Opinion
No. 02-0730
Argued September 24, 2003.
Opinion Delivered May 27, 2005.
On Petition for Review from the Court of Appeals for the Fourteenth District of Texas.
JUSTICE OWEN delivered the opinion of the Court, in which CHIEF JUSTICE JEFFERSON, JUSTICE HECHT, Justice Medina and JUSTICE GREEN joined. JUSTICE O'NEILL joined in Part I and Part II, C and D, and JUSTICE WAINWRIGHT joined in Part II, C.
JUSTICE HECHT filed a concurring opinion.
JUSTICE O'NEILL filed a concurring opinion.
JUSTICE WAINWRIGHT filed a concurring opinion.
JUSTICE BRISTER and JUSTICE JOHNSON did not participate in the decision.
The issue in this case is whether excess insurance carriers that disputed coverage but that settled third-party claims against their insured are entitled to recoup the settlement payments from their insured when it was subsequently determined that the claims against the insured were not covered. There was no express agreement allowing reimbursement. The trial court granted summary judgment for the insured, holding there was no right to reimbursement, and the court of appeals affirmed. Both courts concluded that this Court's decision in Texas Association of Counties County Government Risk Management Pool v. Matagorda County was controlling. Because the facts at issue in that case differ from those before us today, and because we are persuaded that a right of recoupment can arise even absent an insured's express agreement to reimburse settlement payments made by an insurer if there is no coverage, Matagorda County does not foreclose reimbursement in this case. We accordingly reverse the court of appeals' judgment and remand this case to the trial court to enter judgment in the excess underwriters' favor.
52 S.W.3d 128 (Tex. 2000).
I
Frank's Casing Crew Rental Tools, Inc. fabricated a drilling platform at its facility in Louisiana for ARCO/Vastar. The platform was installed in the Gulf of Mexico and collapsed several months later. ARCO sued Frank's Casing, among others.
Frank's Casing had a primary liability policy with limits of $1 million, and Frank's Casing had obtained excess coverage of up to $10 million from Certain Companies Subscribing Severally But Not Jointly To Policy No. 548/TA4011F01 and Excess Underwriters at Lloyd's, London (whom we will call the excess underwriters). The excess underwriters issued reservation of rights letters in which they asserted that certain of ARCO's claims against Frank's Casing were not covered.
The primary carrier retained defense counsel for Frank's Casing. ARCO made a pre-trial settlement offer of $9.9 million, which Frank's Casing rejected. Two weeks before trial, the excess underwriters contacted ARCO directly, without Frank's Casing's knowledge, and attempted to settle only the claims the underwriters were willing to concede were covered. No agreement was reached. ARCO subsequently offered to settle all claims against all defendants for $8.8 million, which would have required Frank's Casing to contribute about $7.55 million. The excess underwriters proposed to Frank's Casing that the underwriters pay two-thirds of that amount, that Frank's Casing pay one-third, and that all coverage issues would be waived by the underwriters. In the alternative, the underwriters proposed that they pay $5 million and that all coverage issues be resolved in arbitration. Frank's Casing did not accept either proposal.
As trial approached, the excess underwriters retained counsel to associate with Frank's Casing and its primary carrier in the defense of ARCO's claims, as the underwriters were entitled to do under the excess liability policy. ARCO's suit against Frank's Casing proceeded to trial, and it readily became apparent that Frank's Casing was the target defendant. By the close of the second day of trial, Frank's Casing's in-house counsel had contacted ARCO and requested that it make a settlement demand within the excess policy's limits, suggesting $7 million. ARCO promptly responded with a demand of $7.5 million, which Frank's Casing communicated to the excess underwriters accompanied by a demand that the underwriters accept this offer, thus " Stowerizing" the excess underwriters. The underwriters agreed that the case should be settled for this amount and stated that they would fund the settlement up to $7.5 million, less any contribution from the primary carrier, if Frank's Casing would expressly agree that all coverage issues would be resolved at a later date. Frank's Casing refused and sent a second letter demanding that the underwriters accept ARCO's settlement offer. The excess underwriters then advised Frank's Casing that they would pay $7.5 million, less any contribution from the primary carrier, and seek reimbursement from Frank's Casing. That same day, the underwriters contacted ARCO and orally accepted the settlement offer. The primary carrier simultaneously tendered its remaining policy limits, approximately $500,000, to settle the lawsuit.
The policy provides:
The Underwriters shall not be called upon to assume charge of the settlement or defense of any claim made or suit brought or proceeding instituted against the Assured but Underwriters shall have the right and shall be given the opportunity to associate with the Assured or the Assured's underlying insurers or both in the defense and control of any claim, suit or proceeding relative to an occurrence where the claim or suit involves, or appears reasonably likely to involve Underwriters, in which event the Assured and Underwriters shall co-operate in all things in the defense of such claim, suit or proceeding.
See G.A. Stowers Furniture Co. v. Am. Indemn. Co., 15 S.W.2d 544, 547 (Tex. Comm'n App. 1929, holdings approved).
The excess insurance policy required Frank's Casing's approval of any settlement, and it gave that approval. A written settlement agreement among ARCO, Frank's Casing and the excess underwriters preserved "any claims that exist presently" between Frank's Casing and the underwriters. Prior to that agreement's execution, the excess underwriters had filed this suit against Frank's Casing for reimbursement, and Frank's Casing had answered.
The policy provided: "The Assured shall make a definite claim for any loss for which the Underwriters may be liable under this policy within twelve (12) months . . . after the Assured's liability shall have been fixed and rendered certain either by final judgment against the Assured after actual trial or by written agreement of the Assured, the claimant, and Underwriters."
In the coverage litigation, the excess underwriters and Frank's Casing filed cross motions for summary judgment. Among the issues presented to the trial court was whether Texas or Louisiana law governed, and the trial court applied Texas law. The trial court initially dismissed Frank's Casing's counterclaims and granted three separate motions for partial summary judgment for the excess underwriters, finding that none of ARCO's claims against Frank's Casing were covered, requiring Frank's Casing to reimburse the excess underwriters, and awarding the underwriters $7,013,612.00. Shortly thereafter, however, this Court issued Texas Association of Counties County Government Risk Management Pool v. Matagorda County. The trial court then directed Frank's Casing to file a motion for new trial only on the issue of reimbursement, and Frank's Casing complied. After further briefing and another hearing, the trial court withdrew its order granting partial summary judgment on the reimbursement issue and signed a take-nothing judgment against the excess underwriters.
52 S.W.3d 128 (Tex. 2000).
The court of appeals affirmed, although it noted: "We recognize this case carries Matagorda County to a logical conclusion that is somewhat disquieting — Frank's was able to resolve the parties' coverage dispute in its own favor simply by sending a Stowers demand to the Underwriters. . . . But this is a matter that the Underwriters must take up with the superior court." The excess underwriters petitioned this Court for review, and we granted that petition.
We conclude that the law of both Texas and Louisiana entitle an insurer to reimbursement under the facts of this case. Accordingly, we do not decide which state's law governs. We first consider Texas law.
II
In Matagorda County, the County was sued after inmates armed with razor blades physically and sexually assaulted other inmates in the County's jail. The County's policy with the Texas Association of Counties' risk pool specifically excluded any claim arising out of the operation of the jail. The risk pool nevertheless agreed to defend the inmates' suit against the County with a reservation of rights and concurrently sought a declaratory judgment that the inmates' claims were not covered. Before the declaratory judgment action was resolved, the inmate plaintiffs offered to settle their suit against the County for $300,000, which was within policy limits. The County advised the risk pool that this was a reasonable settlement offer, but did not ask the risk pool to accept the offer and refused to fund the settlement itself, insisting that there was coverage. The risk pool then sent the County a letter, reasserting its position that there was no coverage, but advising the County that the risk pool would fund the settlement and then seek reimbursement from the County in the declaratory judgment action. The County did not respond, and the risk pool settled the inmates' claims. The County subsequently stipulated in the declaratory judgment action that the settlement amount was reasonable. This Court held that an implied-in-fact agreement that the risk pool could seek reimbursement could not be found from the County's silence in response to the risk pool's letter stating it would seek reimbursement after it funded the settlement. The Court also concluded that the doctrine of equitable subrogation did not apply. Finally, the Court concluded that the quasi-contractual theories of quantum meruit and unjust enrichment should not be applied. In resolving these issues, the Court's opinion said that the risk pool was not entitled to reimbursement unless the insured "consent[ed] to the settlement and the insurer's right to seek reimbursement."
