Reimbursement of Advance Benefits

Thereafter, Bridger Lake filed suit against Seneca seeking the remaining $900,000 under the policy. Seneca answered the suit and filed a counter-claim seeking the return of the $100,000. On summary judgment practice, applying Wyoming law, the court held the insurance policy did not provide coverage for Bridger Lake's claims. Id. On the issue of reimbursement, the court noted that when Seneca advanced the money, neither party knew whether the policy mandated coverage, which is why Seneca expressly reserved its rights to argue that no coverage existed. The court held that Seneca was entitled to reimbursement as Bridger Lake had been unjustly enriched due to the undeserved advance. Id.

Bridger Lake opposed the motion, in part, by arguing that Seneca was not entitled to reimbursement because its reservation of rights letter was an impermissible attempt to alter the terms of the policy. Bridger Lake pointed to a prior Wyoming Supreme Court decision prohibiting an insurer from recovering defense costs expended for uncovered claims as support for its position. In refusing to allocate costs between covered claims and uncovered claims in an action involving both, a “mixed action,” the Wyoming Supreme Court held that “unless an agreement to the contrary is found in the policy, the insurer is liable for all of the costs of defending the action.” Shoshone First Bank v. Pac. Employers Ins. Co., 2 P.3d 510, 514 (Wy.2000).

The Shoshone court likened a reservation of rights to recoup costs to a unilateral modification of the policy. Id. at 515-16. However, the Bridger Lake court distinguished Shoshone as it dealt with an insurer seeking allocation of defense costs, and although the policy in Shoshone was silent on the issue of allocation, there is a legal requirement under Wyoming law that an insurer defend all claims under the policy unless the policy expressly states otherwise. Bridger Lake, supra at 3.

Equity and public policy considerations ultimately guided the Bridger Lake court. It noted, “[w]hile there is no language in the policy requiring Bridger Lake to return any money 'voluntarily' advanced by Seneca, there is also no language requiring Seneca to indemnify Bridger Lake for non-covered events. If Seneca could not seek reimbursement, insurers would have no incentive in the future to advance any funds to insured clients before coverage was definitely established, to avoid unjustly enriching their clients. At the same time, withholding funds might be a violation of the duty of good faith. The more equitable policy is to allow insurers who advance funds but expressly reserve objections regarding coverage to seek reimbursement if it is later determined that no coverage existed.” Id. at 3-4.

The equitable analysis in the Bridger Lake decision appears consistent with the majority of cases addressing the reimbursement of benefits erroneously advanced under an insurance policy. The majority view allows reimbursement under equitable grounds if two factors are met:

1. The recipient of the erroneously paid funds received a windfall and would be unjustly enriched; and
2. The recipient did not detrimentally change its position in reliance on the receipt of the payments.

French King Realty Inc. v. Interstate Fire & Cas. Co, 79 Mass. App. Ct. 653, 669, 948 N.E.2d 1244, 1257 (2011); see also Lindsay Mfg. Co. v. Hartford Acc. & Indem. Co., 911 F. Supp. 1249, 1259 (D. Neb. 1995) rev'd on other grounds, 118 F.3d 1263 (8th Cir. 1997) (Reimbursement allowed under theory of unjust enrichment when insurer paid clean-up expenses upon mistaken belief that policy required payment. “[A]s a matter of policy, it would be unwise to discourage insurers from making payments, even if the payments were made in error, by refusing to permit later adjustments”).

