IN THE SUPREME = COURT OF TEXAS

IN THE SUPREME COURT OF TEXAS

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No. 02-0730

════════λ= 2;═══

Excess = Underwriters at=20 Lloyd=92s, London=20 and Certain Companies Subscribing Severally But Not Jointly to Policy = No.=20 548/TA4011F01, Petitioners,

Frank=92s Casing = Crew &=20 Rental Tools, Inc., Respondent

════════λ= 2;══════════&= #9552;═════════_= 52;══════════= ══════════ = 552;═

On Petition for Review from = the

Court of Appeals for the Fourteenth = District of=20 Texas

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Argued February=20 15, 2006

=20 Justice Hecht, = joined by=20 Justice Green, = dissenting.

=20 By refusing to apply to insurers the same law of unjust = enrichment that=20 applies to everyone else, the Court hands Frank=92s Casing Crew & = Rental=20 Tools, Inc. $7 million for which it paid nothing and to which it has no=20 contractual right. The court does not deny the injustice of this result = but=20 argues that such windfalls are necessary to avoid situations in which an = insured=20 might be prejudiced by having to pay its own liabilities. Never mind = that=20 Frank=92s Casing claims no such prejudice in this case, or that no case = can be=20 found in which any insured ever claimed such prejudice, or that if any = imagined=20 prejudice ever actually did occur, it could easily be remedied. The = Court=92s=20 holding is contrary to the only other cases it can find on the = subject,[1] and it has been expressly = rejected in the=20 Restatement (Third) of Restitution and Unjust Enrichment.[2] Worst of all, the burden of the = windfalls=20 in this and many other cases will most likely fall on other = policyholders who=20 have never tried to get away with demanding more coverage than they = bought, so=20 that insureds who stick to their policies = will have=20 the privilege of paying extra to satisfy the claims of those who do = not.

=20 A blanket rule providing an insurer reimbursement for payment of=20 non-covered claims might work unfairness. An insurer could try to take = unfair=20 advantage of its insured=92s inexperience in assessing coverage issues = and use a=20 weak coverage dispute, coupled with the threat of a reimbursement claim = if=20 coverage is found lacking, to force the insured to contribute more = toward the=20 settlement of a liability claim than it should, thereby denying the = insured the=20 full protection of insurance to which it was entitled. But the Court=92s = rule=20 denying reimbursement in every situation is more than potentially = unfair.=20 As this case demonstrates, it actually allows an insured to take unfair=20 advantage of the extra-contractual liability an insurer faces for = failing to=20 resolve claims against the insured and leverage the threat of that = liability to=20 force its insurer to settle a claim and abandon a serious coverage = issue,=20 thereby effectively obtaining coverage it did not pay for and increasing = the=20 risk for which other policyholders must pay. The general law of = restitution=20 avoids the problems of both extremes by allowing reimbursement to = prevent unjust=20 enrichment but not otherwise.[3] This is reflected in section 35 = of the=20 Restatement (Third) of Restitution and Unjust Enrichment, = recently=20 adopted by the American Law Institute.[4] Section 35 provides a balanced, = practical, and principled rule for resolving the issue presented by this = case.

=20 The Court encourages insurers, as it has in the past, to obtain = prompt=20 resolution of coverage disputes, but today=92s decision leaves them no=20 alternative. Now an insurer must litigate coverage before a = liability=20 claim is resolved, even if that means putting an insured in the = undesirable=20 position

class=3DSection2>

of = having to=20 fight liability and coverage at the same time, even if it means = litigating the=20 liability claim in a declaratory judgment action to determine coverage, = and even=20 if it means delaying resolution of the liability claim until coverage = has been=20 determined. Otherwise, an insurer will be denied the right to litigate = coverage=20 altogether, which the Court surely cannot intend. I suspect that this=20 consequence of the today=92s decision, forcing more coverage litigation, = will=20 cause far more problems than the hypothetical concerns expressed in the = Court=92s=20 opinion.

=20 For these reasons, which I now explain more fully, I respectfully = dissent.

=20 Respondent Frank=92s Casing Crew & Rental Tools, Inc. has = provided oil=20 well and completion services and products throughout the = United = States=20 since 1938. Headquartered in Louisiana, it has=20 offices in Texas and transacts business = here.

=20 In 1995, an offshore drilling platform that Frank=92s Casing had = fabricated=20 in Louisiana for ARCO Oil and Gas Co. = and its=20 successor, Vastar Resources, Inc., collapsed = and sank=20 in the Gulf of Mexico. In May 1996, = ARCO filed=20 suit in Texas=20 against two defendants, and after they in turn sued Frank=92s Casing as = a=20 third-party defendant, ARCO and Vastar (who = had joined=20 the suit as plaintiff, collectively =93ARCO=94) named Frank=92s Casing = as a defendant=20 in January 1997. Alleging that Frank=92s Casing had failed to weld the = platform=20 components properly, ARCO sued for breach of contract, negligence, = strict=20 products liability, and contractual indemnity, seeking damages for lost = profits=20 and production and for costs of investigation, salvage, and repair, as = well as=20 exemplary damages and attorney fees.

=20 In addition to a $1 million surplus lines comprehensive general = liability=20 insurance policy, Frank=92s Casing had a $10 million umbrella policy = provided by=20 petitioners, Certain Companies Subscribing Severally But Not Jointly To = Policy=20 No. 548/TA4011F01 and Excess Underwriters at Lloyd=92s, London (=93the = Excess=20 Underwriters=94). Frank=92s Casing notified both insurers of ARCO=92s suit. The primary insurer assumed the = defense of the=20 lawsuit, as was its right and duty under its policy, and hired counsel = to=20 represent Frank=92s Casing.

=20 In March 1997, counsel for the Excess Underwriters wrote = Frank=92s Casing a=20 reservation-of-rights letter, stating in part:

Underwriters have commenced an investigation into = the claims=20 being made against Frank=92s in the [ARCO] Litigation. We are writing to = advise=20 you of our representation of Underwriters, to advise that we will be = evaluating=20 the coverage provided by the Umbrella Policy, to request your assistance = and=20 cooperation in our investigation into the claims being made against = Frank=92s and=20 the facts relevant to the Litigation, to advise that Underwriters have = not yet=20 come to any conclusions as to coverage, to invite Frank=92s to provide=20 Underwriters any information that you believe might assist Underwriters = in their=20 evaluation of the coverage questions, to solicit your input into our = evaluation,=20 and to advise Frank=92s as to Underwriters=92 preliminary reservation of = certain=20 rights under the Umbrella Policy.

Specifically,=20 the letter explained that coverage of ARCO=92s claims=20 =93may be limited or negated=94 under the umbrella policy because:

=95 &n= bsp; =20 claims alleging breach of contract and warranties =93may not constitute = an=20 =91occurrence=92 as that term is defined by the policy=94 =96 =93an = accident or a=20 happening. . . which unexpectedly and unintentionally results in = personal injury=20 or property damage or advertising liability=94 ;

=95 &n= bsp; =20 the policy excluded property damage claims for the failure of Frank=92s = Casing=92s=20 product or work due to deficiencies in its designs, plans, or written=20 instructions;

=95 &n= bsp; =20 the policy also excluded the costs of removal, recovery, repair, or = replacement=20 of product or work that failed to perform its function, and the costs of = raising, removal, or destruction of any of wreckage or debris or = obstruction,=20 however caused;

=95 &n= bsp; =20 the policy expressly excluded coverage for punitive damages and would = not cover=20 any damages occurring after September 30, 1995, the end of the policy = period;=20 and

=95 &n= bsp; =20 notice of the claim may not have been timely.