Id.
Id.
Id.
Id. at 129.
Id. at 130.
Id.
Id.
Id.
Id. at 131-33.
Id. at 134.
Id.
Id. at 135.
A
In Matagorda County, the insurer had the unilateral right to settle claims against the insured without the insured's consent. One of the chief concerns expressed by the Court in Matagorda County was that when an insurer has the unilateral right to settle, an insurer could accept a settlement that the insured considered out of the insured's financial reach, and the insured could be required to reimburse the insurer for that amount. "[T]he insured is forced to choose between rejecting a settlement within policy limits or accepting a possible financial obligation to pay an amount that may be beyond its means, at a time when the insured is most vulnerable." The facts of the case before us today lead us to conclude that this concern is ameliorated if not eliminated in at least two circumstances:
Id. at 130.
Id. at 135.
Id.
1) when an insured has demanded that its insurer accept a settlement offer that is within policy limits, or
2) when an insured expressly agrees that the settlement offer should be accepted.
In these situations, the insurer has a right to be reimbursed if it has timely asserted its reservation of rights, notified the insured it intends to seek reimbursement, and paid to settle claims that were not covered.
B
The insured in this case, Frank's Casing, specifically demanded that the excess underwriters accept and fund ARCO's settlement offer. Even when a claim is covered, an insurer has no duty to accept a settlement offer within policy limits unless "an ordinarily prudent person, in the exercise of ordinary care, as viewed from the standpoint of the assured, would have." When Frank's Casing " Stowerized" the excess underwriters, it could not thereafter take the inconsistent position that the settlement offer was reasonable if the insurer bore the cost of settling but unreasonable if the insured ultimately bore the cost. Once an insured asserts that a settlement offer has triggered a Stowers duty, and the insurer then accepts that settlement offer or a lower one, the insured is estopped from asserting that the settlement is too financially burdensome for the insured to bear if it turns out the claims against the insured are not covered.
G.A. Stowers Furniture Co. v. Am. Indemn. Co., 15 S.W.2d 544, 547 (Tex. Comm'n App. 1929, holdings approved).
We have said that the duty imposed by Stowers is to "exercise `that degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business.'" We have also said that the Stowers duty is viewed from the perspective of an insurer: "the terms of the demand are such that an ordinarily prudent insurer would accept it." Both statements are correct. Whether a settlement offer within policy limits is a reasonable one is determined by an objective standard based on an assessment of the likelihood that the insured will be found liable and the range of potential damages for which the insured may be held liable, including "the likelihood and degree of the insured's potential exposure to an excess judgment." The reasonableness of a settlement offer is not judged by whether the insured has no assets or substantial assets, or whether the limits of insurance coverage greatly exceed the potential damages for which the insured may be liable. It is an objective assessment of the insured's potential liability.
Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 848 (Tex. 1994) (quoting Stowers, 15 S.W.2d at 547).
Id. at 849 ("The Stowers duty is not activated by a settlement demand unless three prerequisites are met: (1) the claim against the insured is within the scope of coverage, (2) the demand is within the policy limits, and (3) the terms of the demand are such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the insured's potential exposure to an excess judgment.").
Id.
When there is a coverage dispute and an insured demands that its insurer accept a settlement offer within policy limits, the insured is deemed to have viewed the settlement offer as a reasonable one. If the offer is one that a reasonable insurer should accept, it is one that a reasonable insured should accept if there is no coverage. The insured knows that if the case is not settled, a judgment may be rendered against it for which there is no insurance coverage. Typically, a party considers a settlement reasonable when there is a substantial risk that if the case proceeds to trial, a judgment larger than the settlement offer will be entered against it. Requiring an insured to reimburse its insurer for settlement payments if it is later determined there was no coverage does not prejudice the insured. The insured's substantial exposure to a judgment against it greater than the settlement amount has been eliminated, at its insistence, and by its own admission the settlement amount was reasonable. The insured is in the same, or at least no worse, position than it would have been in if there had been no policy. Insurance coverage should not be created where none exists merely because an insured could not afford to pay a judgment if the case were tried or to fund a settlement demand from an injured third party. The insurer should be entitled to settle with the injured party for an amount the insured has agreed is reasonable and to seek recoupment from the insured if the claims against it were not covered. From the insured's point of view, it is in precisely the same position it would have been in absent any insurance policy, except that the insurer is now the insured's creditor rather than the injured third party.
Reimbursement rights encourage insurers to settle cases even when coverage is in doubt. This inures to the benefit of injured third parties. When an insurer settles a claim for which coverage is in doubt, the risk that the insured lacks the resources to fund a settlement is shifted to the insurer and is lifted from the injured plaintiff who sued the insured. The coverage dispute between an insured and its insurer can be resolved after the injured plaintiff is compensated. Thus, an injured plaintiff's risk that the defendant has no coverage and may be financially unable to fully compensate the plaintiff is lessened.
See Blue Ridge Ins. Co. v. Jacobsen, 22 P.3d 313, 321 (Cal. 2001).
Id.
Whether the insurer or the insured ultimately bears the cost of a reasonable settlement with a third party should depend on whether there is coverage. As pointed out by the California Supreme Court and our own court of appeals in the present case, denying a right of reimbursement once an insured has demanded that an insurer accept a reasonable settlement offer from an injured third party can significantly tilt the playing field. The insurer would have only two options. It could refuse to settle and face a bad faith claim if it is later determined there was coverage. Or it could settle the third-party claim with no right of recourse against the insured if it is determined there was no coverage, which effectively creates coverage where there was none. As the California Supreme Court concluded, "[R]eimbursement should be available because the insurer had not bargained to bear these costs and the insured had not paid the insurer premiums for the risk."
See id. (observing that the insured's objection to a reservation of rights "would create coverage contrary to the parties' agreement in the insurance policy and violate basic notions of fairness"); Excess Underwriters, 93 S.W.3d at 180 (observing that denying reimbursement was "somewhat disquieting — Frank's was able to resolve the parties' coverage dispute in its own favor simply by sending a Stowers demand to the Underwriters").
Blue Ridge, 22 P.3d at 321; Excess Underwriters, 93 S.W.3d at 180.
Blue Ridge, 22 P.3d at 320 (citing Buss v. Superior Court, 939 P.2d 766, 776 (Cal. 1997)).
C
A second situation in which reimbursement will be permitted is when there is a coverage dispute, the insured has expressly agreed the third party's settlement offer should be accepted, and the insurer has notified the insured that it intends to seek reimbursement. In Matagorda County, the County agreed that the settlement amount was reasonable. But the risk pool had the right to, and did, settle without the County's consent. Here, the underwriters could not settle without Frank's Casing's consent. Frank's Casing had the option of continuing the litigation. Frank's Casing made an informed decision between continuing to defend ARCO's suit and consenting to settle that litigation, knowing that the excess underwriters intended to pursue coverage issues and to seek reimbursement of the amount paid in settlement. The insured had control over whether to settle for the sum offered by ARCO or continue the litigation. An insured who agrees to the settlement and benefits by having claims against it extinguished cannot complain that it must reimburse its insurer if the claims against the insured were not covered by its policy.
