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Case Bulletin – Federal District Court Grants Insurance Company’s Request for Reimbursement of Settlement Monies Paid Following Determination That There Was No Duty to Defend the Client

On February 6, 2015, the United States District Court for the Eastern District of Pennsylvania granted American Western Home Insurance Company’s (“American Western”) Motion for Summary Judgment asking for reimbursement of monies which it paid towards the settlement of the underlying lawsuit on behalf of its insured, Donnelly Distribution (“Donnelly”).  Am. W. Home Ins. Co. v. Donnelly Distrib., 2015 WL 505407 (E.D. Pa. 2015).

 

Before the Philadelphia County Court of Common Pleas, Plaintiff Sharon Swanlund (“Swanlund”) brought suit against Donnelly following a slip and fall that occurred as a result of her foot becoming entangled in plastic cord used to tie papers distributed by Donnelly.  Subsequently, American Western appointed counsel for Donnelly, and before trial, contributed $125,000 on behalf of Donnelly towards a $150,000 settlement towards Swanlund (Donnelly was to contribute the remaining $25,000).

 

However, prior to entering into this settlement agreement with Swanlund, American Western brought a declaratory judgment action before the District Court for the Eastern District of Pennsylvania claiming that it had no duty to defend or indemnify Donnelly in the Swanlund matter.  The Eastern District granted summary judgment in favor of Donnelly, holding that American Western did have a duty to defend and indemnify.  American Western then appealed to the Third Circuit, which reversed the Eastern District’s decision, finding that no duty to defend or indemnify was owed.

 

Following the Third Circuit’s decision, American Western returned to the District Court for the Eastern District and brought suit against Donnelly seeking reimbursement for the $125,000 it had paid on Donnelly’s behalf to settle the Swanlund matter, claiming unjust enrichment.  The Eastern District noted that Pennsylvania law does not allow a party to recover a payment made as a result of a mistake of law.  However, American Western argued that there was a distinction to this case as it was not mistaken as to the law, but rather the factual issue of how the court would resolve its declaratory judgment action.

 

Additionally, the Court held that Pennsylvania law permits an insurer to make a claim for reimbursement under a theory of unjust enrichment as a result of a settlement paid on its insured’s behalf if it is later determined that the insurer was not obligated to make that payment as per the terms of the insurance policy. To prevail on such claims, the insurer must establish that:

 

  • It did not make the payment due to a mistake of law;
  • The insured was on notice at the time of payment that the obligation to pay was disputed;
  • The insurer did not make the payment primarily to protect its own interests; and
  • Permitting reimbursement under the circumstances would not upset the delicate incentive structure inherent in the insurer/insured relationship.

 

The Court noted that American Western was seeking reimbursement based upon a theory of unjust enrichment, not breach of contract, and therefore its claim was not foreclosed by a lack of contractual language allowing for reimbursement.  Additionally, the court found that reimbursement claims such as American Western’s could stem from either settlement or final judgment.

 

The court found that American Western did not make its payment due to a mistake of law and that it had constantly disputed its obligation to pay under the insurance policy, including the issuance of a reservation of rights letter and a letter disclaiming coverage.   It is noted that the settlement did benefit American Western in capping potential litigation costs and being well within limits, however, it is determined that it benefited Donnelly as well in that it avoided a trial that could have led to higher verdict in a case where it was ultimately determined that the insurance company had no duty to indemnity the insured.  Finally, the court determined that reimbursement would not upset the insurer/insured relationship, given the procedural history of this matter and the fact the district court originally decided the declaratory judgment action in favor of Donnelly.

 

Thus, the district court determined that American Western was owed reimbursement for its contribution to the settlement of the Swanlund matter from its insured, Donnelly.