Carrier May Seek Reimbursement for Settlement of Uncovered Claims
Insurance Law Update
Excess Underwriters at Lloyd's London v. Frank's Casing Crew & Rental Tools
Texas Supreme Court
On May 27, 2005, the Texas Supreme Court in Excess Underwriters at Lloyd’s London v. Frank’s Casing Crew & Rental Tools (“Frank’s Casing”), ---S.W.3d--- , 2005 WL 1252321 (Tex. May 27, 2005) limited its prior decision in Texas Ass’n of Counties Cty. Gov. Risk Mgmt. Pool v. Matagorda County (“Matagorda”), 52 S.W.3d 128 (Tex. 2000). The court found that an insurer may seek reimbursement for settlement funds paid on behalf of its insured for a 3rd-party claim that is subsequently ruled uncovered, where either: (1) the insured demands that the insurer accept an offer within policy limits, or (2) where the insured acknowledges that coverage is disputed, but expressly agrees that the settlement offer should be accepted. The court held that the right to reimbursement in such cases is quasi-contractual and implied in law.
In Frank’s Casing, the insured had fabricated a drilling platform that collapsed. The buyer of the platform sued the insured, who had a $1 million primary liability policy and an excess liability policy with limits of $10 million issued by certain excess underwriters.
The primary carrier provided defense counsel for the insured. The excess underwriters issued a reservation of rights, asserting that certain claims at issue were not covered. During the initial stages of the trial, it became evident that the insured was a target defendant and faced substantial exposure. Soon thereafter, at the suggestion of the insured’s defense counsel, the underlying plaintiffs made a demand within the excess policy limits. The insured demanded that the primary carrier and excess underwriters accept the offer. The excess underwriters tried to obtain the insured’s agreement that, although the excess underwriters would pay the settlement, it reserved its right to seek reimbursement if the claim was subsequently determined not to be covered. The excess underwriters subsequently filed an action for declaratory relief to recover the settlement amount.
The court discussed Matagorda, which held that an insured could not be required to reimburse an insurer that paid a settlement where the insurer had a unilateral right to settle claims against its insured without the insured’s consent. The Frank’s Casing court held that where, as here, the insured specifically demanded that excess underwriters accept and fund the settlement, the insured cannot then take the inconsistent position that the settlement was unreasonable or otherwise financially burdensome. Finally, the Frank’s Casing court noted that its decision encouraged insurers to settle cases on behalf of their insureds, even where coverage is in doubt, and protected injured plaintiffs from the potential financial incapacity of the insured.