The letter=20 also stated that the scope of the umbrella policy=92s coverage was to = follow the=20 form of the primary policy (other than the monetary limits, of course), = which=20 counsel had not had an opportunity to review, and that the primary = policy might=20 therefore further restrict coverage of ARCO=92s claims.=20 In January 1998, the Excess Underwriters sent Frank=92s Casing a second=20 reservation-of-rights letter giving an additional reason for lack of = coverage:=20 that ARCO=92s claims for lost profits and = loss of use of=20 the platform were not =93property damage=94 covered by the policy. The = record does=20 not reflect whether Frank=92s Casing responded to the letters but does = indicate=20 that Frank=92s Casing took the position that all claims were = covered.

=20 Nearing the February 16, 1998 trial setting, the parties = discussed=20 settlement. ARCO=92s claims totaled $16 = million (Frank=92s=20 Casing stipulated that property damage was $5,630,360.28), far more than = the=20 policy limits of Frank=92s Casing=92s insurance, but after an = unsuccessful=20 mediation, ARCO=92s counsel offered to = settle for $9.9=20 million. Although Frank=92s Casing had no express right under its = primary policy=20 to control settlement,[5] and may or may not have had one = under the=20 umbrella policy,[6] its corporate counsel = unilaterally=20 rejected the offer as too high, even though it was within policy limits, = and did=20 not even forward it to the Excess Underwriters. On January 30, counsel = for the=20 Excess Underwriters contacted ARCO directly, without Frank=92s = Casing=92s knowledge,=20 and attempted to settle only the claims they believed were covered, but = no=20 agreement was reached. When Frank=92s Casing=92s counsel learned of = this, he=20 objected to any settlement negotiations being conducted without his = involvement.=20 ARCO then offered to settle all of its claims against all of the = defendants for=20 $8.8 million. In a February 2 letter to corporate counsel for Frank=92s = Casing,=20 counsel for the Excess Underwriters estimated that, after contributions = offered=20 by other defendants, Frank=92s Casing would be required to contribute = about $7.55=20 million. Assuming that $750,000 of primary coverage remained, the letter = made=20 two proposals: the Excess Underwriters would pay two-thirds of the = amount=20 required to meet ARCO=92s demand and waive = all coverage=20 issues if Frank=92s Casing would pay one-third; alternatively, they = would=20 contribute $5 million to any reasonable settlement Frank=92s Casing = reached with=20 ARCO and arbitrate coverage issues later. Frank=92s Casing refused both=20 proposals.

=20 Under their policy, the Excess Underwriters had no duty to = provide=20 Frank=92s Casing a defense but did have the right to associate in the = defense with=20 Frank=92s Casing=92s cooperation when it appeared likely they would be = involved,[7] and on February 2, they = retained separate=20 trial counsel. Trial commenced February 17, and it immediately became = clear for=20 the first time that Frank=92s Casing was ARCO=92s target=20 defendant. The next day, Frank=92s Casing=92s corporate counsel = requested ARCO=92s trial counsel to make a settlement offer = within the=20 umbrella policy=92s limits, suggesting $7 million. ARCO promptly = responded with a=20 $7.5 million offer, which Frank=92s Casing=92s counsel immediately = passed along to=20 the Excess Underwriters in a letter hand-delivered and faxed to their = counsel,=20 insisting that since trial was not going well, =93Frank=92s does now = look to=20 Underwriters to settle this claim.=94 The letter added that the Excess=20 Underwriters=92 coverage reservations had =93little credence=94 and that = it was=20 =93probable=94 Frank=92s Casing would suffer a jury verdict in excess of = policy=20 limits. ARCO=92s last offer, the letter = continued, was=20 =93one that an insurer, acting as a reasonably prudent insured, would = accept.=94=20 Counsel concluded:

=20 Should Underwriters in this instance refuse to move forward and = resolve=20 this dispute based upon [ARCO=92s] current = demand,=20 [Frank=92s Casing] specifically reserves its rights pursuant to the = Stowers doctrine[[8]] to proceed against the = Underwriters for=20 any liability Frank=92s may incur over and above the limits of its=20 insurance.

=20 On February 20, counsel for the Excess Underwriters responded by = faxed=20 letter that ARCO=92s offer should be = accepted but stated=20 that they continued to believe =93a substantial portion=94 of the claims = were not=20 covered and that it would be =93unreasonable for Umbrella Underwriters = to assume=20 total responsibility for [ARCO=92s] current = demand.=94 The=20 Excess Underwriters again proposed to resolve both ARCO=92s claims and the coverage issues by paying = two-thirds=20 of ARCO=92s settlement demand with Frank=92s = Casing paying=20 one-third (after contribution of the remainder of the primary policy=92s = limits,=20 which turned out to be about $500,000). Alternatively, the Excess = Underwriters=20 proposed to pay ARCO=92s demand, less the = contribution=20 from the primary insurer, with Frank=92s Casing=92s agreement to resolve = coverage=20 issues later. When counsel for Frank=92s Casing faxed a reply again = refusing to=20 contribute to the settlement and reiterating its demand that the Excess=20 Underwriters accept ARCO=92s offer, the = Excess=20 Underwriters acceded. ARCO had indicated that its offer would remain = open only=20 until the trial court=92s ruling on a particular issue, which was = expected=20 imminently. By letter faxed to Frank=92s Casing=92s counsel on the = morning of=20 February 23, counsel for the Excess Underwriters stated that they were = acting=20 =93to ensure that the favorable settlement will not be lost to both = Frank=92s and=20 Umbrella Underwriters.=94 But, he added, the Excess Underwriters would = =93continue=20 to reserve all coverage issues=94 and would =93hold Frank=92s = responsible for and . .=20 . seek reimbursement of all sums paid in settlement of claims for which = no=20 coverage exists=94.

=20 A few hours later, counsel for the Excess Underwriters=92 faxed = ARCO=92s trial counsel a letter agreeing to pay = $7.5 million=20 in settlement. Frank=92s Casing contends that it had no opportunity to = respond to=20 the Excess Underwriters=92 reimbursement claim before the case settled. = But when=20 the settlement was announced to the court the next day, counsel for = Frank=92s=20 Casing and the Excess Underwriters both referred to the latter=92s = reimbursement=20 claim:

=20 [Counsel for Frank=92s Casing]: Underwriters have attempted to = reserve all=20 rights against Frank=92s as to coverage under the umbrella policy. It is = Frank=92s=20 position that no proper preservation of reservations has been made and = Frank=92s=20 denies that the Underwriters may preserve coverages.=20 More specifically, Underwriters=92 offer to resolve the issue with = [ARCO], which=20 [was] made pursuant to Frank=92s demand by a Stowers letter dated February 19, 1998 and = February=20 20th, 1998, forwarded by Michael Andrepont = to Jay=20 James Cooper, counsel for Underwriters.

