No Texas case had previously addressed the issue of whether and under what circumstances a liability insurer that questions coverage can settle the underlying case on the insured's behalf, and then seek reimbursement from the insured of amounts paid in settlement. The Texas Supreme Court in Texas Association of Counties County Government Risk Management Pool v. Matagorda County, 44 Tex. Sup. Ct. J. 215, 2000 WL 1867945 (Tex., Dec. 21, 2000), gave some guidance to insurers in this area. The court recognized a right of reimbursement where the insured gives its consent to the insurer's actions and agrees that the insurer can seek reimbursement. However, the court held that an insured's silence in response to a unilateral reservation of rights letter purporting to reserve a right to settle a claim and to seek reimbursement is insufficient to support a claim for reimbursement by the insurer.
It was undisputed that the policy did not provide the insurer a right of reimbursement. That right was first asserted by the insurer in a reservation of rights letter. The court rejected the insurer's contention that the insured's silence in response to its reservation of rights letter established an implied-in-fact contractual obligation for the insured to provide reimbursement in the event it was determined the underlying claim was not covered. A reservation of rights letter cannot create rights not contained in the policy. Accordingly, a letter purporting to assert a right of reimbursement could be binding only if the insured accepted it.
Following general contract law, the court concluded that silence in response to an offer could not be construed as an assent to the offer. Because the insured did not give any affirmative indication of an acceptance of the insurer's reimbursement proposal and consistently contested the insurer's coverage position, the insured's consent to settle could not be implied. The court went on to reject any equitable right to reimbursement on the part of the insurer. Declining to follow Buss v. Superior Court, 16 Cal. 4th 35, 65, Cal. Rptr. 2d 366, 939 P.2d 766 (1997), the Justices concluded there was no quasi-contractual reimbursement right. Rather, the court held that when coverage is disputed and the insurer is presented with a reasonable settlement demand within policy limits, the insurer may fund the settlement and seek reimbursement only if it obtains the insured's clear and unequivocal consent to the settlement and the insurer's right to seek reimbursement.
In its opinion, the Texas Supreme Court encouraged insurers to seek prompt resolution of coverage disputes in declaratory judgment actions. Citing to its own recent opinions addressing the difficult choices insurers face when coverage is questioned, the court concluded that allowing insurers a unilateral right to settle claims and then seek reimbursement would reduce incentives to seek early resolution of coverage disputes. Matagorda County underscores the importance of seeking prompt resolution of coverage questions. An insurer that does not seek prompt resolution of coverage issues when possible may be faced with the unpleasant choice of settling a claim against the insured where coverage is questionable, without a right of reimbursement, or risking an excess judgment against the insured that could result in Stowers or other extracontractual liability.