Tex. Ass'n of Counties County Gov't Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128, 130 (Tex. 2000).
Id.
D
In cases such as the one presently before us, an agreement to reimburse an insurer is implied in law. It is quasi-contractual. In Matagorda County, this Court held that a quasi-contract did not arise under the facts of that case. In explaining why, the Court cited three cases and a law review article for the proposition that "the few courts that have considered the settlement-reimbursement question have generally opted to recognize a reimbursement right only if the insured has authorized the settlement and agreed to reimburse the insurer should the insurer prevail on its coverage defense." The three cases cited were Medical Malpractice Joint Underwriting Association of Massachusetts v. Goldberg, Mt. Airy Insurance Co. v. Doe Law Firm, and Val's Painting Drywall, Inc. v. Allstate Insurance Co. However, only one of those decisions, Mt. Airy, held that reimbursement is limited to the circumstance in which there was an express agreement that the insurer would be entitled to reimbursement if there was no coverage. Val's Painting held that even absent an express or implied-in-fact agreement, an insurer may obtain reimbursement if "it has secured specific authority to make that settlement or has notified the insured of a reasonable offer by the claimant and given the insured an opportunity to assume the defense." Goldberg, extensively relied on in Matagorda County, expressly agreed with Val's Painting that reimbursement is required when the insured had been given the opportunity to assume its own defense after notification of a reasonable settlement offer. Goldberg held "an insurer [who] defends under a reservation of rights to later disclaim coverage . . . may later seek reimbursement for an amount paid to settle the underlying tort action" if the "insurer [has] notif[ied] the insured of a reasonable settlement offer and give[n] the insured an opportunity to accept the offer or assume its own defense." Similarly, the law review article cited in Matagorda County concluded that "[m]ost courts to consider this question have held that the insurer can obtain reimbursement of settlement funds if the insured has authorized the settlement and agreed to reimburse the insurer in the event the insurer prevails on the coverage issue, or if the insurer has notified the insured of a reasonable offer and given the insured the opportunity to assume the defense." After citing these three cases and the law review article, Matagorda County said, "We agree with this approach."
Blue Ridge, 22 P.3d at 320 ("`The insurer therefore has a right of reimbursement that is implied in law as quasi-contractual, whether or not it has one that is implied in fact in the policy as contractual.'" (quoting Buss, 939 P.2d at 776)).
Id.
Id.
680 N.E.2d 1121 (Mass. 1997).
668 So. 2d 534 (Ala. 1995).
126 Cal. Rptr. 267 (Cal.Ct.App. 1975).
Tex. Ass'n of Counties County Gov't Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128, 133, 134-35 (Tex. 2000).
Med. Malpractice Joint Underwriting Ass'n of Mass. v. Goldberg, 680 N.E.2d 1121, 1129 n. 30 (Mass. 1997) ("We recognize that Val's Painting is the holding from another jurisdiction. We nevertheless find its reasoning sound.").
Id. at 1129.
Jerry, The Insurer's Right to Reimbursement of Defense Costs, 42 ARIZ. L. REV. 13, 70 n. 220 (2000) (emphasis added). This footnote said in its entirety:
A similar question can be asked of the indemnity obligation: Is it possible, in circumstances where the defense is being provided under reservation to contest coverage, for the insurer to settle the underlying litigation and reserve a right to obtain reimbursement of the settlement amounts in the event it is determined that the plaintiff's claim(s) against the insured are outside the coverage? In this situation, like the reimbursement of defense costs situation, the insurer performs an obligation-indemnity-while reserving a right to claim that the indemnity duty was not owed on account of lack of coverage and to retrieve the funds that were advanced to resolve the underlying claim. Most courts to consider this question have held that the insurer can obtain reimbursement of settlement funds if the insured has authorized the settlement and agreed to reimburse the insurer in the event the insurer prevails on the coverage issue, or if the insurer has notified the insured of a reasonable offer and given the insured the opportunity to assume the defense. See, e.g., Mt. Airy Ins. Co. v. Doe Law Firm, 668 So. 2d 534 (Ala. 1995); Johansen v. California State Auto. Ass'n Inter-Ins. Bur., 538 P.2d 744, 750 (Cal. 1975); Val's Painting and Drywall, Inc. v. Allstate Ins. Co., 126 Cal. Rptr. 267, 273-74 (Ct.App. 1975); Medical Malpractice Joint Underwriting Ass'n v. Goldberg, 680 N.E.2d 1121, 1127-29 (Mass. 1997); Matagorda County v. Texas Ass'n of Counties County Gov't Risk Mgmt. Pool, 975 S.W.2d 782 (Tex.Ct.App. 1998), review granted (June 29, 1999). This, however, is not inconsistent with the analysis, developed in the text, that the insured's express agreement to the insurer's claim of right to reimbursement of defense costs is not needed. As with reimbursement of defense costs, see supra note 45, a specific policy provision authorizing reimbursement of settlement funds in the event the insurer prevails on the coverage issue is enforceable. See National Cas. Co. v. Lane Express, Inc., 05-96-00444-CV, 1999 WL 219437 (Tex.Ct.App. Apr. 16, 1999).
Two statements in Matagorda County did not, however, fully set forth the "approach" taken by three of the four authorities relied upon. Those two statements in Matagorda County were that "the few courts that have considered the settlement-reimbursement question have generally opted to recognize a reimbursement right only if the insured has authorized the settlement and agreed to reimburse the insurer should the insurer prevail on its coverage defense," and
Id. at 134.
when coverage is disputed and the insurer is presented with a reasonable settlement demand within policy limits, the insurer may fund the settlement and seek reimbursement only if it obtains the insured's clear and unequivocal consent to the settlement and the insurer's right to seek reimbursement. See Goldberg, 680 N.E.2d at 1129.
Id. at 135.
To the extent Matagorda County indicated that the only circumstance under which an insurer may obtain reimbursement from an insured for settlement payments when there is no coverage is when there is an express agreement that there is a right to seek reimbursement, we clarify that there are additional circumstances that will give rise to a right of reimbursement. Those include the circumstances in the case presently before us.
III
The Louisiana courts have not considered whether an insurer is entitled to reimbursement from its insured when it pays to settle claims against its insured that are not covered. However, it appears that under Louisiana law there would be a right to reimbursement in this case.
The Louisiana Civil Code provides a remedy when a person "has been enriched without cause at the expense of another person." The Code says,
A person who has been enriched without cause at the expense of another person is bound to compensate that person. The term "without cause" is used in this context to exclude cases in which the enrichment results from a valid juridical act or the law. The remedy declared here is subsidiary and shall not be available if the law provides another remedy for the impoverishment or declares a contrary rule.
The amount of compensation due is measured by the extent to which one has been enriched or the other has been impoverished, whichever is less.
The extent of the enrichment or impoverishment is measured as of the time the suit is brought or, according to the circumstances, as of the time the judgment is rendered.
Id.
This section was enacted in 1995. The commentary to this section notes that "[i]t expresses the principle of enrichment without cause that was inherent but not fully expressed in the Louisiana Civil Code of 1870. The formulation of the principle accords with civilian doctrine and jurisprudence."
Id. revision cmts. (1995).
