Will Restitution Rights Be Resurrected? Courts Persist in Pondering Perplexing Problem.
It’s over when it’s over, except when it isn’t.
Here’s how the situation typically comes up. The insurer issues a reservation of rights, and agrees to defend the insured against a third party claim subject thereto. The insurer then decides that it is best to settle the case with the third party, but continues to reserve its rights to seek reimbursement from its insured if it is later decided in a declaratory judgment action that there is no coverage. If the policy does not contain a right of reimbursement, and the insured does not otherwise agree, can the insurer pursue the coverage matter after settlement and, if it successfully proves non-coverage, achieve reimbursement of the settlement payment from the insured?
We thought this question was answered with a resolute “No!” back in 2008 when the Texas Supreme Court handed down its decision in Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42 (Tex. 2008). We understood the simple idiom: it’s over when it’s over. Perhaps we were a bit hasty.
In Frank’s Casing Crew, the Texas Supreme Court held that an insurer can seek reimbursement only when that right is included in the policy or there is a clear contractual right to that effect. The court said an insurer may not seek equitable restitution against an insured for erroneous payment of a non-covered claim if the insurance policy does not provide for such a remedy. The court went on to say that the rights of the parties to the insurance policy must be found in the policy itself, and if the insurer wants the right to reimbursement for erroneous payment of non-covered claims, the insurer must include such a right in the policy, which might yield a lower premium than a policy that does not contain such a right. To recognize an equitable right to reimbursement, where the policy does not provide for that right, would require the court to rewrite the parties’ contract or add to its language.
That’s pretty clear. But then along comes Warren E&P, et al v Gotham Insurance Co. (Tex. App-El Paso 2013, pet. granted). In this case, the court of appeals faithfully followed the Frank’s Casing decision and denied the insurer’s quest to recover policy benefits from the insured for non-covered claims.
The court observed that the policy did not provide for a right to reimbursement for payment of non-covered claims. Therefore, the insurer had no right to reimbursement from the insured for payment of the non-covered claims in question. Said the court: “Frank’s Casing restated the bright-line rule disallowing reimbursement on an equitable unjust enrichment theory because insurers are in a superior position to evaluate the risks stemming from a coverage dispute and can expressly allocate that risk by delineating reimbursement rights in their policies.”
The insurer has appealed this decision, and to the surprise of most of us, the Supremes have agreed to hear the case. So, if you will excuse our french, it’s déjà vu all over again.
While the ultimate outcome in the Texas high court is unknown, the dissenting opinion in the lower court may offer a clue as to what may be a factor. Unlike the third party liability policy involved in the Frank’s Casing suit, the Warren case involves a first party policy, thus alleviating many, if not all, conflicts of interest. Perhaps even more of a factor is the insurer’s claim in Warren that the insured misrepresented the extent and nature of its “legal loss” which caused the insurer to erroneously pay its policy limits of two million dollars. Said the dissent: “By contrast, the issue presented in this case is ‘whether an insurer is entitled to restitution from its insured when, in reliance upon its insured’s representations, it pays an alleged loss that was in fact ‘no loss’ because it was ‘made good’ by a third party.’”
Oral argument is scheduled for October 8 before the Texas Supreme Court.
We’ll let you know when it’s over– just like the last time we let you know it was over.