Insurance Defense Costs

Pennsylvania Supreme Court declares insurance defense costs may not be reimbursable

Elise M. Carlin
December 2, 2010

Your company is sued as a result of an alleged constructive defect. You tender the claim to your insurance company and they hire and pay for a lawyer to defend your company. It is later determined that there is no insurance coverage for the construction defect claim. Can the insurance company force your company to reimburse it for all the costs that it spent in defending the action? The answer depends on the language contained in your insurance policy.    

Recently, the Pennsylvania Supreme Court determined that an insurer who assumes an insured’s defense is forbidden from seeking reimbursement of defense costs from the insured unless the policy specifically permits it to do so.

American and Foreign Insurance Company v. Jerry’s Sport Center, Inc.

In American and Foreign Insurance Company v. Jerry’s Sport Center, Inc., the Court held that even if a court ultimately determines that an insurance company had no duty to defend its insured, that insurance company generally cannot seek reimbursement of defense costs from the insured “absent an express provision in the written insurance contract.”

Jerry’s Sports Center (Jerry’s) was a sporting good store that sold firearms. It was one of eighteen firearms wholesalers and distributors sued by the National Association for the Advancement of Colored People (NAACP) and the National Spinal Cord Injury Association (NSCIA) who “sought to hold the firearms industry 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.” The NAACP and the NSCIA alleged that the firearms dealers caused bodily injury to its members, and while it did not seek monetary damages to compensate individual members injured by the defendants’ actions, it did seek injunctive relief, along with monetary damages to “establish a fund for the education, supervision and regulation of gun dealers.”

Once it learned that it was being sued, Jerry’s notified its insurance company, American and Foreign Insurance Company (AMCO), of the action and requested defense and indemnification. Such a request for indemnification and defense is commonly referred to as the “tendering the defense” of a claim. AMCO initially paid for the cost of defending Jerry’s in the lawsuit, even though it suspected that it had no contractual duty to do so.

After its legal bills climbed to $309,216.00, AMCO filed a separate declaratory action, asking the trial court to declare that the claims asserted by NAACP and the NSCIA were not covered by its insurance policy. AMCO prevailed in the declaratory action and the trial court ruled that there was no coverage. AMCO then demanded that Jerry’s reimburse it for the costs it had expended in defending Jerry’s. On appeal, the Court held that that even though it had been determined that AMCO had no duty to defend Jerry’s, Jerry’s was not responsible for reimbursing AMCO for its costs in defending the action. The Court noted that the outcome of the case would have been different if the insurance policy had expressly provided for such reimbursement.

Conclusion

Although not a construction law case, this case will impact the construction industry where similar issues of insurance coverage and defense obligations arise. It is common for an owner to allege that construction work is defective and for a contractor to tender the claim to its insurance company, and seek to have the insurance company pay for the contractor’s defense. Before this case was decided, the contractor had to accept some risk that a court would later decide that there was no coverage, and the insurance company would seek reimbursement of its legal expenses. Following the Court’s recent ruling, this risk is alleviated. Defense costs are reimbursable only where the insurance policy specifically provides for reimbursement.

With this in mind, contractors are advised to discuss this issue with their insurance broker to ensure that their policies do not permit the insurance company to recover defense costs under such circumstances.