International Society of Primerus Law Firms

Insurer Not Entitled to Reimbursement for Defense Costs Absent an Express Provision in the Written Insurance Contract

Written By: Thomas Paschos

Thomas Paschos & Associates, P.C.

(Haddonfield, NJ)

In American and Foreign Ins. Co. v. Jerry’s Sport Center, Inc., — A.2d —, 2010 WL 3222404 (Pa. August 17, 2010), the action arose out of a suit against Jerry’s Sports Center brought by several organizations alleging the firearms industry was liable for injury, death, and other damages to association members through the negligent creation of a public nuisance by virtue of the industry's failure to distribute firearms reasonably and safely. One of the insurers, Royal, agreed to provide a defense, but claimed the right to reimbursement of defense costs if it was found to not have a duty to cover the claim. The Royal policies issued to Jerry’s Sports Center did not contain a provision for the right to reimbursement of defense costs.

The trial court held that there was no covered claim and held that Royal had the right to reimbursement of all defense costs. The Superior Court disagreed and reversed the trial court’s ruling on the issue of reimbursement. The issue before the court here was whether, following a court's declaration that an insurer had no duty to defend its insured, the insurer is entitled to reimbursement of the amounts paid for the defense of its insured in the underlying lawsuit.

The court held that an insurer is not entitled to be reimbursed for defense costs absent an express provision in the written insurance contract. The court rejected Royal’s argument that it was entitled to reimbursement of defense costs for the claims that the trial court found to be outside coverage of the policy. The court provided:

Where the insurance contract is silent about the insurer's right to reimbursement of defense costs, permitting reimbursement for costs the insurer spent exercising its right and duty to defend potentially covered claims prior to a court's determination of coverage would be inconsistent with Pennsylvania law. It would amount to a retroactive erosion of the broad duty to defend in Pennsylvania by making the right and duty to defend contingent upon a court's determination that a complaint alleged covered claims, and would therefore narrow Pennsylvania's long-standing view that the duty to defend is broader than the duty to indemnify.

The court also held that since Royal’s policy did not contain a provision providing for reimbursement of defense costs under any circumstances, its attempts to assert in this case, the right to reimbursement, is not a right to which it is entitled based on the policy. And, the court found that Royal could not employ a reservation of rights letter to reserve a right it does not have pursuant to the contract.

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