A decision of the Supreme Court of Louisiana that preceded the promulgation of this provision illuminates the principles of Louisiana law it embodies. In Edmonston v. A-Second Mortgage Co. of Slidell, Inc., Edmonston and her husband obtained a loan from Standard Life Insurance Company. To secure the loan, Edmonston mortgaged her separate property. Standard also required the couple to insure their lives and assign the policies to Standard. The assignment provided that any proceeds of the policy would be used to discharge the mortgage or would be paid to the beneficiary, at the survivor's option. The couple later obtained a loan from A-Second Mortgage Company, and Edmonston gave that company a second mortgage on her property. Thereafter, the couple deeded the property to A-Second in satisfaction of its mortgage as well as the outstanding debt to Standard. Instead of immediately paying off the debt to Standard, A-Second agreed to make all payments on the Standard loan as they became due. Edmonston's husband subsequently died. Although A-Second had assumed the couple's obligation to repay the Standard loan, Standard had never released Edmonston or her husband from liability. She and Standard agreed that the proceeds of her husband's life insurance policy, $16,000, should be applied to pay off the Standard loan, which had a balance of about $14,500, with the remainder to be paid to Edmonston. Edmonston then sued A-Second to recover the $14,500, apparently realizing she had discharged a debt that she had already paid A-Second to discharge on her behalf. The Louisiana Supreme Court recognized that Edmonston had no obligation to A-Second to pay Standard's note and that "A-Second received a benefit they had never bargained for, the discharge of its obligation to Standard." The court held that Edmonston was entitled to restitution, reasoning, "[s]he has, in effect, paid the debt of another and the actual benefit to A-Second cannot be questioned."
289 So. 2d 116, 118 (La. 1974).
Id. at 121.
Id. at 122.
Under the rationale of Edmonston and the provisions of article 2298, it appears that Louisiana law would permit the excess underwriters to obtain reimbursement from Frank's Casing. Accordingly, the result under Louisiana and Texas law would be the same, and we need not engage in a conflict of laws analysis to determine which state's law applies.
* * * * *
For the reasons set forth, we reverse the court of appeals' judgment and remand this case to the trial court to render judgment in favor of the excess underwriters consistent with this opinion.
I join fully in the Court's opinion and write separately only to say that while I agree distinctions can be found between this case and Texas Association of Counties County Government Risk Management Pool v. Matagorda County, in fact those distinctions are immaterial, and the rule in Matagorda County cannot survive today's decision for the reasons Matagorda County was wrongly decided.
52 S.W.3d 128 (Tex. 2000).
Id. at 136-141 (Owen, J., joined by Hecht, J., dissenting).
The question in both cases is this: may a liability insurer accept a reasonable offer within policy limits to settle a claim for which coverage is disputed and, if the claim is later determined not to have been covered, obtain reimbursement from the insured. In the present case, we answer "yes"; in Matagorda County, the Court said "no". The Court sees two distinctions in the cases. In the present case, the insured (1) had the right to consent to any settlement and (2) demanded that the insurer accept the claimant's settlement offer. Neither of these things was true in Matagorda County, but neither distinction matters to the decision in either case.
The insured's right to consent to settlement does not matter because neither case is about a settlement forced on an insured. The insureds in both cases wanted the insurer to settle. The insured in Matagorda County "advised [the insurer] that the proposed settlement was reasonable and prudent, given the facts and circumstances of the case"; it simply refused to contribute to the settlement or to agree to reimburse the insurer's contribution if the claim were determined not to be covered. The insured never argued that it would have withheld consent to the settlement had it had that right under the policy. Right or no right, the insured in each case viewed the proposed settlement exactly the same way. The insureds' desire in both cases to "have their cake and eat it, too" has nothing whatever to do with a right to consent to settlement.
Id. at 129.
Nor does it matter to either case that the insured did or did not demand that the insurer accept the settlement offer. The insurer's duty to settle is triggered by a reasonable offer from the claimant — which was made in each case — regardless of whether the insured demands that the offer be accepted. It is the existence of this duty and the severe consequences for its breach that forced the insurer in each case to accept the settlement offer and seek reimbursement from the insured. Now granted, it is harder to sympathize with an insured that, instead of sitting mute, demands that its insurer settle a claim and then denies its responsibility to fund the settlement when it is later determined that there was no coverage, but the insurer's responsibilities in both cases were exactly the same.
American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 848-849 (Tex. 1994); G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544, 547-548 (Tex. Comm'n App. 1929, holding approved).
Since the present case cannot be distinguished from Matagorda County on any ground that matters, this case effectively overrules Matagorda County, as it should. "[A]n insurer has no duty to settle a claim that is not covered under its policy." But to deny an insurer the option of accepting a reasonable settlement though coverage is doubtful and then seeking reimbursement from the insured if the claim is determined not to be covered forces on the insurer this choice: either fund the settlement and abandon all arguments that the claim is not covered, or refuse to fund the settlement and if the claim is determined to be covered, face liability for the full amount of the claim, even above policy limits, plus statutory damages and attorney fees. Since the cost of the latter option will almost certainly exceed the cost of settlement many times over, an insurer cannot afford to gamble. In both the present case and Matagorda County, the insurer ultimately prevailed on its arguments of no coverage. Yet the insurer in Matagorda County paid $300,000, and the insurer in the present case paid over $7 million, hoping for reimbursement, rather than take the chance that they were wrong about coverage. When insurers are forced to pay doubtful claims, the premiums paid by policyholders who have purchased coverage must be used to satisfy claims against policyholders who have not purchased coverage. The rule in Matagorda County thus allows a non-covered policyholder to extort payments not only from the insurer but from the insurer's other policyholders. The result in Matagorda County was especially egregious because it fell on the public: in effect, the Court allowed the Matagorda County Commissioners' Court to force the innocent and unknowing taxpayers of the risk pool's other member counties to pay for damages the members had not agreed to cover.
American Physicians, 876 S.W.2d at 848.
Id. at 849.
See TEX. INS. CODE art. 21.21, § 16A, art. 21.55, § 6.
Justice Wainwright's concurring opinion argues that when "the insurer gives notice of its intention to recoup [a settlement] payment in a timely reservation of rights letter or makes reimbursement a term or condition of a subsequent agreement", an agreement for the insured to reimburse the payment is implied in fact. I agree with this, of course, and said so in Matagorda County, but the Court in Matagorda County expressly rejected that view. Matagorda County cannot survive reasoning in Justice Wainwright's concurring opinion.
Post at ___.
Matagorda County, 52 S.W.3d at 140 (Owen, J., joined by Hecht, J., dissenting) ("If in the case before us, the County had demanded that the Association settle the Coseboon litigation after receiving the reservation-of-rights letter, I would hold that an implied-in-fact agreement arose, even if the County maintained that there was no obligation to reimburse.").
Id. at 129, 131-133.
Justice O'Neill's concurrence argues that "absent a consent-to-settlement clause or the opportunity for the insured to assume its own defense, an insured [does not] necessarily assume a reimbursement obligation merely by expressing agreement with the insurer's decision to settle a case." Why an insured should assume an obligation to reimburse an insurer's settlement of a non-covered claim when the insured has the right to consent to settlement and does so, but not when he consents though he has no right to do so, is baffling. What possible difference can the right to consent make if the insured in fact consents? The insured's obligation to reimburse an insurer's settlement of a non-covered claim depends entirely on the reasonableness of the settlement.
Post at ___.
