The importance of the ordinary reservation of rights letter – “we will defend you, but that doesn’t mean we’re going to pay a judgment” — is well known.   A different kind of reservation of rights letter – “We will defend you because a trial court declared that we have a duty to do so. But if we can get that order reversed, we’re coming after you for what we spent on your defense, plus interest!” – received the imprimatur of the Ohio Court of Appeals the other day, in Chiquita Brands International, Inc. v. National Union Fire Ins. Co.

Upon being named as a defendant in several tort suits, Chiquita turned to its liability carrier, National Union. National Union denied that it had any duty to defend, but Chiquita persuaded a trial court to declare otherwise. “After the court’s ruling, National Union began funding the defense. Each defense cost payment, except one, was accompanied by a letter stating, in pertinent part, that National Union was reserving a right to seek reimbursement of the payments.”

National Union secured a reversal of the trial court’s order, and then sought to “recoup $11,744,014.87 in defense costs that it had paid to Chiquita, plus $1,247,042.79 in prejudgment interest.” The trial court ruled in favor of National Union, and the Court of Appeals affirmed.

Citing the Restatement on Restitution and Unjust Enrichment, the Court declared:

Chiquita correctly points out that the policies were silent as to reimbursement of defense costs upon a judicial determination that there was no duty to defend. But we believe National Union is entitled to recover under a restitution theory. Restitution is appropriate where one party to a contract demands from the other a performance that is not in fact due by the terms of that contract under circumstances where it is reasonable to accede to that demand, and where the party on whom the demand is made renders such performance under a reservation of rights, thereby preserving a claim in restitution to recover the value of the benefit conferred in excess of the recipient’s contractual entitlement.

It added that “[r]estitution under these circumstances does not require that the contract be set aside; rather, it is a means to enforce adherence to a contract through ordering repayment of a sum to which the recipient was never entitled under the contract’s terms.”

The lessons are obvious: insurers should go to school on the Chiquita record, to see how National Union laid the groundwork for its victory. And insureds should look very carefully at any conditional offer to defend.