Lead Opinion
delivered the opinion of the Court
In this case, we decide whether the Texas Association of Counties County Government Risk Management Pool (TAC) may obtain reimbursement from its insured, Matagorda County, for an amount that TAC paid to settle a claim that was later determined to be excluded from coverage. The trial court ruled that TAC was entitled to reimbursement, but the court of appeals reversed.
I
Since the late 1980s, TAC has provided law-enforcement-liability insurance to Ma-tagorda County.
In 1993, inmates armed with razor blades physically and sexually assaulted three other prisoners (collectively “the Coseboon plaintiffs”). The Coseboon plaintiffs sued Matagorda County and its sheriff, Keith Kilgore (collectively “the County”), both of whom demanded that TAC defend and indemnify them under the law-enforcement-liability insurance policy. TAC initially denied coverage because of the jail exclusion. But after negotiations with the County, TAC agreed to pay the defense costs of the counsel that the County had retained to represent it in the Cose-boon suit, subject to a reservation of rights to continue to deny coverage. Also, TAC filed this suit seeking a declaratory judgment that the claims were not covered. The County asserted that the claims were covered, and filed several counterclaims against TAC.
In 1995, the Coseboon plaintiffs offered to settle their lawsuit for $300,000. This demand was within the policy limits. The County’s lawyer advised TAC that the proposed settlement was reasonable and prudent, given the facts and circumstances of the case. The Matagorda county judge,
TAC then issued a second reservation-of-rights letter to the County, this time reserving its rights to continue to deny coverage and to seek reimbursement of the settlement funds from the County if the declaratory-judgment action estаblished that the Coseboon suit was not covered. The letter stated:
1. we have advised you of ongoing settlement discussions with Coseboon’s counsel;
2. you have chosen not to contribute to the funding of the settlement;
3. Jim Ludlum, your counsel, agrees with [TAC] that a $300,000 settlement of the Coseboon matter is not only not unreasonable, but prudent given the facts and circumstances [ ];
4. [TAC is not] waiving any of its rights to pursue full recovery of this settlement amount from the County ... in the declaratory judgment action;
5. the funding of this settlement by [TAC and its reinsurers] is based solely upon the recognition of the exposure inherent in the Coseboon litigation and their desire to avoid having this opportunity to settle fall through, possibly resulting in a jury verdict far in excess of the $300,000 settlement;
6. this funding should not be construed by anyone as a voluntary payment and is specifically made without prejudice to the rights of [TAC] to recover up to the entire amount as determined in [the declaratory-judgment action.]
The letter concluded:
If you have any question that the intent of [TAC] is anything other than funding settlement of the Cosboon [sic] matter and proceeding with the declaratory judgment action to recover the full amount of the funding, please advise me immediately.
The County did not respond to the letter.
The insurance agreement between the County and TAC allowed TAG to settle any claim at its own discretion, and without the County’s consent. TAC settled the Coseboon litigation for $300,000,
The case proceeded to trial on the coverage dispute. The trial court ruled that the jail exclusion was not ambiguous, and a jury resolved the remaining issues in TAC’s favor. The trial court rendered a declaratory judgment for TAC and awarded recovery of its $300,000 settlement payment, together with interest, attorneys’ fees, and costs. The court of appeals concluded that no equitable remedy allowed TAC to recover the settlement funds, and
II
Whether an insurer
A
Implied Consent to Reimburse
TAC contends that the County’s silence in response to its reservation-of-rights letter, together with the County’s stipulation acknowledging no dispute as to the settlement’s reasonableness, establishes an implied-in-fact contractual obligation for the County to provide reimbursement. For a number of reasons, we disagree.
First, a unilateral reservation-of-rights letter cannot create rights not contained in the insurance policy. See Shoshone First Bank v. Pac. Employers Ins. Co.,
TAC contends that the County implicitly agreed to reimburse the settlement funds by not responding to TAC’s reservation-of-rights letter. But as a general rule, “silence and inaction will not be construed as an assent to an offer,” 2 Willi-ston on CONTRACTS § 6:49 (4th ed.1991), and none of the narrow exceptions to this general rule apply in this case. TAC cites our decision in Preston Farm & Ranch Supply, Inc. v. Bio-Zyme Enters.,
[TJhere is evidence of a course of conduct which gave rise to an agreement to pay interest. The record reflects that the parties had extensive dealings with one another. Altogether twenty separate sales were made from Bio-Zyme to [Preston], The sales continued for over a year, and [Preston] received a statement each month containing the service charge provision.... [Preston] continued [the] credit purchases and ... continued to accept the goods.... No objections to the service charges in question were ever made. To the contrary, Preston Farm paid [the service charges].... By [Preston’s] continued purchases and payments [it] at least impliedly agreed to pay the specified interest.
