Expansion of Insurer Claw-Back Initiatives

A question routinely asked about liability insurance claims seems clear and straightforward on its face: “Is the claim covered?” Because “coverage,” however, typically invokes two concepts, rather than one, such a question often is superficial and misleading. Liability insurance policies, particularly at the primary and umbrella levels, usually provide both defense and indemnity coverage. Each coverage is quite valuable to policyholders, and the defense coverage can be the much more valuable of the two, particularly when underlying cases are complex and, accordingly, expensive to defend, but present little or no prospect of policyholder liability.

Of these two types of coverage, defense coverage also is widely understood to be the broader. In other words, a policy may provide defense coverage but, ultimately, no indemnity coverage. Such variances arise from the nature of “notice” pleading and the unpredictability of underlying litigation. Under “notice” pleading utilized in federal courts and most state courts, it often is difficult and sometimes impossible to discern with precision at the outset of litigation the full nature of all underlying claims against the policyholder. Even when such claims can be discerned with precision, it often is impossible to know at the outset which of the claims, if any, will be successful against the policyholder. When these factors all play out, it is common for insurers to have to pay defense costs but not indemnity costs. Hence, it is said that defense coverage is broader than indemnity coverage.

Notwithstanding wide acknowledgment of the two types of coverages and of the variation in the scopes of the two types, insurers have sought in some jurisdictions to recover or claw back costs paid under a policy's defense coverage when they ultimately are determined to have no liability under the policy's indemnity coverage. To a limited extent, insurers have had success with these initiatives. Perhaps encouraged by their successes, they now are expanding these claw-back efforts and are beginning to seek refunds of indemnity payments they make to settle underlying claims against policyholders. This article reviews briefly the evolution of the law concerning insurer attempts to claw back defense payments and addresses two recent cases in which insurers have expanded claw-back efforts to settlement payments.

Insurers' Attempts to Obtain Reimbursement of Defense Costs

A leading early case addressing an insurer's attempt to obtain reimbursement of defense costs was Buss v. Superior Court, 939 P.2d 766 (Cal. 1997), in which the Supreme Court of California recognized an insurer's right, in certain circumstances, to recover costs it had paid for the defense of its policyholder. In that case, the court recognized that an insurer under California law had a distinct duty to defend claims even if they merely were potentially within the indemnity coverage of the policy, and it noted that an insurer could not recover any costs it paid to defend such claims. Id. at 774-775. It held, however, that an insurer could recover costs that were allocable solely to defending claims that were not even potentially within the indemnity coverage of the policy if the insurer expressly reserves such rights, and it also held that such a reservation of rights could be effective even if the policyholder did not consent. Id. at 784, n. 27.

Since the Buss decision, courts that are inclined to permit such claw-backs by insurers generally recognize that an insurer's right to reimbursement of defense costs exists only if: 1) underlying claims are asserted that are both within and outside of the indemnity coverage of the policy, 2) the insurer timely and expressly reserves a “right” to seek reimbursement, and 3) the policyholder agrees or fails to object to the assertion of such a “right.” Often, such courts reason that such a right is necessary to protect against unjust enrichment, even though policyholders pay for the distinct defense coverage provided by the policies. See Gen. Star. Indem. Co. v. V.I. Port Auth., 564 F. Supp.2d 473 (D. Vi. 2008) (denying insurer's claim for recoupment of defense costs under the law of the Virgin Islands but acknowledging unjust enrichment rationale in contrary cases). See also Colony Ins. Co. v. G&E Tires & Service, Inc., 777 So.2d 1034 (Fla. 2000) (holding that policyholder, under Florida law, by accepting defense provided under a unilateral reservation of rights by the insurer, agreed that the insurer could seek reimbursement of defense costs, as the insurer asserted in its reservation-of-rights letter); United Nat'l Ins. Co. v. SST Fitness Corp., 309 F.3d 914 (6th Cir. 2002) (holding that, under Ohio law, policyholder entered into an implied-in-fact contract with insurer by accepting without objection a defense provided by the insurer subject to a reservation of rights for the reimbursement of defense costs); Knapp v. Commonwealth Land Title Ins. Co., 932 F. Supp. 1169 (D. Minn. 1996) (holding that the policyholder's silence in response to the reservation of rights letter and subsequent acceptance of the defense provided by insurer constituted under Minnesota law an implied agreement to the reservation of rights).