In French King, Interstate issued a commercial lines policy to French King, providing coverage for its restaurant. Two days after a fire loss, and prior to any investigation of the loss, Interstate made a $15,000 advance payment to French King under the policy without any reservation of rights. The court later determined that there was no coverage under the policy, and that Interstate was entitled to reimbursement of its advance to the insured. The court noted, despite the lack of a reservation of rights, that there was no evidence that the advancement was unconditional and the restaurant knew there could be potential issues with the fire suppression system, which knowledge was the basis for excluding coverage under the protective safeguards endorsement in the policy. French King Realty, Inc., supra; see also Glover v. Metropolitan Life Insurance Co., 664 F.2d 1101 (8th Cir.1981); Glover v. Metropolitan Life Insurance Co., 698 F.2d 947 (8th Cir.1983) (An insurer erroneously paid life insurance to the second spouse of the decedent rather than to the former spouse. Finding unjust enrichment and no detrimental reliance, the court permitted the insurer to recover the amount paid by mistake.); c.f. Metro. Life Ins. Co. v. Cotter, 464 Mass. 623, 641, 984 N.E.2d 835, 849 (2013) (A disability insurer paid benefits following its unilateral assertion of an extracontractual reservation of rights, and sought reimbursement after a determination of no coverage under the policy. Reimbursement was not permitted as insurer failed to meet its burden of proving that the payments were unjust.)

Remedy in Contract

Although relying on equitable remedies to allow reimbursement seems to be the correct result in this situation, a recent decision by the Texas Supreme Court held that an insurer was entitled to reimbursement only if a policy provision allowed reimbursement; however, the court also suggested that equitable remedies may still be allowed if the policy is voided due to an insured's misrepresentation and/or failure to comply with policy provisions.

In Gotham Insurance Company v. Warren E&P Inc., et al., 2013 WL 8115706 (Tex. Mar. 21, 2014), the insurer sought reimbursement for expense payments it made following a well blowout. After issuing payment on the claim, Gotham discovered that its insured, Pedeco, may not have complied with industry standards addressing the proper equipment to be used in blowout prevention, a requirement under the policy. Gotham also learned of a joint operating agreement indicating that Pedeco may not have owned 100% of the working interest in the well, despite its contrary representation to Gotham prior to the claim payment.

Gotham filed equitable and contract claims seeking return of the payments made on the claim. Id. While the parties were in the discovery phase, the Texas Supreme Court announced in Texas Association of Counties County Government Risk Management Pool v. Matagorda County, 52 S.W.3d 128, 133-36 (Tex. 2000) 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.” Id. at 135 (emphasis added). Thereafter, the trial court, relying on Matagorda County, determined that Gotham was not entitled to reimbursement under equitable remedies.

On appeal, the court of appeal reversed and held that Matagorda County did not apply because Gotham was not settling a claim in litigation, and the case was remanded to determine the amount of damages due on Gotham's restitution and unjust enrichment claims. Gotham Ins. Co. v. Petroleum Dev. Corp., 04-01-375-CV (Tex. App.- San Antonio 2003); 2003 WL 21696625 ( Gotham I ). On remand, the trial court awarded Gotham over $1.8 million in damages.

However, as the case continued in litigation, and a subsequent appeal, a second decision rendered by the Texas Supreme Court again changed the course of the litigation for Gotham. In Excess Underwriters at Lloyd's, London v. Frank's Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 50 (Tex. 2008), a reimbursement of settlement payments case, the Texas Supreme Court held as a matter of law that an insurer may not seek equitable restitution against an insured for erroneous payment of a non-covered claim if the insurance policy does not provide for such a remedy. Based on its interpretation of the Frank's Casing ruling, on a third appeal in Gotham, the appellate court reconsidered the prior decisions in the case and reversed the trial court judgment, therein again holding that Gotham was not entitled to reimbursement as it had no equitable right, and further concluding there were no contract remedies as the insurance policy did not allow for reimbursement. 368 S.W.3d 633, 634 (Tex. App.- El Paso 2012) (Gotham III ).

The Texas Supreme Court granted review in the Gotham case, and agreed that Gotham could not proceed on its equity claims but, only because it found that the insurance policy included a reimbursement clause, i.e. , salvage and recoveries clause, and further addressed Gotham's ability to recover payments under the due diligence clause and misrepresentation clause. Gotham Insurance Company v. Warren E&P Inc. et al., 2013 WL 8115706 (Tex. Mar. 21, 2014) (Gotham Supreme Court). The Gotham Supreme Court further indicated that the absence of a reimbursement clause in a policy does not necessarily foreclose an insurer's ability to recover if the insured breached the policy. In dicta, the Gotham Supreme Court noted that if the policy is voided due to a material breach by the insured, an insurer could then proceed in equity to recover its payments. Id. at 7. Because the trial court did not fully address Gotham's contract claims, the case was remanded. Id. at 8.

