The United States Court of Appeals for the Eleventh Circuit, applying Georgia law, has reversed the dismissal of an insurer’s complaint for recoupment of amounts it paid to settle a claim against its insured, holding that the district court erred in relying on factual conclusions that did not flow inevitably from the insurer’s complaint in determining that the insurer’s lawsuit was barred by waiver and the insurer’s voluntary payment. Twin City Fire Ins. Co. v. Hartman Simons & Wood LLP, 2015 WL 1651628 (11th Cir. April 15, 2015).

The insured, a law firm, was hired by a bank to draft documents for a real estate transaction. The bank alleged that, due to an attorney drafting error, a party to the transaction was erroneously released of all of its financial obligations to the bank, costing the bank $60 million. The bank demanded indemnification from the insured, and the insured tendered the matter to its insurer. Approximately three years later, the bank made a $10 million time-limited settlement demand on the insured, which the insured demanded the insurer accept.

After the insured rejected the insurer’s request for an allocation of the settlement amount between covered and non-covered amounts, the insurer agreed to pay the entire settlement subject to a full reservation of its rights. Shortly before making the settlement payment, the insurer filed a coverage action asserting claims for allocation and recoupment of settlement amounts paid.

The insured moved to dismiss the insurer’s complaint for failure to state a claim, arguing that the insurer failed to reserve its right to seek allocation and recoupment properly and therefore waived it, that the insurer’s settlement with the bank was a “voluntary payment,” and that the insurer had no contractual right to seek allocation and recoupment of the settlement payment. The district court agreed that the insurer waived its allocation and recoupment claims by failing to reserve its rights properly, and dismissed the insurer’s complaint.

On appeal, the Eleventh Circuit disagreed, reversing the district court’s dismissal. The appellate court first took issue with the district court’s reliance on the insured’s claims that the insurer did nothing to reserve its rights between the three years from when it was notified of the bank’s claim to when the bank made the settlement demand. The court stated that the complaint included no factual allegations regarding what might have occurred in those three years and that the district court’s determination that the insurer was “dilatory” during those three years rested on inferences only. The court explained that the insurer was under no obligation to anticipate the insured’s affirmative waiver defense and include factual allegations responsive to that defense. According to the court, the complaint’s silence “did not give the district court license to assume that [the insurer] had failed to take certain actions during that period.” The court also found that, by concluding the insurer was “dilatory,” the district court implicitly found that the insurer’s conduct had prejudiced the insured, which is “quintessentially a question of fact” that should not have been reached in evaluating the complaint on a motion to dismiss.

The court found that the district court made similar errors in concluding that the insurer’s claim was barred pursuant to the voluntary payment doctrine. The court explained that the district court could not properly have made the factual finding that the insurer “was aware of all the material facts relating to its coverage defense at the time it made the payment to the [b]ank” by looking solely at the complaint. The court added that, although the district court properly noted that Georgia law recognizes exceptions to the voluntary payment doctrine for payments made under “urgent and immediate” necessity, the district court improperly put the onus on the insurer to establish the applicability of the exception at the motion to dismiss phase, where the sole question should have been whether it was plain from the face of the complaint that the exception could not be invoked.