Matagorda County v. Texas Ass'n of Counties County Government Risk Management Pool

• Court: Texas Court of Appeals
• Writing for the Court: Before SEERDEN; SEERDEN
• Citation: Matagorda County v. Texas Ass'n of Counties County Government Risk Management Pool, 975 S.W.2d 782 (Tex. App. 1998)
• Decision Date: 20 August 1998
• Docket Number: No. 13-97-074-CV,13-97-074-CV
• Parties: MATAGORDA COUNTY, Texas and Keith Kilgore, Appellants, v. TEXAS ASSOCIATION OF COUNTIES COUNTY GOVERNMENT RISK MANAGEMENT POOL, Appellee.

Page 782

975 S.W.2d 782

MATAGORDA COUNTY, Texas and Keith Kilgore, Appellants, v. TEXAS ASSOCIATION OF COUNTIES COUNTY GOVERNMENT RISK MANAGEMENT POOL, Appellee.

No. 13-97-074-CV.

Court of Appeals of Texas Corpus Christi.

Aug. 20, 1998.

Robert D. Allen, Douglas R. Hafer, Baker & McKenzie, Aaron L. Mitchell, Vial, Hamilton, Koch & Knox, Dallas, for appellants Matagorda County, Texas and Keith Kilgore.

Lawrence P. Gwin, Jr., Bay City, George H. Kolb, James Michael Meredith, Dallas, Todd A. Hunter, Hunter & Handel, Corpus Christi, for appellee.

Before SEERDEN, C.J., and YANEZ and CHAVEZ, JJ.

OPINION

SEERDEN, Chief Justice.

Matagorda County and Sheriff Keith Kilgore (Collectively "the County") appeal from a judgment granting to the County's liability insurer, Texas Association of Counties County Government Risk Management Pool ("TAC"), reimbursement for the costs of defense and settlement of a federal lawsuit against the County by prisoners complaining of jail conditions. The County raises nine points of error complaining, among other things, that no right to reimbursement exists. We reverse and render judgment in favor of the County.

Since the late 1980s, TAC has provided law enforcement liability insurance to Matagorda County, protecting the County against claims for personal injury, bodily injury, property damage, and violation of civil rights. However, since 1991, TAC has included an endorsement to its policy specifically excluding from coverage any claim "arising out of jail." In 1993, three prisoners from the Matagorda County jail sued the County in federal court for damages arising out of assaults that occurred in the jail.

The County promptly requested coverage and defense by TAC as provided in the insurance policy in connection with these claims. TAC disputed coverage and brought the present action against the County asking for a declaratory judgment that the claims were not covered by TAC's policy. Nevertheless, TAC provided a defense to the County against the prisoner's lawsuit, while still reserving its right to challenge coverage.

On September 18, 1995, TAC informed the County that it had received, and intended to accept, a settlement offer of $300,000. TAC further stated that it would, if coverage were decided in TAC's favor, seek to recover the full settlement amount from the County. In early 1996, TAC settled the prisoner's lawsuit in accordance with the offer.

TAC then amended its declaratory judgment action to request reimbursement of the amount of its defense and settlement costs associated with the federal lawsuit against the County. The trial court granted a partial summary judgment finding that the TAC policy excluded the federal lawsuit from coverage. After a trial on various defenses asserted by the County, the jury returned a verdict finding that the County had accepted the jail exclusion endorsements and was estopped from claiming that it was unaware of such endorsements. The trial court then entered a final judgment granting TAC recovery of both its $300,000 settlement payment and $53,522.15 in attorney's fees paid by TAC for defending the federal lawsuit, interest, attorney's fees and costs in connection with the present lawsuit.

By its first point of error, the County complains that TAC had no right to reimbursement for either defense costs or the cost of settling the federal lawsuit. There was no mention in the insurance policy itself of a right to either form of reimbursement, nor does TAC contend that the policy conferred such rights. Accordingly, we look outside the policy to determine whether TAC has any rights to reimbursement.

Reimbursement of Defense Costs

With regard to defense costs, we have found no Texas cases that would recognize such a right to reimbursement. However, those state and federal courts that have examined the issue have generally denied the right of an insurer to seek reimbursement of defense costs for uncovered claims unless the insurer's reservation of rights letter specifically notified the insured that reimbursement of defense costs would later be sought and thus created a quasi-contractual duty to reimburse.

In Buss v. Superior Court, 16 Cal.4th 35, 65 Cal.Rptr.2d 366, 939 P.2d 766, 776-78 & 784 n. 27 (1997), the California Supreme Court found a quasi-contractual right of a liability insurer to collect from its insured reimbursement for defense costs of certain claims only if the insurer specifically reserved its right to seek reimbursement of defense costs at or before the time it provided a defense. See also Resure, Inc. v. Chemical Distributors, Inc., 927 F.Supp. 190, 194 (M.D.La.1996), aff'd, 114 F.3d 1184 (5 th Cir.1997) (under New Mexico law specific reservation of right is required to seek reimbursement of defense costs).