The Gotham Supreme Court did not discuss Gotham I's holding that reimbursement for settlement payments cases, like Matagorda County, did not apply in instances where the insurer seeks reimbursement of advanced benefits. Instead, the court relied on its decision in Fortis Benefits v. Cant, 234 S.W.3d 642, 648-49 (Tex. 6/29/07), wherein an insurer's claim for reimbursement was denied as the policy included reimbursement provisions but did not provide for reimbursement under the facts presented. The Fortis court held that where a valid contract prescribes particular remedies or imposes particular obligations, equitable remedies generally must yield. Id. However, interestingly, the Gotham Supreme Court provided a back door for an insurer to seek reimbursement under equitable remedies if payment was made due to the misrepresentation of an insured, and the insurer chooses to void the policy.

Other cases have also allowed insurers to recover advance benefits paid when later discovered facts determine that there is no coverage due to fraud or misrepresentation by an insured. For example, see S. Carolina Farm Bureau Mut. Ins. Co. v. Kell, 345 S.C. 232, 242, 547 S.E.2d 871, 876 (S.C. Ct. App. 2001) (Insurer was permitted to void its policy and recover money it paid an insured on two fire claims when, after a third fire claim was submitted, the insured's son admitted to arson connected with all three fires); see also Shelter Ins. Co. v. Cruse, 446 So. 2d 893, 894-95 (La. App. 1 Cir. 1984) (Insurer allowed to recover amount paid under auto policy where policy was void ab initio due to insured's misrepresentation on application).

Summary and Recommendations

A review of the case law on an insurer's right to seek reimbursement for advanced benefits on uncovered claims reveals that there are many jurisdictions that have not yet addressed this issue. Those that have consider rulings in prior cases involving reimbursement of defense costs and/or settlement payments on uncovered claims, and involve claims in equity and contract. But, opinions on defense cases are arguably distinguishable, at least in the context of “mixed” claims, as generally an insurer's duty to defend is broader than its duty to indemnify. Reimbursement of settlement payment cases typically occur after the insurer is fully informed of what claims are covered, and the insurer has an opportunity to apprise an insured of its options regarding settlement. In contrast, an insurer's advance of benefits usually occurs immediately after the loss and before all facts are discovered, creating distinctive circumstances.

Most courts appear to allow reimbursement under equitable remedies, but there is no bright-line rule. Moreover, there are some jurisdictions that simply do not allow an insurer to seek reimbursement. However, the number one way for an insurer to preserve its right to reimbursement is to notify the insured of its rights before payment and include a specific reimbursement clause in every policy that allows it to recoup monies paid if it is later determined that there is no coverage under the policy. U.S. Fidelity and Guarantee Co. v. U.S. Sports Specialty Ass'n, 270 P.3d 464, 468 (Utah 1/24/12) (An insurer's right to reimbursement from an insured must be expressly stated in an insurance policy before it can be enforced).

If a policy does not contain a reimbursement provision, courts still allow an insurer to seek reimbursement of funds if the insurer satisfies strict prerequisites, essentially creating a separate contract between the insurer and insured to allow reimbursement. This can be accomplished by: 1) timely and expressly reserving your rights; 2) expressly notifying the insured of an intent to pay potentially non-covered claims; and 3) requiring the insured to agree that the insurer may still seek reimbursement at a later date if there is a determination of non-coverage under the policy. Mount Airy Ins. Co. v. Doe Law Firm, 668 So.2d 534, 538'39 (Ala.1995) (reimbursement not allowed under theory that the insurer is a volunteer payor if it pays defense or settlement costs while attempting to reserve rights over the insured's objection); Steadfast Ins. Co. v. Sheridan Children's Healthcare Servs., Inc., 34 F. Supp. 2d 1364 (S.D. Fla. 1998) (liability insurer that failed to obtain non-waiver agreement preserving coverage defenses could not seek reimbursement); Utica Mut. Ins. Co. v. Rohm & Haas Co, 683 F. Supp. 2d 368 (E.D. Pa. 2010) (reimbursement of settlement payments denied as general liability policies at issue did not provide insurer with right to reimbursement and insured did not expressly agree to grant insurer right to reimbursement).

