The First Circuit recently affirmed the decision of the United States District Court for the District of Maine to deny American National Fire Insurance Company’s (“ANFIC”) plea for recoupment of a settlement payment made by ANFIC to York County Jail. ANFIC argued that it was entitled to a per-claim deductible, which negated its settlement payment. The First Circuit, however, held that ANFIC was not entitled to “have its cake and eat it too.” Click here for a copy of the First Circuit’s decision.

According to the decision, ANFIC and several other insurance carriers issued a series of law enforcement liability insurance policies to the York County Jail. A class action suit was filed against York County based upon its alleged practice of performing unlawful strip searches on persons arrested for misdemeanors. ANFIC and the other insurers who had issued policies during the class period negotiated an allocation whereby each insurer paid a percentage of defense costs (under the policies, defense costs did not erode the insurers’ limits of liability).

ANFIC’s original reservation of rights letter stated that it believed that the $5,000 per claim deductible would apply to each claimant, rather than one deductible for the entire class.

A series of mediation sessions was held. Although ANFIC maintained its position on the deductible issue in its first mediation session, it authorized $650,000 (of its $1 million limit) toward settlement at the second session without communicating any restrictions on contribution or mentioning that it intended to seek recoupment based on the policy’s deductible provision.

After correspondence in which it stated it would only be liable for loss in excess of $5,000 on each claim, ANFIC increased its proposed contribution to $750,000. With the money offered by ANFIC and the other insurers, York County’s counsel was able to settle the class action for $3,300,000. The district court designated 1,410 claimants to receive payments from the settlement fund. Of those claimants, only 273 had been strip searched during ANFIC’s policy period. The claimants each received approximately $1,719.08.

After the class action was over, ANFIC sued York County in Maine’s federal district court to recover the $750,000 it had contributed to the class action settlement, arguing that the funds represented deductibles which York County owed to ANFIC.

Although the district court accepted ANFIC’s per claimant reading of its policy deductible, the court denied ANFIC’s recovery based upon both accord and satisfaction and equitable estoppel.

The First Circuit agreed that ANFIC was precluded from seeking recovery based on the doctrine of equitable estoppel. Applying Maine law, the First Circuit found that both elements of an equitable estoppel claim had been met (unreasonable conduct that misleads the insured concerning the scope of coverage, and justifiable and detrimental reliance by the insured on such conduct).

The First Circuit noted that ANFIC’s agreement to make the $750,000 contribution to class settlement without any contemporaneous mention of the deductible or any renewal of its rights was unreasonably deceptive and its conduct lead York County to reasonably believe that any issue about the deductibles “had been swallowed up in the global settlement.”

Furthermore, the First Circuit upheld the finding that York County suffered a detriment, noting that the county might not have otherwise acquiesced in the settlement.

The First Circuit did not reach the issue of accord and satisfaction due to its finding that ANFIC was equitably estopped from seeking reimbursement of the deductible.