MARCH 2006 BAD FAITH CASES CARRIER COULD NOT RECOVER DEFENSE COSTS UNDER RESERVATION OF RIGHTS LETTER, AS NO SUCH RECOUPMENT RIGHT EXPLICITLY SET FORTH IN THE POLICY (Philadelphia Commerce)

In LA Weight Loss Ctrs., Inc. v. Lexington Insurance Company, the Philadelphia Court of Common Pleas, Commerce Court, strictly construed the language of a “claims made” insurance policy in denying coverage. The carrier had issued a reservation of rights letter, asserting the right to recoup defense costs in the event there was no coverage, but there was no provision in the insurance contract itself providing that right.  The Commerce Court Judge found no Pennsylvania appellate precedent on the issue of whether recoupment could be permitted on these facts, and surveyed the law nationally.  The Court chose to go with the minority view and would not allow recoupment of defense costs, purely on such a right being asserted in the reservation of rights letter, without an express underlying contractual right in the insurance agreement.  On the underlying claim, the Court noted that “claims made” policies only protect against claims made during the life of a policy, the reporting requirements are strictly construed, and after looking to extrinsic evidence, the Court determined that written notice qualified as making a claim; however, since the claim was first made outside the policy period, the Court held that coverage for the underlying class action did not exist. 

Date of Decision:  March 1, 2006

LA Weight Loss Ctrs., Inc. v. Lexington Ins. Co., Court of Common Pleas, Philadelphia, December Term 2003, No. 1560, 2006 Phila. Ct. Com. Pl. LEXIS 127 (C.C.P. Philadelphia  March 1, 2006) (Jones, J.)