Clarifying Settlement Reimbursement

by Jackie Taylor Meier and Jocelyn Gabrynowicz Hill

Clarifying Settlement Reimbursement

Reversing its May 2005 ruling, the Texas Supreme Court recently held that an insurance company cannot seek reimbursement for the settlement of a claim that is later found to be an uncovered liability unless the policyholder expressly agreed to the insurance company's right to do so.

In Excess Underwriters at Lloyd's, London, et al. v. Frank's Casing Crew & Rental Tools Inc., Frank's Casing had issued a settlement demand to its excess underwriters, Lloyd's, and requested that it accept the offer. On the day of settlement, the excess underwriters issued a unilateral reservation of its right to seek reimbursement of settlement funds from the policyholder.  The policyholder agreed to the payment of settlement funds but did not agree to the excess underwriters' right to reimbursement. 

In subsequent coverage litigation, the court found that Frank's Casing's claims were not covered. Despite the absence of a policy provision creating a right to reimbursement, in May 2005, the Texas Supreme Court found that "a right of 'recoupment' could arise even absent a policyholder's express agreement to reimburse settlement payments made by an insurer if there is no coverage."

The Texas Court declined to find an exception under the facts of Frank's Casing because none of the distinctions proffered by the insurance company could alleviate the concerns that drove the court's analysis.  In reaching its current holding, the Texas Supreme Court recognized that the risk of coverage uncertainties is best placed with the insurer, not the policyholder. The Texas Supreme Court has rejected the insurance company's attempt to create an extra-contractual or implied "right" to reimbursement not contained in the policy.

Policyholders must still beware, however, as insurance companies are now more likely to insert conditions and provisions in settlement agreements requiring the policyholder to agree to the insurance company's reimbursement as a precondition to receive settlement funding. If the policyholder chooses to-or is forced to-agree to such a condition, then the policyholder must realize that settlement will become more expensive when an insurer funds a settlement and then subsequently turns to the policyholder for reimbursement of the settlement funds. The burden is now on the insurance company to either:  (a) deny coverage and face bad faith exposure, (b) pay the claim and account for the possibility that it may occasionally pay uncovered claims, or (c) draft a policy provision creating a right to reimbursement.

Regardless, this is an improved state of affairs for the policyholder. The law now becomes more predictable for courts, policyholders and insurance companies alike. At the outset, the policyholder is aware of potential settlement recoupment and can plan accordingly. The insurance company can charge more for a policy that does not contain reimbursement rights. Conversely, policyholders can save money up front by purchasing a policy that spells out the insurance company's reimbursement rights. Moreover, requiring a policy provision for reimbursement rights would be more economical for the courts, which no longer have to conduct an intensive case-by-case analysis and, instead, have a rule grounded in contract.

Jackie Taylor Meier is an attorney in the Philadelphia office of Anderson Kill & Olick, P.C.

Jocelyn Gabrynowicz Hill is an attorney in the Philadelphia office of McCarter & English, LLP.

Reprinted from Risk Management Magazine.
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