United Nat. Ins. Co. v. Sst Fitness Corp.

• Decision Date: 04 November 2002
• Docket Number: No. 00-4239.,00-4239.
• Citation: 309 F.3d 914
• Parties: UNITED NATIONAL INSURANCE COMPANY, Plaintiff-Appellant, v. SST FITNESS CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

309 F.3d 914

UNITED NATIONAL INSURANCE COMPANY, Plaintiff-Appellant, v. SST FITNESS CORPORATION, Defendant-Appellee.

No. 00-4239.

United States Court of Appeals, Sixth Circuit.

Argued: March 19, 2002.

Decided and Filed: November 4, 2002.

James Christian Nielsen (argued and briefed), Thomas H. Nienow, Nielsen, Haley & Abbott, San Francisco, CA, for Plaintiff-Appellant.

Lawrence R. Elleman (argued), David P. Fornshell, Dinsmore & Shohl, Cincinnati, OH, Gerald W. Simmons (briefed), Thompson Hine, Cincinnati, OH, for Defendant-Appellee.

Before BATCHELDER and CLAY, Circuit Judges; CARR, District Judge.^*

CARR, D.J., delivered the opinion of the court, in which BATCHELDER, J., joined. CLAY, J. (pp. 923-28), delivered a separate dissenting opinion.

OPINION

CARR, District Judge.

Plaintiff-appellant United National Insurance Company ("United National") appeals the denial of its motion, brought pursuant to 28 U.S.C. § 2202, for defense costs paid to its insured, defendant-appellee SST Fitness Corporation ("SST"). For the following reasons, we REVERSE the judgment of the district court and REMAND for further proceedings in accordance with this decision.

BACKGROUND

SST purchased liability insurance from United National, which agreed to provide defense costs and indemnify SST for any liability. J.A. at 49-79. When SST was sued for patent and trademark infringement, United National paid SST's defense costs. Prior to providing defense costs, United National provided a letter to SST stating, "United National reserves the right to recoup from SST any defense costs and fees to be paid subject to this reservation letter on the basis that no duty to defend now exists or has existed with regard to the tendered suit." J.A. at 115.

United National paid $116,706.39 to SST's counsel in the patent and trademark infringement suit. SST accepted payment of its defense costs, without objecting to United National's reservation of rights.

United National thereafter sued SST, seeking a declaratory judgment that United National owed no duty to defend or indemnify SST in the underlying infringement action. The district court granted declaratory judgment in favor of United National, and the Sixth Circuit affirmed.

United National moved, under 28 U.S.C. § 2202, for costs paid under reservation, $116,706.39, and prejudgment interest, $29,633.41. The district court denied this motion, finding that United National was a volunteer when it paid SST's defense costs and, therefore, could not recover those costs. J.A. at 185.

STANDARD OF REVIEW

Because the district court decided questions of law, we review its judgment de novo. United States v. Al-Zubaidy, 283 F.3d 804, 812 (6th Cir.2002) ("We review questions of law and statutory interpretation de novo.") (citing Nixon v. Kent Co., 76 F.3d 1381, 1386 (6th Cir.1996) (en banc); Mumford v. Zieba, 4 F.3d 429, 432 (6th Cir.1993)); see also Pro-Eco, Inc. v. Board of Comm'rs of Jay County, Indiana, 57 F.3d 505, 508 (7th Cir.1995) (In reviewing a district court's denial of relief in a case brought pursuant to 28 U.S.C. § 2202, the court stated, "[W]ith the district court deciding the case on pure questions of law, and in light of our circuit's decision to guard jealously the discretion afforded under the Declaratory Judgment Act, we will review the district court's denial of Pro-Eco's motion de novo.").

DISCUSSION

I. Insurer's Right to Recoupment

United National contends that, because it had no duty to defend SST in the underlying infringement action and it reserved its right to recoup defense costs, it is entitled recover those costs. United National further argues that SST accepted the terms of its reservation of rights letter when it accepted defense costs without objecting to the reservation of rights, thereby giving rise to an implied contract for reimbursement. There being no Ohio decisions on this issue, United National urges us to look at opinions from other jurisdictions allowing insurers to reserve a right to recoupment and Ohio cases on implied contracts.

SST contends that, because it never expressly accepted the reservation of rights, the reservation is ineffective. SST argues, "An insurer's offer to defend is made primarily for its own benefit, and the insured should not be forced to reimburse costs that the insurer expends for its own benefit." Appellee's Final Br. at 4.

The district court did not address this argument because it decided United National's § 2202 motion solely on the basis that United National was a "volunteer" when it defended the underlying patent suit.