Similarly in Knapp v. Commonwealth Land Title Insurance Co., 932 F.Supp. 1169, 1172 (D.Minn.1996), a Minnesota federal court concluded that, only when the insurer's reservation of rights letter clearly indicates its intention to later seek reimbursement for defense costs does the insured's silent acceptance of the defense provided by the insurer constitute an implied agreement to the reservation of rights and entitle the insurer to reimbursement of attorney's fees and costs.

Reimbursement of defense costs is not allowed when the reservation of rights letter is silent about reimbursement and the record does not reflect an agreement or understanding that the insured would reimburse if later it was determined there was no duty to defend. Michaelian v. State Compensation Insurance Fund, 50 Cal.App.4th 1093, 58 Cal.Rptr.2d 133, 144 n. 8 (1996); In re Hansel, 160 B.R. 66, 70 (Bankr.S.D.Tex.1993) (applying Texas law); see also Terra Nova Insurance Co. v. 900 Bar, Inc., 887 F.2d 1213, 1219-20 (3 rd Cir.1989) (concluding generally, under Pennsylvania law, that even when the insurer defends under a reservation of rights letter, it may not later recover costs expended in defending the insured, on the ground that the insurer's provision of a defense is as much for its own benefit as for the insured's).

Texas, like other states, recognizes certain rights to reimbursement under theories of implied and quasi-contract, which are often considered together or even synonymous with other equitable theories of unjust enrichment and quantum meruit, all of which generally allow restitution of benefits conferred on a party that it would be unjust for him to retain. See PIC Realty Corp. v. Southfield Farms, Inc., 832 S.W.2d 610, 614 (Tex.App.--Corpus Christi 1992, no writ); City of Corpus Christi v. S.S. Smith & Sons Masonry, Inc., 736 S.W.2d 247, 250 (Tex.App.--Corpus Christi 1987, writ denied); La Chance v. Hollenbeck, 695 S.W.2d 618, 620 (Tex.App.--Austin 1985, writ ref'd n.r.e.); Berger Engineering Co. v. Village Casuals, Inc., 576 S.W.2d 649, 652 (Tex.Civ.App.--Beaumont 1978, no writ).

Specifically, quantum meruit is an equitable theory of recovery which is based on an implied agreement to pay for benefits received. Vortt Exploration Co. v. Chevron U.S.A., Inc., 787 S.W.2d 942, 944 (Tex.1990). To recover under the doctrine of quantum meruit, a plaintiff must establish that: 1) valuable services and/or materials were furnished, 2) to the party sought to be charged, 3) which were accepted by the party sought to be charged, and 4) under such circumstances as reasonably notified the recipient that the plaintiff, in performing, expected to be paid by the recipient. Id.; Heldenfels Bros., Inc. v. City of Corpus Christi, 832 S.W.2d 39, 41 (Tex.1992); The Cadle Co. v. Butler, 951 S.W.2d 901, 914 (Tex.App.--Corpus Christi 1997, no writ).

Similarly, a party may recover under the unjust enrichment theory when one person has obtained a benefit from another by fraud, duress, or the taking of an undue advantage. Heldenfels Bros., 832 S.W.2d at 41-42. Unjust enrichment is not a proper remedy merely because it might appear expedient or generally fair that some recompense be afforded for an unfortunate loss to the claimant, or because the benefits to the person sought to be charged amount to a windfall. Id. For a person to be entitled to restitution under a theory of unjust enrichment, he must also show that the person sought to be charged had wrongfully secured a benefit or had passively received one which it would have been unconscionable to retain. S.S. Smith & Sons Masonry, 736 S.W.2d at 250.

When Texas law of quasi-contract, unjust enrichment, and quantum merit is applied to the right of an insurer to seek reimbursement of a voluntarily provided defense, it seems clear that we must follow the same logic as used in federal and sister states' courts. Absent specific notice to the insured that he may later be charged for these costs, the insurer has no right to reimbursement.

In the present case, TAC's September 8, 1995, reservation of rights letter to the County stated, in relevant part:

This letter notifies you about certain coverage conditions and exclusions and informs you that a defense will be provided to you under [the insurance policy], subject to a "reservation of rights," meaning the Pool reserves its right to contend that the allegations in the Complaint may not be covered under the coverage document.

Although this letter further encouraged the County to consult with its own attorney concerning coverage, it did not contain any suggestion that TAC would attempt to recover its costs of defense if coverage were decided against the County. Accordingly, we conclude that TAC failed to reserve any right to reimbursement of defense costs and that the County is not liable for such costs.

Reimbursement of Settlement Costs

With regard to the recovery of settlement costs, theories of quantum meruit and unjust enrichment do not apply if the insured's settlement with the claimant bypasses the insured and does not require its acceptance or approval. See Heldenfels Bros., 832 S.W.2d at 41-42; Vortt, 787 S.W.2d at 944; see also Argonaut...