Court Opinion

ID: 9495514
Source: CourtListenerOpinion
Date Created: 2023-08-05 16:04:34.673717+00
Date Added: 2024-06-11T17:57:03.671567
License: Public Domain

CLAY, Circuit Judge,
dissenting.
Despite the lack of any controlling precedent from the Ohio courts on this matter, the majority opinion essentially holds that an insurer can unilaterally alter the terms of an existing contract and force an insured to reimburse the insurer for attorney fees and costs by way of a unilateral reservation of rights letter. Because the law and public policy considerations strongly militate against reaching such a holding, I respectfully dissent.
This case requires that we determine whether an insurer that decides in good faith to defend an insured against claims, which the insurer is uncertain are covered under the insurance policy, may unilaterally alter the terms of the insurance policy to recoup defense costs when a court later makes an after-the-fact determination that the policy did not. cover the claims against the insured. As explained below, the answer to this question unequivocally is that an insurer should not be allowed to do so.
*924In Ohio, an insurer has a duty to defend an insured whenever a complaint filed against the insured contains allegations that are expressly covered by the policy or are even arguably or potentially covered. City of Willoughby Hills v. Cincinnati Ins. Co., 9 Ohio St.3d 177, 459 N.E.2d 555, 558 (1984). Where the allegations in the complaint in the underlying suit against the insured “are vague, ambiguous, or incomplete, so that the ‘potential for coverage’ exists, a duty to defend by the insurer exists.” Monsler v. Cincinnati Cas. Co., 74 Ohio App.3d 321, 598 N.E.2d 1203, 1206 (1991) (citation omitted); see also Grange Mut. Cas. Co. v. Rosko, 146 Ohio App.3d 698, 767 N.E.2d 1225, 1230-31(2001) (“Even where the duty to defend is unclear from the complaint brought against the insured or where there exists some doubt about whether the theory of recovery falls within the scope of the policy, if the allegations state a claim which may arguably or potentially fall within policy coverage, the insurer must, as a rule, accept the defense.”)
If an insurer refuses to defend the insured, and a court later determines that the claims asserted against the insured were in fact covered under the insurance contract, the insured may sue' the insurer for breach of contract. See Centennial Ins. Co. v. Liberty Mut. Ins. Co., 62 Ohio St.2d 221, 404 N.E.2d 759, 761 (1980) (“It is settled law in this state that an insurer owes a duty to exercise good faith in defending and settling claims against the insured and that a breach of that duty will give rise to a cause of action by the insured.”) (emphasis added). In the instant case, United National Insurance Company (“United National”) apparently had some concerns about whether coverage existed under the insurance contract inasmuch as it agreed “in the abundance of caution” to defend SST in the underlying patent action asserted against SST by a third party. (J.A. at 114.)
Where there is doubt about whether the policy covers claims asserted against an insured, it is in the insurer’s interest to mount a defense for the insured, subject to a reservation of rights. City of Willoughby Hills, 459 N.E.2d at 559 n. 1; see also Motorists Mut. Ins. Co. v. Trainor, 33 Ohio St.2d 41, 294 N.E.2d 874, 877 (1973) (explaining that a “unilateral reservation of rights is notice given by the insurer that it will defend the suit, but reserves all rights it has based on noncoverage under the policy ”) (emphasis added). Otherwise, although a court might later determine that the underlying insurance contract does not cover a particular claim, where the insurer undertakes the defense without reserving its rights to deny either coverage or a duty to defend, the insured may be estopped from later doing so. Turner Liquidating Co. v. St. Paul Surplus Lines Ins. Co., 93 Ohio App.3d 292, 638 N.E.2d 174, 178 (1994). In Turner, for instance, an insurer defended an insured in an action and then a couple of months later informed the insured that it would soon stop providing a defense. Id. at 175. The insurer did not reserve its rights to withdraw the defense. The insured sued claiming that the insurer was precluded from withdrawing a defense under the doctrines of waiver and estoppel. Id. The intermediate appeals court stated that the general rule is that waiver and estoppel cannot create coverage under a contract where none existed. Id. Thus, inasmuch as the insurance contract never covered the claims brought against the insured in the first place, these equitable doctrines could not be used to expand coverage where none existed. Id. However, the court recognized that there exists an exception to this general rule. That is, where an insurer, without reserving its rights under the policy, provides a defense for such a period as to prejudice the insured if the defense is withdrawn, or where the insurer or its agent misrepre*925sents the extent of the coverage the insured has purchased, then the insurer may be estopped from denying coverage. Id. at 179.