Justice O'Neill's concurrence argues that the reasonableness of a settlement depends on the availability of insurance or the defendant's ability to pay. It is true, of course, that a claimant is often willing to settle his claim for less than its fair value when there is no insurance coverage and the defendant's assets are limited, although that is certainly not always the case. From this observation, Justice O'Neill's concurrence concludes that it is somehow wrong to saddle an insured with an obligation to reimburse a settlement paid by the insurer when coverage was in doubt, because the claimant might have agreed to a lesser settlement, and one within the insured's means, had coverage been determined not to exist. Even if one accepts that a claimant would take less to settle a non-covered claim than to settle a claim for which coverage was disputed, Justice O'Neill's concurrence cannot explain how the insured is disadvantaged by an obligation to reimburse the settlement in the latter instance. Suppose P's claim is worth $10X but P is convinced that he can extract only $1X from D, who is not covered by insurance, so P settles with D for $1X. D pays $1X. But suppose D's liability might be covered by insurance, so the insurer decides to pay P the reasonable value of the claim, $10X, and seek reimbursement from D if coverage issues are later resolved in the insurer's favor, rather than face liability for much more than $10X if coverage issues are resolved in D's favor. How much does D pay the insurer if there is found to be no coverage? $1X — that's all D has. Justice O'Neill's concurrence seems to imagine — one cannot tell for sure — a defendant of limited means who can negotiate a settlement with the claimant that is less than his ability to pay, but there is no reason to suppose that a claimant would demand less in settlement from a defendant, known to be uninsured, than the insurer would demand in reimbursement from the defendant for settling a claim later determined not to be covered. A defendant who cannot pay the claimant more than $1X cannot reimburse his insurer more than $1X. Justice O'Neill's concurrence states: "I just do not believe that an insured that calls upon its insurer to settle a disputed claim necessarily agrees it is willing and able to pay the same amount in the event the insurer ultimately prevails in its coverage dispute." The statement is, of course, correct; the would-be insured agrees to nothing regarding his willingness and ability to pay. But it is also irrelevant. The exposure of the defendant of limited means to his insurer is no greater than it would be to the claimant.
Post at ___.
Perhaps it is necessary to stress, again, that no one suggests that an insurer may unilaterally settle a claim for an unreasonable amount, or in circumstances that actually (rather than hypothetically) prejudice the insured, and then force reimbursement from the insured. Neither the present case nor Matagorda County involved such a situation. The Court has never been cited to a case involving such a situation. In the off-chance that such a situation could arise, statutory prohibitions against unfair practices by insurers offer full relief: actual damages, additional damages, and attorney fees.
See TEX. INS. CODE art. 21.21, § 16A, art. 21.55, § 6.
An insured should not be allowed to unreasonably withhold consent to settlement to force the insurer to pay a claim and abandon coverage issues at the risk of incurring stiff statutory liabilities. An insurer's right to recoup from its insured the amount paid to settle a claim depends on two things: the reasonableness of the settlement, and coverage. That is the essence of today's decision.
I agree that the excess underwriters are entitled to reimbursement under the circumstances presented in this case. As the Court notes, the insurers could not settle without their insured's consent under the parties' insurance agreements, and Frank's Casing not only consented to the settlement, but initiated it. For this reason, I join Part I and Part II, C and D, of the Court's opinion. I cannot join the remainder, however, for in my view the Court's opinion is unduly broad and based at least in part upon faulty assumptions.
The Court holds that an insured may be required to reimburse its insurer for settling claims that are ultimately determined to be outside the scope of coverage if the insured expressly agrees to the settlement. ___ S.W.3d at ___. In discussing that justification, the Court emphasizes that the underwriters in this case could not settle without Frank's consent and distinguishes our decision in Texas Association of Counties County Government Risk Management Pool v. Matagorda County, 52 S.W.3d 128 (Tex. 2000), on that basis. ___ S.W.3d at ___. I agree because, when the insurance policy requires the insured's consent before a settlement may be reached, the insured has at least some control over whether to settle for the offered amount or continue the litigation, unlike the situation presented in Matagorda County. In Matagorda County, we expressed agreement with the approach other courts had taken in recognizing a reimbursement right when the insurer conveys a reasonable offer to the insured and gives the insured an opportunity to assume the defense. 52 S.W.3d at 134. In that instance, the insured retains a level of control similar to that which a consent-to-settlement clause confers. Because in Matagorda County the insurer had not given its insured the opportunity to assume its own defense, we did not expand on this approach. But it is analogous to the situation presented here, in which control of Frank's Casing's defense did not lie with the underwriters, and the underwriters had to obtain Frank's Casing's consent before settling the case. The implied reimbursement right that we recognize in Part II, C and D, is entirely consistent with our decision in Matagorda County.
Accordingly, I do not read the Court's opinion to decide that, absent a consent-to-settlement clause or the opportunity for the insured to assume its own defense, an insured necessarily assumes a reimbursement obligation merely by expressing agreement with the insurer's decision to settle a case. Those situations contrast with the allocation of power set out in the standard homeowner's or automobile liability policies, under which the insurer generally exercises exclusive control over settlement decisions. See, e.g., Texas Personal Auto Policy, available at http://www.adcusa.com/bain/F15.html (last visited May 26, 2005); Rodriquez v. Tex. Farmers Ins. Co., 903 S.W.2d 499, 509 (Tex.App.-Amarillo 1995, writ denied); G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544, 547 (Tex. Comm'n App. 1929, holdings approved); Syverud, The Duty to Settle, 76 VA. L. REV. 1113, 1118-19 (1990). Under those policies, the insurer may not unilaterally impose a right of reimbursement that does not appear in the policy with its insured. See Matagorda County, 52 S.W.3d at 134.
Although the case could be resolved on the basis I have just discussed, the Court ventures beyond. The Court also holds that a reimbursement obligation is implied "when an insured has demanded that its insurer accept a settlement offer that is within policy limits." ___ S.W.3d at ___. Citing Stowers, the Court reasons that an insured that has demanded that its insurer settle "is deemed to have viewed the settlement offer as a reasonable one." Id. at ___. But the Court's application of Stowers's reasoning to this situation makes no sense. The Stowers test was designed to define the standard of care an insurer must abide by in deciding whether to accept a third-party claimant's settlement demand — it measures whether "the terms of the demand are such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the insured's potential exposure to an excess judgment." Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994) (emphasis added). In sum, the Stowers test presumes coverage and simply has no application in determining an insurer's reimbursement right when coverage is disputed. Id. ("The Stowers duty is not activated by a settlement demand unless . . . the claim against the insured is within the scope of coverage. . . .").
Further, the Court's application of Stowers presumes that a settlement's reasonableness is measured solely by the insured's potential liability exposure irrespective of the insured's ability to pay. While that premise is certainly true when coverage is presumed, as Stowers contemplates, it doesn't square with reality when coverage doesn't exist. See Syverud, supra, at 1114 (noting that "most tort suits would be significantly less attractive to plaintiffs and their attorneys" without liability insurance). When a defendant lacks coverage, the uninsured's ability to pay becomes the paramount concern driving settlement discussions. If the uninsured has assets totaling $100,000, surely it would not behoove an injured plaintiff to seek a considerably larger but uncollectible judgment against him. Rather, the case will likely settle in the range of what the uninsured can pay irrespective of the amount of damages that the injured plaintiff sustained. I just do not believe that an insured that calls upon its insurer to settle a disputed claim necessarily agrees it is willing and able to pay the same amount in the event the insurer ultimately prevails in its coverage dispute. Accordingly, I would not hold, as the Court seems to, that an insured assumes a reimbursement obligation merely by asking its insurer to accept a settlement demand within policy limits.
On this disposition, at least, JUSTICE WAINWRIGHT and I are in agreement. However, I disagree with JUSTICE WAINWRIGHT's conclusion that Frank's Casing assumed a contractual reimbursement obligation in this case by acquiescing to the settlement of the underlying lawsuit. In settling the ARCO suit, both Frank's Casing and the excess carriers expressly sought to preserve their positions in the coverage dispute; in effect, they agreed to disagree on the reimbursement question and let the trial court decide the legal effect. This is a far cry from impliedly consenting to reimbursement under the common-law contract principles JUSTICE WAINWRIGHT purports to follow, and ignores the parties' written agreement preserving "any claims that presently exist" between them. As JUSTICE WAINWRIGHT recognizes, the excess carriers benefitted from the settlement by eliminating potential Stowers liability in the event ARCO's claims were later determined to be covered, just as Frank's Casing benefitted by eliminating the possibility of a large verdict that might turn out not to be covered. Given the parties' explicit efforts to preserve their positions, it makes no more sense to say that Frank's Casing impliedly agreed to reimburse the excess carriers than it would to say that the excess carriers impliedly agreed to waive their coverage position. Just as an insured's acceptance of a defense the insurer proffers with a reservation of rights implies the insured's consent to the reservation, the excess underwriters' agreement to accept the settlement in light of Frank's Casing's reimbursement contest implied the insurers' consent to Frank's Casing's reservation of the reimbursement question.