=20 Underwriters have accepted this offer in order to avoid the = possibility=20 of having to pay out funds in excess of policy limits. As a result, it = is=20 Frank=92s position that Underwriters have either waived their right to = reserve=20 cover issues or alternatively [are estopped] = from=20 asserting any coverage issues since Underwriters have agreed to the=20 settlement.

* * *

=20 [Counsel for the Excess Underwriters]: This settlement is being = funded by=20 Frank=92s Umbrella Underwriters subject to a full reservation of all = rights=20 against Frank=92s under the umbrella policy No. 548TA4011FO1. And these=20 Underwriters will hold Frank=92s responsible for and will seek = reimbursement of=20 all sums paid the settlement of claims for which no coverage exists = under the=20 umbrella policy.

The parties=20 later signed and filed a settlement agreement that made no reference to = the=20 Excess Underwriters=92 reimbursement claim specifically but preserved = =93any claims=20 that exist presently or may arise in the future between Defendant = Frank=92s and=20 Frank=92s Insurers arising from the claims asserted by = Plaintiffs.=94

=20 Also on February 23, the Excess Underwriters filed this action = against=20 Frank=92s Casing to resolve the coverage dispute and to obtain = reimbursement for=20 the settlement of any non-covered claims. They asserted seven provisions = of the=20 umbrella policy that limited or denied coverage of ARCO=92s claims. The policy neither provided for = nor=20 prohibited a right of reimbursement; it was entirely silent on the = subject. The=20 Excess Underwriters asserted that the right was implied in law and in = fact. In=20 its answer, Frank=92s Casing asserted in part that the Excess = Underwriters had not=20 stated a claim in contract or tort and had acted with unclean hands. = Frank=92s=20 Casing also counterclaimed for negligence, bad faith, violations of the = Texas=20 Insurance Code, breach of contract, business disparagement, and a = declaratory=20 judgment that all of ARCO=92s claims were = covered by the=20 umbrella policy.

=20 The case was presented to the trial court in seven motions for = partial=20 summary judgment, five by the Excess Underwriters and two by Frank=92s = Casing,=20 addressing separately the reimbursement issue, the various coverage = issues, and=20 damages. In September 1999, the trial court issued a series of orders = granting=20 the Excess Underwriters reimbursement for any non-covered claims and = denying=20 most of Frank=92s Casing=92s counterclaims. Then in March and April = 2000, the trial=20 court granted the Excess Underwriters=92 motions on the coverage issues = and denied=20 Frank=92s Casing=92s remaining motion. Finally, on December 14, 2000, = more than two=20 years and nine months after the case was filed, the trial court granted = the=20 Excess Underwriters=92 motion on damages, ordering that they were = entitled to=20 reimbursement of $7,013,612. But a week later, this Court issued its = decision in=20 Texas Association of Counties County Government Risk Management Pool = v.=20 Matagorda County, holding that an insurer that pays a claim later = determined=20 not to be covered by the policy is entitled to reimbursement =93only if = it obtains=20 the insured=92s clear and unequivocal consent to the settlement and the = insurer=92s=20 right to seek reimbursement.=94 [9] The trial court directed = Frank=92s Casing=20 to move for reconsideration on the issue of the right to reimbursement, = and=20 Frank=92s Casing complied. After further hearing, the trial court = granted the=20 motion, withdrew its orders on that issue, granted summary judgment for = Frank=92s=20 Casing on that issue, and signed a judgment that the Excess Underwriters = take=20 nothing. The trial court did not withdraw its orders resolving the = coverage=20 issue in favor of the Excess Underwriters.

=20 Only the Excess Underwriters appealed. The court of appeals = affirmed,=20 although it noted:

=20 We recognize this case carries Matagorda County to a logical = conclusion that is=20 somewhat disquieting =97 Frank=92s was able to resolve the parties=92 = coverage dispute=20 in its own favor simply by sending a Stowers=20 demand to the Underwriters. Thereafter, the Underwriters had to pay if = Arco=92s=20 claims were within the policy, but also had to pay if they = [were]=20 not within the policy because there was no right to reimbursement. = But this=20 is a matter that the Underwriters must take up with the superior = court.[10]

=20 The Court granted the Excess Underwriters petition for review[11] and issued an opinion = reversing and=20 remanding the case to the trial court for rendition of judgment in their = favor.[12] Though two Justices did not join fully = in the=20 Court=92s opinion,[13] none dissented from the = judgment.[14] When respondent=92s motion for = rehearing=20 was filed, only four of the Justices present at oral = argument=20 remained on the Court. To fully consider respondent=92s motion, = petitioner=92s=20 response, and a number of amicus briefs,[15] the Court granted the motion = and ordered=20 the case reargued.[16]

=20 Frank=92s Casing has not challenged, either in the court of = appeals or in=20 this Court, the trial court=92s rulings on the coverage issues. = Therefore, I=20 assume that none of ARCO=92s claims were = covered by the=20 umbrella policy. The only issue, then, is whether the Excess = Underwriters are=20 entitled to be reimbursed for the amount they paid in settlement.

=20 The parties agree that the coverage issues were governed by = Louisiana law, but they disagree whether the = reimbursement=20 issue is governed by Louisiana law or = Texas law, and=20 whether the two are different. Frank=92s Casing contends that the Excess = Underwriters never requested the application of Louisiana law in the trial court and that in any = event, on=20 the issue before us it is no different than Texas law. The Excess Underwriters = alluded to=20 Louisiana law=20 twice in the trial court. A six-sentence footnote in their motion for = summary=20 judgment began, =93[t]o the extent Louisiana law=20 might apply to this case=94, and then cited two Louisiana statutes[17] and two cases[18] generally allowing recovery = for unjust=20 enrichment. None of the authorities cited specifically addressed the = issue in=20 this case. In response to Frank=92s Casing=92s motion for = reconsideration, after=20 this Court=92s decision in Matagorda County issued, the Excess = Underwriters=20 again briefly cited general Louisiana authority =93[t]o the extent this = Court=20 finds Louisiana law controlling=94. Neither instance amounted to an = actual=20 assertion that the reimbursement issue is controlled by Louisiana = law. If=20 Louisiana law=20 were controlling, it is not clear from the authorities cited how it = would=20 resolve the issue before us. Without proof that Louisiana and Texas law are different, they should = be=20 presumed to be the same,[19] and which of the two states=92 = law=20 controls need not be resolved.

=20 Accordingly, I turn to the question whether Texas law = affords an=20 insurer the right to reimbursement from its insured for settling a = non-covered=20 liability claim.

III

=20 When the parties to a contract disagree over what performance is = required=20 and that disagreement cannot be resolved before performance is due, the = party=20 who must perform is put to the choice of doing more than he thinks is = called for=20 or facing the other party=92s claim of breach. The potential adverse = consequences=20 of the latter course may be severe enough that the party is all but = forced to=20 render the performance demanded and forego resolution of the dispute. = The other=20 party thus obtains more than he bargained for.

