From Gerry's Desk - Pennsylvania Rejects Insurer's Right for Reimbursement of Defense Costs

September 14, 2010 - We would like to make our business partners aware of a recent ruling in Pennsylvania that may change how carriers approach claims with questionable coverage triggers. In the case of American & Foreign Insurance Company v. Jerry’s Sport Center, Inc., The Pennsylvania Supreme Court ruled  “an insurer may not obtain reimbursement of defense costs for a claim for which a court later determines there was no duty to defend, even where the insurer attempted to claim a right to reimbursement in a series of reservation of rights letters.” 

When faced with a claim with questionable coverage, an insurer typically sends a reservation of rights letter to their insured. These letters can be challenging to interpret to say the least.  Insurers state somewhere in the letter that they retain the right to seek reimbursement of defense costs if it is later determined there is no coverage for the claim.  In other words, the policyholder is required to reimburse the carrier for any defense costs spent, while the insurance company walks away.  Recently, the Supreme Court of Pennsylvania dealt a blow to this practice by ruling that insurance carriers no longer have the right to a reimbursement of defense costs, even if it is later determined there was no duty to defend in the first place. 

The logic behind this ruling is that insurance companies have a duty to defend a claim and can also control the defense of the claim when they hire lawyers. The right and duty to defend allows the insurance company to protect itself.  More importantly, it forces the insurance companies to make quicker decisions on whether to cover a claim as opposed to leaving their insureds in limbo.  By eliminating the right to recovery of defense costs, insureds can enjoy the benefit of a defense without the anxiety of anticipating a huge legal bill if it is determined coverage does not apply. We expect that insureds will experience a more definitive approach going forward by carriers in PA.   In other words, the carriers may deny coverage faster rather than moving forward with the defense under a reservation of rights letter. 

It is more important than ever to secure quality coverage with a broker that has a strong claims advocacy program.

If there are any claims that you are concerned about, feel free to contact KMRD at contactus@kmrdpartners.com.

Sincerely,

Gerry Sorge, Claims Advocate
KMRD Partners, Inc.

This information is for reference only and is not intended to be used to make decisions on risk management or on any other aspect of your business without the input of both your attorney and a representative of KMRD. 

About KMRD Partners, Inc. – KMRD Partners, Inc. is a full service Property & Casualty broker serving the commercial property and casualty insurance market from offices in the Philadelphia, PA region.  Their mission statement, “Making a difference by Managing the Cost of Risk”, is a unique approach that focuses not just on insurance placement, but coverage expertise, service accountability, client education and risk management.

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Warrington, PA 18976
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www.kmrdpartners.com
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