In United States Fidelity & Guarantee Company v. United States Sports Specialty Association, 270 P.3d 464 (Utah 2012), the Supreme Court of Utah held that an insurer is not entitled to seek reimbursement or restitution unless the insurer’s right is expressly provided in the policy. The Court specifically rejected following the law of those jurisdictions that allow reimbursement through an extracontractual claim of unjust enrichment.
The dispute arose under somewhat unusual circumstances, but reflects a common situation in which the insurer, having defended under a reservation of rights, offers to settle the claim against the insured, but wants to maintain its reservation of rights to deny that coverage exists and pursue coverage litigation against the insured to seek reimbursement. “No way,” I often say.
Assuming that the insurer has been placed in the position of having an opportunity to settle within policy limits where the risk of not settling is conceivably well above its policy limits, the insurer should be desperate to eliminate the risk that its coverage defenses will not protect it if the plaintiff scores a huge verdict. So, being a typical insurer, it wants to have its cake and eat it, too. It wants to settle for its own benefit, i.e., limit its risk, but it wants to preserve its right to prove up its coverage defense and get the money back from the policyholder.
Invariably, the only real bargaining chip the policyholder has is before the settlement. It needs to refuse to give the insurer the right to pay “over” its reservation of right and still deny coverage. So, my advice to policyholders is, take a cue from the United States Sports Specialty Association (“USSSA”) and “stand firm.”
In the USF&G v. USSSA case, a seven-year-old spectator was struck in the head with a bat during an adult softball game sponsored by USSSA. The liability policy issued by USF&G was approximately $2 million. Jury awarded roughly $6.1 million against USSSA. Initially, USF&G contended it was only liable up to its $2 million policy limit. USSSA, however, argued that USF&G should pay the entire judgment , alleging USF&G had conducted its defense in bad faith, as demonstrated by conflicts of interest, failure to communicate, refusal to accept settlement offers within policy limits, and other misconduct. Ultimately, USF&G paid the entire judgment under a “unilateral reservation of rights.” USSSA never agreed to any reservation and refused to sign the settlement agreement.
USF&G urged the court to follow the analysis in Blue Ridge insurance Company v, Jacobsen, 25 Cal.4th 489, 22 P.3d 313 (2001), which had allowed restitution under a theory of “unjust enrichment.” The Court rejected the California case and found the reasoning set forth in Excess Underwriters at Lloyd’s London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42 (Tex. 2008), to be more persuasive, finding that allowing recovery under an equitable theory of “unjust enrichment” is generally inconsistent with the terms of an express contractual agreement. Obviously, if the insurer wanted to preserve a right to pay settlements and seek reimbursement, it should have put it in writing. As the Court so aptly concluded:
“The right of an insurer to recover reimbursement from its insured distorts the allocation of right unless it has been specifically bargained for… an insurer’s claim to an unbargained-for right to reimbursement from its insured presents a perverse manipulation of risk that has no place in our law.”