Matagorda County had a liability policy with The Texas Association of Counties (TAC) for its law enforcement activities. The policy contained a “jail exclusion” which excluded legal action brought by the county’s jail inmates. Following just such an event, TCA agreed to indemnify and defend Matagorda but twice repeated its right to question coverage and seek reimbursement. TAC settled the case, and brought suit to obtain reimbursement. The trial court in the coverage case ultimately ruled that TAC was entitled to reimbursement of defense and indemnity costs because the underlying liability claims were not covered.
TAC claimed that the policy’s “jail exclusion” clause and Matagorda County’s refusal to reply to TCA’s letters reserving reimbursement rights amounted to create a contractual obligation. The Texas Supreme Court disagreed and held that an insurer’s unilateral reservation of rights letter did not create rights which are not specifically created by the insurance policy. TAC’s reservation letter was a unilateral offer to pay a disputed claim in exchange for the right to later seek reimbursement. The insured’s failure to respond to the insurer’s reservation letter was not construed as an acceptance of the insurer’s reimbursement offer.
The Texas Supreme Court also rejected any equitable right of reimbursement possessed by the liability insurer. The court initially rejected reimbursement under an equitable subrogation theory because Texas law does not allow an insurer to subrogate against its insured. The court also rejected a reimbursement theory under a “quasi-contractual theory of unjust enrichment.” The Texas Supreme Court expressly rejected the California Supreme Court reimbursement approach set forth in Buss v. Superior Court, a 1997, California Court opinion.
The Texas Supreme Court then articulated the standard to determine when a liability insurer may seek reimbursement of defense or indemnity payments from an insured: “We hold that, when coverage is disputed and the insurer is presented with a reasonable settlement demand within policy limits, 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.