All is not lost if an insured will not agree to acknowledge an insurer's reimbursement right. In some instances, reimbursement is still permitted if there is sufficient evidence for the court to find an implied-in-fact or implied-in-law contract, or in limited jurisdictions, even with a unilateral reservation of rights. Cincinnati Ins. Co. v. Grand Pointe, LLC, 501 F. Supp. 2d 1145 (E.D. Tenn. 2007); Nobel Ins. Co. v. Austin Powder Co, 256 F.Supp.2d 937, 940 (W.D. Ark. 2003) (insurer must expressly include reimbursement in reservation of rights letter to reserve that right); United Nat'l Ins. Co. v. SST Fitness Corp., 309 F.3d 914 (6th Cir.2002) (allowing insurer to recoup defense costs under an implied-in-fact contract theory); Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489, 106 Cal.Rptr.2d 535, 22 P.3d 313 (2001) (finding implied-in-law contract); Travelers Prop. Cas. Co. of Am. v. Hillerich & Bradsby Co., Inc., 596 F. Supp. 2d 1020, 1025 (W.D. Ky. 2008) aff'd, 598 F.3d 257 (6th Cir. 2010) (unilateral reservation of rights sufficient to allow reimbursement).

Last, if it is discovered that benefits were paid on a non-covered claim after the fact, and no reservation of rights was issued, an insurer may seek reimbursement if there is evidence that the payment was made based on fraud or a misrepresentation by the insured, and the payment does not represent an unconditional tender. French King Realty Inc., supra; Cameron Parish School Board v. RSUI Indemnity Company, 06-1970 (W.D. La. 11/20/08); 2008 WL 4965294.

In sum, an insurer should not be faced with waiving its right to seek reimbursement of advanced benefits if it is later determined that the loss is not covered. Although cases analyzing reimbursement of defense and settlement payments may provide some guidance, whether an insurer can seek reimbursement of policy benefits advanced for uncovered claims presents a unique situation, not yet addressed by all jurisdictions. The most effective way for an insurer to preserve its reimbursement claim is to include a provision in the insurance policy that allows reimbursement and issue a reservation of rights with any payment. Alternatively, the insurer can reserve its rights and ask its insured to consent to its potential reimbursement rights before benefits are paid. Some jurisdictions will also permit reimbursement under an insurer's unilateral reservation of rights; but, it appears without any reservation, the insurer's most successful recourse is to void the policy based on fraud or the misrepresentation of an insured to recoup advanced benefits on uncovered claims.

Shaundra M. Schudmak is an attorney at Lugenbuhl, Wheaton, Peck, Rankin & Hubbard in the firm's insurance practice group. This article is not intended to provide legal advice. Issues relating to insurance coverage and litigation are fact-specific, and their resolution will depend on the facts involved and the law governing the disputes, which varies from state to state. The views expressed in this article are not necessarily those of Lugenbuhl or its clients.

Insurance companies are often required to decide whether to pay benefits under the policy before sufficient information is known about the claim to determine whether there will ultimately be coverage. So, what happens if it is later discovered that payments were made for non-covered claims? Can an insurer seek reimbursement? Although a plethora of case law exists on an insurer's right to seek reimbursement of defense costs and settlement payments on non-covered claims, rendering mixed results on these issues nationwide, there is a dearth of decisions on reimbursement of advance benefits. Two recent decisions suggest that an insurer can seek reimbursement, albeit under differing theories of law, leaving open the conundrum of how an insurer can preserve its rights. A review of the differing theories allowing recovery and suggestions on how an insurer can protect its rights to reimbursement follows.

