Liberty Mutual Insurance v. Mid-Continent Insurance
Docket: No. 03-10705
Court: Court of Appeals for the Fifth Circuit; March 30, 2005; Federal Appellate Court
This Texas law diversity case involves unresolved legal questions requiring certification to the Supreme Court of Texas. The case is Liberty Mutual Insurance Company v. Mid-Continent Insurance Company, originating from the Northern District of Texas, with federal jurisdiction based on diversity of citizenship. Liberty Mutual seeks to recover $600,000 from Mid-Continent, claiming it is owed that amount as part of a $1.5 million settlement paid to resolve a third-party claim against Kinsel Industries, who was insured under both companies' $1 million comprehensive general liability (CGL) policies.
During the litigation, Liberty Mutual settled a claim for $1.5 million, of which Mid-Continent contributed only $150,000, leading Liberty Mutual to pay the remaining $1,350,000. The district court awarded Liberty Mutual $550,000 after a bench trial. Kinsel, the general contractor for a Texas highway project, was insured by Liberty Mutual, while Mid-Continent insured Kinsel's subcontractor, Crabtree Barricades, identifying Kinsel as an additional insured.
Both insurers treated their CGL policies as primary and equally applicable, with identical 'other insurance' clauses mandating equal or pro rata sharing of liabilities. Additionally, both policies contained 'voluntary payment' clauses prohibiting insureds from making payments or assuming obligations without consent, along with subrogation clauses transferring recovery rights to the insurer for any payments made under the policy. Mid-Continent is now appealing the district court's judgment.
In November 1996, an automobile accident in a construction zone resulted in a head-on collision between a westbound driver, Cooper, and an eastbound vehicle carrying James Boutin and his family, leading to substantial injuries. The Boutin family sued Cooper, the State, Kinsel, and Crabtree in July 1997. By April 1998, Mid-Continent and Liberty Mutual agreed to share defense costs for Kinsel but disagreed on Kinsel’s likely liability. Mid-Continent maintained a 10-15% fault assessment, while Liberty Mutual later increased its estimate to 60%. In May 1999, Liberty Mutual settled for $1.5 million on behalf of Kinsel and sought Mid-Continent's contribution, which calculated Kinsel's settlement value at only $300,000, leading to Mid-Continent agreeing to pay $150,000. Mid-Continent also settled the claims against Crabtree for $300,000. Liberty Mutual subsequently filed a lawsuit against Mid-Continent in Texas state court, which was moved to federal court. After a February 2003 bench trial, the court ruled Liberty Mutual was entitled to recover $550,000 from Mid-Continent, based on the sharing provisions of their insurance policies. Mid-Continent was deemed unreasonable in its continued low assessment of Kinsel's liability, failing to adapt to changing case dynamics, while Liberty Mutual acted reasonably by settling within policy limits, thus mitigating the risk of significant joint liability.
Liberty Mutual's evaluation of Kinsel's liability and the settlement reached was deemed reasonable by the Court, which contrasts with Mid-Continent's unreasonable exercise of its policy rights. As a result, Liberty Mutual is granted subrogation rights. Mid-Continent is appealing the decision but does not contest the district court's factual findings.
On appeal, Mid-Continent argues that, having timely taken on the defense of the lawsuit against Kinsel and recognized policy coverage, it held the right under its policy's voluntary payment provision to dictate its settlement contributions without owing a duty to Liberty Mutual or Kinsel, except for a duty to indemnify Kinsel in the event of an adverse judgment up to policy limits. Mid-Continent points out that its stance contradicts the General Agents case but claims that General Agents, not reviewed by the Texas Supreme Court, conflicts with established Texas law. It asserts that it breached no duties under its policy or Stowers obligations to Kinsel that would allow Liberty Mutual to claim subrogation.
Mid-Continent cites American Centennial Ins. Co. v. Canal Ins. Co. to support its position, highlighting that the only duty a primary insurer owes to an excess insurer arises from subrogation to the insured's Stowers rights, with no independent duty owed. Liberty Mutual's argument relies heavily on General Agents, which involved concurrent primary insurers, where one insurer's settlement offer was deemed insufficient, leading to a lawsuit between the insurers after a settlement was reached. The appellate court found that there should have been a jury inquiry into the reasonableness of the insurer's conduct, indicating potential liability if it was found unreasonable.
