Opinion ID: 779726
Heading Depth: 2
Heading Rank: 1

Heading: Insurer's Right to Recoupment

Text: 8 United National contends that, because it had no duty to defend SST in the underlying infringement action and it reserved its right to recoup defense costs, it is entitled recover those costs. United National further argues that SST accepted the terms of its reservation of rights letter when it accepted defense costs without objecting to the reservation of rights, thereby giving rise to an implied contract for reimbursement. There being no Ohio decisions on this issue, United National urges us to look at opinions from other jurisdictions allowing insurers to reserve a right to recoupment and Ohio cases on implied contracts. 9 SST contends that, because it never expressly accepted the reservation of rights, the reservation is ineffective. SST argues, An insurer's offer to defend is made primarily for its own benefit, and the insured should not be forced to reimburse costs that the insurer expends for its own benefit. Appellee's Final Br. at 4. 10 The district court did not address this argument because it decided United National's § 2202 motion solely on the basis that United National was a volunteer when it defended the underlying patent suit. 11 Because the Ohio Supreme Court has not determined the issue before us, we 12 must ascertain from all available data, including the decisional law of the state's lower courts, restatements of law, law review commentaries, and decisions from other jurisdictions on the majority rule, what the state's highest court would decide if faced with the issue. 13 Grantham & Mann, Inc. v. American Safety Prods., Inc., 831 F.2d 596, 608 (6th Cir.1987) (citations omitted). 14 In accordance with this directive, we examine decisions and rationales from other jurisdictions that have decided this specific issue, general Ohio law, and policy considerations for guidance in determining how the Ohio Supreme Court would likely decide this issue.
15 United National contends this court should, and the Ohio Supreme Court would, follow decisions from other jurisdictions that allow an insurer to recover defense costs when the insurer had no duty to defend. 16 In Colony Insurance Co. v. G & E Tires & Service, Inc., 777 So.2d 1034 (Fla.Ct. App.2000), the court decided whether an insurer could be reimbursed for defense costs when the insurer did not have a duty to defend. After reviewing cases from other jurisdictions, the court determined that the insurer was entitled to reimbursement of those costs. Id. at 1039. The court stated, Having accepted Colony's offer of a defense with a reservation of the right to seek reimbursement, G & E ought in fairness make Colony whole, now that it has been judicially determined that no duty to defend ever existed. Id. The court also looked to basic contract law and stated, A party cannot accept tendered performance while unilaterally altering the material terms on which it is offered. Id. (citing RESTATEMENT (SECOND) OF CONTRACTS § 69 (1981)). The court found that, when the insured accepted its defense, it also accepted the terms of the offer, including a potential for reimbursement. Id. 17 In Grinnell Mutual Reinsurance Co. v. Shierk, 996 F.Supp. 836 (S.D.Ill.1998), the court looked to other jurisdictions for guidance in deciding whether an insurer was entitled to reimbursement for defense costs. The court stated that to be entitled to reimbursement, an insurer must: 1) specifically reserve the right to seek reimbursement from its insured; and 2) provide the insured with adequate notice of this potential reimbursement. Id. at 839. The court held: 18 Shierk accepted the benefit of Grinnell's defense. Further, Shierk was fully apprised that Grinnell reserved its right to seek reimbursement in the event that it was later determined that it had no duty to defend him. As a result, although it appears that the Illinois courts have not yet had an opportunity to address the precise issue of reimbursement, the Court predicts that if the Illinois Supreme Court were faced with this precise issue, it would authorize the relief sought by Grinnell and order reimbursement of the costs of defense. 19 Id. (citations omitted). 