Equitable Remedies

In Bridger Lak', a federal court in Louisiana held that an insurer was allowed to seek reimbursement of advanced funds under a theory of unjust enrichment if it later determined there was no coverage under the policy. Bridger Lake, LLC v. Seneca Ins. Co. Inc., 11-0342, (W.D. La. 3/4/14); 2014 WL 849893. After receiving notice of a claim, Seneca made an advance under the policy to assist with immediate remediation costs following a ruptured pipeline. When the money was forwarded to Bridger Lake, Seneca included a reservation of rights letter stating, “[t]his advance is not to be construed as a[n] admission of coverage, and [Seneca] expressly reserves its right to seek reimbursement of the $100,000 from [Bridger Lake] in the event that ' there is no coverage for this loss.” The letter further stated that if coverage did exist, the advance would be taken out of the $1 million coverage limit. Seneca then refused to make any further payments under the policy.

Thereafter, Bridger Lake filed suit against Seneca seeking the remaining $900,000 under the policy. Seneca answered the suit and filed a counter-claim seeking the return of the $100,000. On summary judgment practice, applying Wyoming law, the court held the insurance policy did not provide coverage for Bridger Lake's claims. Id. On the issue of reimbursement, the court noted that when Seneca advanced the money, neither party knew whether the policy mandated coverage, which is why Seneca expressly reserved its rights to argue that no coverage existed. The court held that Seneca was entitled to reimbursement as Bridger Lake had been unjustly enriched due to the undeserved advance. Id.

Bridger Lake opposed the motion, in part, by arguing that Seneca was not entitled to reimbursement because its reservation of rights letter was an impermissible attempt to alter the terms of the policy. Bridger Lake pointed to a prior Wyoming Supreme Court decision prohibiting an insurer from recovering defense costs expended for uncovered claims as support for its position. In refusing to allocate costs between covered claims and uncovered claims in an action involving both, a “mixed action,” the Wyoming Supreme Court held that “unless an agreement to the contrary is found in the policy, the insurer is liable for all of the costs of defending the action.” Shoshone First Bank v. Pac. Employers Ins. Co. , 2 P.3d 510, 514 (Wy.2000).

The Shoshone court likened a reservation of rights to recoup costs to a unilateral modification of the policy. Id. at 515-16. However, the Bridger Lake court distinguished Shoshone as it dealt with an insurer seeking allocation of defense costs, and although the policy in Shoshone was silent on the issue of allocation, there is a legal requirement under Wyoming law that an insurer defend all claims under the policy unless the policy expressly states otherwise. Bridger Lake, supra at 3.

Equity and public policy considerations ultimately guided the Bridger Lake court. It noted, “[w]hile there is no language in the policy requiring Bridger Lake to return any money 'voluntarily' advanced by Seneca, there is also no language requiring Seneca to indemnify Bridger Lake for non-covered events. If Seneca could not seek reimbursement, insurers would have no incentive in the future to advance any funds to insured clients before coverage was definitely established, to avoid unjustly enriching their clients. At the same time, withholding funds might be a violation of the duty of good faith. The more equitable policy is to allow insurers who advance funds but expressly reserve objections regarding coverage to seek reimbursement if it is later determined that no coverage existed.” Id. at 3-4.

The equitable analysis in the Bridger Lake decision appears consistent with the majority of cases addressing the reimbursement of benefits erroneously advanced under an insurance policy. The majority view allows reimbursement under equitable grounds if two factors are met:

1. The recipient of the erroneously paid funds received a windfall and would be unjustly enriched; and
2. The recipient did not detrimentally change its position in reliance on the receipt of the payments.

French King Realty Inc. v. Interstate Fire & Cas. Co , 79 Mass. App. Ct. 653, 669, 948 N.E.2d 1244, 1257 (2011); see also Lindsay Mfg. Co. v. Hartford Acc. & Indem. Co. , 911 F. Supp. 1249, 1259 (D. Neb. 1995) rev'd on other grounds, 118 F.3d 1263 (8th Cir. 1997) (Reimbursement allowed under theory of unjust enrichment when insurer paid clean-up expenses upon mistaken belief that policy required payment. “[A]s a matter of policy, it would be unwise to discourage insurers from making payments, even if the payments were made in error, by refusing to permit later adjustments”).