Because the Ohio Supreme Court has not determined the issue before us, we

must ascertain from all available data, including the decisional law of the state's lower courts, restatements of law, law review commentaries, and decisions from other jurisdictions on the "majority" rule, what the state's highest court would decide if faced with the issue.

Grantham & Mann, Inc. v. American Safety Prods., Inc., 831 F.2d 596, 608 (6th Cir.1987) (citations omitted).

In accordance with this directive, we examine decisions and rationales from other jurisdictions that have decided this specific issue, general Ohio law, and policy considerations for guidance in determining how the Ohio Supreme Court would likely decide this issue.

A. Decisions from Other Jurisdictions

United National contends this court should, and the Ohio Supreme Court would, follow decisions from other jurisdictions that allow an insurer to recover defense costs when the insurer had no duty to defend.

In Colony Insurance Co. v. G & E Tires & Service, Inc., 777 So.2d 1034 (Fla.Ct. App.2000), the court decided whether an insurer could be reimbursed for defense costs when the insurer did not have a duty to defend. After reviewing cases from other jurisdictions, the court determined that the insurer was entitled to reimbursement of those costs. Id. at 1039. The court stated, "Having accepted Colony's offer of a defense with a reservation of the right to seek reimbursement, G & E ought in fairness make Colony whole, now that it has been judicially determined that no duty to defend ever existed." Id. The court also looked to basic contract law and stated, "A party cannot accept tendered performance while unilaterally altering the material terms on which it is offered." Id. (citing RESTATEMENT (SECOND) OF CONTRACTS § 69 (1981)). The court found that, when the insured accepted its defense, it also accepted the terms of the offer, including a potential for reimbursement. Id.

In Grinnell Mutual Reinsurance Co. v. Shierk, 996 F.Supp. 836 (S.D.Ill.1998), the court looked to other jurisdictions for guidance in deciding whether an insurer was entitled to reimbursement for defense costs. The court stated that to be entitled to reimbursement, an insurer must: 1) specifically reserve the right to seek reimbursement from its insured; and 2) provide the insured with adequate notice of this potential reimbursement. Id. at 839. The court held:

Shierk accepted the benefit of Grinnell's defense. Further, Shierk was fully apprised that Grinnell reserved its right to seek reimbursement in the event that it was later determined that it had no duty to defend him. As a result, although it appears that the Illinois courts have not yet had an opportunity to address the precise issue of reimbursement, the Court predicts that if the Illinois Supreme Court were faced with this precise issue, it would authorize the relief sought by Grinnell and order reimbursement of the costs of defense.

Id. (citations omitted).

In Resure, Inc. v. Chemical Distributors, Inc., 927 F.Supp. 190 (M.D.La.1996), the insurer sought reimbursement of defense costs following a reservation of its right to reimbursement. The court determined that the insured was entitled to reimbursement, stating:

Resure timely reserved its rights under the policy. That reservation specifically referred to the possibility that Resure might seek reimbursement for any and all costs of defense. There is nothing in the record to suggest CDI objected to the reservation. Accordingly, Resure is entitled to reimbursement for all costs of defense.

Id. at 194.

In Knapp v. Commonwealth Land Title Insurance Co., 932 F.Supp. 1169 (D.Minn. 1996), the insurer, in a reservation of rights letter, stated it would pay defense costs in a land title dispute and reserved the right to seek attorneys' fees and costs later. The court found that an insurer had a right to recover defense costs. Id. at 1172 ("[W]here an insurer has properly met its duty and subsequently successfully challenges policy coverage, it should be entitled to the full benefit of such a challenge and be reimbursed for the benefits it bestowed, in good faith, to its insured."). The court stated that an insurer must clearly indicate a reservation of its right to seek reimbursement. Id. The court concluded, "Under these circumstances, the Court finds it appropriate to determine that Knapp's silence in response to Commonwealth's reservations of rights letter, and subsequent acceptance of the defense provided by Commonwealth, constitutes an implied agreement to the reservation of rights." Id.

In First Federal Savings & Loan Association of Fargo, North Dakota v. Transamerica Title Insurance Co., 793 F.Supp. 265, 269 (D.Colo.1992) (citations omitted), the court stated, "An insurance company may also reserve its right to deny its duty to defend and later recover for any attorney fees paid." The court determined that because the insured did not object to the insurer's reservation of rights, the insurer was entitled to reimbursement. Id.

A few cases, however, have not allowed recoupment of defense costs. See Terra Nova Ins. Co. v. 900 Bar Inc., 887 F.2d 1213 (3d Cir.1989); In re Hansel, 160 B.R. 66 (Bankr.S.D.Tex.1993); Shoshone First Bank v. Pacific Employers Ins. Co., 2 P.3d 510 (Wyo.2000). These cases, however, reject demands for recoupment on the basis of defects in the...