Lee H. Shidlofsky on Excess Underwriters v. Frank's Casing: The Right of Reimbursement in Texas
One pressing issue in insurance law is the extent, if any, to which an insurer has the right to seek reimbursement from its insured of defense costs and/or indemnity payments when it ultimately is determined that no coverage exists. On February 1, 2008, after a long wait, a divided Supreme Court of Texas reversed its earlier decision and concluded that no such right exists in
Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 2008 Tex. LEXIS 92 (Tex. Feb. 1, 2008) (opinion on rehearing). In doing so, the Court signaled the end of the right of recoupment by an insurer against its insured in Texas.
The author writes:
“The appellate court decision in [Matagorda County] left behind some unanswered questions. First, although implying that a unilateral reservation of rights would be sufficient to preserve a claim for reimbursement of defense costs, the court did not address whether Texas recognized such a claim. Second, although it held that a specific agreement was required for reimbursement of settlement costs under an equitable subrogation theory, the court did not elaborate as to whether anything but a bilateral agreement could trigger a claim for reimbursement under other reimbursement theories.”
The author explains: “Relying on a Supreme Court of Wyoming decision, the Court held [in Matagorda County] that ‘a unilateral reservation-of-rights letter cannot create rights not contained in the insurance policy.’ Consequently, although silence by the insured after the insurer issues a reservation of rights letter implies agreement that the insurer will later contest coverage, the same silence cannot imply ‘consent to additional obligations not contained in the insurance contract.’”
The author notes: “Because the Corpus Christi Court of Appeals did not actually issue a ruling as to whether Texas law recognized a right of reimbursement of defense costs and because that issue was not before the Supreme Court of Texas, the right of reimbursement of defense costs for those claims that are ultimately determined to be uncovered technically still is unclear in Texas. Nevertheless, technicalities aside, both the majority and the dissent in the Supreme Court’s decision in Matagorda County unmistakably addressed the issue.”
Looking at Frank’s Casing I, the author writes: “Notably, the Court concluded that ‘[r]equiring an insured to reimburse its insurer for settlement payments if it is later determined there was no coverage does not prejudice the insured.’ Moreover, the Court said that ‘[t]he 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.’ The Court’s ruling had three concurring opinions and left many questions unanswered.”
The author explains: “Frank’s Casing I ignited a clash that was particularly loud between insureds and their defense counsel on one side of the fence and the insurance industry on the other. As evidence of that battle, a motion for rehearing was filed and an onslaught of amicus curiae briefs were filed on both sides. Insurers loved the result of Frank’s Casing I, whereas insureds and defense counsel strongly contested the result. Apparently, a similar battle existed between justices of the Supreme Court as well, as it took close to two years to issue a new opinion on rehearing.”
Turning to the opinion in Frank’s Casing II, the author writes: “[N]o right of reimbursement exists after settlement if the insurer has not first obtained ‘the insured’s clear and unequivocal consent to the settlement and the insurer’s right to seek reimbursement.’ Because Frank’s Casing had agreed only to first part—the settlement—but not the second part—the insurer’s right to seek reimbursement—the Court did not allow Excess Underwriters a right to reimbursement.”
The author concludes: “The Court’s holding in Frank’s Casing II is another in a growing line of favorable decisions for insureds in Texas, qualifying as one of the most significant decisions issued by the Supreme Court of Texas in recent years.”
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