Lead Opinion
This dispute between one primary liability insurer and another primary insurer that also provides the applicable excess insurance policy comes to us on certified questions from the United States Court of Appeals for the Fifth Circuit. Pursuant to article V, section 3-c of the Texas Constitution and Texas Rule of Appellate Procedure 58.1, we answer the following questions:
1.Two insurers, providing the same insured applicable primary insurance liability coverage under policies with $1 million limits and standard provisions (one insurer also providing the insured coverage under a $10 million excess policy), cooperatively assume defense of the suit against their common insured, admitting coverage. The insurer also issuing the excess policy procures an offer to settle for the reasonable amount of $1.5 million and demands that the other insurer contribute its proportionate part of that settlement, but the other insurer, unreasonably valuing the case at no more than $300,000, contributes only $150,000, although it could contribute as much as $700,000 without exceeding its remaining available policy limits. As a result, the case settles (without an actual trial) for $1.5 million funded $1.35 million by the insurer which also issued the excess policy and $150,000 by the other insurer.
In that situation is any actionable duty owed (directly or by subrogation to the insured’s rights) to the insurer paying the $1.35 million by the underpaying insurer to reimburse the former respecting its payment of more than its proportionate part of the settlement?
2. If there is potentially such a duty, does it depend on the underpaying insurer having been negligent in its ultimate evaluation of the case as worth no more than $300,000, or does the duty depend on the underpaying insured’s evaluation having been sufficiently wrongful to justify an action for breach of the duty of good faith and fair dealing for denial of a first party claim, or is the existence of the duty measured by some other standard?
3. If there is potentially such a duty, is it limited to a duty owed the overpaying insurer respecting the $350,000 it paid on the settlement under its excess policy?
Liberty Mut. Ins. Co. v. Mid-Continent Ins. Co.,
I. Background
In November 1996, an automobile accident occurred in the construction zone of a State of Texas highway project. A westbound car driven by Tony Cooper on the lanes narrowed by construction crossed
Kinsel was the named insured under Liberty Mutual Insurance Company’s $1 million comprehensive general liability (CGL) policy. Liberty Mutual also provided Kinsel with $10 million in excess liability insurance. Crabtree was the named insured under Mid-Continent Insurance Company’s $1 million CGL policy. Mid-Continent’s policy identified Kinsel as an additional insured for liability arising from Crabtree’s work. Kinsel, therefore, was a covered insured under two CGL policies, both of which provided Kinsel with $1 million in indemnity coverage for the underlying suit. The insurers had no contract between them that was implicated by the automobile accident.
The CGL policies contained identical “other insurance” clauses providing for equal or pro rata sharing up to the co-insurers’ respective policy limits if the loss is covered by other primary insurance:
4. Other Insurance.
If other valid and collective insurance is available to the insured for a loss we cover under Coverages A [‘Bodily Injury and Property Damage Liability’] or B of this Coverage Part, our obligations are limited as follows:
a. Primary Insurance
... If this insurance is primary our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the method described in c. below.
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c. Method of Sharing If all of the other insurance permits contribution by equal shares, ... each insurer contributes equal amounts until it has paid its applicable limit of insurance or none of the loss remains, whichever comes first.
If any of the other insurance does not permit contribution by equal shares, we will contribute by limits. Under this method, each insurer’s share is based on the ratio of its applicable limit of insurance to the total applicable limits of insurance of all insurers.
Each policy also contained a “voluntary payment” clause,
Liberty Mutual and Mid-Continent do not dispute that each owed some portion of Kinsel’s defense and indemnification. The
Therefore, the district court concluded that, whether apportioned pro rata or in equal shares, Mid-Continent was liable in subrogation for $750,000, one-half of the $1.5 million settlement with Kinsel. Id. at 546.
II. Discussion
Liberty Mutual defends the district court’s $550,000 award on grounds that it is entitled to reimbursement through the contractual subrogation clause in its CGL policy and through the type of equitable subrogation applied in General Agents. Liberty Mutual argues it is subrogated to the contractual right of Kinsel to enforce language in Mid-Continent’s policy that places a duty on Mid-Continent to defend any claim or suit and pay an equal or pro rata share of settlement. Liberty Mutual also contends it is subrogated to the common law right of Kinsel to have Mid-Continent act reasonably when handling an insured’s defense — including reasonable negotiation and participation in settlement. The latter suggests we expand or create a modified Stowers duty in the circumstances of this case.
Mid-Continent contends that it did not breach any recognized contractual or common law duty to Kinsel to which Liberty Mutual may be subrogated. Mid-Continent further argues that it owed no direct duty to Liberty Mutual upon which reimbursement may be based. Any new duty in this context created by General Agents and adopted by the district court, Mid-Continent continues, is contrary to Texas law.
Specifically, with respect to subrogation, Mid-Continent denies that Kinsel has an enforceable contract right to which Liberty Mutual may be subrogated. Mid-Continent explains that because it complied with its contractual duty to timely assume defense of the suit against Kinsel and acknowledged policy coverage, Kinsel — and therefore Liberty Mutual — has no contract claim against Mid-Continent. Mid-Continent relies on the voluntary payment and no-action clauses in its policy to limit its liability to the amounts it consented to pay.
