Academic journal article Defense Counsel Journal

Insurance Law - Frank's Casing's Effect on Reimbursement of Settlement and Defense Costs in Texas

Academic journal article Defense Counsel Journal

Insurance Law - Frank's Casing's Effect on Reimbursement of Settlement and Defense Costs in Texas

Article excerpt

IMAGINE that you are a business owner. One of your employees badly injures himself while on your premises. He sues you for hundreds of thousands of dollars. Both parties enter into settlement negotiations. You thank your lucky stars that you have insurance that might cover this claim, but you and your insurer dispute over whether this claim is covered under your insurance policy. If the claim is covered, your insurer must pay the settlement amount. If the claim is not covered, you must pay the settlement amount. The insurance policy does not allow you to consent to settlement, which means that the insurer has control of approving the settlement amount. The injured employee offers to settle for an amount within your policy's limit. Even though you have no right to consent to the settlement amount, you agree that this amount is reasonable. Before the coverage dispute is determined, your insurer settles the case. Your insurer unilaterally reserves its right to seek reimbursement from you if a court later determines that coverage does not exist, even though your insurance policy says nothing about reimbursing your insurer for settling non-covered claims. After your insurer pays the settlement, a court later determines that the claim is not covered.

Now your insurer wants you to reimburse it for the settlement amount it paid on your behalf. Prior to the summer of 2005, you would not have to reimburse your insurer. (1) You paid a premium to pass certain risks to your insurer, and you had absolutely no control over settlement negotiations. It would be unfair to be forced to reimburse your insurer for a settlement amount to which you could not consent.

Before May 2005, the insurer would not be entitled to reimbursement of settlement costs, but today, the outcome is less clear because of a recently decided Texas Supreme Court case. In May 2005, the Texas Supreme Court in Excess Underwriters at Lloyd's, London v. Frank's Casing Crew & Rental Tools ("Frank's Casing") ruled that an insurer is entitled to reimbursement of settlement costs in certain circumstances. (2) This decision caused significant concern among insurers, insureds, and defense attorneys regarding the settlement-reimbursement question.

The purpose of this comment is to discuss the settlement-reimbursement question in light of Frank's Casing and address its effect on an insurer's ability to recoup defense costs expended on its insured for a non-covered claim. Section I discusses the settlement-reimbursement question in Texas. It begins by examining the supreme court's treatment of the settlement-reimbursement question before Frank's Casing. Next, it discusses the supreme court's decision in Frank's Casing and its reliance on the majority view in recognizing an implied right to reimbursement in insurance contracts. This section also provides an overview of criticisms and reactions arising from the Frank's Casing decision and general guidance to a practicing attorney in analyzing the settlement-reimbursement question in light of Frank's Casing.

Section II discusses Frank's Casing's effect on the defense-reimbursement question, which the supreme court has not addressed. The issue raised after Frank's Casing is whether the insurer is entitled to reimbursement of defense costs if a court later finds no coverage. This section examines the majority and minority views in other jurisdictions, concluding that the Texas Supreme Court will likely adopt the majority view and entitle an insurer reimbursement of defense costs for a non-covered claim in the same way it adopted the majority view on the settlement-reimbursement question.

I. Frank's Casing's Effect on Reimbursement of Settlement Costs

A. Pre-Frank's Casing: No Implied Right to Reimbursement

Prior to Frank's Casing, no implied right to reimbursement existed in Texas. (3) The Texas Supreme Court established this proposition in Texas Association of Counties County Government Risk Management Pool v. …

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