August 19, 2010
Written By Attorneys: Michael A. Hamilton and Erika Aljens
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
In a case closely watched by the insurance industry, the Pennsylvania Supreme Court in American and Foreign Ins. Co. at al. v. Jerry's Sport Center, Inc., __ A.2d __, 2010 WL3222404 (Aug. 17, 2010), held that a liability insurer was not entitled to recover defense costs incurred with respect to uncovered claims, even though the insurer defended its insured while reserving the right to seek reimbursement.
In the underlying action, the NAACP and National Spinal Cord Injury Association sought to hold firearms dealers liable for injuries and death suffered by their membership. The firearms dealers allegedly failed to distribute firearms in a reasonable and safe manner. Jerry's Sport Center, Inc. (Jerry's) tendered the defense to American and Foreign Insurance Company (Royal), which agreed to defend Jerry's while reserving the right to seek reimbursement for defense costs "ultimately determined not to be covered." Royal filed suit and obtained a ruling that the claims in the underlying action were equitable in nature, not specific to any person, and thus not covered under the policy. Royal commenced a second action seeking reimbursement for the past defense costs.
On appeal, the Pennsylvania Supreme Court considered the seminal decision in Buss v. Superior Court, 939 P.2d 766 (Cal., 1997), wherein the California Supreme Court recognized an insurer's right to seek reimbursement for defense costs associated with uncovered claims when the insurer reserved the right to collect the past costs from its insured. Since that time, numerous courts have considered whether to adopt or reject the teachings of Buss. Citing with approval to Terra Nova Insurance Co. Ltd. v. 900 Bar, Inc., 877 F.2d 1213 (3d Cir, 1989) and General Agents Insurance Co. of Am., Inc. v. Midwest Sporting Goods, Inc., 828 N.E.2d 1092 (Ill. 2005), the Supreme Court ultimately found that an insurer is not entitled to reimbursement of past defense costs associated with a claim that is potentially uncovered.
Some commentators may proclaim the creation of a bright line rule in Pennsylvania against reimbursement claims. However, it is important to note that the court dealt with the limited issue of reimbursement rights for costs incurred in defending a potentially covered claim (which is later determined not to be covered). The court contrasted this scenario with one where the underlying action clearly consisted of mixed claims, i.e. both covered and uncovered claims.
Thus, the court found Buss to be distinguishable because in this case there was uncertainty about coverage when the insurer initially provided a defense. The court noted that Royal "would not be entitled to reimbursement even if we adopted the reasoning in Buss. There, one claim was potentially covered, and 26 were not, and there was no dispute about the potentiality for coverage."
This distinction may serve the basis for further litigation in Pennsylvania over the scope of an insurer's ultimate financial obligation to pay defense costs for claims that were clearly not covered at the time of the tender.
