SEPTEMBER 2010 BAD FAITH CASES NO REIMBURSEMENT FOR DEFENSE COSTS WHERE INSURER MOTIVATED TO AVOID POTENTIAL BAD FAITH BY DEFENDING UNDERLYING ACTION (Pennsylvania Supreme Court)

In American and Foreign Insurance Company v. Jerry’s Sport Center, Inc., the issue at the Supreme Court level was whether, following a court’s declaration that the insurer had no duty to defend the insured, the insurer was entitled to reimbursement of the amounts paid for the defense of its insured in the underlying lawsuit.  The insured was a firearm wholesaler-distributor, and it was the defendant in a lawsuit where the plaintiff alleged that it negligently created a public nuisance due to its failure to distribute firearms reasonably and safely.  The insurer defended the insured in the suit, but once the court determined that it was not required to do that, it asked the court for reimbursement of the fees it spent defending the suit.

The Supreme Court ultimately determined that an insurer is not entitled to be reimbursed for defense costs absent an express provision in the written insurance contract, and one of the reasons for the holding concerned bad faith law.  It listed reasons that the insurer may have defended the insured for its own benefit, including protecting itself from a potential bad faith claim.  The Court noted that “bad faith damages are imposed where the insurer, with no good cause, refuses to provide a defense.”  Therefore, the insurer could have faced a bad faith claim if a court eventually determined that it was required to defend the insured and it did not.  Because the insurer was protecting its own interests in addition to the interests of the insured, the insurer was not entitled to reimbursement for the expenses of defending the insured.

Date of Decision:  August 17, 2010

Am. & Foreign Ins. Co. v. Jerry’s Sport Ctr., Inc., 606 Pa. 584, 2 A.3d 526 (2010) (Baer, J.)