Id. at 298 (emphasis added).
The Court recognized this distinction in Triton Oil and Gas Corp. v. Marine Contractors and Supply, Inc.,
TAC purports to find support for its implied contract theory in Western Casualty & Surety Co. v. Newell Mfg. Co.,
There is a difference between an insurer’s reservation of its right to disclaim coverage, which occurred here, and an agreement by the insured that he will reimburse the insurer for any reasonable settlement, which did not occur here. An insurer’s reservation of rights is the notification to the insured that the insurer will defend the insured, but that the insurer is not waiving any defenses it may have under the policy, and it protects an insurer from a subsequent attack on its coverage position on waiver or estoppel grounds.
Medical Malpractice Joint Underwriting Ass’n v. Goldberg,
Moreover, a meeting of the minds is an essential element of an implied-in-fact contract. See Haws & Garrett Gen. Contractors, Inc. v. Gorbett Bros. Welding Co.,
TAC relies upon the County’s failure to dispute the settlement’s reasonableness to support a reimbursement right. But the mere fact that the County did not dispute the settlement’s reasonableness does not imply that it agreed to reimburse TAC should TAC decide to accept the settlement and then later prevail on its coverage defense. Accord Goldberg,
We hold that the County’s agreement to reimburse TAC for funds paid to settle the Coseboon suit cannot be implied from this record. We now consider whether the cirсumstances presented will support imposing upon the County an equitable reimbursement obligation.
B
Equitable Rights to Reimbursement
TAC argues that we should apply the doctrine of equitable subrogation to support its reimbursement claim. Typically, an insurer paying a claim under a policy is equitably subrogated to any claim the insured may have against a third party responsible for the insured’s injury. In
As the court of appeals recognized, allowing an insurer to unilaterally settle claims and then step into the shoes of the claimant could potentially foster conflict and distrust in the relationship between an insurer and its insured.
Finally, TAC argues that it is entitled to recover under the intertwined quasi-contractual theories of quantum meruit and unjust enrichment. We agree with the court of appeals that these equitable theories do not apply in the circumstances presented. See
TAC claims that the Fifth Circuit has recognized a reimbursement right under Texas law in two cases. In the first, the court held that an excess insurer was not estopped by its participation in a settlement from seeking reimbursement of its retained limit “[i]n accordance with the provisions of the ... policy....” Arkwright-Boston Mfrs. Mut. Ins. Co. v. Aries Marine Corp.,
Ill
TAC contends that denying a reimbursement right places insurers faced with a reasonable settlement offer within policy limits in an untenable position. We recognize that, however the issue is resolved, either insurers or insureds will face a difficult choice when coverage is questioned. But an insurer in such a situation that cannot obtain the insured’s consent may, among other options, seek prompt resolution of the coverage dispute in a declaratory judgment action, a step we have encouraged insurers in TAC’s position to take. See State Farm Fire & Cas. Co. v. Gandy,
Requiring the insurer, rather than the insured, to choose a course of action is appropriate because the insurer is in the business of analyzing and allocating risk and is in the best position to assess the viability of its coverage dispute. See id.;
IV
Conclusion
We hold that the County’s consent to reimburse TAC’s settlement costs cannot be implied from this record, and no equitable remedy will support a right of reimbursement under the circumstances presented. Accordingly, we affirm the court of appeals’ judgment.
Notes
. Local Government Code Chapter 119 allows Texas counties to form a risk management pool to insure participating counties against liability for the acts and omissions of the counties and their officials and employees. Tex Loc. Gov’t Code § 119.002. The Texas Association of Counties County Government Risk Management Pool was created under Chapter 119 and also Texas Government Code Chapter 791. Tex. Gov’t Code §§ 791.001-.032. Although we refer to the pool as "TAC” for brevity, the pool is a distinct entity from the Texas Association of Counties, a Texas nonprofit corporation.
. The Coseboon settlement agreement suggests that the County did not participate in the settlement negotiations. The release recites that "all negotiations have taken place strictly between a representative of the insurer for [the County] and [the Coseboon plaintiffs'] counsel."
. TAC contends that it is not an insurer. It cites section 119.008 of the Local Government Code, which prоvides that a pool created under that Chapter “is not insurance for the purposes of the Insurance Code and other laws of this state.” TAC also notes that the participating counties signed an agreement and bylaws stating that “the parties recognize that the Pool is a risk management fund authorized by statute and the coverage provided is not considered insurance under the Texas Insurance Code and under other state laws.” But because TAC is acting in a capacity virtually identical to that of an insurer in this case, we treat TAC as an insurer for the limited purpose of determining whether it is entitled to reimbursement of settlement funds. We note that TAC itself relies upon insurance cases to support its position.