In other well-reasoned cases, however, courts increasingly have rejected insurers' attempts to recover defense costs and have held that insurers cannot unilaterally modify their insurance obligations by asserting in reservation-of-rights letters supposed “rights” not granted to them by their policies. In Shoshone First Bank v. Pacific Employers Ins. Co., 2 P.3d 510 (Wyo. 2000), the Supreme Court of Wyoming, after considering the language in the policy at issue, held that the insurer was not entitled to reimbursement of its defense costs even though the insurer attempted to assert such a “right” unilaterally. The court held that if a policy did not establish a right to recoup defense costs, an insurer could not create for itself such a right through a reservation-of-rights letter. Id. at 516. In that case, the policy at issue made no distinction between the insurer's obligation to defend claims that fell within and outside the indemnity coverage. Therefore, the insurer was obligated to defend all claims and could claim no right to reimbursement of defense costs. Citing a prior decision from the Supreme Court of Hawaii, the court stated that “a reservation of rights letter 'does not relieve the insurer of the costs incurred in defending its insured where the insurer was obligated, in the first instance, to provide such a defense.'” Id. at 516, citing First Ins. Co. of Hawaii, Inc. v. State, by Minami, 665 P.2d 648 (Haw. 1983). The court also quoted with approval the following language from an unpublished order of the U.S. District Court for the District of Wyoming: “A reservation of rights letter does not create a contract allowing an insurer to recoup defense costs from its insureds.” Id. at 516. Consequently, the court held that a reservation of rights letter cannot be used to modify unilaterally the terms of a policy to create a right to reimbursement of defense costs. See also General Agents Ins. Co. of America v. Midwest Sporting Goods Co., 828 N.E.2d 1092 (Ill. 2005) (insurer cannot recover defense costs pursuant to a unilateral reservation of rights, even when a policyholder fails to respond, absent an express provision to that effect in the insurance contract between the parties); Westchester Fire Ins. Co. v. Wallerich, 563 F.3d 707 (8th Cir. 2009) (under Minnesota law, insurer was not entitled to reimbursement of defense costs paid subject to unilateral reservation of rights to recover back such costs when policy did not include express provision for reimbursement and insurer provided defense even after policyholders explicitly rejected the insurer's attempted assertion of a right to reimbursement).

Insurers' Attempts to Obtain Reimbursement of Settlement Payments

To date, claw-back attempts by insurers largely have been limited to defense costs. Two recent cases, however, suggest that insurers are expanding such attempts, using unilateral reservation of rights letters as a basis for attempting to recover settlement payments made on behalf of policyholders.

In Utica Mutual Insurance Co. v. Rohm and Haas Co., 683 F.Supp.2d 368 (E.D. Penn. 2010), the insurer in a reservation of rights letter agreed to fund only a portion of defense costs and to contribute only a share of indemnity payments in regard to four separate claims against the insured, and the policyholder remained silent on these points. The court in Rohm and Haas analyzed an insurer's ability to reserve unilaterally rights not contained in an insurance policy. In regard to defense costs, the court acknowledged a split among courts and followed decisions of courts in Illinois and Pennsylvania (the two jurisdictions whose laws potentially applied to the matter) which “refuse to recognize claims by insurers for the reimbursement of defense costs expended under a unilateral reservation of rights, absent a provision for such reimbursement in the applicable insurance policy.” Id. at 373 citing General Agents Ins. Co. of America v. Midwest Sporting Goods Co, supra; Am. & Foreign Ins. Co. v. Jerry's Sport Ctr. Inc., 948 A.2d 834 (Pa. Super Ct. 2008); Terra Nova Ins. Co. v. 900 Bar, Inc. 887 F.2d 1213 (3d. Cir. 1989).