=20 According to the Restatement (Third) of Restitution and Unjust = Enrichment:

=20 The commonsense solution to this dilemma =97 allowing performance = with=20 reservation of rights =97 promotes justice and efficiency. Because it = offers=20 recourse to a party who might otherwise be effectively compelled to = render an=20 extracontractual performance, it serves both = to=20 reinforce the parties=92 agreement and to prevent the unjust enrichment = that would=20 otherwise result. Equally important, the mechanism of contingent or = provisional=20 performance (that is, performance subject to an eventual claim in = restitution)=20 will serve in many cases to reduce the overall cost of resolving the = parties=92=20 dispute. Disputes over contractual requirements commonly arise in the = midst of=20 the undertaking, rather than at its outset or conclusion. The cost of=20 interruption is then at its highest; the risk of consequential harms = (which must=20 ultimately be borne by one party or the other) leverages the stakes = beyond the=20 amount initially in dispute. If the party on whom a questionable demand = is made=20 can protect its position only by refusing performance, the costs of = resolution=20 are magnified accordingly. Performance with reservation of rights can = reduce=20 these costs by deferring dispute resolution to a point at which the risk = of=20 consequential harm is lower.[20]

Provisional=20 performance is the rule for transactions governed by the Uniform = Commercial=20 Code, which provides that =93[a] party that with explicit reservation of = rights=20 performs or promises performance or assents to performance in a manner = demanded=20 or offered by the other party does not thereby prejudice the rights = reserved.=94[21] The UCC imposes no requirement = that the=20 other party consent to the reservation for it to be effective.

=20 The point of reserving rights is, of course, is to see them = vindicated,=20 which cannot be accomplished without a remedy.[22] The remedy, according to the=20 Restatement (Third) of Restitution and Unjust Enrichment, is = restitution.=20 The UCC provision, the Restatement explains, =93presume[s] . . . that the =91rights reserved=92 by = a performing=20 party =97 =91where one party is claiming as of right something which the = other=20 believes to be unwarranted=92 =97 take the form of a claim in = restitution for the=20 value of any benefit conferred to which the recipient was not = entitled.=94[23] Texas law recognizes restitution as = a remedy=20 for unjust enrichment =93[w]hen a person has obtained a benefit by = taking undue=20 advantage of another=94.[24] The Restatement sets = out the=20 following rule, originally suggested by Professor Mark Gergen:[25]

=A7 35. Performance of Disputed = Obligation

=20 (1) If one party to a = contract=20 demands from the other a performance that is not in fact due by the = terms of=20 their agreement, the party on whom the demand is made may render such=20 performance under protest or with reservation of rights, preserving a = claim in=20 restitution to recover the value of the benefit conferred in excess of = the=20 recipient=92s contractual entitlement.

=20 (2) The claim described = in=20 subsection (1) is available only to a party acting in good faith and in = the=20 reasonable protection of the claimant=92s own interests. It is not = available where=20 there has been an accord and satisfaction between the parties, or where = a=20 performance with reservation of rights is inadequate to discharge the = claimant=92s=20 obligation to the recipient.[26]

The rule=20 restricts restitution to claimants who act in good faith and in the = reasonable=20 protection of their own interests. The provisional performance must also = go far=20 enough to discharge a claimant=92s obligation. In such circumstances, = restitution=20 is not precluded by the voluntary-payment rule because, as comment b to = section=20 35 explains, the claimant acts under a kind of coercion =97 the pressure = to take=20 action to avoid consequential harms before uncertainty as to contractual = obligations can be resolved.[27]

=20 Section 35 restates the principle of restitution inherent in the = UCC=20 provision and applicable to contracts generally. But insurance policies = are not=20 governed by the UCC, and as comment c to section 35 recognizes, = =93disputes=20 between insurers and policyholders over the insurer=92s duty to pay a = claim, or to=20 settle or defend a claim brought against the policyholder, present = special=20 difficulties for the law of restitution, because the insurer=92s duty to = indemnify=20 and defend is subject to extensive regulation under local insurance = law.=94[28] Regulation is necessary = because an=20 insured is typically at a distinct disadvantage in dealing with an = insurer,=20 having little or nothing to say about the policy language, little or no=20 experience in evaluating coverage issues, and neither the wherewithal = nor the=20 inclination to litigate disputes. The prospect that a third-party = liability=20 claim may not be covered by insurance poses a significant threat to most = insureds. As the Restatement observes, = =93[p]ublic policy strongly favors the prompt discharge = of an=20 insurer=92s obligations to its policyholder.=94 [29]

=20 Nevertheless, Texas law permits a liability = insurer to=20 defend or settle a claim against its insured while reserving its rights = to=20 contest coverage,[30] as long as it acts timely and = in good=20 faith.[31] An insured may reject the = reservation,=20 demand an unconditional defense, and sue for contractual and extracontractual damages.[32] But if the insured does not = reject the=20 reservation, the insurer must be given a meaningful opportunity to = resolve the=20 coverage dispute if the reservation is to be anything but an empty = formality.=20 Without that opportunity, the Restatement explains:

the risk of enhanced liability in coverage disputes = may compel=20 a performance by the insurer that is outside the scope of the insurance=20 contract. If the insurer, by denying coverage, risks a potential = liability=20 greater than the amount initially in controversy =97 and if the insurer = is obliged=20 to take action before the coverage issue can be adjudicated =97 the = effect of the=20 applicable legal rules may be to subject the insurer to an extracontractual liability. Such a result distorts = the=20 parties=92 allocation of risks and creates the sort of unjust enrichment = with=20 which the present Section is concerned.[33]

=20 The present case is a prime example of such distortion of risk = and unjust=20 enrichment when an insurer is denied restitution from its insured for = settling=20 non-covered claims. The Excess Underwriters=92 Stowers obligation was to accept a = reasonable=20 settlement offer within policy limits or stand to the full recovery = against=20 Frank=92s Casing, even beyond policy limits. Once ARCO made such an = offer, Frank=92s=20 Casing had almost no incentive to confront the coverage issues. If ARCO=92s claims were covered by the Excess = Underwriters=92=20 policy, Frank=92s Casing had no exposure, and if the claims were not = covered, so=20 what? If the Excess Underwriters settled and won the coverage dispute, = Frank=92s=20 Casing had nothing to lose without an obligation to reimburse the = settlement of=20 the non-covered claims. And if the Excess Underwriters did not settle = and lost=20 the coverage dispute, Frank=92s Casing would have no obligation. Only if = the=20 Excess Underwriters refused to settle and later won the coverage dispute = would=20 Frank=92s Casing risk any liability. But while Frank=92s Casing=92s risk = of refusing=20 to contribute to the settlement was slight, the Excess Underwriters=92 = risk of=20 refusing to settle was enormous. Even if they won the coverage dispute, = they=20 could not recover without a right of reimbursement, and if they lost the = coverage dispute, their Stowers = liability would=20 extend to ARCO=92s full recovery, perhaps = $16 million.=20 Having estimated their ultimate exposure to be $5 million, as reflected = in their=20 settlement offer to Frank=92s Casing, the Excess Underwriters barely = hesitated in=20 paying $2 million more to settle $16 million in claims, especially after = trial=20 had begun and Frank=92s Casing itself viewed ARCO=92s case=20 claims as strong.