Home had the burden of proving its right to payment from GAINSCO through contractual or conventional subrogation to Power Equipment's rights. The General Agents opinion cites relevant case law, noting that in prior cases, non-contributing co-insurers who denied coverage forfeited their rights to rely on policy clauses. Unlike those situations, GAINSCO did not deny responsibility but was prepared to defend Power Equipment. However, the General Agents court determined that GAINSCO could still be liable to Home, as GAINSCO's willingness to defend must be weighed against Home’s interest in settling for policy limits and its right to control the defense. This implies that liability hinges on duties between co-insurers rather than subrogation rights.
The authority cited by General Agents includes Storebrand Ins. Co. U.K. Ltd. v. Employers Ins. Co. of Wausau, where Wausau, a servicing agent, defended a lawsuit involving a leasing company but only offered a partial settlement, leading Storebrand to pay the difference. The court granted summary judgment to Wausau, highlighting its reasonable basis for the settlement offer. However, the decision did not clarify the nature of the claims or the status of Storebrand. Keystone Shipping Co. v. Home Ins. Co. is more directly relevant, where Home, a third-level excess carrier, refused to pay more than its pro-rata share of a $30 million settlement. The court ultimately found Home’s evaluation reasonable and ruled in its favor, confirming that its pro-rata share was within policy limits.
The Third Circuit upheld the district court's findings, emphasizing the lack of controlling Pennsylvania law regarding co-insurers' obligations in settlement scenarios. It suggested that Pennsylvania law likely would not allow a recalcitrant insurer to avoid its share of a reasonable settlement simply by asserting objections. When a co-insurer, despite objections to a settlement's size, contributes to a settlement deemed not unreasonably low, its duty is assessed in good faith. The court refrained from defining the exact source of the duty owed by co-insurers, acknowledging that neither the General Agents opinion nor its cited authorities clarified this duty. It then turned to the traditional Stowers duty of liability insurers, noting uncertainty in Texas courts about whether the insured, Kinsel, could pursue a Stowers claim against Mid-Continent for its refusal to pay more than $150,000 towards a $1.5 million settlement. This uncertainty stems from the traditional requirement of an excess judgment after trial for a Stowers claim and the challenges in determining negligence or damages without such a judgment. The court also pointed out that allowing a Stowers claim under these circumstances could undermine policy provisions regarding voluntary payments and required approvals for settlements. While Texas law does allow for waiver of certain policy benefits if an insurer refuses to defend, it has not established that an insurer waives such benefits merely by negligently refusing a settlement offer within policy limits. The court referenced two Texas Supreme Court cases indicating that a Stowers claim might not always necessitate an actual trial judgment. In Rocor v. National Union Fire Ins. Co., the court suggested that an insured could potentially recover attorney fees due to an insurer's negligent delay in settling, but ultimately denied recovery due to lack of evidence of a clear settlement offer before the actual settlement. Thus, Rocor does not definitively establish the requirement for a prior judgment in Stowers claims related to liability to third parties.
In American Centennial Ins. Co. v. Canal Ins., 843 S.W.2d 480 (Tex. 1992), the Texas Supreme Court established that if an excess insurance carrier pays part of a judgment against its insured, it is equitably subrogated to the insured's rights against a primary insurance carrier for negligent handling of the defense in a third-party action. The case involved a primary insurer with $100,000 coverage that mishandled the defense, leading excess insurers, who had coverage from $100,000 to $4 million, to settle for $3.7 million. Initially, the trial court ruled that the primary insurer owed no duty to the excess carriers; however, the court of appeals reversed this decision, and the Supreme Court affirmed the need for trial on the claims against the primary insurer.
