), the court reasoned that
the duty to defend is broader than the duty to indemnify, and that the duty
is triggered when a claim is potentially covered. Permitting reimbursement retroactively
would erode this right and duty.
The court also concluded that the unjust enrichment claims fail because an
insurer who defends under reservation is protecting itself as much as its insured.
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