. TAC does not contend that it could not have included a reimbursement clause in its policy. A number of other states’ courts have upheld reimbursement clauses in insurance contracts. See, e.g., Rural Mut. Ins. Co. v. Peterson,
. An alternative approach was recognized in Maryland Cas. Co. v. Imperial Contracting Co.,
. We note that in this case, almost two years elapsed between the time TAC filed its declaratory-judgment action and the date it settled the Coseboon suit. The record reflects no effort by TAC during that time to resolve the coverage dispute.
Dissenting Opinion
joined by Justice HECHT, dissenting.
Matagorda County has been unjustly enriched in this case. It acknowledges that the amount that the Texas Association of Counties paid to settle serious claims against it was reasonable. And Matagorda County must now concede that those claims were not covered by its agreement with the Association. The County should be required to bear responsibility for its own liabilities. Because the Court does not require it to do so, I dissent.
I would hold that when an insurer reserves its right to contest coverage and there has been a settlement demand within policy limits that the insured agrees is reasonable, the insurer may settle the claim and recover settlement costs based on an obligation that is implied in law. In order to prevent unjust enrichment, obligations are implied in law even when there is no agreement, either express or implied.
I
The most cogent discussion of an insurer’s reimbursement rights when a third party’s claims against аn insured are not covered appears in a decision of the California Supreme Court. Buss v. Superior Court of Los Angeles County,
The reimbursement issue in Buss arose in a case that the court called a “mixed” action, that is, some of the claims were covered by the insured’s policy and some were not. Under California law, an insurer has a duty to defend all claims in a mixed action, including claims that are not even arguably covered. Id. at 775. But the question in Buss was whether the insured could nevertheless seek reimbursement for the costs of defending claims that were “not even potentiаlly covered” when they were joined with claims that were covered. Id. at 776. The California Supreme Court first explained that the duty to defend non-covered claims in a mixed action was not a contractual obligation. “We cannot justify the insurer’s duty to defend the entire ‘mixed’ action contractually, as an obligation arising out of the policy, and have never even attempted to do so.” Id. at 775. Instead, the court has imposed the duty to defend as an obligation of law.
But it does not follow, the California court reasoned, that the insured is entitled to benefit from a bargain that it did not make with the insurer. The court concluded that it “would not upset the [insurance] arrangement” to shift the defense costs of claims that are not covered to the insured. Id. at 776. One of the compelling reasons the court gave is that the insureds do not pay premiums for a defense of claims that are not covered:
Under the policy, the insurer does not have a duty to defend the insured as to the claims that are not even potentially covered. With regard to defense costs for these claims, the insurer has not been paid premiums by the insured. It did not bargain to bear these costs.
Id.
The court then held that a right of reimbursement is implied in law based on principles of restitution. Id. at 776-77. “[U]n-der the law of restitution such a right runs against the person who benefits from ‘unjust enrichment’ and in favor of the person who suffеrs loss thereby.” Id. at 777. The court further explained that “[e]ven if the policy’s language were unclear, the hypothetical insured could not have an objectively reasonable expectation that it was entitled to what would in fact be a windfall.” Id. In support of this conclusion, the court cited one of its earlier decisions in which it had said that if an insurer reserves the right to assert coverage issues, then it may seek reimbursement from its insured for a reasonable settlement payment. Id. (citing Johansen v. California State Auto. Ass’n Inter-Ins. Bureau,
In another decision, Maryland Casualty Co. v. Imperial Contracting Co.,
Other decisions have held that an insurer may settle a claim without the consent of the insured and then seek reimbursement for the portion of the settlement funds that are the insured’s sole obligation. In Arkwright-Boston Manufacturers Mutual Insurance Co. v. Aries Marine Corp.,
Here, Matagorda County is contractually responsible not just for a portion of the damages, but for all damages that it owed to the Coseboon plaintiffs. By definition, claims that are not covered under a policy of insurance are the responsibility of the insured. The insured should be required to contribute its full share of liability for amounts paid to settle contractually excluded claims.
Implying an obligation as a matter of law is far from unprecedented in this state’s jurisprudence. This Court has implied at least two obligations in contracts of insurance. First was the Stowers obligation, which is a duty imposed on an insurer to accept a settlement demand within policy limits if the claim is covered and an ordinarily prudent person would accept it, considering the likelihood and degree of the insured’s potential exposure to an excess judgment, See American Physicians Ins. Exch. v. Garcia,
An obligation of reimbursement should be imposed when an insured pays an amount that the insured agrees is reasonable to settle a claim that is not covered. This rule of law would preserve the respective rights and obligations of parties to an insurance contract. An insured would be responsible for liabilities it incurs that are not covered by the policy of insurance. In this case, there is no principled basis for requiring the Association rather than Matagorda County to bear the cost of settling the Coseboon litigation. There is no dispute that the amount the Association paid to settle the matter was reasonable. Matagorda County is receiving a benefit for which it did not bargain-payment of a claim that was not covered under its agreement with the Association. Matagor-da Cоunty has been unjustly e:iriched because it paid nothing to settle a serious claim against it. The Association has paid an obligation that was Matagorda County’s alone.
