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PA Superior Court -- Insurers Cannot Recover Defense Fees Absent Express Contractual Provision.

May 9, 2008

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In the case of <em>American and Foreign Insurance Company, et. al. v. Jerry’s Sport Center</em> (2008 PA Super 94), the defendant Jerry's Sport Center was a PA based firearm distributor. In June 2000, the NAACP sued Jerry's Sports for negligently distributing handguns that were then used to commit crimes. At all times relevant to the suit, Jerry's was insured by Royal Insurance. Upon receipt of the claim, Royal agreed to defend Jerry's but reserved on the issue of indemnity. The ROR also noted that Royal retained the right to recover defense fees if a court determined that the Royal policy did not provide coverage to Jerry's for the NAACP suit. Ultimately, Royal was able to obtain a judgment that its policy did not provide coverage to Jerry's. It then sought (and successfully obtained at the trial level) a judgment requiring Jerry's to reimburse Royal for paid defense fees. Jerry's appealed and the Superior Court got the case.
The Superior Court reversed the trial court and held that Jerry's was not required to reimburse Royal. In reaching its decision (which was a case of first impression for a PA appellate court), the Superior Court analyzed the majority view (which holds that there is a “a right of reimbursement based on the existence of an implied contract between the insurer and its insured created through a reservation of rights letter”) and the minority view (which holds that reimbursement is only possible if there is a “specific reimbursement clause in the Policy”). The Court sided with the minority view and held that if “an insurer wishes to retain its right to seek reimbursement of defense costs in the event it later is determined that the underlying claim is not covered by the policy, the insurer is free to include such a term in its insurance contract.”
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