Pennsylvania Bars Right To Recoup Defense Costs
Pennsylvania has become the latest state to weigh in on the controversial question of whether an insurer that is later held not to owe coverage for a case may recoup its defense costs in a subsequent coverage suit against its policyholder.
In the decade since the California Supreme Court recognized such a right, courts around the country have come to widely different conclusions about whether or when to allow recoupment. Some have focused on the necessity of the insurer having expressly asserted such a right when it agreed to provide a defense. If so, some courts have found that am implied contract was created and that the insured, having obtained the benefit of the insurer's defense, must also fulfill its duty to reimburse if coverage was held not to exist. Other courts, notably the Supreme Courts of Illinois and Texas, have rejected any argument that the insurer can unilaterally impose such a duty or has an implied right pursuant to theories of quantum meruit.
In this latest case, the Pennsylvania Superior Court ruled in American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 2008 PA Super. 1994 (Pa. Super. May 5, 2008), that a trial court erred in holding that Royal was entitled to reimbursement for the cost of defending various class action gun cases that it was later held not to have any obligation to defend because the NAACP case did not allege or involve “bodily injury.”
Whereas the trial court had found that an implied contract existed between the parties in light of the fact that the insured had accepted Royal’s defense pursuant to a reservation of rights letter that included an asserted right to recoupment of fees, the Superior Court held that such an analysis undercut the focus of the duty to defend on the possibility of coverage as distinguished from such facts as might ultimately be adjudicated.
The appellate court also took note of the fact that it was Royal’s suggestion that the insured retain independent counsel as opposed to participating in a joint defense involving multiple defendants that would have resulted in substantially lower legal costs to the policyholder. Where the insurer had a contractual duty to defend and had obtained various benefits by exercising that right to defend, the Superior Court refused to find that an implied contractual right to reimbursement existed or that the insured was unjustly enriched by the defense that Royal had provided so as to entitle Royal to reimbursement of attorney’s fees under a theory of quantum meruit.
Plainly the outcome of this case was influenced by its unique facts. At the same time, the court was clearly persuaded by the Illinois Supreme Court's 2005 opinion in Gainsco (which also involved recoupment claims in the context of the NAACP gun suits). It will be interesting to see whether the case proceeds to the Pennsylvania Supreme Court.
