American and Foreign Insurance Co. v. Jerry’s Sport Center, Inc.

Jerry’s Sport Center, Inc., and its subsidiaries (defendants) were sued by the National Association for the Advancement of Colored People (NAACP) and the National Spinal Cord Injury Association (NSCIA) for failing to reasonably and safely distribute firearms. The associations argued that Jerry’s failures resulted in bodily injury to their members, but they only sought injunctive relief and monetary damages to establish a fund for educating, supervising, and regulating firearm distributors. Jerry’s sought defense against the suit and indemnification from its various insurers, including Royal Insurance Company of America (defendants). Jerry’s commercial-general-liability (CGL) policy obligated Royal to defend Jerry’s against any lawsuits brought to recover damages for potentially covered bodily injuries. The policy contained no language indicating that Royal had a right to reimbursement of defense costs for claims held not to be covered by the policy. Royal undertook Jerry’s defense against the associations’ lawsuit and chose a special counsel. However, Royal reserved its right to noncoverage and sent Jerry’s four reservation-of-rights letters, starting from when counsel was chosen. The letters alleged that Royal had a right to reimbursement for defense costs on claims ultimately determined not to be covered. Later, Royal sought a declaratory judgment that Royal had no duty to defend because the associations’ claims did not allege bodily injury and thus were not covered under the policy. Royal also sought reimbursement for litigation costs. A state trial court granted summary judgment in Royal’s favor and awarded the requested reimbursement under an unjust-enrichment theory. Jerry’s appealed. The superior court reversed, finding that although the claims were not covered, Jerry’s had not been unjustly enriched by Royal’s defense. The court noted that Royal had benefited from being able to control Jerry’s defense and minimize its exposure to indemnification liability. The court concluded that because the policy did not provide for reimbursement, allowing recovery under a quantum meruit theory impermissibly altered the contract unilaterally. Royal appealed.