Maine Judge Rejects Insurer's Recoupment of Settlement Contribution
The dispute with respect to whether insurers may recoup costs of settlement has moved north to the State of Maine. In American National Fire Ins. Co. v. York County, No. 2:06-cv-200 (D. Me. October 20, 2008), a federal district court ruled that a liability insurer’s failure to expressly reserve the right to recoup settlement costs precluded its ability to subsequently recover those sums from its insured. While leaving open the issue of whether recoupment is ever permitted, this opinion emphasizes the importance of insurers asserting these rights early and consistently if they ever hope to prevail on this question.
In 2004, York County was sued by three inmates of the York County Jail for strip searches that the plaintiffs claimed had violated their constitutional rights. York County tendered the defense of this case to American National and other insurers that had provided Law Enforcement Liability insurers that have provided LEL coverage to it during the period in question. American National agreed to defend under a reservation of rights noting the fact that its policy in question contained a $5,000 “per claim” deductible. A dispute arose between the parties as to whether this deductible applied to each individual class member or, as the insured contended, applied to its claim for coverage as a whole.
Despite this reservation, American National ultimately agreed to contribute $750,000 towards a package settlement of the claims. At the time, its agreement to contribute was not explicitly tied to any claim to reimbursement reflecting its position with respect to the $5,000 “per claim” deductible. Thereafter, American National sought to recover its settlement contribution, noting that it was undisputed that none of the members of the underlying class action had been subjected to strip searches during its policy nor had any of the claimants who were approved to payments from the class action settlement fund obtained recovery in excess of $5,000 per claimant.
In the ensuing coverage litigation, Judge Singal agreed with American National that the policy deductible was unambiguous and applied individually to each underlying claimant. The court ruled, however, that the application of this deductible to American National’s contribution to settlement was far from clear given the size and makeup of the class and the numerous parties participating in funding the settlement. Further, the district court held that American National had no right to recover back these payments as York County had proved that there was a binding agreement between it as of 2004 without any reservation to recoup these sums.
Alternatively, the district court held that York County had proved the affirmative defense of equitable estoppel that it had relied to its detriment on American National’s agreement to contribute these sums without any right to recoupment. The district court concluded that it was “unreasonable for [American National] as the insurer to ‘gamble’ in this manner without explicitly disclosing its position to the insured, who, in the absence of any such disclosure, reasonably believed that its own $50,000 contribution to the York County class action settlement fund was the maximum extent of its payment under the terms of the settlement.”
The district court held that accord and satisfaction would not exist so as to create a contract if American National had explicitly reserved its rights regarding the deductible at the time that the parties were agreeing on the various contributions to the settlement or, later, when it tendered its settlement contribution. The court took note of the fact, however, that American National had last pressed the issue of its deductible months earlier and had not sought clarification as to how the deductible would be reimbursed or reiterated its reservation of rights during the final stages of the settlement discussions, a period of time when it was well aware of its insured’s position that the County’s maximum contribution would be capped at $50,000.
As to the issue of estoppel, the court ruled that American National’s conduct was, in fact, unreasonable, not because of its willingness to contribute $750,000 but because of its failure to alert its policyholder that this sum was not the contribution it appeared to be. Rather, the district court concluded that American National had evolved its strategy of seeking recoupment after the fact without appropriate disclosure to its policyholder who had in the interim justifiably and detrimentally relied on the insurer’s “misleading offer.”
Judge Singal’s order did not reach the crucial question of whether an insurer ever has a right to recoup settlement payments. Courts around the country have reached different conclusions on this issue although most have ruled as a matter of equity that if an insurer funds a settlement at the request of the insured for which it is later held not to owe coverage, an insurer is entitled to recoupment and the insured would otherwise obtain a windfall. Compare. Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489, 22 P.3d 313, 106 Cal. Rptr.2d 535 (2001)(right to recoupment) with Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew and Rental Tools, No 02-0730 (Tex. February 1, 2008)(no right).
In all of these cases, however, courts have emphasized the need for transparency and, in particular, for disclosure of the insurer’s intent to seek contribution. Without such an explicit assertion, few courts will uphold or imply a right to recovery.