The court then analyzed the issue of potential reimbursement of settlement payments in light of a leading case on insurer's rights from Texas, Texas Association of Counties County Gov't Risk Management Pool v. Matagorda County, 52 S.W.3d 128 (Tex. 2000). In Matagorda County, the court held, “[Insured's] silence in response to [an insurer's] reservation of rights letter cannot support an implied agreement to reimburse settlement costs.” Id. at 133. The court reasoned that insurers are in a better position than their policyholders to assess coverage disputes and risk and that insurers can address in their policy rate structures the prospect of sometimes having to pay settlements on claims they may believe are not within their indemnity coverages. Id. at 135-136. The Rohm and Haas court found the reasoning in Matagorda County was consistent and “compatible” with the reasoning applied in Midwest Sporting Goods and Jerry's Sport on the issue of reimbursement of defense costs. 683 F. Supp.2d at 375. “The strategic, risk/reward analysis supporting the decision of an insurer to pay defense costs is very much the same analysis that would lead to the decision to pay a settlement, rather than waiting passively for (or risking) an adverse judgment.” Id. at 376. Because the insurance policies at issue did not contain an express right to reimbursement of settlement payments, the court held the insurer could not rely on a unilateral reservation of rights letter to recover settlement payments made on behalf of the policyholder. Id. at 377.

Contrary to the rationale followed by the court in Rohm and Haas, the court in Travelers Property Casualty Co. of America v. Hillerich & Bradsby Co., 598 F.3d 257 (6th Cir, 2010), applying Kentucky law and also relying on prior decisions from other jurisdictions regarding an insurer's ability to reserve unilaterally rights not contained in an insurance policy, held that an insurer could reserve unilaterally its right to reimbursement of settlement payments made on behalf of the insured in factually limited circumstances. In Hillerich & Bradsby, the insurer initially agreed to fund the settlement subject to a reservation of rights, which the policyholder refused to accept. The insurer ultimately funded the settlement at the demand of the policyholder following a threat of a bad faith claim. It then sought reimbursement of the settlement funds it paid based on the reservation of rights letter provided to the policyholder. Hillerich & Bradsby, 598 F.3d at 263.

Because courts in Kentucky had not previously considered an insurer's right to seek reimbursement of settlement payments, the court looked to a decision by the California Superior Court that it believed to be in line with Kentucky's law on an insurer's ability to reserve rights unilaterally. In Blue Ridge Ins. Co. v. Jacobsen, 22 P.3d 313 (Cal. 2001), the court held (based on its previous decision in Buss) that: 1) an insurer had an implied-in-law right to reimbursement of settlement payments from a policyholder even if the policyholder objected to the reservation of rights, and 2) the recognition of such right was necessary to avoid unjust enrichment of the policyholder. Id. at 321-323. The court reasoned that such an outcome provided for fair and reasonable settlements while precluding unjust enrichment of the policyholder. Id.

Because of factual similarities between Blue Ridge and Hillerich & Bradsby and the narrow duty to indemnify under Kentucky law, the court determined that the reasoning in Blue Ridge should apply to the Hillerich & Bradsby case. The court stated the policyholder, which demanded payment by the insurer of the settlement of the underlying case, would be unjustly enriched if the insurer could not reserve its “right” to reimbursement of settlement payments. Hillerich & Bradsby, 598 F.3d at 269. Therefore, under an implied-in-law contract theory, the court held that Kentucky would permit reimbursement to an insurer after a unilateral reservation of rights by the insurer over the objection of the policyholder when “(1) the insurer has timely asserted a reservation of rights; (2) the insurer has notified the insured of its intent to seek reimbursement; and (3) the insured has meaningful control of the defense and negotiation process.” Id. at 268.

The courts in both Rohm and Haas and Hillerich & Bradsby referenced applicable law on an insurer's ability to reserve rights that are not contained in the insurance policy. Whether the respective courts recognized a right to reimbursement of settlement costs hinged on whether the jurisdiction allowed insurers to reserve unilaterally “rights” not contained in their policies. In Illinois and Pennsylvania, courts do not allow such unilateral expansion of an insurer's rights. Therefore, the Rohm and Haas court did not allow for the recovery of settlement payments under such a reservation of rights. In contrast, the Hillerich & Bradsby court reasoned, “if not explicitly then by implication ' the insurer can unilaterally reserve its right to contest coverage by an explicit letter to that effect.” Therefore, an insurer under Kentucky law may have the right to recover settlement payments under a unilateral reservation of rights. Id.

Few other cases have considered this issue, but those that have also considered whether an insurer is allowed to reserve unilaterally rights that are not provided in its insurance policy. See Excess Underwriters at Lloyd's, London v. Frank's Casing Crew & Rental Tools, Inc., 246 S.W.3d 42 (Tex. 2008) (policyholder must consent to both settlement and the insurer's right to reimbursement
contained in the reservation of rights letter) and Cincinnati Ins. Co., v. Grand Pointe, LLC, 501 F.Supp.2d 1145 (E.D. Tenn. 2007) (reimbursement for defense costs and settlement funds is available to insurer under Tennessee law, even if policy contains no express reimbursement provision, if the insurer reserved its rights).

