Third Circuit Upholds Defense Cost Reimbursement Clause in Professional Liability Policy 

Global Insurance Alert

November 6, 2014

On October 10, 2014, the 3rd Circuit Court of Appeals decided Camico Mutual Ins. Co. v. Heffler, Radetich & Saitta, LLP, where it enforced a policy clause providing for repayment to the insurer of defense costs, and confirmed that a 2010 Pennsylvania Supreme Court decision had not invalidated such clauses. The court also determined the insured’s employee was performing “professional services” as defined in the policy notwithstanding the employee’s fraudulent conduct.

Underlying Matter

The insured Heffler, an accounting firm, had been appointed as the claims administrator for a $490 million settlement of a class action against BankAmerica Corporation. A senior claims analyst employed by Heffler committed fraud in the context of administering three class actions, including the BankAmerica action, by conspiring with others to file false claims, a portion of which the conspirators remitted to the Heffler employee. After the fraud was detected, a member of the BankAmerica class brought a new class action against Heffler seeking damages. The suit alleged breach of fiduciary duty, accounting malpractice and negligent supervision.

CAMICO initially funded Heffler’s defense, but later informed Heffler that it reserved its rights to recover defense costs that exceeded a $100,000 sub-limit in the policy concerning “misappropriation, misuse, theft or embezzlement.” While defending Heffler, CAMICO incurred costs in excess of the sub-limit. CAMICO ultimately filed a declaratory judgment against Heffler seeking, among other things, a claim for recovery of overpayment of defense costs. The district court granted summary judgment for CAMICO.

The Professional Services Definition

Under the policy, a former employee of Heffler would constitute an “Insured” in the context of the sub-limit only if the employee had been “performing Professional Services for [Heffler’s] benefit.” Heffler contended that its employee did not perform the professional services for its benefit because the income the employee secured in committing the fraud did not inure to Heffler. The court held this interpretation was too narrow. “If this were in fact the case, it is hard to imagine a situation in which the sub-limit at issue would apply. Whenever an employee was engaged in independent criminal conduct of this type – the benefits of which by definition would not inure to Heffler – he would immediately move outside the ambit” of the sub-limit provision. Because Heffler’s interpretation would render the sub-limit clause “surplusage,” the court rejected it.

The Reimbursement of Defense Costs Clause

In 2010, in American & Foreign Ins. Co. v. Jerry’s Sport Ctr., Inc., 2 A.3d 526 (Pa. 2010), the Pennsylvania Supreme Court had determined that insurers normally may not recoup costs expended in defense of an insured party. Heffler, relying on this precedent, contended that CAMICO was barred from seeking reimbursement of defense costs in excess of the sub-limit.

The 3rd Circuit observed that the Jerry’s Sport Center decision had qualified its decision, stating that the bar on repayment applied only “[w]here the insurance contract is silent about the insurer’s right to reimbursement of defense costs.” Here, however, the policy stated: “[i]f [CAMICO] pays any Claims Expenses or Damages … in excess of the applicable Limit of Liability, [Heffler] shall reimburse [CAMICO] these amounts within thirty (30) days of [CAMICO’s] request.” “This,” the Third Circuit recognized, was an “express provision in a written insurance contract” thus providing an exception to non-reimbursement of defenses costs.


The Heffler decision is welcome, though expected, confirmation that under Pennsylvania law freedom of contract means that parties can draft exceptions to “default rules” announced by the courts. The decision is consistent with the view that other such provisions, such as clauses providing for “evenhanded interpretation” of the contact or that alter the scope of the “duty to defend,” are likewise fully enforceable. Separately, we note that even absent an express provision, the insured and insurer can agree to reimbursement of defense costs in the context of a particular claim. This can be accomplished via a carefully drafted “interim funding and non-waiver agreement.” Many insureds recognize the practical wisdom of so agreeing, in order to avoid forcing their insurer to commence a declaratory judgment action while the underlying case is proceeding.

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To discuss any questions you may have regarding the issues discussed in this Alert, or how they may apply to your particular circumstances, please contact Richard C. Mason at (215) 665-2717 or