On December 30, 2015, the First District Court of Appeals reached a decision without precedent in Ohio courts when it affirmed an order that required the policyholder to repay its insurer more than $11.7 million in defense costs, together with interest, which the insurer had paid before the First District determined that it had no duty to defend. See Chiquita Brands Intl., Inc. v. Natl. Union Fire Ins. Co., 1st Dist. Hamilton No. C-140492, 2015-Ohio-5477 (“Chiquita”). The question is whether, in the wake of Chiquita, insurers possess a broad “right” of reimbursement under Ohio law or whether that alleged right is far more limited. The answer clearly is the latter, given that the First District confined its decision to “the particular facts of this case” and further described it as “narrow.” It is nonetheless important for policyholders and brokers to understand the rationale of the First District’s decision and how it could impact defense coverage.
The Background Facts. The case originated from a dispute regarding insurance coverage for certain underlying tort actions brought against Chiquita. After the trial court declared that National Union owed Chiquita a duty to defend, National Union began making defense cost payments. Each payment, except one, was accompanied by a letter stating that National Union reserved its right to seek reimbursement of the payment. More than three years later, the First District reversed and remanded the matter to the trial court to decide whether National Union was entitled to recoup the defense payments it made before the First District determined it had no duty to defend. On remand, the trial court ordered Chiquita to repay the defense payments, finding that (i) Chiquita’s acceptance of payments from National Union without objecting to its reservation-of-rights letters created an implied-in-fact contract for reimbursement; and (ii) National Union was entitled to restitution as the prevailing party on appeal. The First District affirmed the trial court’s judgment.
Implied-in-Fact Contract Theory. In reaching its decision, the First District rejected the trial court’s determination that an implied-in-fact contract had been created by Chiquita’s acceptance of defense payments without objecting to National Union’s reservation of its right to reimbursement. According to the First District, the record did not show that “Chiquita ever agreed that National Union should be entitled to recoupment of defense costs in the event that a court determined that National Union had no duty to defend”; rather, Chiquita’s “acceptance of defense-cost payments was clearly premised on its position that the payments were due under the terms of the policies, and not on an ‘acceptance’ of the terms contained in National Union’s accompanying letters.” Significantly, this holding erodes the federal Sixth Circuit Court of Appeal’s conclusion in United Natl. Ins. Co. v. SST Fitness Corp, 309 F.3d 914 (6th Cir.2002), that, under Ohio law, an implied-in-fact contract may be created when a policyholder accepts defense payments from its insurer without objecting to the insurer’s reservation of its right to reimbursement.
Restitution Theory. While rejecting reimbursement based on an implied-in-fact contract theory, the First District agreed with the trial court that National Union was entitled to repayment under a restitution theory. A discussion of the reasons why this conclusion contravenes Ohio insurance coverage law is beyond the scope of this article; however, the dissenting judge explains some of these reasons in his separate opinion. Important to the discussion herein is the fact that the First District felt compelled to include a separate section in its opinion entitled, “Our Holding is a Narrow One.” In that section, the First District wrote:
"Based on the particular facts of this case, National Union is entitled to restitution of its defense costs and interest payments. But our holding is a narrow one. Specifically, where (1) an insurer does not provide a defense until after a court has entered judgment declaring that the insurer has a duty to defend, (2) the insured demands that the insurer provide a defense, (3) the insurer provides the defense under a reservation-of-rights stating that it may seek to be reimbursed, and later (4) an appellate court determines that a duty-to-defend never existed, then (5) the insurer is entitled to be reimbursed for its defense-cost expenditures under a theory of restitution."
Thus, the First District unequivocally expressed its intention to diminish the impact of Chiquita on other cases. It did not broadly grant insurers a right to reimbursement of defense costs under most circumstances.
The Chiquita decision is a mixed bag for policyholders. On the one hand, it implicitly rejects the implied-in-fact contract theory for reimbursement employed by the Sixth Circuit in SST Fitness, thereby narrowing the potential ways by which a policyholder may be required to repay its insurer for defense payments. On the other hand, it allows an insurer, under very limited circumstances, to recoup defense payments on a restitution theory, even though the insurance policy does not contain a provision allowing for recoupment.
In light of Chiquita, policyholders and brokers would be well-advised to:
• Keep in mind that Chiquita is controlling law only in the First District and, therefore, is subject to challenge in other Ohio appellate districts;
• Continue to object in writing to any reservation-of-rights letter in which an insurer purports to reserve its “right” to reimbursement of defense costs, thereby impairing an insurer’s ability to argue for reimbursement on an implied-in-fact contract theory; and,
• Be cognizant of the Chiquita decision and, if possible, take action to avoid falling within its “narrow” holding.