In French King, Interstate issued a commercial lines policy to French King, providing coverage for its restaurant. Two days after a fire loss, and prior to any investigation of the loss, Interstate made a $15,000 advance payment to French King under the policy without any reservation of rights. The court later determined that there was no coverage under the policy, and that Interstate was entitled to reimbursement of its advance to the insured. The court noted, despite the lack of a reservation of rights, that there was no evidence that the advancement was unconditional and the restaurant knew there could be potential issues with the fire suppression system, which knowledge was the basis for excluding coverage under the protective safeguards endorsement in the policy. French King Realty, Inc., supra ; see also Glover v. Metropolitan Life Insurance Co. , 664 F.2d 1101 (8th Cir.1981); Glover v. Metropolitan Life Insurance Co. , 698 F.2d 947 (8th Cir.1983) (An insurer erroneously paid life insurance to the second spouse of the decedent rather than to the former spouse. Finding unjust enrichment and no detrimental reliance, the court permitted the insurer to recover the amount paid by mistake.); c.f. Metro. Life Ins. Co. v. Cotter , 464 Mass. 623, 641, 984 N.E.2d 835, 849 (2013) (A disability insurer paid benefits following its unilateral assertion of an extracontractual reservation of rights, and sought reimbursement after a determination of no coverage under the policy. Reimbursement was not permitted as insurer failed to meet its burden of proving that the payments were unjust.)

Remedy in Contract

Although relying on equitable remedies to allow reimbursement seems to be the correct result in this situation, a recent decision by the Texas Supreme Court held that an insurer was entitled to reimbursement only if a policy provision allowed reimbursement; however, the court also suggested that equitable remedies may still be allowed if the policy is voided due to an insured's misrepresentation and/or failure to comply with policy provisions.

In Gotham Insurance Company v. Warren E&P Inc., et al., 2013 WL 8115706 (Tex. Mar. 21, 2014), the insurer sought reimbursement for expense payments it made following a well blowout. After issuing payment on the claim, Gotham discovered that its insured, Pedeco, may not have complied with industry standards addressing the proper equipment to be used in blowout prevention, a requirement under the policy. Gotham also learned of a joint operating agreement indicating that Pedeco may not have owned 100% of the working interest in the well, despite its contrary representation to Gotham prior to the claim payment.

Gotham filed equitable and contract claims seeking return of the payments made on the claim. Id. While the parties were in the discovery phase, the Texas Supreme Court announced in Texas Association of Counties County Government Risk Management Pool v. Matagorda County , 52 S.W.3d 128, 133-36 (Tex. 2000) 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.” Id . at 135 (emphasis added). Thereafter, the trial court, relying on Matagorda County, determined that Gotham was not entitled to reimbursement under equitable remedies.

On appeal, the court of appeal reversed and held that Matagorda County did not apply because Gotham was not settling a claim in litigation, and the case was remanded to determine the amount of damages due on Gotham's restitution and unjust enrichment claims. Gotham Ins. Co. v. Petroleum Dev. Corp., 04-01-375-CV (Tex. App.- San Antonio 2003); 2003 WL 21696625 ( Gotham I ). On remand, the trial court awarded Gotham over $1.8 million in damages.

However, as the case continued in litigation, and a subsequent appeal, a second decision rendered by the Texas Supreme Court again changed the course of the litigation for Gotham. In Excess Underwriters at Lloyd's, London v. Frank's Casing Crew & Rental Tools, Inc. , 246 S.W.3d 42, 50 (Tex. 2008), a reimbursement of settlement payments case, the Texas Supreme Court held as a matter of law that an insurer may not seek equitable restitution against an insured for erroneous payment of a non-covered claim if the insurance policy does not provide for such a remedy. Based on its interpretation of the Frank's Casing ruling, on a third appeal in Gotham, the appellate court reconsidered the prior decisions in the case and reversed the trial court judgment, therein again holding that Gotham was not entitled to reimbursement as it had no equitable right, and further concluding there were no contract remedies as the insurance policy did not allow for reimbursement. 368 S.W.3d 633, 634 (Tex. App.- El Paso 2012) (Gotham III ).