Mid-Continent adds that its only common law duty to Kinsel in this third party context was the Stowers duty to accept a reasonable settlement offer within policy limits from the Boutins, or else be liable for any excess judgment against Kinsel. See G.A. Stowers Furniture Co. v. Am. Indem. Co.,
Asserting that no direct action exists between co-insurers in Texas, Mid-Continent points to Traders & General Insurance Co. v. Hicks Rubber Co.,
Liberty Mutual’s claim for reimbursement involves the contractual and common law duties of an insurer in two distinct scenarios. The first scenario involves the ability of one co-insurer to compel a second co-insurer’s proportionate participation in the settlement of a third party claim. The second scenario, which arises from the
We agree with Mid-Continent and conclude that Liberty Mutual is not entitled to reimbursement because there is no direct duty of reimbursement between these co-primary insurers, and because Kinsel has no rights against Mid-Continent to which Liberty Mutual may be subrogated. We disapprove of General Agents to the extent it would provide recovery to an overpaying co-primary insurer in the context presented.
A. Contribution
Even though Liberty Mutual does not expressly argue for a right of contribution, its reliance on General Agents necessarily implies such. Thus, we analyze whether Liberty Mutual has a direct action for reimbursement under a right of contribution from Mid-Continent.
We recognized long ago in Hicks Rubber “the general rule that, if two or more insurers bind themselves to pay the entire loss insured against, and one insurer pays the whole loss, the one so paying has a right of action against his co-insurer, or co-insurers, for a ratable proportion of the amount paid by him, because he has paid a debt which is equally and concurrently due by the other insurers.” Hicks Rubber,
We also recognized in Hicks Rubber, however, that this direct claim for contribution between co-insurers disappears when the insurance policies contain “other insurance” or “pro rata” clauses.
The CGL policies at issue here contain pro rata clauses. Liberty Mutual and
This conclusion is contrary to the holding of the San Antonio Court of Appeals in General Agents, which appears to have recognized a new duty between co-insurers to reasonably exercise their rights under an insurance policy given the totality of the circumstances.
On GAINSCO’s appeal, the San Antonio Court of Appeals reversed and remanded for a new trial, holding that “[t]he trial court should have submitted a question to the jury that inquired about the reasonableness of GAINSCO’s position and actions in exercising its rights under its policy given the totality of the circumstances.” Id. at 426 (listing various factors a jury should consider). According to the court, “GAINSCO’s willingness to proceed with the defense of the lawsuit and its right to enforce the no-action clause in its policy ... [had to] be balanced against Home’s desire to settle for policy limits and its coequal right to control the defense and settlement of the lawsuit.” Id. at 424.
The General Agents opinion suggests that breach of this duty would provide, through subrogation, an overpaying co-insurer with a right of reimbursement for the excess from the breaching co-insurer. Id. at 426. Although it characterized the right of action as one of subrogation, the General Agents court did not identify the rights of the common insured to which Home could be subrogated to recover its overpayment from GAINSCO. Rather, by balancing Home’s interests with those of GAINSCO, the court appeared to premise a right of reimbursement on a direct duty between co-insurers to act reasonably in exercising their policy rights. Id. at 426. For the reasons outlined above, we disagree with General Agents to the extent it creates a common law duty between co-primary insurers to reasonably exercise rights under an insurance policy.
Acknowledging that a right of contribution does not exist in this context, Liberty Mutual contends it can seek reimbursement through contractual or equitable sub-rogation to the rights of Kinsel. Both Hicks Rubber and Employers Casualty contain language suggesting that such an avenue of reimbursement could exist.
In Employers Casualty, after precluding a right to contribution, we said that the co-insurers’ remedy for reimbursement would lie in contractual or equitable subrogation.
Having a right to subrogation, however, is distinct from the ability to recover under that right. See Esparza v. Scott & White Health Plan,
There are two types of subrogation. See id. at 551. Contractual (or conventional) subrogation is created by an agreement or contract that grants the right to pursue reimbursement from a third party in exchange for payment of a loss, while equitable (or legal) subrogation does not depend on contract but arises in every instance in which one person, not acting voluntarily, has paid a debt for which another was primarily liable and which in equity should have been paid by the latter. Argonaut Ins. Co. v. Allstate Ins. Co.,
1. Kinsel’s Potential Contractual Rights
Liberty Mutual asserts a right to subrogation in equity and through the sub-rogation clause found in its CGL policy. In either case, Liberty Mutual must step into Kinsel’s shoes to assert only those rights held by Kinsel against Mid-Continent, subject to any defenses held by Mid-Continent against Kinsel. See Interstate Fire,
Liberty Mutual argues it is subrogated to the contractual right of Kinsel to enforce language in Mid-Continent’s policy imposing a duty upon Mid-Continent to defend and indemnify Kinsel and to pay a pro rata share of settlement. We agree that the co-insurers’ contractual duties to Kinsel were specified in the CGL policies and included, as discussed above, a several and independent duty to pay a pro rata share of a covered loss up to their respective policy limits. See Hicks Rubber,
A liability policy obligates an insurer to indemnify the insured against a covered loss arising from the insured’s own legal liability. Members Mut. Ins. Co. v. Hermann Hosp.,
[W]here there are several policies of insurance on the same risk and the insured has recovered the full amount of its loss from one or more, but not all, of the insurance carriers, the insured has no further rights against the insurers who have not contributed to its recovery. Similai’ly, the liability of the remaining insurers to the insured ceases, even if they have done nothing to indemnify or defend the insured.
