Insurance companies often have a contractually based "duty to defend" liability claims, such as those alleging that the policyholder caused bodily injury or property damage, when those claims are covered or potentially covered by the insurance policy. A common question is whether an insurance company may recoup the costs of defense from its policyholder when-pursuant to its contractual obligation-the insurance company assumes the defense of an action, but a court ultimately rules that there is no coverage for any claim asserted in the action. In a much-anticipated decision, the Pennsylvania Supreme Court has answered that question, holding that an insurance company may not obtain reimbursement from its policyholder absent specific contractual language granting the insurance company a right of reimbursement.
The Pennsylvania Supreme Court issued its decision on defense cost reimbursement in American and Foreign Ins. Co. v. Jerry's Sport Center, Inc. on August 17, 2010. Reed Smith partners John Ellison and Timothy P. Law in Philadelphia represented United Policyholders, a nationwide nonprofit advocating the rights of insurance policyholders, in submitting an amicus curiae (friend of the court) brief that was cited favorably by the Pennsylvania Supreme Court. In addition, the court was persuaded by a law review article by Stanley Nardoni, an attorney in Reed Smith's Chicago office.
The Jerry's Sport decision represents a significant victory for insurance policyholders. The Pennsylvania Supreme Court rejected the insurance companies' legal and equitable arguments that they should be entitled to reimbursement of defense costs for a claim ultimately determined to be outside their policies' coverage. Instead, the court agreed with the arguments submitted by Reed Smith on behalf of United Policyholders, and held that an insurance company's duty to defend is "a question to be answered by the insurer in the first instance, upon receiving notice of the complaint by the insured." A subsequent decision by a court in a declaratory judgment action that the claim was not covered does not "somehow nullify [the insurer's] initial determination that the claim was potentially covered."
In addition, the Pennsylvania Supreme Court cited and agreed with the positions presented in an article co-authored by Stanley Nardoni analyzing the insurance policy language and history of court decisions on the reimbursement issue. Indeed, the court adopted one of his points, finding that the insurance policy explicitly lays out an obligation to pay with respect to "any suit against an Insured we defend...[a]ll expenses we incur." Under the plain language of the insurance policy, the insurance company is obligated to pay for the expenses it incurs in connection with the defense, an obligation that would be eviscerated if the policyholder were deemed to have a duty to reimburse the insurance company.
The court found that an insurance company cannot use a reservation-of-rights letter as a vehicle for reserving or creating rights that it does not have under the language of the insurance policy. The court further held that the insurance companies did not have an equitable right to reimbursement of defense costs in part because the parties' rights were governed by the express provisions in the insurance policies.
The Pennsylvania Supreme Court's decision in Jerry's Sport has far-reaching implications for policyholders. Most CGL insurance policies currently do not contain an express provision entitling the insurance company to reimbursement of defense costs in the event a claim is ultimately deemed to be outside of coverage. In the wake of decisions like Jerry's Sport, however, policyholders should beware that insurance companies may attempt to add language to their insurance policies providing a right to reimbursement of defense costs incurred on uncovered claims. Reed Smith's insurance recovery attorneys can assist policyholders with evaluating coverage under all types of insurance policies during the renewal process, including a review of changes in policy forms and comparison of offers from numerous carriers. They also have extensive experience assisting policyholders to maximize their claims for insurance coverage and holding insurance companies to their obligations under insurance policies and the law.