=20 If the Excess Underwriters=92 assessment of the coverage issues = had been=20 correct, they would have paid $2 million more than they owed. As it = turned out,=20 the Excess Underwriters were finally determined to have no obligation at = all.=20 None of ARCO=92s claims were covered. Stowers liability combined with no right of = reimbursement effectively forced the Excess Underwriters to extend = Frank=92s=20 Casing $7 million in coverage for which it had not contracted and had = paid=20 nothing. Such disincentive for insurers to resolve coverage issues = carries a=20 cost that must be paid in higher premiums.

=20 The purpose of the law of restitution is to prevent such unjust=20 enrichment without permitting abuse. In Matagorda County, the Court noted that = an=20 insurer=92s right of reimbursement could operate unfairly against an = insured.=20 Though the Court did not elaborate, such a situation can occur when the=20 plaintiff=92s claims exceed the defendant=92s assets, but not its policy = limits,=20 coverage is uncertain, and the insurer can settle over the defendant=92s = objection.[34] But Matagorda County = incorrectly=20 asserted that a right of reimbursement might result in a defendant = having to pay=20 more than it is worth.[35] It is impossible for an = insurer to exact=20 more from an insured than he is worth; you can=92t squeeze blood from a = turnip.=20 And an insurer has no more incentive or ability to sue for reimbursement = that=20 cannot

class=3DSection3>

be = collected=20 than a plaintiff has to demand a settlement that cannot be paid. Indeed, = it=20 almost always has less incentive. Not only will the insurer want to = leverage the=20 coverage dispute to extract a lower settlement demand from the = plaintiff, but an=20 insurer who pursues its insured into bankruptcy does so at a business = cost paid=20 in bad customer relations and lower premiums.

=20 In any event, Frank=92s Casing does not argue that an obligation = to=20 reimburse the Excess Underwriters would have put it in the predicament=20 hypothesized in Matagorda County. Frank=92s Casing is = a=20 substantial business, and there is nothing to indicate that it lacked = the means=20 to meet its liability to ARCO. When both the defendant=92s assets and = the=20 plaintiff=92s demand exceed the insurer=92s policy limits, granting the = defendant=20 the unilateral power to accept or reject a settlement offer may unfairly = prejudice the insurer.[36]

=20 The possibility of prejudice to an insured, not = actually=20 present in either this case or in Matagorda County, is avoided = under=20 section 35, which would not allow reimbursement because the insurer=92s = settlement=20 of the claim under a reservation of rights would result in a higher = payment by=20 the insured and therefore be =93inadequate to discharge [the = insurer=92s] obligation=20 to the [insured]=94. The remedy for unjust enrichment does not come at a = price of=20 unfairness to the other party. Further, if the restrictions on = restitution=20 contained in section 35 were inadequate to prevent an unjust application = of the=20 rule, equity could intervene because restitution is an equitable = remedy.[37] If an insured were unfairly = prejudiced=20 by affording an insurer a right of reimbursement, the answer is to limit = the=20 right in that situation to prevent the prejudice, not to deny it = altogether in=20 the many other cases in which it is necessary to prevent unjust = enrichment.

=20 The Court rejects section 35, not because it is in any way unfair = to=20 insureds, but because it =93undermine[s] . . = . the=20 predictability that our decision in Matagorda County provided=94.[38] Of course, it does. = Never is=20 extremely predictable. But section 35 would certainly create no serious=20 unpredictability in this case or any one like it. It is not very hard to = see=20 that Frank=92s Casing should not be given the benefit of coverage it did = not=20 buy.

=20 Frank=92s Casing and amici curiae = have raised=20 several other arguments against an insured=92s right to be reimbursed by = its=20 insured for settling non-covered claims.

=20 1. Such a = right disincentivizes insurers to obtain a resolution of = coverage=20 issues before a liability claim must be settled. We have encouraged = prompt=20 resolution of coverage issues through declaratory judgment actions.[39] The argument that an insurer = entitled to=20 reimbursement might delay such resolution is easily answered; an insurer = who=20 intentionally delays resolution of coverage issues to prejudice the = insured may,=20 in a particular case, forfeit the right of reimbursement by failing to = act in=20 the good faith required by section 35.

=20 Denying reimbursement altogether raises a different set of = problems.=20 Early resolution of coverage issues is often impossible or imprudent.[40] In many cases, there is simply = not time.=20 Here, for example, while Frank=92s Casing faults the Excess Underwriters = for doing=20 nothing to resolve coverage issues in the eleven months that the = liability case=20 was pending against it, the fact that the coverage case took nearly = three years=20 and seven motions for summary judgment strongly suggests that it could = not have=20 been completed before the trial of ARCO=92s = claims. In=20 other cases, litigating coverage while the liability claim is pending is = prejudicial to the insured. The insured may be forced to take positions = in=20 support of coverage that undermine the defense of the liability claim. = Pitting=20 the insurer and insured against one another may create intolerable = conflict at a=20 time when their interests in defending against liability should be = aligned. It=20 may simply be distracting and difficult for the insured to fight the = liability=20 claimant on one front and his insurer on another. These problems may now = be=20 unavoidable, since the Court=92s refusal to allow an insurer to recover = payment of=20 a non-covered claim means that unless an insured agrees to defer = coverage=20 issues, they must be determined before the liability claim is resolved = or be=20 forever lost. It may even be necessary to delay resolution of the = liability=20 claim. The Court certainly does not suggest that an insurer should be = denied a=20 fair opportunity to litigate coverage issues.

=20 2. If there is = to be=20 such a right, it should be expressed in the policy. It is well = settled that=20 the law may imply contractual terms to prevent unjust enrichment. In = Ferrous=20 Products Co. v. Gulf States Trading Co., we said, quoting hornbook = law:

A quasi contractual obligation is one that is = created by the=20 law for reasons of justice, without any expression of assent and = sometimes even=20 against a clear expression of dissent.

* * *

Contracts implied in law, or more properly quasi or=20 constructive contracts, are a class of obligations which are imposed or = created=20 by law without regard to the assent of the party bound, on the ground = that they=20 are dictated by reason and justice, and which are allowed to be enforced = by an=20 action ex contractu. . . . Such=20 contracts rest on the equitable principle that a person shall not be = allowed to=20 enrich himself unjustly at the expense of another, and on the principle = that=20 whatsoever it is certain that a man ought to do, that the law supposes = him to=20 have promised to do.[41]

This settled=20 law is a part of every contract and governs the transaction.[42] The argument here is that the = general=20 law of restitution should not apply. But restitution is necessary if an=20 insurer=92s reservation of rights, long allowed by Texas law, is to have any viability = in cases=20 in which coverage issues cannot be resolved before the liability claim. = To deny=20 restitution in such cases, given an insurer=92s Stowers duty to accept a reasonable = settlement of a=20 liability claim within policy limits, is effectively to create coverage = where=20 none exists. That is what happened in this case.