Although the law regarding insurers' claims for reimbursement of defense costs paid subject to unilateral reservations of rights is becoming more established, this new initiative by insurers in regard to settlement payments is just beginning. Rohm and Haas and Hillerich & Bradsby may suggest a framework for how courts will evaluate insurers' claims for reimbursement of settlement payments. As in those cases, an insurer's right to reimbursement of settlement payments in a particular jurisdiction may be determined based upon that jurisdiction's existing law, if any, relating to an insurer's ability to reserve unilaterally “rights” not contained in its insurance policy.

However, even courts in jurisdictions that generally permit insurers to use unilateral reservation of rights letters to revise policy terms seem hesitant to extend to them such liberties in regard to settlement payments. Both Kentucky and California courts specifically note that an insurer's right to seek reimbursement for settlement costs exists only in limited factual circumstances. Hillerich & Bradsby, 598 F.3d at 286; Blue Ridge, 22 P.3d at 320-321. Courts, in other words, seem inclined to provide to policyholders protections against having to unwillingly accept and contribute toward settlements of underlying claims.

Conclusion

Perhaps encouraged by partial success in recovering or clawing back defense costs paid for their policyholders, insurers increasingly may attempt to recover back settlement payments made on behalf of their policyholders. Such initiatives, if undertaken, may be met with mixed success, it appears, depending upon the law of the particular jurisdiction regarding an insurer's right to unilaterally create rights for itself in its reservation of rights letter, including law on attempts to recover defense costs. Such initiatives may succeed in certain jurisdictions even if the policyholder objects, or they may fail in certain jurisdictions even if the policyholder does not object. However, a policyholder can enhance its position, perhaps substantially, by scrutinizing communications from its insurer for such attempts and promptly objecting to them.

Meagan L. DeJohn is an associate in the Cleveland, OH, office of Brouse McDowell, and Paul A. Rose is a partner in the Akron, OH, office of Brouse McDowell and a member of this newsletter's Board of Editors. They regularly represent policyholders in insurance coverage matters.

A question routinely asked about liability insurance claims seems clear and straightforward on its face: “Is the claim covered?” Because “coverage,” however, typically invokes two concepts, rather than one, such a question often is superficial and misleading. Liability insurance policies, particularly at the primary and umbrella levels, usually provide both defense and indemnity coverage. Each coverage is quite valuable to policyholders, and the defense coverage can be the much more valuable of the two, particularly when underlying cases are complex and, accordingly, expensive to defend, but present little or no prospect of policyholder liability.

Of these two types of coverage, defense coverage also is widely understood to be the broader. In other words, a policy may provide defense coverage but, ultimately, no indemnity coverage. Such variances arise from the nature of “notice” pleading and the unpredictability of underlying litigation. Under “notice” pleading utilized in federal courts and most state courts, it often is difficult and sometimes impossible to discern with precision at the outset of litigation the full nature of all underlying claims against the policyholder. Even when such claims can be discerned with precision, it often is impossible to know at the outset which of the claims, if any, will be successful against the policyholder. When these factors all play out, it is common for insurers to have to pay defense costs but not indemnity costs. Hence, it is said that defense coverage is broader than indemnity coverage.

Notwithstanding wide acknowledgment of the two types of coverages and of the variation in the scopes of the two types, insurers have sought in some jurisdictions to recover or claw back costs paid under a policy's defense coverage when they ultimately are determined to have no liability under the policy's indemnity coverage. To a limited extent, insurers have had success with these initiatives. Perhaps encouraged by their successes, they now are expanding these claw-back efforts and are beginning to seek refunds of indemnity payments they make to settle underlying claims against policyholders. This article reviews briefly the evolution of the law concerning insurer attempts to claw back defense payments and addresses two recent cases in which insurers have expanded claw-back efforts to settlement payments.