20 In Resure, Inc. v. Chemical Distributors, Inc., 927 F.Supp. 190 (M.D.La.1996), the insurer sought reimbursement of defense costs following a reservation of its right to reimbursement. The court determined that the insured was entitled to reimbursement, stating: 21 Resure timely reserved its rights under the policy. That reservation specifically referred to the possibility that Resure might seek reimbursement for any and all costs of defense. There is nothing in the record to suggest CDI objected to the reservation. Accordingly, Resure is entitled to reimbursement for all costs of defense. 22 Id. at 194. 23 In Knapp v. Commonwealth Land Title Insurance Co., 932 F.Supp. 1169 (D.Minn. 1996), the insurer, in a reservation of rights letter, stated it would pay defense costs in a land title dispute and reserved the right to seek attorneys' fees and costs later. The court found that an insurer had a right to recover defense costs. Id. at 1172 ([W]here an insurer has properly met its duty and subsequently successfully challenges policy coverage, it should be entitled to the full benefit of such a challenge and be reimbursed for the benefits it bestowed, in good faith, to its insured.). The court stated that an insurer must clearly indicate a reservation of its right to seek reimbursement. Id. The court concluded, Under these circumstances, the Court finds it appropriate to determine that Knapp's silence in response to Commonwealth's reservations of rights letter, and subsequent acceptance of the defense provided by Commonwealth, constitutes an implied agreement to the reservation of rights. Id. 24 In First Federal Savings & Loan Association of Fargo, North Dakota v. Transamerica Title Insurance Co., 793 F.Supp. 265, 269 (D.Colo.1992) (citations omitted), the court stated, An insurance company may also reserve its right to deny its duty to defend and later recover for any attorney fees paid. The court determined that because the insured did not object to the insurer's reservation of rights, the insurer was entitled to reimbursement. Id. 25 A few cases, however, have not allowed recoupment of defense costs. See Terra Nova Ins. Co. v. 900 Bar Inc., 887 F.2d 1213 (3d Cir.1989); In re Hansel, 160 B.R. 66 (Bankr.S.D.Tex.1993); Shoshone First Bank v. Pacific Employers Ins. Co., 2 P.3d 510 (Wyo.2000). These cases, however, reject demands for recoupment on the basis of defects in the reservation of rights, rather than on the basis that recoupment depends on an express agreement by the insured. 26 In Terra Nova, 887 F.2d at 1217 and 1219, for example, the insurer appointed counsel for its insured subject to a general reservation of rights letter. The court found the insurer was not entitled to reimbursement for defense costs because of the general nature of the reservation of rights. Id. In Hansel, 160 B.R. at 70, the court stated, 27 Nowhere does either letter mention that Republic expects the insureds to reimburse it for the costs of defense of the state tort suit should it be found to have no duty to defend the insureds.... Even assuming Republic could have created this right through a subsequent agreement with the insureds, these letters fail to put the reader on notice that such a right is claimed. 28 The court found that, because the insurer did not provide timely notice of the reservation, the insurer was not entitled to reimbursement. Id. In Shoshone First Bank, 2 P.3d at 511, the court stated, we hold that the allocation and recovery of the costs attributable to the defense of claims that were not covered by the policy of insurance is not permitted under Wyoming law so long as one or more of the claims alleged is covered by the insurance policy. 29 Courts in other jurisdictions thus consistently have held that an insurer is entitled to reimbursement for defense costs when the insurer did not have a duty to defend any of the asserted claims where the insurer: 1) timely and explicitly reserves its right to recoup the costs; and 2) provides specific and adequate notice of the possibility of reimbursement. The general rule thus appears to be that, if these conditions are met, a reservation of rights is enforceable even absent an express agreement by the insured.
