A recent decision from the First Circuit places in sharp relief the conflicts that inhere in an insurer’s defense of an insured under a reservation of rights. In American National Fire Insurance Co. v. York County, No. 08-02439, 2009 WL 2385464 (1st Cir. August 5, 2009), York sought indemnification under its law enforcement liability policies (LEL) for a class action that had been filed against the county by a putative class of persons who had been strip-searched at the county jail.
During what became the class period—October 14, 1996 through April 30, 2004—York County had maintained a series of LEL insurance policies underwritten by Twin Cities Insurers Company, ANFIC, and the Maine County Commissioner’s Association Risk Pool. Each insurer had covered York County for a portion of the class period: Twin Cities covered the county for a span that included the first 16 days; ANFIC’s coverage ran from November 1, 1996, through January 1, 1998; and the Risk Pool afforded coverage from the expiration of ANFIC’s policy to a date past the end of the class period. The declarations page of ANFIC’s policy made its coverage subject to both a $5,000 per claim deductible and an aggregate per-occurrence limit of $1 million. Defense costs under the policy did not erode the liability limits. When the putative class action was filed, the Risk Pool was the insurer of record. The Risk Pool assumed the defense on York County’s behalf.
The class was certified in 2003. York County then notified its other insurers, each of which ultimately agreed to participate in a coordinated defense of the now-certified class action.
Pursuant to a reservation-of-rights letter, ANFIC agreed to pay 25 percent of the collaborative defense costs. The company declared that “the $5,000 deductible will apply to each claim brought forth illegal strip-search within the coverage period.” ANFIC never explicitly withdrew this reservation of rights.
Ultimately, York County and its insurers engaged in a series of mediations with class counsel. ANFIC continued to maintain its position that its coverage was subject to a $5,000-per-claim deductible. ANFIC further maintained that its contribution to any settlement should be limited to no more than 15 percent of the total fund. York County objected, maintaining that a single deductible applied to the entire class and not to individual claims of class members.
Ultimately, York Town and its insurers were able to settle the class action by agreeing to establish a $3,300,000.00 settlement fund. ANFIC contributed $750,000 to the fund. The settlement extinguished all claims by arrestees who were unlawfully strip-searched at the York County jail during the class period. Ultimately, 1,410 claimants were designated eligible to receive payments from the settlement fund. Each proved claimant received a payment of $1,719.08. Of these claimants, 273 were strip-searched during the currency of ANFIC’s policy. None of these 273 claimants received more than $5,000.
Following settlement of the class action, ANFIC brought suit against York County in the United States District Court for the District of Maine. ANFIC sought to recover the $750,000 it had contributed to the class settlement on the ground that the funds represented deductibles owed to it by York County. ANFIC asserted that because each and every individual claim was settled for less than $5,000, its settlement contribution was composed entirely of deductible advanced by it on behalf of York County. York County invoked the affirmative defenses of equitable estoppel and accord and satisfaction. After a bench trial, the district court entered judgment for York County, finding that ANFIC was equitably estopped from pursuing its claim for reimbursement of the deductible.
The First Circuit stated that ANFIC’s intent was not the issue. The court explained:
On the one hand, if ANFIC intended all along to recoup the deductibles yet failed to mention that fact at the appropriate time, it should have known that York County would reasonably perceive its silence as an abandonment of the “deductible” claim and consider ANFIC’s $750,000 as an unconditional contribution from ANFIC’s own coffers (not merely a pass-through payment). On the other hand, if ANFIC made an about-face after the settlement and conceived a plan to recoup the deductibles at that late date, the County’s belief at the time of the settlement, that ANFIC had abandoned the “deductible” claim would be equally reasonable. Either way, the district court’s finding of unreasonable conduct is inexpugnable.
2009 WL 2385464, at *6. The court rejected ANFIC’s argument that it had never formally withdrawn its reservation of rights. The court pointedly remarked that “actions sometimes speak louder than words, and this is such an instance.” Id.
The court also rejected ANFIC’s argument that by simply paying what it was obligated to pay under the policy, its conduct cannot plausibly be deemed unreasonable. “This platitude begs the question; that the payment was made with respect to covered losses and obligated expenses sheds very little light on what York County reasonably perceived ANFIC’s agreement to be when it entered into the global settlement.” Id.
The court further concluded that the district court’s finding that ANFIC’s conduct was unreasonable found support in other facts attendant to the settlement negotiations. First, ANFIC made no effort to secure an agreement as to how its contribution would be allocated. Nor did ANFIC impose conditions or reservations on the negotiation of the draft. Finally, ANFIC did not attempt to characterize its contribution as an advance of deductibles or suggest the payment was anything other than an outright contribution toward the class settlement.
The court further found that York County had established justifiable detrimental reliance. 2009 WL 2385464, at *7. The court was incredulous of ANFIC’s challenge to the reasonableness of York County’s belief that the global settlement would extinguish the county’s liability, remarking that “the chain of events is telling.” Id. “It is transparently clear that each participant was striving to limit its own exposure to potentially massive damages and substantial litigation costs.” Id.
The court characterized as “sophistic reasoning” ANFIC’s contention that “even if a fully informed York County might have acted differently, it suffered no detriment by entering into the settlement agreement, because the County’s alternative was worse.” Id. “ANFIC’s blithe assertion assumes that, had York County not acquiesced in the global settlement and agreed to contribute $50,000, the necessary alternative was a full-dress trial resulting in a multi-million-dollar verdict against York County (far in excess of its available insurance coverage).” Id. The assertion was “incorrect,” noting that “the County’s non-acquiescence might well have prompted the other members of the defense group to rethink the matter and, perhaps, increase their contributions to the common fund (thus allowing the settlement to be consummated); or the County’s non-acquiescence might have prompted the class representatives to lower their sights and accept a lesser amount in settlement.” Id. Even if “the settlement cratered and the class action went to trial, the County might have had a viable claim against ANFIC for a bad-faith refusal to settle.” Id.
“The lesson is that where, as here, a party reasonably believes that it is wrapping up its entire exposure and settling a case for a sum certain, it suffers a detriment whenever it is required to pay more to fund the settlement.” Id. That is, “the County reasonably believed that its $50,000 contribution to the settlement fund would absolve it of all liability but, on ANFIC’s recasting of the scenario, it will be expected to make additional payments that might aggregate as much as $750,000.” Id. The court thus concluded that the County had indeed suffered a detriment: “The County did something that substantially altered its legal rights that it would not otherwise have done.” Id.
“The court held that ANFIC’s course of conduct was unreasonable and misleading; that York County reasonably bought into the impression that ANFIC had created; and that the County, through that reliance, suffered a cognizable detriment.” 2009 WL 2385464, at *8. The court punctuated its opinion with the statement that the district court’s “finding of equitable estoppel is bulletproof .” Id.