=20 3. An express=20 agreement =97 the policy =97 precludes an agreement implied in law. = This both=20 misstates the law and misapplies it to this case. It is true, as we said = in=20 Fortune Production Co. v. Conoco, Inc., that

[g]enerally speaking, = when a valid,=20 express contract covers the subject matter of the parties=92 dispute, = there can be=20 no recovery under a quasi-contract theory. . . . That is because parties = should=20 be bound by their express agreements. When a valid agreement already = addresses=20 the matter, recovery under an equitable theory is generally inconsistent = with=20 the express agreement.[43]

But we also=20 specifically noted that there were certain exceptions which would allow = recovery=20 of =93overpayments under a contract . . . under a theory of restitution = or unjust=20 enrichment.=94 [44] Moreover, the Excess = Underwriters=92=20 policy does not cover the subject of restitution. It required that = Frank=92s=20 Casing make a claim within a year after its liability became fixed[45] and then allowed the Excess = Underwriters=20 thirty days to decide whether to pay it. But this provision neither = required nor=20 entitled the Excess Underwriters to defer a decision on a claim until = after=20 Frank=92s Casing had settled it and thus force a Stowers violation. The policy merely = provided an=20 outside time frame for making and paying claims. On the subject of = reimbursement=20 in the circumstances before us the policy was entirely silent, and that = silence=20 does not preclude restitution.

=20 4. The risk of = any=20 uncertainty about coverage should be borne entirely by the insurer = because of=20 its control of the liability litigation and its superior knowledge and=20 experience with coverage issues. There is no question that most = insurers are=20 better able to assess coverage issues than most insureds, since insurers are likely to have = encountered the=20 issues many times. But as this case illustrates, an insurer must be = virtually=20 certain that coverage does not exist before it can justify the risk of = refusing=20 to settle a claim within policy limits. Few cases are so clear. As the=20 Restatement recognizes, restitution is an equitable accommodation = of the=20 insurer=92s and insured=92s interests in reserving and later resolving = coverage=20 issues. Also, while it may be possible for an insurer to exercise its = right to=20 control the defense and settlement of a liability claim in a way that = unfairly=20 prejudices an insured sued for restitution, the prejudice can be = addressed in=20 any case in which it occurs without denying restitution in all cases. = Frank=92s=20 Casing makes no claim of such prejudice in this case.

=20 5. Insurers = will use=20 meritless coverage issues and the threat of a suit for reimbursement to = force=20 insureds to contribute to settling claims = when they=20 should not have to. This is not what happened in the present case. = Instead,=20 Frank=92s Casing repeatedly refused to contribute anything to the = settlement of=20 ARCO=92s claims, either settling the = coverage issues at=20 the same time or reserving resolution for later, when the umbrella = policy=20 provided no coverage at all. The law does not punish insureds for such obduracy as it would insurers, = as for=20 example with Stowers liability. But = an insured=20 should not be rewarded for forcing coverage when none exists. An insurer = who=20 raises bogus coverage issues to extract a settlement contribution from = an=20 insured is subject to other sanctions as for any unfair practice.[46]

=20 6. Defense = counsel=20 cannot advise an insured that a settlement offer is reasonable if in so = doing he=20 subjects the insured to a reimbursement obligation. The premise is=20 incorrect. Counsel=92s advice regarding the reasonableness of an offer = does not=20 trigger the insurer=92s claim for restitution. That claim depends = entirely on the=20 effectiveness of the reservation of rights, the resolution of coverage = issues,=20 the reasonableness in fact of the acceptance of the settlement offer, = and the=20 insurer=92s good faith and absence of inequitable conduct. Of course, if = counsel=92s=20 advice is communicated beyond persons protected by the attorney-client=20 privilege, it may be evidence of the reasonableness of the offer when = the issue=20 arises, but if kept confidential the advice would be privileged from = disclosure.=20 A right of restitution does not pose a conflict for defense counsel in = advising=20 the insured. In this case, there is no hint of such a conflict. We have = no=20 indication what Frank=92s Casing=92s defense counsel thought of ARCO=92s settlement offer, and corporate counsel = did not=20 hesitate in pronouncing the offer reasonable and twice insisting that = the Excess=20 Underwriters accept it.

=20 7. If an = insurer=92s=20 settlement of a non-covered claim can be recovered from the insured, the = insurer=20 will settle early, even if unfavorably, to minimize defense expenses and = avoid=20 Stowers liability. It is = difficult to=20 imagine why an insurer would accept a settlement offer that is = unreasonable and=20 to which its insured objects, and then try to seek reimbursement from = the=20 insured. If for some reason it occurred, it would exhibit the the lack of good faith that section 35 = requires.

=20 These arguments do not support making an exception to the general = law of=20 restitution for the defense and settlement of liability insurance = claims. The=20 Court cites only one other court of last resort that has considered the = issue:=20 Blue Ridge Insurance Co. v. Jacobsen. There, the Supreme Court of = California allowed a right of reimbursement in circumstances similar to = this=20 case.[47] I agree with the reasoning of = that case,=20 as does the Restatement.[48]

* * * * *

=20 I would reverse the court of appeals=92 judgment and remand the = case to the=20 trial court for rendition of judgment in favor of the Excess = Underwriters.=20 Accordingly, I respectfully dissent.

&nbs= p; = ; = &= nbsp; &n= bsp; =20 ___________________ &n= bsp; =20

&nbs= p; = ; = &= nbsp; &n= bsp; =20 Nathan L. Hecht

&nbs= p; = ; = &= nbsp; &n= bsp; =20 Justice

Opinion delivered: = February 1,=20 2008

^[1]=20 Blue Ridge Ins. Co. v. Jacobsen, 22 P.3d 313, 318-319 (Cal. = 2001);=20 Colony Ins. Co. v. G & E Tires & Serv., Inc., 777 So.2d = 1034,=20 1038-1039 (Fla. Dist. Ct. App. 2000).

^[2]=20 Restatement (Third) of = Restitution and=20 Unjust Enrichment =A7 35 & reporter=92s note to cmt. c, illus. 10 (Tentative Draft No. 3, 2004) = (=93it is the=20 dissenting opinion in Texas Ass=92n of = Counties=20 [County Gov=92t Risk Mgmt. Pool v. = Matagorda=20 County, 52 S.W.3d 128, 136 (Tex. 2000) (Owen, J., joined by Hecht, = J.,=20 dissenting)] that reflects the position of this Restatement=94). =

^[3]=20 Mark P. Gergen, Restitution as a Bridge = over=20 Troubled Contractual Waters, 71 Fordham L. Rev. 709, 725-728=20 (2002).

^[4]=20 Restatement (Third) of = Restitution and=20 Unjust Enrichment =A7 35 & reporter=92s note to cmt. a (Tentative Draft No. 3, 2004). Tentative = Draft No. 3=20 was approved by the membership of the American Law Institute during its = annual=20 meeting on May 18, 2004. American Law=20 Institute, Proceedings at 81st Annual Meeting 259-260 = (2004).

^[5]=20 The policy provided that the insurer =93shall have the right and duty to = defend=20 any suit against the Assured . . . and may make such investigation and=20 settlement of any claim or suit as it deems expedient=94.