30 United National argues that SST's acceptance of defense costs, with United National's reservation of rights, created an implied contract agreeing to the reservation. 31 In Ohio, it is well-established that there are three classes of simple contracts: express, implied in fact, and implied in law. Legros v. Tarr, 44 Ohio St.3d 1, 6, 540 N.E.2d 257 (1989) (citing Hummel v. Hummel, 133 Ohio St. 520, 525, 14 N.E.2d 923 (1938); Rice v. Wheeling Dollar Sav. & Trust Co., 155 Ohio St. 391, 99 N.E.2d 301 (1951)). An express contract occurs when the parties' assent to a contract's terms is expressed through an offer and acceptance. Id. (quoting Hummel, 133 Ohio St. at 525, 14 N.E.2d 923). A contract implied in fact occurs when a meeting of the minds is demonstrated by surrounding circumstances, allowing a factfinder to infer the existence of a contract by tacit understanding. Id. (quoting Hummel, 133 Ohio St. at 525, 14 N.E.2d 923); see also Lucas v. Costantini, 13 Ohio App.3d 367, 369, 469 N.E.2d 927 (1983) (A contract implied in fact may be proved by showing that the circumstances surrounding the parties' transactions make it reasonably certain that an agreement was intended.) (citing Columbus, Hocking Valley & Toledo Ry. Co. v. Gaffney, 65 Ohio St. 104, 61 N.E. 152 (1901)). A contract implied in law occurs when there is no meeting of the minds, and the law creates an obligation on a person who received a benefit and would be unjustly enriched by the benefit. Id. (quoting Hummel, 133 Ohio St. at 525, 14 N.E.2d 923). 32 United National does not contend that this case involves a contract implied at law or an express contract. United National argues, rather, the parties had a contract implied in fact. (Appellant's Final Reply Br. at 2 n. 1) (Because United National seeks recoupment only under an implied-in-fact contract, SST's footnote 3 claiming that `United National's attempt to obtain equitable relief must be rejected ...' is irrelevant.) (alteration in original). 33 Implied in fact contracts usually occur when a party provides another party with services or materials under circumstances where a payment typically is made for the services or materials. Lucas, 13 Ohio App.3d at 369, 469 N.E.2d 927 (The law is said to `imply' an obligation on the part of a person who benefits from the services or materials received to pay for the services or materials.) (citing Ashley v. Henahan, 56 Ohio St. 559, 574, 47 N.E. 573 (1897)); Evans v. Rizzo, No. 9-96-26, 1996 WL 479565, at , 1996 Ohio App. LEXIS 3648, at  (Aug. 20, 1996) (To prove the existence of an implied contract, services must be rendered, work performed, or materials furnished by one party to another under such circumstances that the receiving party knew, or should have known, that such services were rendered with the expectation of being paid on the basis of their reasonable worth.) (citing Terex Corp. v. Grim Welding Co., 58 Ohio App.3d 80, 82, 568 N.E.2d 739 (1989)). 34 To establish the existence of an implied in fact contract, the plaintiff must prove that the defendant either requested or assented to such conduct under conditions precluding an inference that the plaintiff acted gratuitously. Id. (citing Gaffney, 65 Ohio St. 104, 61 N.E. 152); Stepp v. Freeman, 119 Ohio App.3d 68, 74, 694 N.E.2d 510 (1997) (To establish a contract implied in fact a plaintiff must demonstrate that the circumstances surrounding the parties' transaction make it reasonably certain that an agreement was intended.) (citation omitted). 35 Because United National contends the parties entered into an implied in fact contract, United National must prove that SST accepted the defense costs with the reservation of rights under conditions disallowing an inference that United National acted gratuitously. Lucas, 13 Ohio App.3d at 369, 469 N.E.2d 927 (citing Gaffney, 65 Ohio St. 104, 61 N.E. 152) ([T]he plaintiff must prove that the defendant either requested or assented to such conduct under conditions precluding an inference that the plaintiff acted gratuitously.). Stated differently, United National must show that the circumstances surrounding the transaction make it reasonably certain that the parties intended to agree that United National would recoup defense costs if United National had no duty to pay the costs. Stepp, 119 Ohio App.3d at 74, 694 N.E.2d 510. 36 United National has met this burden. The evidence demonstrates that SST knew of United National's reservation of rights because it received a letter stating, United National reserves the right to recoup from SST any defense costs and fees to be paid subject to this reservation letter on the basis that no duty to defend now exists or has existed with regard to the tendered suit. J.A. at 115. SST did not object to the reservation and accepted United National's payment of defense costs. See, e.g., Knapp, 932 F.Supp. at 1172 (Under these circumstances, the Court finds it appropriate to determine that Knapp's silence in response to Commonwealth's reservations of rights letter, and subsequent acceptance of the defense provided by Commonwealth, constitutes an implied agreement to the reservation of rights.). The reservation of rights letter shows that United National did not act gratuitously. 