In the instant case, United National contends that its reservation of rights letter allowed it to do much more than to withdraw from defending SST Fitness Corporation (“SST”) or to deny coverage in the patent action asserted against SST once the district court, and later this Court, determined that such claims were not covered under the policy. United National also claims that it has the right to be reimbursed for the funds it expended defending SST in the patent action. However, United National admits that the underlying insurance contract that United National entered into with SST contains no provision allowing it to recoup attorney fees where United National elects to accept the tender of a defense and then later discovers that it had no duty to do so. Thus, the right United National seeks to assert in this case, the right to reimbursement under the applicable policy of insurance, is not a right to which it is entitled based on noncoverage under the policy. Motorists Mut., 294 N.E.2d at 877.
United National contends, however, that this novel right derives from its unilateral reservation of rights letter.1 Despite the majority’s characterization that courts universally allow recoupment of defense costs in response to reservation of rights letters under circumstances similar to those present in the instant case, in actuality “[tjhere is a difference of opinion as to whether an insurer may reserve the right to reimbursement of defense costs [with a unilateral reservation of rights letter]. Under one view, an insurer has no right to payment for such costs under a policy, and the creation of such a right [by way of a unilateral reservation of rights letter] ... amount[s] to a pro tanto supersession of the policy without separate agreement and separate consideration.” 14 George J. Couch on Insurance § 202:40, at 202-98-99 (3d ed.1999) (footnote and citations omitted).
Further, one of the most recent cases discussing this issue has expressly held that “a unilateral reservation of rights letter cannot create rights not contained in the insurance policy.” Texas Ass’n of Counties County Gov’t Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128, 131 (Tex.2000) (citing Shoshone First Bank v. Pac. Employers Ins. Co., 2 P.3d 510, 515-16 (Wyo.2000) (rejecting the notion that the insurer could base a right to recover defense costs on a letter and stating “we will not permit the contract to be amended or altered by a reservation of rights letter”)). As SST points out, it never assented to any attempt on United National’s part to amend its insurance policy, which, as explained above, did not grant United National the right of recoupment it seeks to exercise.
United National contends, however, that it does not seek to amend the insurance contract, but rather that the unilateral reservation of rights letter formed a new contract. The majority opinion embraces United National’s unpersuasive argument that an entirely new contract was entered into based upon nothing more than the reservation of rights letter unilaterally generated by United National. Specifically, United National contends that the letter constituted an implied-in-fact agreement, separate and apart from the underlying contract. However, set-*926tied law and clear policy considerations warrant that this argument be rejected.
“A contract may either be express or implied-in-fact.” Campanella v. Commerce Exch. Bank, 139 Ohio App.3d 796, 745 N.E.2d 1087, 1095 (2000) (citation omitted). The difference between the two is the form of proof used to show their existence. Express contracts are proved by way of “express written and oral statements” manifesting offer and acceptance of an agreement, and a meeting of the minds between or among the parties. Id. On the other hand, “[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.” See Lucas v. Costantini, 13 Ohio App.3d 367, 469 N.E.2d 927, 929 (1983) (citation omitted); see also Campanella, 745 N.E.2d at 1095 (“In implied-in-fact contracts, the parties’ meeting of the minds is shown by the surrounding circumstances including the parties’ conduct and declarations, making it reasonably inferable that the parties intended to create binding and certain obligations.”).