The Texas Supreme Court granted review in the Gotham case, and agreed that Gotham could not proceed on its equity claims but, only because it found that the insurance policy included a reimbursement clause, i.e. , salvage and recoveries clause, and further addressed Gotham's ability to recover payments under the due diligence clause and misrepresentation clause. Gotham Insurance Company v. Warren E&P Inc. et al., 2013 WL 8115706 (Tex. Mar. 21, 2014) (Gotham Supreme Court). The Gotham Supreme Court further indicated that the absence of a reimbursement clause in a policy does not necessarily foreclose an insurer's ability to recover if the insured breached the policy. In dicta, the Gotham Supreme Court noted that if the policy is voided due to a material breach by the insured, an insurer could then proceed in equity to recover its payments. Id. at 7. Because the trial court did not fully address Gotham's contract claims, the case was remanded. Id. at 8.

The Gotham Supreme Court did not discuss Gotham I's holding that reimbursement for settlement payments cases, like Matagorda County, did not apply in instances where the insurer seeks reimbursement of advanced benefits. Instead, the court relied on its decision in Fortis Benefits v. Cant , 234 S.W.3d 642, 648-49 (Tex. 6/29/07), wherein an insurer's claim for reimbursement was denied as the policy included reimbursement provisions but did not provide for reimbursement under the facts presented. The Fortis court held that where a valid contract prescribes particular remedies or imposes particular obligations, equitable remedies generally must yield. Id. However, interestingly, the Gotham Supreme Court provided a back door for an insurer to seek reimbursement under equitable remedies if payment was made due to the misrepresentation of an insured, and the insurer chooses to void the policy.

Other cases have also allowed insurers to recover advance benefits paid when later discovered facts determine that there is no coverage due to fraud or misrepresentation by an insured. For example, see S. Carolina Farm Bureau Mut. Ins. Co. v. Kell , 345 S.C. 232, 242, 547 S.E.2d 871, 876 (S.C. Ct. App. 2001) (Insurer was permitted to void its policy and recover money it paid an insured on two fire claims when, after a third fire claim was submitted, the insured's son admitted to arson connected with all three fires); see also Shelter Ins. Co. v. Cruse , 446 So. 2d 893, 894-95 (La. App. 1 Cir. 1984) (Insurer allowed to recover amount paid under auto policy where policy was void ab initio due to insured's misrepresentation on application).

Summary and Recommendations

A review of the case law on an insurer's right to seek reimbursement for advanced benefits on uncovered claims reveals that there are many jurisdictions that have not yet addressed this issue. Those that have consider rulings in prior cases involving reimbursement of defense costs and/or settlement payments on uncovered claims, and involve claims in equity and contract. But, opinions on defense cases are arguably distinguishable, at least in the context of “mixed” claims, as generally an insurer's duty to defend is broader than its duty to indemnify. Reimbursement of settlement payment cases typically occur after the insurer is fully informed of what claims are covered, and the insurer has an opportunity to apprise an insured of its options regarding settlement. In contrast, an insurer's advance of benefits usually occurs immediately after the loss and before all facts are discovered, creating distinctive circumstances.

Most courts appear to allow reimbursement under equitable remedies, but there is no bright-line rule. Moreover, there are some jurisdictions that simply do not allow an insurer to seek reimbursement. However, the number one way for an insurer to preserve its right to reimbursement is to notify the insured of its rights before payment and include a specific reimbursement clause in every policy that allows it to recoup monies paid if it is later determined that there is no coverage under the policy. U.S. Fidelity and Guarantee Co. v. U.S. Sports Specialty Ass'n , 270 P.3d 464, 468 (Utah 1/24/12) (An insurer's right to reimbursement from an insured must be expressly stated in an insurance policy before it can be enforced).