Insurers' Attempts to Obtain Reimbursement of Defense Costs

A leading early case addressing an insurer's attempt to obtain reimbursement of defense costs was Buss v. Superior Court , 939 P.2d 766 (Cal. 1997), in which the Supreme Court of California recognized an insurer's right, in certain circumstances, to recover costs it had paid for the defense of its policyholder. In that case, the court recognized that an insurer under California law had a distinct duty to defend claims even if they merely were potentially within the indemnity coverage of the policy, and it noted that an insurer could not recover any costs it paid to defend such claims. Id. at 774-775. It held, however, that an insurer could recover costs that were allocable solely to defending claims that were not even potentially within the indemnity coverage of the policy if the insurer expressly reserves such rights, and it also held that such a reservation of rights could be effective even if the policyholder did not consent. Id. at 784, n. 27.

Since the Buss decision, courts that are inclined to permit such claw-backs by insurers generally recognize that an insurer's right to reimbursement of defense costs exists only if: 1) underlying claims are asserted that are both within and outside of the indemnity coverage of the policy, 2) the insurer timely and expressly reserves a “right” to seek reimbursement, and 3) the policyholder agrees or fails to object to the assertion of such a “right.” Often, such courts reason that such a right is necessary to protect against unjust enrichment, even though policyholders pay for the distinct defense coverage provided by the policies. See Gen. Star. Indem. Co. v. V.I. Port Auth. , 564 F. Supp.2d 473 (D. Vi. 2008) (denying insurer's claim for recoupment of defense costs under the law of the Virgin Islands but acknowledging unjust enrichment rationale in contrary cases). See also Colony Ins. Co. v. G&E Tires & Service, Inc., 777 So.2d 1034 (Fla. 2000) (holding that policyholder, under Florida law, by accepting defense provided under a unilateral reservation of rights by the insurer, agreed that the insurer could seek reimbursement of defense costs, as the insurer asserted in its reservation-of-rights letter); United Nat'l Ins. Co. v. SST Fitness Corp. , 309 F.3d 914 (6th Cir. 2002) (holding that, under Ohio law, policyholder entered into an implied-in-fact contract with insurer by accepting without objection a defense provided by the insurer subject to a reservation of rights for the reimbursement of defense costs); Knapp v. Commonwealth Land Title Ins. Co. , 932 F. Supp. 1169 (D. Minn. 1996) (holding that the policyholder's silence in response to the reservation of rights letter and subsequent acceptance of the defense provided by insurer constituted under Minnesota law an implied agreement to the reservation of rights).

In other well-reasoned cases, however, courts increasingly have rejected insurers' attempts to recover defense costs and have held that insurers cannot unilaterally modify their insurance obligations by asserting in reservation-of-rights letters supposed “rights” not granted to them by their policies. In Shoshone First Bank v. Pacific Employers Ins. Co. , 2 P.3d 510 (Wyo. 2000), the Supreme Court of Wyoming, after considering the language in the policy at issue, held that the insurer was not entitled to reimbursement of its defense costs even though the insurer attempted to assert such a “right” unilaterally. The court held that if a policy did not establish a right to recoup defense costs, an insurer could not create for itself such a right through a reservation-of-rights letter. Id. at 516. In that case, the policy at issue made no distinction between the insurer's obligation to defend claims that fell within and outside the indemnity coverage. Therefore, the insurer was obligated to defend all claims and could claim no right to reimbursement of defense costs. Citing a prior decision from the Supreme Court of Hawaii, the court stated that “a reservation of rights letter 'does not relieve the insurer of the costs incurred in defending its insured where the insurer was obligated, in the first instance, to provide such a defense.'” Id. at 516, citing First Ins. Co. of Hawaii, Inc. v. State, by Minami, 665 P.2d 648 (Haw. 1983). The court also quoted with approval the following language from an unpublished order of the U.S. District Court for the District of Wyoming: “A reservation of rights letter does not create a contract allowing an insurer to recoup defense costs from its insureds.” Id. at 516. Consequently, the court held that a reservation of rights letter cannot be used to modify unilaterally the terms of a policy to create a right to reimbursement of defense costs. See also General Agents Ins. Co. of America v. Midwest Sporting Goods Co., 828 N.E.2d 1092 (Ill. 2005) (insurer cannot recover defense costs pursuant to a unilateral reservation of rights, even when a policyholder fails to respond, absent an express provision to that effect in the insurance contract between the parties); Westchester Fire Ins. Co. v. Wallerich, 563 F.3d 707 (8th Cir. 2009) (under Minnesota law, insurer was not entitled to reimbursement of defense costs paid subject to unilateral reservation of rights to recover back such costs when policy did not include express provision for reimbursement and insurer provided defense even after policyholders explicitly rejected the insurer's attempted assertion of a right to reimbursement).

