Insurers’ Right to Reimbursement: Frank’s Casing
Perhaps the most significant case this year has been Excess Underwriters at Lloyds, et al v. Frank’s Casing Crew & Rental Tools, Inc., No. 02-0730, 2005 WL 1252321 (Tex., May 27, 2005). The court held that an insurance company has a right to seek reimbursement for settlement of uncovered claims, at least in certain circumstances, distinguishing its prior opinion in Texas Association of Counties County Government Risk Management Pool v. Matagorda County, 52 S.W.3d 128 (Tex. 2000) (holding that an insurer could not seek reimbursement from its insured for paying a settlement, unless the insured expressly agreed to the settlement and to the insurer’s right to seek reimbursement).
The insured, Frank’s Casing, 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 million, and excess coverage of $10 million. The excess underwriters issued reservation of rights letters in which they asserted that certain claims against Frank’s Casing 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.
The case ultimately proceeded to trial where it became apparent that Frank’s Casing was the target defendant. 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 $7.5 million demand, which Frank’s Casing communicated to the excess underwriters accompanied by a demand that the insurers accept the offer. The excess underwriters agreed that the case should be settled for this amount and stated they would fund the settlement up to $7.5 million, less any contribution by the primary insurer, if Frank’s Casing would agree that all coverage issues would 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 it would pay the settlement demand and seek reimbursement from Frank’s Casing.
The excess insurance policy required Frank’s Casing’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.
The parties filed cross motions for summary judgment in the coverage suit. The trial court found that there was no coverage under the excess policies and ultimately issued a take-nothing judgment. The court of appeals affirmed. On petition for review, the Texas Supreme Court reversed. The court noted that in Matagorda County, the insurer had the unilateral right to settle claims against the insured 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 the insured’s 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. The court 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 from an insured when there is an express agreement, 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 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, notes 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 Matagorda County leaves open only a small window for insurers to seek reimbursement of settlement payment of claims later determined not to be covered by an insured’s policy, but that the majority opinion widened the window so that the law on reimbursement comports with principles of the common law. He also stated that, but for the insured’s agreement, he would not allow reimbursement.
In a separate concurrence, Justice Hecht stated his opinion that the rule in Matagorda County was always wrong and could not survive under the Frank’s Casing decision. 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, as it leaves a number of issues unresolved.
The case also raises questions as to the extent to which it will impact primary/excess relationships. In the case at issue, 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. There are several cases suggesting that there is no valid Stowers demand, as a single insurer cannot satisfy the demand and obtain a release.
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 American 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.
Finally, in Justice Hecht’s concurring opinion, there is a mention of extracontractual exposure, if an insurer pays an unreasonable amount, without the insured’s consent, or actually prejudices the insured. Justice Hecht’s offhand comment may portend a further expansion of duties and exposure during settlement negotiations, and outside the strict boundaries of the Stowers doctrine.
One additional issue, not referenced in the case, 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 only assume the reasoning should apply equally to defense costs.