A Pennsylvania federal court has held that an insurer was entitled to reimbursement of a settlement payment paid on behalf of its insured where the insurer reserved its rights to deny coverage and entered into a reasonable settlement. Am. Western Home Ins. Co. v. Donnelly Distribution, Inc., No. 14-797 (E.D. Pa. Feb. 6, 2015).

An insured was sued in a tort action arising out of a slip and fall accident. The insurer defended the insured subject to a reservation of rights and filed a coverage lawsuit seeking a declaration that it was not obligated to defend or indemnify the insured. The insured settled the underlying lawsuit for an amount within the limits of the policy, which the insurer paid. The United States Court of Appeals for the Third Circuit held in the coverage action that the insurer had no duty to defend or indemnify the insured. The insurer then filed a lawsuit against the insured seeking reimbursement of the amount it paid to settle the underlying litigation.

The court granted summary judgment to the insurer, holding that it was entitled to recoup the settlement payment. The insurer argued that it was entitled to reimbursement based on an unjust enrichment theory, while the insured argued that the settlement was a voluntary payment that could not be recouped. The insured also noted that the policy at issue did not explicitly allow for recoupment of a settlement payment.

In determining that the insurer was entitled to reimbursement of the settlement payment, the court looked to the factors announced in Axis Specialty Insurance Co. v. The Brickman Group, Ltd., 756 F. Supp. 2d 644 (E.D. Pa. 2010). These factors are (1) whether the insurer made the payment based upon a mistake of law; (2) whether the insured was on notice at the time of payment that the obligation to pay was disputed; (3) whether the insurer made the payment primarily to protect its own interest; and (4) whether permitting reimbursement under the circumstances would upset the “delicate incentive structure inherent in the insurer/insured relationship.” According to the court, all of these factors pointed towards allowing reimbursement. Here, the insurer did not make the payment based on a mistake of law; the insurer reserved its rights at the time of the settlement; the settlement benefited the insured by capping costs at a low amount; and the decision to settle was a reasonable one, so the incentive structure would not be upset. Finally, the court noted that the Third Circuit was aware of the settlement when it held that the insured had no duty to indemnify, and its decision therefore probably contemplated that the insured would be entitled to reimbursement.