^[6]=20 The policy provided: =93The Assured shall make a definite claim for any = loss for=20 which the Underwriters may be liable under this policy within twelve = (12) months=20 after the Assured shall have paid an amount of ultimate net loss in = excess of=20 the amount borne by the Assured or after the Assured=92s=20 liability shall have been fixed and rendered certain either by final = judgment=20 against the Assured after actual trial or by written agreement of the = Assured, the claimant, and Underwriters.=94 (Emphasis added.) The = Excess=20 Underwriters argue that the last phrase gives Frank=92s Casing the right = to=20 consent to any settlement, but Frank=92s Casing argues that this = stretches the=20 phrase=92s meaning.

^[7]=20 The policy provided:

The Underwriters shall not be called upon to = assume=20 charge of the settlement or defense of any claim made or suit brought or = proceeding instituted against the Assured but Underwriters shall have = the right=20 and shall be given the opportunity to associate with the Assured or the = Assured=92s underlying insurers or both in the = defense and=20 control of any claim, suit or proceeding relative to an occurrence where = the=20 claim or suit involves, or appears reasonably likely to involve = Underwriters, in=20 which event the Assured and Underwriters shall co-operate in all things = in the=20 defense of such claim, suit or proceeding.

^[8]=20 See American Physicians Ins. Exch. v. Garcia, 876 S.W.2d = 842, 843=20 n.2 (Tex. 1994) (=93The duty of an insurer to exercise ordinary care in = the=20 settlement of claims to protect its insureds = against=20 judgments in excess of policy limits is generically referred to in Texas = as the=20 Stowers duty.=94); Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544 (Tex. Comm=92n App. 1929, holding approved).

^[9]=20 52 S.W.3d 128, 135 (Tex. 2000) (=93[W]e hold that, when coverage is = disputed and=20 the insurer is presented with a reasonable settlement demand within = policy=20 limits, the insurer may fund the settlement and seek reimbursement only = if it=20 obtains the insured=92s clear and unequivocal consent to the settlement = and the=20 insurer=92s right to seek reimbursement.=94).

^[10] 93 S.W.3d 178, 180 (Tex. = App.=96Houston [14th=20 Dist.] 2002).

^[11] 46 Tex. Sup. Ct. J. 546 (Apr. 3, = 2003).

^[12] 48 Tex. Sup. Ct. J. 735 (May 27, = 2005).

^[13] Id. at 744 (O=92Neill, J., = concurring);=20 id. at 746 (Wainwright, J., concurring).

^[14] Justice Brister did not = participate in=20 the decision, having authored the opinion for the court of appeals while = serving=20 as Chief Justice of that court. Justice=20 Johnson also did not participate, having recently been appointed = to the=20 Court.

^[15] Amicus briefs in support of = respondent=92s=20 motion for rehearing have been submitted by United Policyholders; Brad = Fish,=20 Inc.; Pilco, Inc.; Shell Oil Co.; Motiva = Enterprises=20 LLC; Burlington Resources Inc.; Temple-Inland Inc.; Texas Civil Justice = League;=20 Texas Ass=92n of Defense Counsel, Inc.; and = Valero=20 Energy Corp. Amicus briefs opposing the motion have been filed by = Property=20 Casualty Insurers Ass=92n of America; = American Insurance=20 Ass=92n; and Complex Insurance Claims = Litigation Ass=92n, on behalf of its members: AIG; Chubb = & Son;=20 Farmers Insurance Group; The Hartford Insurance Group; Liberty Mutual = Group=20 Inc.; St. Paul Fire and Marine Insurance Co.; Selective Insurance Co. of = America; The Travelers Indemnity Co. and Travelers Indemnity and Surety = Co.; and=20 Zurich American Insurance Co.

^[16] 49 Tex. Sup. Ct. J. 240 (Jan. 6, = 2006).

^[17] La.=20 Civ. Code Ann. arts. 2055, 2298.

^[18] Edmonston v. A-Second Mortgage Co. of = Slidell, 289 So.2d 116 (La. 1974); E.F. Minyard v.=20 Curtis Prods., Inc., 205 So.2d 422 (La. 1968).

^[19] Coca-Cola Co. v. Harmar Bottling Co., 218 S.W.3d 671, 685 = (Tex. 2006); Gevinson=20 v. Manhattan Constr. Co. of Okla., 449 S.W.2d 458, 465 n. 2 = (Tex. 1969); Milner v. Schaefer, 211 = S.W.2d 600, 603=20 (Tex. Civ. App.=97San Antonio 1948, writ ref=92d); Tempel v. Dodge, 33 S.W. 222, 222 = (Tex. = 1895).

^[20] Restatement (Third) of Restitution = and Unjust=20 Enrichment =A7 35 cmt. a (Tentative = Draft No. 3,=20 2004).

^[21] Tex. Bus. & Com. Code = =A7=A7 1.102=20 (=93Scope of Chapter=94 in Uniform Commercial Code); 1.308(a) = (=93Performance or=20 Acceptance Under Reservation of Rights=94).

^[22] See Miers v. Brouse, 271 S.W.2d 419, 421 (Tex. 1954) = (=93The first=20 maxim of equity is that it will not suffer a right to be without a = remedy. As=20 Lord Holt early said: =91If the plaintiff has a right, he must of = necessity have a=20 means to vindicate and maintain it . . . . It is a vain thing to imagine = a right=20 without a remedy.=92=94 (citation omitted)); Ashby v. White, 92 = Eng. Rep.=20 126, 136 (K. B. 1703) (Lord Holt, C.J., dissenting), reprinted in = 1 Smith=92s Leading Cases 464, = 483 (9th=20 ed. 1889). On writ of error from the King's Bench, the House of Lords = reversed=20 the judgment and ruled in favor of the plaintiff for the reasoning = stated in=20 Lord Chief Justice Holt's dissent. 1 Eng. Rep. 417 (H.L. 1703); = see 90=20 Eng. Rep. 1188 (H.L. 1703); John William=20 Smith et al., A Selection of Leading Cases on Various Branches of the = Law: With=20 Notes 509 (9th ed., Charles H. Edson = & Co.=20 1888).

^[23] Restatement (Third) of Restitution = and Unjust=20 Enrichment =A7 35 cmt. a (Tentative = Draft No. 3,=20 2004).

^[24] Heldenfels Bros., Inc. v. City of Corpus = Christi, 832 S.W.2d 39, 41 (Tex. 1992) (=93A party may recover under = the=20 unjust enrichment theory when one person has obtained a benefit from = another by=20 fraud, duress, or the taking of an undue advantage.=94).

^[25] See Gergen, = supra note 3,=20 at 728.

^[26] Restatement (Third) of Restitution = and Unjust=20 Enrichment =A7 35 (Tentative Draft No. 3, 2004); id. cmt. a (=93The rule of this Section is implicit in = the=20 negative statement of U.C.C. =A7 1-308(a) . . . .=94).

^[27] Restatement (Third) of Restitution = and Unjust=20 Enrichment =A7 35 cmt. b (Tentative = Draft No. 3,=20 2004) (=93When the cost of resistance includes a risk of further loss or = liability, beyond the amount already in controversy, the party on whom = the=20 demand is made may have no practical alternative but to submit. = Performance in=20 such cases is not =91voluntary,=92 and restitution is uniformly = available to rectify=20 the overperformance that the claimant has = effectively=20 been compelled to render.=94); see Dallas County Cmty. Coll. Dist. v. Bolton, 185 S.W.3d 868, = 886 (Tex.=20 2005); BMG Direct Mktg. v. Peake, 178 = S.W.3d=20 763, 776-778 (Tex. 2005).

