TX Ass'n Counties Cty Gov't Risk Mgmt v. Matagorda Cty

• Decision Date: 20 October 1999
• Docket Number: No. 98-0968,98-0968
• Parties: (Tex. 2000) Texas Association of Counties County Government Risk Management Pool, Petitioner v. Matagorda County and Keith Kilgore, Respondents
• Court: Texas Supreme Court

Page 128

52 S.W.3d 128 (Tex. 2000)

Texas Association of Counties County Government Risk Management Pool, Petitioner v. Matagorda County and Keith Kilgore, Respondents

No. 98-0968

SUPREME COURT OF TEXAS

Argued October 20, 1999

Decided: December 21, 2000

Rehearing Overruled March 8, 2001

On Petition for Review from the Court of Appeals for the Thirteenth District of Texas

Justice O'Neill delivered the opinion of the Court joined by Chief Justice Phillips, Justice Enoch, Justice Baker, Justice Abbott, Justice Hankinson, and Justice Gonzales.

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. 975 S.W.2d 782. Because TAC established neither an implied-in-fact nor an implied-in-law right to reimbursement, we affirm the court of appeals' judgment.

I

Since the late 1980s, TAC has provided law-enforcement-liability insurance to Matagorda County.¹ Because Matagorda County's jail fell out of compliance with the minimum requirements of the Texas Commission on Jail Standards, in 1991 TAC began including an endorsement to its policy excluding coverage for any claim "arising out of jail."

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 Coseboon 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 the chief administrative officer for the County, was advised of the proposed settlement and the County was asked to fund the settlement. The County, however, continued to insist that the claim was covered, and advised TAC that it would not contribute to the settlement.

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 established 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 TAC to settle any claim at its own discretion, and without the County's consent. TAC settled the Coseboon litigation for $300,000,² and the Coseboon plaintiffs dismissed their lawsuit. The settlement agreement released the County and its employees from any and all claims, and released any claims against TAC. The County did not object to the settlement. After the settlement, TAC amended its declaratory-judgment action to request reimbursement of the settlement funds. The County stipulated that it "does not dispute the reasonableness of TAC's settlement of the Coseboon litigation."

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 that there was no indication that the County agreed either to be bound by the settlement or to reimburse TAC. 975 S.W.2d 782. Accordingly, the court of appeals reversed and rendered judgment that TAC take nothing.

II

Whether an insurer³ may seek reimbursement from its insured for settlement funds paid under a reservation of rights upon an adjudication of noncoverage is an issue of first impression for this Court. We begin by examining the insurance contract between the parties. It is undisputed that the insurance policy that defines the parties' rights and obligations does not provide TAC a right of reimbursement; TAC first asserted such a right in its reservation-of-rights letter. It is similarly undisputed that the County did not otherwise expressly agree to reimburse TAC for the Coseboon settlement. We must decide whether the County's consent to reimburse TAC may be implied from this record, or whether the circumstances presented warrant imposing, in law, an equitable reimbursement obligation. We consider first the implied-consent issue.

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., 2 P.3d 510, 515-16 (Wyo. 2000) (rejecting the notion that the insurer could base a right to recover defense costs on a reservation letter and stating "we will not permit the contract to be amended or altered by a reservation of rights letter."). The insurance policy at issue allows TAC to settle a case against its insured without the insured's consent. It would have been a simple matter for TAC to also state in the policy that it could seek reimbursement for those settlement funds if it is later determined that the policy does not provide coverage.⁴ If TAC had done so its reservation letter would in fact be reserving contractual rights. But TAC's "reservation" letter was simply a unilateral offer to append a reimbursement provision to the insurance contract. That provision is binding only if the County accepted it.

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 Williston 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., 625 S.W.2d 295, 298 (Tex. 1981), for the proposition that an insured's silence may suffice to show that it consented to reimburse the insurer. But our decision in Preston Farm did not turn on one party's failure to respond to a unilateral offer. Instead, it rested on a continuing course of conduct between two merchants:

[T]here 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., 644 S.W.2d 443, 445 (Tex. 1982). In Triton Oil, we rejected the notion that Marine Contractors' unilateral act of charging interest on Triton's invoices and its deduction of those charges from amounts due Triton were evidence of an agreement between the parties that Triton would pay the interest charges. Id. at 445-46. We distinguished Bio-Zyme, noting that "the mere failure to object within a reasonable time to the interest charges, without more, could not...