Finally, I disagree with Justice Wainwright's implication that our decision in Matagorda County eschewed common-law contract principles in determining reimbursement rights. Nothing could be further from the case. In Matagorda County, we acknowledged those principles would apply if their well-established elements were met. According to the seven justices who comprised the majority (JUSTICE O'NEILL delivered the opinion of the Court joined by CHIEF JUSTICE PHILLIPS, JUSTICES ENOCH, BAKER, ABBOTT, HANKINSON, and GONZALES), they were not met in that case. 52 S.W.3d at 129.
I agree that Frank's Casing had an implied-in-law reimbursement obligation because it consented to the settlement and the underwriters could not have settled without that consent. For this reason, I join Part I and Part II, C and D, of the Court's opinion and concur in the court's judgment of reversal.
When an insurer seeks reimbursement from its insured after paying to settle claims later determined not to be covered under the insurance policy, may contract and quasi-contract principles be considered in determining whether a right to seek reimbursement of the settlement payment arises? In Texas, prior to today, the answer was "no" under almost all circumstances, even though the insurer had timely reserved its right to contest coverage.
The insurance policy in this case is silent as to the insurer's right to reimbursement.
This rule was established in Texas Ass'n of Counties County Government Risk Management Pool v. Matagorda County. 52 S.W.3d 128 (Tex. 2000). Matagorda County precluded reimbursement to an insurer of settlement payments made to resolve claims that are later found not to be covered, and allowed reimbursement to be sought by the insurer " only if it obtains the insured's clear and unequivocal consent to the settlement and the insurer's right to seek reimbursement." Id. at 135 (emphasis added). Matagorda County erected this uncommon standard for contract formation even though the standard eschewed traditional common law contract principles on the tenets necessary to establish a right to recover. The Court further concluded that quasi-contract theories of quantum meruit and unjust enrichment would not support the insurer's claim of a right to reimbursement. Id. at 134-36. Quasi-contracts may be established under the common law, but Matagorda County precluded the normal application of these common law tenets. Id. at 135. A contract is established when proven by a preponderance of the evidence that an offer is accepted, accompanied by consideration. See Fed. Sign v. Tex. S. Univ., 951 S.W.2d 401, 408 (Tex. 1997) ("A contract must be based upon a valid consideration, in other words, mutuality of obligation."); Haws Garrett Gen'l Contractors, Inc. v. Gorbett Brothers Welding Co., 480 S.W.2d 607, 609 (Tex. 1972) ("[T]here must be shown the element of mutual agreement which, in the case of an implied contract, is inferred from the circumstances."). Unusual to Texas' common law of contracts, Matagorda County made a contractual agreement in this context subject to "clear and unequivocal" proof of acceptance. Matagorda County provides no reasoning to support its creation of that standard.
Matagorda County left open a very small window for insurers to seek reimbursement of settlement payments for claims later determined to be outside policy coverage. Although Matagorda County is not expressly overruled by the Court today, the small window Matagorda County left open to consider reimbursement is widened by the Court's decision in this case such that the law on reimbursement comports with principles of the common law. Hence, consideration by Texas courts of common law contract theories and quasi-contract theories (e.g., quantum meruit and unjust enrichment) is appropriate once again in determining the rights and obligations of the parties. I concur in the Court's result but join only one of the bases for its outcome, and write to further explain that basis. The parties reached an agreement on reimbursement and we should decide this case by enforcing their agreement. Therefore, I join section II.C. of the Court's opinion. Although not inconsistent with precedent, the remainder of the opinion is based on equitable and policy considerations and concludes that the parties are bound by a contract implied in law.
Once upon a time, the relationship between insurer and insured was one of contract and was governed by the terms and conditions of the policy. See Progressive County Mut. Ins. Co. v. Sink, 107 S.W.3d 547, 551 (Tex. 2003) (insurance policy is a contract to be interpreted according to contract principles); Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex. 1987) ("It is a fundamental rule of law that insurance policies are contracts and as such are controlled by rules of construction which are applicable to contracts generally."). Even after common law modifications of this common law relationship and legislative regulation of the parties' consensual relationship, see, e.g., TEX. BUS. COM. CODE § 17.41-.63; TEX. INS. CODE § 541.001-.454; Arnold v. Nat'l County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987) (holding that insurers owe a duty of good faith and fair dealing toward insureds); G.A. Stowers Furniture Co. v. Am. Indemn. Co., 15 S.W.2d 544, 547 (Tex. Comm'n App. 1929, holding approved) (creating a duty to accept reasonable settlement demands within policy limits), it still is fundamentally based on the agreement of the parties. See Provident Life Accident Ins. Co. v. Knott, 128 S.W.3d 211, 216 (Tex. 2003) (as a type of contract, insurance policies are interpreted under rules of contract construction); Barnett, 723 S.W.2d at 665. In an insurance arrangement like the one at issue, the insured and insurer enter an agreement for the insurer to cover prescribed risks. Generally, the insured pays premiums to protect it against certain unrealized fortuitous costs or damages, up to an agreed limit, that it may suffer or be obligated to pay. See 1 HOLMES RHODES, HOLMES'S APPLEMAN ON INSURANCE, 2D (1996).
In this case, Frank's Casing agreed to pay premiums for the provision by Excess Underwriters of excess insurance coverage in the amount of $10 million. ARCO/Vastar sued Frank's Casing and others after an offshore drilling platform partially fabricated by Frank's Casing for ARCO/Vastar collapsed in the Gulf of Mexico. Excess Underwriters issued a reservation of rights letter contesting coverage under its excess insurance policy with Frank's Casing. When settlement discussions were unfruitful, the case was tried to a jury. During the heat of trial, with a large verdict appearing increasingly likely, Frank's Casing entered another round of settlement discussions directly with the plaintiff ARCO and procured a settlement demand of $7.5 million. Frank's Casing then " Stowerized" Excess Underwriters asserting that the settlement offered was reasonable and within policy limits and demanding that Excess Underwriters settle the case. Excess Underwriters agreed to pay $7 million (plus $500,000 from the primary insurer) to settle the case, conditioned on its intent to seek reimbursement if it were not required to extend coverage to Frank's Casing for claims at issue at trial and which it was about to resolve by settlement.
At the time the parties were considering the settlement, both believed they were in difficult positions. The record indicates that both parties believed a substantial verdict, possibly beyond the excess layer of insurance coverage, was likely. Both also knew that their original contract of insurance did not address the issue of the insurer's ability to obtain reimbursement of a settlement payment for uninsured claims. Under these circumstances, the following decision trees grew.
During the trial, Excess Underwriters had to decide whether to pay for settlement of claims which it asserted were not covered. It also knew that after being Stowerized, if it did not pay the settlement and did not prevail in a declaratory judgment action contesting coverage, it likely would face claims for bad faith insurance practices. These claims in Texas have on many occasions resulted in large verdicts against insurers which, with common law and statutory penalties, have far exceeded actual damages proven. On the other hand, if it paid to settle on behalf of its insured, Excess Underwriters' payment would be less than its policy limits, it would avoid a verdict that could exhaust its excess limits and it would halt the accrual of attorneys' fees. Effecting a settlement would also avoid a bad faith insurance lawsuit and the potential for a punitive damage award against it. Excess Underwriters would benefit from the proposed settlement.
