Opinion ID: 779726
Heading Depth: 3
Heading Rank: 2

Heading: Ohio Contract Law

Text: 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.