The opinion does not clarify whether a judgment exceeding policy limits is necessary in a Stowers action concerning negligent settlement refusal. It notes no allegations of refusal to settle within policy limits and emphasizes that the case dealt with alleged mishandling of the defense rather than settlement negotiations. The court acknowledged that the Stowers duty includes claim investigation, trial defense, and settlement negotiations, but it remains ambiguous regarding the absence of a settlement offer or evidence of one. Furthermore, while the holding that an excess insurer is subrogated to the insured's Stowers rights is not questioned, later rulings raise doubts about the conclusion that a Stowers violation can exist without a negligent failure to accept a settlement offer. Additionally, the decision does not address subrogation rights among co-primary insurers who participated equally in the defense.
Liberty Mutual engaged in the defense of a case involving its insured, Kinsel, and had control over the litigation. Although Liberty Mutual contributed $350,000 from an excess umbrella policy to the settlement, this alone does not justify a $550,000 judgment against Mid-Continent unless Liberty Mutual is subrogated to a Stowers claim against Mid-Continent. There was no settlement offer within Mid-Continent's policy limits of $1 million or $700,000, creating uncertainty about Mid-Continent's Stowers duty. Mid-Continent was aware that plaintiffs would settle for $1.5 million, which was within the combined limits of both insurers' policies, yet it only contributed $150,000, significantly less than its share. Texas courts have not addressed whether insurers must accept demands exceeding policy limits or when a Stowers duty arises in such contexts. The recent General Agents decision suggests that Mid-Continent may have violated an unspecified duty to contribute to the settlement, but the existence of such a duty under Texas law remains unresolved. Mid-Continent contends that any potential duty should be evaluated under the standard for good faith and fair dealing in first-party claims, yet the Texas Supreme Court has shifted the standard away from "no reasonable basis." The distinction between third-party and first-party obligations under Stowers is also noted, emphasizing that bad faith claims are not extended to the third-party context.
The determination of whether Mid-Continent breached any duty to Liberty Mutual hinges on the reasonableness of Mid-Continent's evaluation of a third-party case, alongside the evaluation made by Liberty Mutual. The district court's findings and judgment depend significantly on the precedent established in General Agents, as there is no controlling Texas Supreme Court precedent on these related legal questions.
Three key questions are certified to the Supreme Court of Texas:
1. In a scenario where two insurers defend a common insured with policies covering $1 million each (one also providing a $10 million excess policy), if the excess insurer settles for $1.5 million while the other insurer contributes only $150,000 (valuing the case at $300,000), is there an actionable duty for the underpaying insurer to reimburse the excess insurer for the additional payment made beyond its proportional share?
2. If there is such a duty, does it depend on the underpaying insurer's negligence in its case evaluation, the wrongdoing of the underpaying insurer justifying a breach of good faith claim, or is the duty assessed by another standard?
3. If a duty exists, is it confined to the reimbursement of the $350,000 paid by the overpaying insurer under its excess policy?
Liberty Mutual also cross-appeals regarding the district court's denial of prejudgment interest. Additionally, the document outlines the obligations of insurers when multiple valid coverages exist, detailing the methods of sharing liability between primary and excess insurance. Mid-Continent argued that Liberty Mutual's Umbrella Excess Liability Policy should factor into the allocation of the settlement costs.
The trial court ruled that Mid-Continent's coverage was excess to both Liberty Mutual’s and Mid-Continent's CGL policies, a decision that Mid-Continent has not appealed. On appeal, Mid-Continent argues that Liberty Mutual's $1 million auto policy covering Kinsel should have factored into the allocation of the $1.5 million settlement, asserting that its liability should not exceed $350,000. Liberty Mutual, however, contends that its auto policy does not cover the claim against Kinsel and only provides excess coverage. The appeal hinges on whether Mid-Continent must reimburse Liberty Mutual for part of the $1.35 million it paid towards the settlement. Both CGL policies require the insured's cooperation in claims, stipulating that recovery is limited to agreed settlements or judgments within policy terms. Liberty Mutual's CGL policy limits are $1 million, but it paid an additional $350,000 through its $10 million Umbrella Excess Liability Policy for Kinsel. The reasonableness of the Crabtree settlement is uncontested. Under Texas law as established in Stowers, an insurer that declines a reasonable settlement demand may be liable for any resulting judgment beyond policy limits; however, the district court's judgment did not apply Stowers or similar precedents in its limitation of Liberty Mutual’s recovery to $550,000 from Mid-Continent’s policy limits. Liberty Mutual has not challenged this limitation. The district court indicated that the method used in General Agents Ins. Co. was appropriate for resolving the disputes, but Mid-Continent disputed this assertion, maintaining that General Agents does not accurately reflect Texas law and reiterated this stance in a motion for reconsideration.