Insurers' Attempts to Obtain Reimbursement of Settlement Payments

To date, claw-back attempts by insurers largely have been limited to defense costs. Two recent cases, however, suggest that insurers are expanding such attempts, using unilateral reservation of rights letters as a basis for attempting to recover settlement payments made on behalf of policyholders.

In Utica Mutual Insurance Co. v. Rohm and Haas Co. , 683 F.Supp.2d 368 (E.D. Penn. 2010), the insurer in a reservation of rights letter agreed to fund only a portion of defense costs and to contribute only a share of indemnity payments in regard to four separate claims against the insured, and the policyholder remained silent on these points. The court in Rohm and Haas analyzed an insurer's ability to reserve unilaterally rights not contained in an insurance policy. In regard to defense costs, the court acknowledged a split among courts and followed decisions of courts in Illinois and Pennsylvania (the two jurisdictions whose laws potentially applied to the matter) which “refuse to recognize claims by insurers for the reimbursement of defense costs expended under a unilateral reservation of rights, absent a provision for such reimbursement in the applicable insurance policy.” Id. at 373 citing General Agents Ins. Co. of America v. Midwest Sporting Goods Co, supra; Am. & Foreign Ins. Co. v. Jerry's Sport Ctr. Inc., 948 A.2d 834 (Pa. Super Ct. 2008); Terra Nova Ins. Co. v. 900 Bar, Inc. 887 F.2d 1213 (3d. Cir. 1989).

The court then analyzed the issue of potential reimbursement of settlement payments in light of a leading case on insurer's rights from Texas, Texas Association of Counties County Gov't Risk Management Pool v. Matagorda County , 52 S.W.3d 128 (Tex. 2000). In Matagorda County, the court held, “[Insured's] silence in response to [an insurer's] reservation of rights letter cannot support an implied agreement to reimburse settlement costs.” Id. at 133. The court reasoned that insurers are in a better position than their policyholders to assess coverage disputes and risk and that insurers can address in their policy rate structures the prospect of sometimes having to pay settlements on claims they may believe are not within their indemnity coverages. Id. at 135-136. The Rohm and Haas court found the reasoning in Matagorda County was consistent and “compatible” with the reasoning applied in Midwest Sporting Goods and Jerry's Sport on the issue of reimbursement of defense costs. 683 F. Supp.2d at 375. “The strategic, risk/reward analysis supporting the decision of an insurer to pay defense costs is very much the same analysis that would lead to the decision to pay a settlement, rather than waiting passively for (or risking) an adverse judgment.” Id. at 376. Because the insurance policies at issue did not contain an express right to reimbursement of settlement payments, the court held the insurer could not rely on a unilateral reservation of rights letter to recover settlement payments made on behalf of the policyholder. Id. at 377.

Contrary to the rationale followed by the court in Rohm and Haas , the court in Travelers Property Casualty Co. of America v. Hillerich & Bradsby Co. , 598 F.3d 257 (6th Cir, 2010), applying Kentucky law and also relying on prior decisions from other jurisdictions regarding an insurer's ability to reserve unilaterally rights not contained in an insurance policy, held that an insurer could reserve unilaterally its right to reimbursement of settlement payments made on behalf of the insured in factually limited circumstances. In Hillerich & Bradsby, the insurer initially agreed to fund the settlement subject to a reservation of rights, which the policyholder refused to accept. The insurer ultimately funded the settlement at the demand of the policyholder following a threat of a bad faith claim. It then sought reimbursement of the settlement funds it paid based on the reservation of rights letter provided to the policyholder. Hillerich & Bradsby, 598 F.3d at 263.

Because courts in Kentucky had not previously considered an insurer's right to seek reimbursement of settlement payments, the court looked to a decision by the California Superior Court that it believed to be in line with Kentucky's law on an insurer's ability to reserve rights unilaterally. In Blue Ridge Ins. Co. v. Jacobsen , 22 P.3d 313 (Cal. 2001), the court held (based on its previous decision in Buss ) that: 1) an insurer had an implied-in-law right to reimbursement of settlement payments from a policyholder even if the policyholder objected to the reservation of rights, and 2) the recognition of such right was necessary to avoid unjust enrichment of the policyholder. Id. at 321-323. The court reasoned that such an outcome provided for fair and reasonable settlements while precluding unjust enrichment of the policyholder. Id.

