Why it matters

A federal district judge in Minnesota rejected an insurer’s effort to recover a portion of the money it paid to resolve a class action suit on behalf of its insured. The court held that there was no agreement that would entitle the insurer to such reimbursement. When the underlying litigation settled, the insurer agreed to pay 33 percent of the total fund. The insured later sued the insurer to recover additional defense payments, and the insurer countersued, claiming it had overpaid and was entitled to a refund. This decision concerned the insured’s motion for summary judgment concerning the insurer’s reimbursement claim. The court found no evidence that the insurer conditioned its payment on a subsequent reapportionment of the settlement, much less that the insured acquiesced to such an agreement.

Detailed Discussion

Select Comfort, the maker of the Sleep Number bed, faced a putative class action alleging that the plaintiffs suffered health problems from mold in beds purchased over a roughly 18-year period.

Select Comfort requested defense coverage for the suit from several insurers with whom it held liability policies during the time period, including Arrowood.

Arrowood, which sold policies to Select Comfort for 2 of the 18 relevant years, accepted the tender with a reservation of rights. The insured hired its own defense counsel and argued that the reservation of rights created a conflict converting Arrowood’s obligation into a duty to pay Select Comfort’s reasonable attorney’s fees and costs.

Select Comfort reached a settlement agreement with the plaintiffs in the underlying litigation after successfully resisting class certification. Arrowood agreed to pay 33 percent of the settlement, and Arrowood and two other insurers paid about half of the defense costs.

Select Comfort then filed suit seeking to recover the roughly $500,000 in defense costs not paid by the insurers. Arrowood responded with a counterclaim for reimbursement of what the insurer argued was an overpayment of its fair portion of the underlying settlement.

Granting Select Comfort’s motion for summary judgment on Arrowood’s counterclaim, the court found no evidence that Arrowood conditioned its payment on a subsequent ability to seek reapportionment of the settlement, much less that the insured assented to such an arrangement.

Arrowood argued that, under Minnesota law, it was responsible for only a pro rata portion of the claims, that it provided insurance in only 2 of the 18 years at issue, and that its liability thus should have been capped at two-eighteenths of the settlement, rather than the 33 percent it actually paid.

The court ruled that, even if the insurer correctly stated Minnesota allocation law, its reimbursement cause of action necessarily had to be founded on contract, not equity. The contracts, however, “contain no provision, and contemplate no ground, on which an amount paid by Arrowood in fulfillment of [its] obligations could later be extracted from Select Comfort and returned to Arrowood.” Although the parties could have agreed to condition the insurer’s participation in the settlement on a later reapportionment, they elected not to do so.

“Arrowood may only maintain its counterclaim if it can show a genuine issue of material fact with respect to whether the parties mutually agreed that Arrowood’s payment towards [the settlement] was subject to a right of reimbursement from Select Comfort,” the court said. “It cannot. There is no evidence in the record before the Court that Select Comfort consented to any such condition, nor even that Arrowood ever sought such consent from Select Comfort.”

The insurer’s reservation of rights letter, which stated that “Arrowood may advance legal fees, court costs, expert expenses, settlement payments, or payments to satisfy a judgment, and then seek reimbursement of such sums from Select Comfort on the ground that it had no obligation to make those payments in the first place,” was insufficient, court explained.

“Arrowood cannot create a right to reimbursement from its insured by unilateral declaration,” the judge wrote. “[T]he undisputed facts show that the parties negotiated the division of [the settlement] between themselves. Arrowood agreed to, and did, pay 33 percent. There is no evidence that Arrowood conditioned that payment on a subsequent re-apportionment of the settlement between itself and Select Comfort, much less that Select Comfort assented to such an arrangement.”

To read the opinion in Select Comfort Corp. v. Arrowood Indemnity Co., click here.