GAINSCO, the defendant-appellant, did not dispute potential liability to Home, a co-insurer, if found to have acted unreasonably. The district court in Storebrand determined that Wausau, acting solely as an agent for the Texas Workers Compensation Facility, was not liable for breach of good faith but could face liability for violations of the DTPA or Texas Insurance Code. The employee's claims included allegations under the Longshore and Harbor Workers’ Compensation Act (LHWCA) and negligence but did not involve claims against TDI under section 905(b) of the LHWCA. The court upheld the district court’s decision, stating that Storebrand's claims, which addressed unfair claims practices, were statutory bad faith claims rather than fraud. It found Wausau's actions reasonable, with no evidence of bad faith, and asserted that Storebrand did not succeed under the Stowers doctrine due to the absence of unreasonable or imprudent actions by Wausau. The matter was settled in mediation, and TDI was not held liable. The court acknowledged a duty on Home’s part, implied by some form of contract or law, to share in the settlement payments based on its insurance obligations, although the exact source of this duty was not specified. The court also indicated a possible conflation of good faith with reasonableness. Additionally, it noted that there were no definitive findings suggesting that a judgment against Kinsel would have exceeded the settlement amount or policy limits. The Rocor court interpreted relevant sections of Article 21.21 as imposing a settlement duty in third-party claims equivalent to that of Stowers.
The Rocor court determined that the case did not fit the Stowers paradigm since the insurer settled within policy limits. It concluded that the primary carrier owed no direct duty to the excess carrier, negating any claims for breach of good faith under the Texas Insurance Code or DTPA. The court ruled that the excess carrier could pursue equitable subrogation against the insured's attorney for negligent defense but limited the attorney's liability to that owed to the insured. Additionally, the court of appeals confirmed that the $3.7 million settlement was formalized without an actual trial, and the statute of limitations for the Stowers claim began 30 days post-judgment, making the excess carrier’s suit timely. The Supreme Court upheld this limitations finding and noted that the limitations on claims against the attorneys were also tolled until the judgment was final. The dissenting opinion suggested that the facts warranted an expansion of the Stowers doctrine, referencing the Supreme Court's earlier ruling in Ranger County, which established that insurers have a duty of ordinary care in defending lawsuits and settling claims. However, it was noted that no negligence was found in the investigation or trial of the underlying case. The Stowers doctrine requires proof that an insurer was presented with a reasonable opportunity to settle within policy limits to shift the risk of an excess judgment. Maryland Insurance confirmed that Texas law recognizes only the tort duty outlined in Stowers, which protects the insured against the insurer’s refusal to defend or mishandle claims. Rocor clarified that a breach of Stowers occurs only when an insurer negligently declines a reasonable settlement demand within policy limits, a sentiment supported by State Farm Mutual, which characterized some prior broad statements about insurer responsibilities as dicta.
State Farm Mutual asserts that it is not vicariously liable for the actions of an independent attorney it chooses to defend an insured, which challenges prior interpretations in Ranger. This viewpoint may weaken the conclusion in American Centennial regarding evidence of a Stowers violation. The court has determined that the expansive language in Ranger has been narrowed by Garcia, indicating that the Stowers duty is only triggered by a settlement demand within policy limits that the insurer's refusal to accept would constitute negligence. Furthermore, the Stowers duty is currently the sole common law tort duty recognized in Texas for third-party insurance claims, as established in Ford v. Cimarron Insurance Co. and other cited cases. In the context of the case, Mid-Continent settled the plaintiffs' claims against Kinsel by paying $300,000 to settle claims against another insured, Crabtree, under the same policy, and this settlement's reasonableness remains unchallenged.
