An Insurer’s Right to Reimbursement: Frank’s Casing
Insurers have long sought the right of reimbursement in Texas and, in the right circumstances, the court’s opinion will provide a valuable tool.
The most significant Texas insurance case this year is the Texas Supreme Court’s recent opinion in Excess Underwriters at Lloyds, et al v. Frank’s Casing Crew & Rental Tools, Inc., No. 02-0730 (Tex., May 27, 2005). In what appeared to be a departure from prior law, the court held that an insurance company has a right to seek reimbursement for settlement of uncovered claims, at least in certain circumstances.
The court distinguished its prior opinion in Texas Association of Counties County Government Risk Management Pool v. Matagorda County and held it does not foreclose an action for reimbursement. 52 S.W.3d 128 (Tex. 2000). In Matagorda County, the court previously held that an insurer could not seek reimbursement from its insured for settlement of non-covered claims unless the insured expressly agreed to the settlement and to the insurer’s right to seek reimbursement. In Frank’s Casing, the court held that a right of reimbursement may be implied, even without an express agreement.
In Frank’s Casing, the insured fabricated a drilling platform at its facility in Louisiana for Arco/Vaster. The platform ultimately collapsed. Arco sued Frank’s Casing, among others. Frank’s Casing had a primary liability policy with limits of $1,000,000. Frank’s Casing also had excess coverage up to $10,000,000. The excess underwriters reserved rights, asserting that certain claims were not covered under the excess policy.
Before trial, the excess underwriters attempted to settle only the claims for which they acknowledged coverage. They also attempted to obtain a contribution from the insured, or an agreement to reserve the coverage issues for arbitration. None of these efforts were successful
During trial, in-house counsel for Frank’s Casing contacted Arco and requested that it make a settlement demand within the excess policy limits. Arco promptly responded with a $7,500,000 demand, which Frank’s Casing communicated to the excess underwriters accompanied by a demand that the insurers accept the offer. The excess underwriters offered to fund the settlement, less any contribution by the primary insurer, if Frank’s Casing would agree that all coverage issues could be resolved at a later date. Frank’s Casing refused and sent another letter demanding that the settlement offer be accepted. The excess underwriters then advised Frank’s Casing that they would pay the settlement demand and seek reimbursement from Frank’s Casing.
The excess policy required the insured’s consent to settle, which Frank’s Casing provided. 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 the execution of the agreement, the excess underwriters filed suit against Frank’s Casing for reimbursement.
On cross motions for summary judgment in the coverage litigation, the trial court found there was no coverage but ultimately issued a take-nothing judgment against the excess underwriters. The court of appeals affirmed.
On petition for review, the Texas Supreme Court reversed. Distinguish-ing its prior opinion, the court noted that, in Matagorda County, the insurer had a unilateral right to settle claims without the insured’s consent. The court also noted that one of the chief concerns in Matagorda County was that an insurer could accept a settlement that the insured considered out of its financial reach, and the insured could then be required to reimburse the insurer for that amount.
The court reasoned that the same concern is not always present, including (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. It noted that, 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. The court clarified that to the extent Matagorda County had been viewed as indicating that an insurer could only obtain reimbursement when there is an express agreement with the insured, that was too narrow a reading and there are additional circumstances, such as those in Frank’s Casing, that also give rise to a right of reimbursement.
The court recognized the insured had approved the settlement, consistent with the policy requirement. It also emphasized that the insured’s demand that the insurer settle precluded the insured from then taking the “inconsistent position” that the settlement offer was unreasonable, or too financially burdensome. Likewise, the court held that the insured’s assets, or lack of assets, were not a consideration in evaluating the insurer’s reasonableness.
Two justices did not participate, so the opinion is from a seven-member court, and includes several concurring opinions that affect its impact. Justice O’Neill, author of the majority opinion in Matagorda County, concurred in parts of the Frank’s Casing decision. Justice O’Neill, however, also opined 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 express agreement with the insurer’s decision to settle a case. Justice O’Neill also noted that the Stowers doctrine presumes the claims are covered, and that an insured’s lack of adequate resources to satisfy non-covered claims can be a compelling factor in settlement
discussions.
Justice Wainwright also wrote a concurring opinion, joining in part of the decision. Justice Wainwright agreed that the law on reimbursement should comport with principles of the common law but concluded that, but for the insured’s agreement, he would not allow reimbursement.
In a separate concurrence, Justice Hecht opined that the rule in Matagorda County was simply wrong and could not survive the Frank’s Casing decision. Justice Hecht argued that a right of reimbursement was necessary to avoid forcing an insurer to choose between paying non-covered claims or facing extracontractual exposure, effectively allowing extortion of premiums from other policyholders to pay non-covered claims.
Insurers have long sought the right of reimbursement in Texas and, in the right circumstances, the court’s opinion will provide a valuable tool. Where there is a significant risk of excess exposure, with a likely valid coverage defense, the opinion may help insurers to avoid being forced to choose to pay a potentially non-covered claim or gamble on the outcome, because the plaintiff can make a settlement demand before the coverage issue can be resolved. In other situations, however, the opinion may actually create new quandaries or obstacles. In addition, it leaves a number of issues unresolved.
Unresolved issues
The unresolved issues include whether a reasonable, but ultimately wrong, coverage determination can be a defense to a “Stowers” claim. The case also raises questions as to the efficacy of Stowers demands to excess carriers. The Supreme Court assumed that there was a Stowers demand, because the demand was within the first excess layer, and the primary had agreed to tender. This has not, in fact, been Texas law.
In addition, the opinion suggests that an element of a valid Stowers demand is the insured’s demand that the insurer settle the case. As Justice Hecht noted, this has not been the law. Under Stowers and its progeny, there is a valid demand if there is a demand to fully settle and release the insured, within policy limits, for a covered claim, that a reasonably prudent insurer would accept, considering the likelihood and degree of the insured’s exposure to an excess judgment. See Am. Phys. Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994). The insured’s insistence on settlement, while a frequent component of advocacy, is not part of the test.
One additional issue is the extent to which insurers may now seek reimbursement of defense costs allocated to non-covered claims. The court did not reach this issue in Matagorda County, but seemed to suggest there might be a right of reimbursement, if it was properly reserved and the defense costs were severable. While Frank’s Casing is limited to indemnity, one can argue the reasoning should apply equally to defense costs.
The implications and unresolved issues of Frank’s Casing will undoubtedly lead to further litigation and will likely be affected by changes in the court. The opinion represented only seven justices, with two of those concurring in only a part of the opinion. The author, Justice Owen, has left the court to accept an appointment to the Fifth Circuit. While the case leaves issues unresolved, it still represents a significant shift in insurance practice in Texas.
Note: The author gratefully acknowledges the assistance of Jackie Chandler, a partner at Thompson Coe.
Bradley is a partner in the Dallas office of
Thompson, Coe, Cousins & Irons, L.L.P. She is
a member of the Insurance Litigation and
Coverage Section and leads the firm’s coverage
practice. She has represented agents in disputes
with policyholders and insurers and routinely
represents insurers in evaluating and
litigating coverage issues under general and pro
fessional liability policies, commercial auto and
trucking policies, commercial property policies
and homeowners policies.