United National contends, and the majority opinion agrees, that the circumstances surrounding the unilateral reservation-of-rights letter demonstrate that the parties intended to enter into a binding agreement. Specifically, United National contends that after it sent the reservation of rights letter to SST, the latter did not object to the terms explicated in the letter and accepted United National’s payment of the defense costs. United National therefore attempts to use SST’s silence to bind it. However, “in the usual situation an offeror cannot cause the silence of the offeree to constitute an acceptance.... ” Berjian v. Ohio Bell Tel. Co., 54 Ohio St.2d 147, 375 N.E.2d 410, 414 (1978); see also Matagorda County, 52 S.W.3d at 132 (“as a general rule, ‘silence and inaction will not be construed as an assent to an offer ....’”) (quoting 2 Williston on Contracts § 6:49 (4th ed.1991)). Moreover, while there are exceptions to this general rule, strong policy considerations militate against allowing an insurer to unilaterally declare that it can recoup the costs of defending an insured where it is later determined that the underlying insurance policy did not cover the claim(s) asserted against the insured. As the Third Circuit has explained:
A rule permitting such recovery would be inconsistent with the legal principles that induce an insurer’s offer to defend under reservation of rights. Faced with uncertainty as to its duty to indemnify, an insurer offers a defense under reservation of rights to avoid the risks that an inept or lackadaisical defense of the underlying action may expose it to if it turns out there is a duty to indemnify. At the same time, the insurer wishes to preserve its right to contest the duty to indemnify if the defense is unsuccessful. Thus, such an offer is made at least as much for the insurer’s own benefit as for the insured’s. If the insurer could recover defense costs, the insured would be required to pay for the insurer’s action in protecting itself against the es-toppel to deny coverage that would be implied if it undertook the defense without reservation.
Terra Nova Ins. Co., Ltd. v. 900 Bar, Inc., 887 F.2d 1213, 1219-20 (3d Cir.1989) (citations omitted).
Further, although SST accepted the funds in the instant case, it also vigorously defended its position in the district court and in this Court that United National indeed had a duty to pay SST’s legal fees. United National cannot claim that there truly was a meeting of the minds on the issue of whether SST intended to reimburse United National for paying SST’s *927attorney fees when SST vigorously contended that United National had a duty to pay those fees in the first place. Cf. Matagorda County, 52 S.W.3d at 133 (holding that there was no meeting of the minds to establish an implied-in-faet contract where the insured had consistently contested the insurer’s position regarding coverage and insisted that the insurer pay under the policy).
United National clearly had other options available to it when SST requested that United National pay its attorney fees if United National believed that it had no duty to defend against the patent action. For example, United National simply could have refused to defend SST. However, in its efforts to protect itself from a potential breach of contract claim, it chose not to do so. United National should not now be allowed to force a duty onto SST that the parties did not bargain for in the underlying insurance contract. As one court wrestling with this issue aptly explained:
The question as to whether there is a duty to defend an insured is a difficult one, but because that is the business of an insurance carrier, it is the insurance carrier’s duty to make that decision. If an insurance carrier believes that no coverage exists, then it should deny its insured a defense at the beginning instead of defending and later attempting to recoup from its insured the costs of defending the underlying action. Where the insurance carrier is uncertain over insurance coverage for the underlying claim, the proper course is for the insurance carrier to tender a defense and seek a declaratory judgment as to coverage under the policy. 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. Furthermore, endorsing such conduct is tantamount to allowing the insurer to extract a unilateral amendment to the insurance contract. If this became common practice, the insurance industry might extract coercive arrangements from their insureds, destroying the concept of liability and litigation insurance.
Shoshone First Bank, 2 P.3d at 516 (quoting America States Ins. Co. v. Ridco, Inc., Riddles Jewelry, Inc., and Ken B. Berger, Civ. No. 95CV158D (D.Wyo.1999)) (emphasis added). As the above quote demonstrates, the result reached by the majority opinion — a result that is not required under Ohio law — opens the door to bad policy and future coercive practices by insurance companies. Id.
Of course, Ohio courts do enforce reservations of rights, and this is not to suggest otherwise. See, e.g., Turner, 638 N.E.2d at 179. However, the point here is simply that the insurer cannot pursue recoupment of rights when the insured did not preserve the right to do so in the underlying insurance contract. In fact, the insurer in the instant case was so unsure of its legal rights and obligations that it sought clarification of its duties by filing a declaratory judgment action.
Because the underlying insurance contract involved in this case did not provide for recoupment of attorney fees and no implied-in-fact contract was formed by way of United National’s unilateral reservation of rights letter, United National is not entitled to recoup the costs it paid in defending SST. Moreover, strong policy considerations support our refusing to expand Ohio insurance law to find rights to re-coupment of attorney fees where such rights, at a minimum, do not even exist in the insurance contract. Because the ma*928jority reaches the contrary conclusion, I respectfully dissent.

. The reservation of rights letter stated in pertinent part: "United National reserves the right to recoup from SST Fitness 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 [patent] suit.” (J.A. at 114— 15.)