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Insurer Entitled to Reimbursement from Insured for Settlement Amount it Paid After Appellate Court Found Insurer Did Not Owe Coverage

Earlier this month, the U.S. District Court for the Eastern District of Pennsylvania held in American Western Home Ins. Co. v. Donnelly Distrib., Inc., No. 14-797, 2015 U.S. Dist. LEXIS 14357 (E.D. Pa. Feb. 6, 2015) (Schiller, J.), that an insurance company was entitled to reimbursement from its insured based on an unjust enrichment theory for $125,000 it paid on its insured's behalf to settle an underlying slip and fall case after the Third Circuit Court of Appeals held that theBrandonMcCullough--Insurance Blog Photo 2.jpg insurance company did not owe coverage to the insured for the incident.

Donnelly Distribution, Inc. ("Donnelly") was a defendant in a case where it was alleged that the plaintiff slipped and fell when her foot became entangled in the loop of a plastic tie used to wrap papers allegedly distributed or used by Donnelly. American Western Home Insurance Company ("American Western") insured Donnelly under a commercial insurance policy. American Western defended Donnelly in the slip and fall case under a reservation of rights, and subsequently filed a declaratory judgment action seeking a declaration that it owed no duty to defend or indemnify Donnelly. In the declaratory judgment action, the court initially ruled that American Western owed a defense and indemnity to Donnelly in the slip and fall case, but then vacated that order and ordered additional briefing. Shortly thereafter, Donnelly settled the slip and fall case on the eve of trial for $150,000. Of that amount, $125,000 was paid by American Western on behalf of Donnelly. The court in the declaratory judgment action subsequently granted summary judgment in favor of Donnelly and declared that American Western owed a duty to defend and indemnify Donnelly. American Western appealed, and the Third Circuit reversed and concluded that American Western did not owe a duty to defend or indemnify Donnelly. American Western then filed suit against Donnelly in the Eastern District seeking reimbursement for the $125,000 it paid to settle the underlying action under an unjust enrichment theory. 

The Eastern District granted summary judgment in favor of American Western and held that American Western was entitled to reimbursement from Donnelly based on an unjust enrichment theory. In doing so, the Eastern District looked to the considerations set forth in Axis Specialty Ins. Co. v. The Brickman Group, Ltd., 756 F. Supp. 2d 644 (E.D. Pa. 2010), which held that "to prevail on an unjust enrichment theory, the insurer must establish that: (1) it did not make the payment due to a mistake of law; (2) the insured was on notice at the time of payment that the obligation to pay was disputed; (3) the insurer did not make the payment primarily to protect its own interest; and (4) permitting reimbursement under the circumstances would not upset the delicate incentive structure inherent in the insurer/insured relationship."

The court found that American Western did not make the payment under a mistake of law, and consistently disputed its obligation to pay through a reservation of right letter and a letter disclaiming coverage. It further found that while the settlement benefited American Western, it also greatly benefited Donnelly because it guaranteed a fixed settlement amount and avoided a verdict that could have been higher than the settlement amount. The court also did not believe that a balance of interests between the insured and insurer would be upset by ordering reimbursement, as the decision to settle was reasonable and American Western could not be faulted for settling given the court's initial ruling prior to settlement of the underlying action that American Western owed a duty to defend and indemnify. Finally, the court held that the Third Circuit's ruling that American Western did not have a "duty to indemnify Donnelly for any amount due pursuant to the settlement," when the Third Circuit was aware of the settlement at the time of its ruling, indicated that American Western should not be barred from reimbursement following the Third Circuit's decision. The court noted that if an insurer were barred in such a situation, "it would provide an incentive for the insurer not to settle, hoping that it owed no duty to indemnify, or stall on litigating and paying a settlement, hoping that its duties would be clarified before it made any payments."

The full decision can be found here: American Western Home Ins. Co. v. Donnelly Distrib. (E.D. Pa. Feb. 6, 2015).pdf

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