Frank's Casing likewise believed that it was faced with the specter of a large jury verdict against it. It solicited a settlement offer within policy limits from ARCO. Armed with a potential way out, Frank's Casing demanded that Excess Underwriters pay the settlement. The settlement would end the trial and vanquish the risk of a large verdict and Frank's Casing's potential exposure for amounts above the excess limits or for the entire verdict if there were no coverage. Plus, by sending a Stowers letter, Frank's Casing upped the ante against Excess Underwriters for if it did not pay the settlement, and a large verdict were rendered for which coverage was found to exist, Excess Underwriters may have been liable for enhanced damages and substantial statutory penalties. In other words, the settlement would also benefit Frank's Casing.
Excess Underwriters decided to pay its portion of the settlement but conditioned its payment on its right to seek reimbursement if the claim were proven not to be a risk the parties had agreed to cover under their insurance policy. The insurer sent a letter on February 23, 1998, making this offer to Frank's Casing. The letter further stated that the insurer "will contact Arco/Vasta's attorney this morning" to settle the claims against Frank's in this case. Frank's Casing concurred that the settlement was reasonable and not only approved but demanded that Excess Underwriters consummate the $7.5 million settlement. Excess Underwriters sent a second letter on February 23 to confirm the settlement with ARCO and then filed a declaratory judgment action contesting coverage that same day. The next day at the hearing before the trial court, which had recessed trial to give the parties the opportunity to resolve the dispute, the parties dictated their settlement into the record. At the hearing after the parties had entered the settlement the prior day, Frank's Casing objected for the first time that Excess Underwriters did not preserve its ability to contest "coverage."
Hence, we come to the dispute before this Court. Did Frank's Casing obtain a windfall — i.e., payment by its insurer of millions of dollars to settle claims against it for which there was no coverage? Or did Excess Underwriters voluntarily pay a settlement to obtain the benefits of saving itself potentially millions of dollars from the expected verdict and millions more from a possible bad faith verdict in a subsequent lawsuit? Two sophisticated entities carefully exercised their rights and obligations in light of their potential exposure. Both made reasoned decisions they believed to be in their best interests under the circumstances. And but for the condition on reimbursement included in Excess Underwriters' offer accepted by Frank's Casing, I would conclude that there is no right to reimbursement. Absent the parties entering into a legally enforceable agreement, I do not believe that the equities of the parties' respective circumstances alone supports allowing a right to recoup the settlement payment.
I agree with the Court that by Stowerizing Excess Underwriters, Frank's Casing acknowledged the reasonableness of the settlement. See ___ S.W.3d at ___. But I disagree with the Court that the effect of that action supports allowing the insurer to seek reimbursement. If Frank's Casing's only conduct upon obtaining the $7.5 million settlement offer from ARCO was to make a Stowers demand on Excess Underwriters and acquiesce to a settlement that did not include the term on reimbursement, Excess Underwriters should have no right to reimbursement. Threatening to sue does not change the contract between the parties. And such a threat should not serve as a sufficient basis to entitle Excess Underwriters to obtain reimbursement of its payment. Under these circumstances, it is difficult to conceive that Excess Underwriters was under any legally cognizable duress that undermined its will and forced it to pay the settlement. Neither the threat to exercise a legal right nor legally exercising that right can constitute duress. In re FirstMerit Bank, N.A., 525 S.W.3d 749, 758 (Tex. 2001); Ulmer v. Ulmer, 162 S.W.2d 944, 947 (Tex. 1947). There were no allegations of fraud, collusion, or extortion to tilt the scale here.
However, I conclude that Frank's Casing, by its acquiescence in the settlement, bound itself under principles of contract law to the condition that Excess Underwriters would be able to seek reimbursement. Frank's Casing was not simply a beneficiary of its insurer's settlement, but demanded in a prior letter of February 19, 1998, that Excess Underwriters act in a "reasonably prudent" manner and accept the settlement offer from ARCO and do so "BEFORE a ruling by the court on the contract issues . . . [which] could occur at any time, but will occur, at the latest, by the beginning of court Tuesday of next week." Including the weekend, the following Tuesday (February 24) was five days away. Excess Underwriters agreed to pay the settlement but as a condition to doing so reserved the right to seek repayment from Frank's Casing if the declaratory judgment action determined there was no insurance coverage for the claims at issue in the prior trial. The February 23 letter to Frank's Casing in which Excess Underwriters agreed to settle the case on its behalf provided:
In order to ensure that the favorable settlement will not be lost to both Frank's and [Excess Underwriters], [Excess Underwriters] will fund the settlement up to $7,500,000 (less any contribution from the primary policy) and will continue to reserve all coverage issues under the Umbrella Policy. [Excess Underwriters] will hold Frank's responsible for and will seek reimbursement of all sums paid in settlement of claims for which no coverage exists under the Umbrella Policy."
(emphasis added). Excess Underwriters then settled the case against its insured the same day and faxed written confirmation to ARCO with a copy to Frank's Casing. Frank's Casing never asserts that it rejected the settlement offer or made a counteroffer. Instead, Frank's Casing acknowledged that it accepted the settlement offer from Excess Underwriters but argues that Excess Underwriters did not obtain "Frank's agreement nor its clear and unequivocal consent to seek reimbursement."
Frank's Casing's also complains that it had only a few hours to study the proposed settlement from Excess Underwriters. This complaint carries little weight as it was Frank's Casing that imposed the February 23 deadline on the settlement negotiations in its February 19 letter.
The February 23 letter to ARCO confirming the verbal settlement also stated that Excess Underwriters continued to reserve all rights "against Frank's as to coverage" and, for a second time that day, affirmed that it would "hold Frank's responsible for and will seek reimbursement of all sums paid in settlement of claims for which no coverage exists under the Umbrella policy." Frank's Casing again did not reject but accepted the settlement. After entering the settlement, Excess Underwriters filed its declaratory judgment action contesting coverage that afternoon.
The next morning the trial court recessed the trial to enable the parties to dictate their settlement into the record. Frank's Casing stated that by the February 23 letter from Excess Underwriters to ARCO it had agreed to pay $7,500,000 to settle the case with the plaintiffs. Frank's Casing then asserted that "underwriters have either waived their right to reserve cover [sic] issues or alternatively [are estopped] from asserting any coverage issues since underwriters have agreed to the settlement." The court rendered judgment on the agreement dictated into the record. The Settlement Agreement and Release, signed later by the parties, including Frank's Casing and Excess Underwriters, confirmed that the covenants not to sue and the releases between the parties do not apply "to any claims that exist presently or may arise in the future between Defendant Frank's and Frank's Insurers arising from the claims asserted by Plaintiffs."
Frank's Casing has never disputed that Excess Underwriters' settlement offer was conditioned on a right to seek reimbursement. Frank's Casing argues that by its silence it accepted the part of the settlement offer providing for Excess Underwriters to make a $7 million settlement payment but did not accept the condition on that promise. The law and the facts do not support Frank's Casing's position.
A contracting party cannot accept the benefits of a contract and disclaim its obligations. W.H. Putegnat Co. v. Fidelity Deposit Co. of Md., 29 S.W.2d 1004, 1006 (Tex. 1930) ("Where one accepts the benefits of a contract, he must assume its burdens."). Nor can a party accepting an offer validly purport to accept the offer's benefits, acquiesce in the benefits from the offeror's performance of the contract, but later reject the detriments. United Concrete Pipe Corp. v. Spin-Line Co., 430 S.W.2d 360, 364 (Tex. 1968) (noting that a party may have the right to withdraw his consent before a contract's performance but not after the promise is accepted or performed); see Daniel v. Goesl, 341 S.W.2d 892, 895 (Tex. 1960) (one who "receives and accepts benefits under the contract . . . is bound by the terms of the contract"); Jerry, The Insurer's Right to Reimbursement of Defense Costs, 42 ARIZ. L. REV. 13, 71-72 (2000) ("[A]cquiescence in and acceptance of the benefits of [the party's] performance constitute a manifestation of acceptance of the terms on which [the party's] performance was tendered."). To effectively decline an offer, some terms of which an offeree disapproves, the offeree must reject the offer or make a counteroffer. See Ashford Dev., Inc. v. USLife Real Estate Servs. Corp., 661 S.W.2d 933, 935 (Tex. 1983) (determining that supplemental provision of loan commitment was a counter-offer); Komet v. Graves, 40 S.W.3d 596, 601 (Tex.App.-San Antonio 2001, no pet.) (attempt to change offer before acceptance operates as a rejection and counter-offer). Neither occurred here before the settlement was consummated.