If a policy does not contain a reimbursement provision, courts still allow an insurer to seek reimbursement of funds if the insurer satisfies strict prerequisites, essentially creating a separate contract between the insurer and insured to allow reimbursement. This can be accomplished by: 1) timely and expressly reserving your rights; 2) expressly notifying the insured of an intent to pay potentially non-covered claims; and 3) requiring the insured to agree that the insurer may still seek reimbursement at a later date if there is a determination of non-coverage under the policy. Mount Airy Ins. Co. v. Doe Law Firm , 668 So.2d 534, 538'39 (Ala.1995) (reimbursement not allowed under theory that the insurer is a volunteer payor if it pays defense or settlement costs while attempting to reserve rights over the insured's objection); Steadfast Ins. Co. v. Sheridan Children ' s Healthcare Servs., Inc. , 34 F. Supp. 2d 1364 (S.D. Fla. 1998) (liability insurer that failed to obtain non-waiver agreement preserving coverage defenses could not seek reimbursement); Utica Mut. Ins. Co. v. Rohm & Haas Co , 683 F. Supp. 2d 368 (E.D. Pa. 2010) (reimbursement of settlement payments denied as general liability policies at issue did not provide insurer with right to reimbursement and insured did not expressly agree to grant insurer right to reimbursement).

All is not lost if an insured will not agree to acknowledge an insurer's reimbursement right. In some instances, reimbursement is still permitted if there is sufficient evidence for the court to find an implied-in-fact or implied-in-law contract, or in limited jurisdictions, even with a unilateral reservation of rights. Cincinnati Ins. Co. v. Grand Pointe, LLC , 501 F. Supp. 2d 1145 (E.D. Tenn. 2007); Nobel Ins. Co. v. Austin Powder Co , 256 F.Supp.2d 937, 940 (W.D. Ark. 2003) (insurer must expressly include reimbursement in reservation of rights letter to reserve that right); United Nat'l Ins. Co. v. SST Fitness Corp. , 309 F.3d 914 (6th Cir.2002) (allowing insurer to recoup defense costs under an implied-in-fact contract theory); Blue Ridge Ins. Co. v. Jacobsen , 25 Cal.4th 489, 106 Cal.Rptr.2d 535, 22 P.3d 313 (2001) (finding implied-in-law contract); Travelers Prop. Cas. Co. of Am. v. Hillerich & Bradsby Co., Inc. , 596 F. Supp. 2d 1020, 1025 (W.D. Ky. 2008) aff'd, 598 F.3d 257 (6th Cir. 2010) (unilateral reservation of rights sufficient to allow reimbursement).

Last, if it is discovered that benefits were paid on a non-covered claim after the fact, and no reservation of rights was issued, an insurer may seek reimbursement if there is evidence that the payment was made based on fraud or a misrepresentation by the insured, and the payment does not represent an unconditional tender. French King Realty Inc., supra; Cameron Parish School Board v. RSUI Indemnity Company, 06-1970 (W.D. La. 11/20/08); 2008 WL 4965294.

In sum, an insurer should not be faced with waiving its right to seek reimbursement of advanced benefits if it is later determined that the loss is not covered. Although cases analyzing reimbursement of defense and settlement payments may provide some guidance, whether an insurer can seek reimbursement of policy benefits advanced for uncovered claims presents a unique situation, not yet addressed by all jurisdictions. The most effective way for an insurer to preserve its reimbursement claim is to include a provision in the insurance policy that allows reimbursement and issue a reservation of rights with any payment. Alternatively, the insurer can reserve its rights and ask its insured to consent to its potential reimbursement rights before benefits are paid. Some jurisdictions will also permit reimbursement under an insurer's unilateral reservation of rights; but, it appears without any reservation, the insurer's most successful recourse is to void the policy based on fraud or the misrepresentation of an insured to recoup advanced benefits on uncovered claims.

Shaundra M. Schudmak is an attorney at Lugenbuhl, Wheaton, Peck, Rankin & Hubbard in the firm's insurance practice group. This article is not intended to provide legal advice. Issues relating to insurance coverage and litigation are fact-specific, and their resolution will depend on the facts involved and the law governing the disputes, which varies from state to state. The views expressed in this article are not necessarily those of Lugenbuhl or its clients.