The Court says that an insured should not be required “to choose between rejecting a settlement within policy limits or accepting a possible financial obligation to pay an amount that may be beyond its means, at a time when the insured is most vulnerable.”
II
I agree with the Court that in this case, there was no implied-in-fact agreement be
But the Court’s opinion unnecessarily forecloses all implied-in-fact agreements between an insured and its insurer with regard to reimbursement for settlement payments. The Court says, “the insurer may fund the settlement and seek reimbursement only if it obtains the insured’s clear and unequivocal consent to the settlement and the insurer’s right to seek reimbursement.”
Implied-in-fact contracts are a species of contract. Unless there are strong public policy reasons for holding otherwise, the law of contracts applies to the relationship between an insured and its insurer. See generally State Farm Life Ins. Co. v. Beaston,
In Walbrook Insurance Co. v. Goshgarian & Goshgarian,
Other courts have held that an insured’s silence in response to an insurer’s reservation of the right to seek reimbursement оf defense costs coupled with an acceptance of the defense results in an implied agreement. See Knapp v. Commonwealth Land Title Ins. Co.,
At least one court has held that there is a right of reimbursement for defense costs under a reservation-of-rights letter without discussing the legal theory for that hold
Depending on what a particular reservation-of-rights letter says, I can perceive that there may be valid distinctions between reservation-of-rights letters that address reimbursement for settlement payments and those that address defense costs. If an insured accepts a defense or payment for defense costs after receiving a reservation-of-rights letter, that acceptance should be deemed an acceptance of the insurer’s right to reimbursement if it turns out that the claim was not covered. But silence or acquiescence to a settlement may or may not be deemed acceptance of an obligation to reimburse, depending on what the reservation-of-rights letter provided or on the parties’ conduct. If in the case before us, the County had demanded that the Association settle the Coseboon litigation after receiving the reservation-of-rights letter, I would hold that an implied-in-fact agreement arose, even if the County maintained that there was no obligation to reimburse. A demand for settlement by the County would have constituted an acceptance of the Association’s offer to settle the case with the right to seek reimbursement. See, e.g., Walbrook,
It would be more judicious for the Court to decide whether an implied-in-fact contract has arisen between an insured and its insurer on a case-by-case basis. Instead, the Court has entirely precluded the application of this aspect of contract law to insurers. The Court offers no compelling reason for that edict.
Ill
The Court does not address defense costs in today’s decision. However, the Court says at one point in its opinion that “a unilateral reservation-of-rights letter cannot create rights not contained in the insurance policy.”
In Shoshone, some of the claims against the insured were covered and some were not. The insurance company sent a reservation-of-rights letter in which it said that it intended to allocate the costs of defending the non-covered claims to the insured. The Supreme Court of Wyoming held, un-remarkably, that it would not allow allocation of costs. Id. at 514. It conсluded that it should follow the minority view, which is that an insurance company’s duty to defend includes the obligation to defend non-covered claims when they are asserted together with covered claims. Id. at 515. The reservation-of-rights letter was ineffective to alter the contractual duty to defend. Id.
The Court’s statement that a “unilateral reservation-of-rights letter cannot create rights not contained in the insurance policy” is not only overly broad, it is a misstatement. For example, an insurance company can bind itself in a reservation-of-rights letter to pay defense costs even if none of the claims against the insured are covered. An insurance company that tenders a defense but reserves only the right to assert that it has no indemnity obligation cannot seek to recover defense
Under Texas law, if an insurance company tenders a defense with a reservation of rights, the insured may either accept that defense with the reservation of rights, or it may refuse the tendered defense and defend the suit itself. Rhodes v. Chicago Ins. Co.,
It would seem that an insured should have to pay defense costs for excluded claims regardless of whether it defends itself or allows its insurance company to assume the defense with a reservation of rights. The Court does not offer any reason why, on рublic policy or other grounds, an insurer should be foreclosed from recovering defense costs if the insured accepts a defense that is tendered with a reservation of rights. Nevertheless, insurers should be on notice that today’s decision may foreshadow how the Court will decide the issue if it is presented.
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I would hold that when an insurer pays an amount that the insured agrees is reasonable to settle a claim, and a court later determines that the claim was not covered, the law imposes an obligation on the insured to reimburse the insurer. Because I would render judgment for the Texas Association of Counties on this basis, I respectfully dissent. I also take issue with the Court’s categorical holding that the law of implied contracts does not apply to the relationship between insurers and their insured.