Frank's Casing accepted the settlement proposed by Excess Underwriters and thereby acquiesced in the terms of the offer, and bound itself to the settlement under the law of contracts. In practice in an insurance context, insureds often communicate acceptance of an offer by conduct, as in the case of an insured accepting a defense from an insurer which reserves its right to deny coverage. In such cases, the insured's acceptance of the defense is an implied consent to the insurer's reservation of the coverage issues, "even in the absence of an express consent or acceptance of the offer." W. Cas. Sur. Co. v. Newell Mfg. Co., 566 S.W.2d 74, 76 (Tex.Civ.App.-San Antonio 1978, writ ref'd n.r.e.); see In re Halliburton Co., 80 S.W.3d 566, 568 (Tex. 2002) ("[W]hen an employer notifies an employee of changes to the at-will employment contract and the employee `continues working with knowledge of the changes, he has accepted the changes as a matter of law.'") (citing Hathaway v. General Mills, Inc., 711 S.W.2d 227, 229 (Tex. 1986)); Blue Ridge Ins. Co. v. Jacobsen, 22 P.3d 313, 317 (Cal. 2001).
Hence, during the trial the parties extended their contractual arrangement to address the risk of a large verdict by settlement and also agreed on a method to allocate the cost. The settlement vanquished the risk of a jury verdict against them. The allocation of the cost of settlement would be based on the outcome of the coverage suit. If the claims settled were found to be covered by the excess policy, Excess Underwriters' payment of the settlement would end the matter. The contractual relationship would function as intended as Excess Underwriters was paid premiums to protect Frank's Casing from covered risks within policy limits. If the claims settled were found not to be covered under the insurance policy, Excess Underwriters would have its contractual right to seek reimbursement of the settlement payment. The relationship of the parties is still one governed by contract.
In her concurring opinion, Justice O'Neill contends that no such agreement was in fact reached, and under this contractual implied-in-fact analysis Frank's Casing may keep the benefit of the offer to pay $7,500,000 to settle the case but reject the reimbursement condition on the offer. As cited, infra, contract law does not allow her approach of "having my cake and eating it, too." A deal is a deal, and in Texas we enforce deals. If, as JUSTICE O'NEILL asserts, Frank's Casing really wanted to reject the offer's condition on reimbursement, it could have done so by refusing the $7,500,000 payment on its behalf and proceeding with trial, or making a counteroffer that excluded the reimbursement condition, or objecting to the reimbursement term before the settlement was entered with ARCO. (Frank's Casing likely did not want to do the latter because objecting to the condition would also have rejected the entire offer of settlement.) She further asserts that "Frank's Casing's reimbursement contest implied the insurers' consent to Frank's Casing's reservation of the reimbursement question." Again, neither the law nor the facts support her assertion. Only after the settlement with ARCO was entered verbally and confirmed in writing by Excess Underwriters did Frank's Casing assert that Excess Underwriters waived or was estopped from raising any coverage issues. Assuming the objection to raising coverage issues is an objection to the reimbursement condition, a party cannot make a deal and then later selectively reject parts of it. See W.H. Putegnat Co., 29 S.W.2d at 1006.
Even accepting, arguendo, JUSTICE O'NEILL's position that Frank's Casing can reject a term of an accepted agreement, the facts still undercut her conclusion. Frank's Casing never asserted that it objected to the reimbursement term in Excess Underwriter's settlement offer. Even at the trial court hearing to enter the settlement on the record, Frank's Casing asserted only that Excess Underwriters waived or was estopped from contesting the insurance coverage issues. Its briefing is careful to only make the factual claim that it objected to a contest to coverage. Thus, contrary to JUSTICE O'NEILL's suggestion, Frank's Casing did not object to or reserve for court determination the reimbursement issue in the settlement. This issue is not a central part of my writing because it was not raised by the parties.
Frank's Casing argues that such a result is unfair. I do not agree. A trial court decided that the claims against Frank's Casing which Excess Underwriters agreed to pay to settle were not covered claims under Frank's Casing's insurance policy. Frank's Casing did not appeal that determination, and it is therefore settled. Frank's Casing is not entitled to insurance coverage for risks for which it paid no premiums. And Excess Underwriters is not obligated to pay for risks it did not agree to cover and for which it received no consideration. Should the parties have desired to cover such risks, they could have consented to such an arrangement by defining the scope of the coverage to include the claims at issue, and agreed on premiums to be paid for such insurance. But they did not.
The parties should sink or swim on the agreements they enter, unless the facts are such that they effect a change in the parties' agreement under principles of contract law, are validly affected by the Legislature, or involve fraud, extortion or other basis for altering a contract. Accordingly, the factors the Court cites as the basis for concluding that the right to reimbursement exists are not central to the reimbursement analysis. I disagree with the Court's reasoning that the weight and potential severity of a Stowers or bad faith insurance verdict can serve as a basis to alter the agreement of the parties. Insurance is a consensual arrangement not subject to change by the threat of a lawsuit. If Stowers or bad faith actions are skewing litigation and parties' legitimate incentives, then Stowers actions may need to be addressed by the appropriate branch rather than allow threat of such actions to serve as a basis for reimbursement.
In summary, I would hold that absent a provision in the insurance policy providing for the insured to reimburse the insurer for paying to settle a claim that is later held not to be covered, there is no right to reimbursement of the settlement payment. However, an insurer should be allowed the opportunity to prove a right to recoupment of a reasonable settlement under contract law, including under the theories of implied-in-fact contracts and quasi-contracts, if the insurer gives notice of its intention to recoup the payment in a timely reservation of rights letter or makes reimbursement a term or condition of a subsequent agreement.
This approach is straightforward and predictable. The current jurisprudence on this issue involves a convoluted set of tangled yet important interests and policy considerations that, with slight changes in the facts, can lead to widely varying results in cases that seem quite similar. Compare Frank's Casing, 93 S.W.3d 178 with Matagorda County, 52 S.W.2d 128. Under this Court's opinions, the adjudication of each case is based on the equities of the parties which will lead to a series of case-by-case adjudications or, at best, adjudications by category. Each case will involve the same plethora of questions with a different set of answers. Was a Stowers demand made? Did the insurer have the unilateral right to settle and was consent of the insured obtained to the settlement? Who controlled the defense? Who initiated and controlled the settlement discussions? Did the insurer give the insured the option to assume its own defense? Then the courts' balancing will begin. Instead, I believe the parties' contractual relationship should govern an insurer's right to reimbursement. These other factors may be central to other issues that arise between insurers and insureds, but should not be central to a right of reimbursement.
This case raises a tangled mound of considerations. The Court deftly traverses the multitude of policies, incentives, and equities to reach a decision. See, e.g., Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842 (Tex. 1994); Arnold, 725 S.W.2d 165; Stowers, 15 S.W.2d 544; see also Blue Ridge Ins., 22 P.3d 313. Frank's Casing acknowledges that decisions in reimbursement cases are "based on a balancing of policy considerations applicable to the relationship between an insurer and its insured." If our analysis of this reimbursement issue were based on the agreements between the parties, the law in this area would be less perplexing and more predictable.