Because of factual similarities between Blue Ridge and Hillerich & Bradsby and the narrow duty to indemnify under Kentucky law, the court determined that the reasoning in Blue Ridge should apply to the Hillerich & Bradsby case. The court stated the policyholder, which demanded payment by the insurer of the settlement of the underlying case, would be unjustly enriched if the insurer could not reserve its “right” to reimbursement of settlement payments. Hillerich & Bradsby, 598 F.3d at 269. Therefore, under an implied-in-law contract theory, the court held that Kentucky would permit reimbursement to an insurer after a unilateral reservation of rights by the insurer over the objection of the policyholder when “(1) the insurer has timely asserted a reservation of rights; (2) the insurer has notified the insured of its intent to seek reimbursement; and (3) the insured has meaningful control of the defense and negotiation process.” Id. at 268.

The courts in both Rohm and Haas and Hillerich & Bradsby referenced applicable law on an insurer's ability to reserve rights that are not contained in the insurance policy. Whether the respective courts recognized a right to reimbursement of settlement costs hinged on whether the jurisdiction allowed insurers to reserve unilaterally “rights” not contained in their policies. In Illinois and Pennsylvania, courts do not allow such unilateral expansion of an insurer's rights. Therefore, the Rohm and Haas court did not allow for the recovery of settlement payments under such a reservation of rights. In contrast, the Hillerich & Bradsby court reasoned, “if not explicitly then by implication ' the insurer can unilaterally reserve its right to contest coverage by an explicit letter to that effect.” Therefore, an insurer under Kentucky law may have the right to recover settlement payments under a unilateral reservation of rights. Id.

Few other cases have considered this issue, but those that have also considered whether an insurer is allowed to reserve unilaterally rights that are not provided in its insurance policy. See Excess Underwriters at Lloyd's, London v. Frank's Casing Crew & Rental Tools, Inc., 246 S.W.3d 42 (Tex. 2008) (policyholder must consent to both settlement and the insurer's right to reimbursement
contained in the reservation of rights letter) and Cincinnati Ins. Co., v. Grand Pointe, LLC , 501 F.Supp.2d 1145 (E.D. Tenn. 2007) (reimbursement for defense costs and settlement funds is available to insurer under Tennessee law, even if policy contains no express reimbursement provision, if the insurer reserved its rights).

Although the law regarding insurers' claims for reimbursement of defense costs paid subject to unilateral reservations of rights is becoming more established, this new initiative by insurers in regard to settlement payments is just beginning. Rohm and Haas and Hillerich & Bradsby may suggest a framework for how courts will evaluate insurers' claims for reimbursement of settlement payments. As in those cases, an insurer's right to reimbursement of settlement payments in a particular jurisdiction may be determined based upon that jurisdiction's existing law, if any, relating to an insurer's ability to reserve unilaterally “rights” not contained in its insurance policy.

However, even courts in jurisdictions that generally permit insurers to use unilateral reservation of rights letters to revise policy terms seem hesitant to extend to them such liberties in regard to settlement payments. Both Kentucky and California courts specifically note that an insurer's right to seek reimbursement for settlement costs exists only in limited factual circumstances. Hillerich & Bradsby, 598 F.3d at 286; Blue Ridge, 22 P.3d at 320-321. Courts, in other words, seem inclined to provide to policyholders protections against having to unwillingly accept and contribute toward settlements of underlying claims.

Conclusion

Perhaps encouraged by partial success in recovering or clawing back defense costs paid for their policyholders, insurers increasingly may attempt to recover back settlement payments made on behalf of their policyholders. Such initiatives, if undertaken, may be met with mixed success, it appears, depending upon the law of the particular jurisdiction regarding an insurer's right to unilaterally create rights for itself in its reservation of rights letter, including law on attempts to recover defense costs. Such initiatives may succeed in certain jurisdictions even if the policyholder objects, or they may fail in certain jurisdictions even if the policyholder does not object. However, a policyholder can enhance its position, perhaps substantially, by scrutinizing communications from its insurer for such attempts and promptly objecting to them.

Meagan L. DeJohn is an associate in the Cleveland, OH, office of Brouse McDowell, and Paul A. Rose is a partner in the Akron, OH, office of Brouse McDowell and a member of this newsletter's Board of Editors. They regularly represent policyholders in insurance coverage matters.