37 SST argues that the parties did not create an implied in fact contract because: 1) United National did not provide consideration to modify the original insurance contract with the reservation of rights; 2) United National could not unilaterally modify the original insurance contract; and 3) SST never accepted the reservation of rights because silence and inaction do not constitute acceptance. United National did not, however, modify the original insurance contract; instead, the parties entered into a new agreement in which United National offered defense costs subject to potential reimbursement and SST accepted that offer by accepting the defense costs. 38 United National's conduct also entitles United National to reimbursement under the persuasive decisions addressing this specific issue in other jurisdictions. Under that line of cases, as previously discussed, United National is entitled to reimbursement if United National: 1) timely and explicitly reserved its right to recoup the costs; and 2) provided specific and adequate notice of the possibility of reimbursement. 39 United National timely and explicitly reserved its right to recoup defense costs because United National notified SST of the reservation, in a letter dated January 21, 1997, prior to payment of the defense costs. The letter explicitly stated that United National reserved its right to recoup defense costs if a court determined that United National had no duty to provide such costs. J.A. at 115 (United National reserves the right to recoup ... any defense costs....). United National also provided specific and adequate notice of the possibility of reimbursement in this letter. 40 As further support for its claim for reimbursement, United National contends that allowing an insurer to recoup costs when it did not have a duty to defend ensures that defenses will be afforded even in questionable cases. United National argues that reservation-of-rights letters promote economic use of scarce judicial resources by increasing insurers' willingness to defend in cases of questionable coverage. Appellant's Final Br. at 17. United National cites Knapp, which stated, The courts should be consistent in encouraging insurance companies to properly meet their duty to defend its insured against third party claims and minimize unnecessary claims to enforce policy coverage. Knapp, 932 F.Supp. at 1172. 41 SST, echoing the district court, contends that an insurer benefits from defense under a reservation of rights because the insurer avoids a claim for bad faith. Appellee's Final Br. at 12 (United National `avoided any allegation of bad faith' and avoided responsibility to pay damages if it were later determined that United National had an obligation to defend the underlying action.) (citing J.A. at 186). SST further contends that United National had the benefit of controlling the underlying litigation. SST quotes from Shoshone and argues reimbursement would force insureds to make a difficult decision: 42 However, to allow the insurer to force the insured into choosing between seeking a defense under the policy, and run the potential risk of having to pay for this defense if it is subsequently determined that no duty to defend existed, or giving up all meritorious claims that a duty to defend exists, places the insured in the position of making a Hobson's choice. 43 2 P.3d at 516 (citation omitted). 44 We agree that allowing an insurer to recover under an implied in fact contract theory so long as the insurer timely and explicitly reserved its right to recoup the costs and provided specific and adequate notice of the possibility of reimbursement promotes the policy of ensuring defenses are afforded even in questionable cases. When an insurer conditions payment of defense costs on the condition of reimbursement if the insurer had no duty to defend, the condition becomes part of an implied in fact contract when the insured accepts payment. When faced with a reservation of rights, the insured can choose to: 1) decline the offer, pay for the defense, and seek to recover on the policy; 2) decline the offer and file a declaratory judgment action; or 3) accept the offer subject to the reservation of rights. 45 Because SST entered into an implied in fact contract by accepting the defense costs subject to a reservation of the right to recoupment if a court determined that United National had no duty to defend SST and a court found United National had no duty to defend, United National is entitled to reimbursement of its defense costs and prejudgment interest.