^[28] Id. cmt.=20 c.

^[29] Id.

^[30] See American Physicians = Ins.=20 Exch., 876 S.W.2d at 861 (Hightower, J., dissenting).

^[31] See American Eagle Ins. = Co. v.=20 Nettleton, 932 S.W.2d 169, 174 (Tex. App.=97El Paso 1996, writ = denied) (=93[A]n=20 insurer may undertake the insured=92s defense and later deny coverage if = it=20 =91reserves its rights=92 by advising the insured that it may interpose = a policy=20 defense following adjudication of the claimant=92s suit against the = insured. This=20 is a proper course of action only when the insurer has a good faith = belief that=20 the complaint alleges conduct which may not be covered by the policy. In = such a=20 situation, the reservation of rights will not breach the duty to defend = if=20 timely notice of intent to reserve rights is sufficient to inform the = insured of=20 the insurer=92s position.=94 (citations omitted)).

^[32] Texas Ass'n of=20 Counties County Gov=92t Risk Mgmt. Pool v. = Matagorda=20 County, 52 S.W.3d 128, 141 (Tex. 2000) (Owen, J., joined by Hecht, = J.,=20 dissenting) (=93Under Texas law, if an insurance company tenders a = defense with a=20 reservation of rights, the insured may either accept that defense with = the=20 reservation of rights, or it may refuse the tendered defense and defend = the suit=20 itself. If the insured decides to defend itself, it must bear the cost = of that=20 defense if the claims against it are not covered by insurance.=94 = (citation=20 omitted)).

^[33] Restatement (Third) of Restitution = and Unjust=20 Enrichment =A7 35 cmt. c (Tentative = Draft No. 3,=20 2004).

^[34] Suppose the following: at trial, = P has a=20 50% probability of recovering 10 and a 50% probability of recovering 0; = coverage=20 is 50/50; policy limits are 10; and D has 2 in assets.

&nbs= p; =20 P expects, on average, to recover 3. Half the = time P=20 loses at trial and takes nothing. A fourth of the time he wins at trial = and=20 there is coverage, so he recovers 10 from I. But another fourth of the = time he=20 wins at trial but there is no coverage, so he is limited to D=92s = assets, 2. With=20 one chance at 10, one at 2, and two at 0, he should expect 3.

&nbs= p; =20 With no right of reimbursement, I expects at = trial to=20 pay only 2.5 on average, since there is only one chance in 4 that it = will owe=20 10, and D expects to pay only 0.5 on average, since there is only one = chance in=20 4 that it will owe 2. If there is a right of reimbursement, I can pay P = 3 to=20 settle and still lower its expected cost to 2 on average, since half the = time it=20 will recover nothing from D in the coverage suit and the other half it = will=20 recover D=92s 2. But D=92s expected cost then increases, on average, to = 1, since it=20 will lose the coverage fight half the time. In this situation, if I can = insist=20 on settling for 3, it benefits itself and harms D.

^[35] 52 S.W.3d at 135 (stating that a = right of=20 reimbursement might force an insured to =93choose between rejecting a = settlement=20 within policy limits or accepting a possible financial obligation to pay = an=20 amount that may be beyond its means, at a time when the insured is most=20 vulnerable.=94).

^[36] Now suppose: at trial, P has a = 50%=20 probability of recovering 20 and a 50% probability of recovering 0; = coverage is=20 50/50; policy limits are 10; and D has 50 in assets.

&nbs= p; =20 At trial, P expects, on average, to recover = 10. D=20 expects, on average, to pay 7.5. I expects, on average, to pay 2.5. If D = has the=20 unilateral power to accept or reject settlements, even assuming I has a = right of=20 reimbursement, I=92s average expected cost = is increased=20 to 5, and D=92s falls to 5. But if D can use the threat of Stowers liability to force I to pay 10, and = I has no=20 right of reimbursement, I=92s average = expected cost is=20 increased to 10, and D=92s falls to 0.

^[37] BMG Direct Mktg. v. Peake, 178 S.W.3d 763, 771, 775(Tex. 2005) (noting, however, that =93an adequate = legal=20 remedy may render equitable claims of unjust enrichment and equitable = defenses=20 of voluntary-payment unavailable=94 and citing Matagorda County, = 52 S.W.3d=20 128, 133-135 (Tex.2000)); Dallas County Cmty. Coll. Dist. v. Bolton, 185 S.W.3d 868, = 886 (Tex.=20 2005) (Brister, J., joined by Jefferson, C.J, and O=92Neill, J., = dissenting to=20 opinion holding that allegedly illegal student activity fees were = voluntarily=20 paid as a matter of law). See Restatement (Third) of Restitution = and Unjust=20 Enrichment =A7 1, cmt b (=93This = equitable=20 conception of the law of restitution is crystallized by Lord = Mansfield=92s famous=20 statement in Moses v. Macferlan = (1761): =91In one=20 word, the gist of this kind of action is, that the defendant, upon the=20 circumstances of the case, is obliged by the ties of natural justice and = equity=20 to refund the money.=92 Explaining restitution as the embodiment of = natural=20 justice and equity gives the subject an undoubted versatility, an = adaptability=20 to new situations, and =97 in the eyes of many observers =97 a = particular moral=20 attractiveness. Restitution in this view is the one aspect of our legal = system=20 that makes a direct appeal to standards of equitable and conscientious = behavior=20 as a source of obligations that society will enforce with a legal=20 sanction.=94).

^[38] Ante at ___.

^[39] See, e.g., Farmers = Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 84 = (Tex. 1997)=20 (per curiam); State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex.=20 1996).

^[40] Griffin, 955 S.W.2d at=20 84.

^[41] 332 S.W.2d 310, 312 (Tex. 1960) = (citations=20 omitted).

^[42] See,=20 e.g., Wessely Energy Corp. v. Jennings, 736 S.W.2d 624, 626 = (Tex. 1987) = (=93The laws=20 existing at the time a contract is made becomes a part of the contract = and=20 governs the transaction. Langever = v.=20 Miller, 124 Tex. 80, 76 S.W.2d 1025, 1026-27 (1934).=94).

^[43] 52 S.W.3d 671, 684 (Tex. 2000) = (citations=20 omitted).

^[44] Id. (citing = Southwestern=20 Elec. Power Co. v. Burlington N. R.R. Co., 966 S.W.2d 467, 469 (Tex. = 1998)=20 (=93[I]n some circumstances, overpayments under a valid contract may = give rise to=20 a claim for restitution or unjust enrichment.=94)).

^[45] See supra note = 6.

^[46] See Tex. Ins. Code =A7 541.060 = (prohibiting=20 certain unfair settlement practices).

^[47] 22 P.3d 313, = 318-319=20 (Cal.=20 2001).

^[48] Restatement (Third) of Restitution = and Unjust=20 Enrichment =A7 35, illus. 10 & reporter=92s note (Tentative = Draft No. 3,=20 2004).