Fireman’s Fund Ins. Co.,
Equity does not demand a different result here. We hold, therefore, that a fully indemnified insured has no right to recover an additional pro rata portion of
2. Kinsel’s potential common law rights
Liberty Mutual also argues it is subrogated to the common law right of Kinsel to enforce Mid-Continent’s duty to act reasonably when handling an insured’s defense — including reasonable negotiation and participation in settlement. An insurer’s common law duty in this third party context is limited to the Stowers duty to protect the insured by accepting a reasonable settlement offer within policy limits. See Stowers,
Mid-Continent did not breach a Stowers duty to Kinsel because the Bout-ins did not make a settlement offer within Mid-Continent’s policy limits. See id. (settlement demand must be within policy limits to trigger Stowers duty). We decline to modify Stowers to create rights for Kinsel and therefore, Liberty Mutual, via subrogation. In addition, we note Liberty Mutual paid a debt for which it too was primarily liable, thus not satisfying the traditional subrogation requirement that the subrogee pay a debt for which another was primarily liable. See Argonaut Ins. Co.,
The present situation differs from the issue we addressed in Canal.
In response to the first certified question, we conclude there is no right of reimbursement in the context presented. Therefore, we do not reach questions two and three. Kinsel has no common law cause of action against Mid-Continent, nor does it have, after being fully indemnified, any contractual rights remaining against Mid-Continent. Because Kinsel has no rights to which Liberty Mutual may be subrogated, Liberty Mutual has no right of reimbursement through subrogation. Of course, how our answer is applied in the case before the Fifth Circuit Court of Appeals is solely the province of that certifying court. See Amberboy v. Societe de Banque Privee,
Notes
. The "voluntary payment” clauses provided, "No insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”
. The subrogation clauses provided, "If the insured has rights to recover all or part of any payment we have made under this Coverage Part ['Bodily Injury or Property Damage Liability'], those rights are transferred to us.”
."A person or organization may sue us to recover on an agreed settlement or on a final judgment against an insured obtained after an actual trial; but we will not be liable for damages that are not payable under the terms of this Coverage Part ['Bodily Injury or Property Damage Liability’] or that are in excess of the applicable limit of insurance. An agreed settlement means a settlement and release of liability signed by us, the insured and the claimant or the claimant’s legal representative.”
. At trial the parties disputed how many policies should be considered in apportioning the cost of the settlement, as Liberty Mutual also held a business auto policy and excess policy in favor of Kinsel. Id. at 539. Because the Fifth Circuit’s certified questions presume the loss triggered only Mid-Continent's and Liberty Mutual’s CGL policies, our answers consider only these two policies.
. "In the context of equitable subrogation, ‘Texas courts have been liberal in their determinations that payments were made involuntarily.’ ” Keck, Mahin & Cate v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa.,
Concurrence Opinion
concurring.
I concur with the Court’s answer to the first certified question and with the Court’s analysis. I write only to provide some additional thoughts on why Texas law should not recognize a claim by one primary insurer against another in these circumstances.
At the outset I emphasize my belief that we must confine ourselves to the factual circumstances presented. This Court frequently finds itself deciding high-stakes insurance law questions, which, for me at least, can be fiendishly difficult. With some regularity these questions originate in the form of certified questions from the United States Court of Appeals for the Fifth Circuit. The Fifth Circuit appreciates that the outcomes of these cases often pivot heavily on the underlying facts, and here it has continued its excellent practice of providing us with a detailed compendium of the relevant facts. Some insurance cases present recurring issues, and, of course, courts must scrupulously apply governing legal principles, but it is indisputable that case outcomes are often driven by unique factual circumstances.
Here, the body of precedent presenting similar but not identical issues deserves our respect and most careful analysis, but with an appreciation of the factual differences between those cases and the one before us now. We should start with the principle that Mid-Continent’s primary, if not exclusive, contractual and common-law duty is to its insured, Kinsel Industries. Mid-Continent did not deny coverage or sit idly on the sidelines; it participated in the defense but disputed Liberty Mutual’s subjective assessment of what the case was worth. I see no basis for concluding that Mid-Continent, by taking a hard line in negotiations, breached a duty to Kinsel— to defend, to exercise good faith, to settle within policy limits, or any other contractual or common-law duty an insurer might owe its insured. Kinsel purchased insurance and got what it paid for, a legal defense of the claim against it and a settlement within policy limits, both funded by its insurers. Not surprisingly, Liberty Mutual, with Kinsel as its named (as opposed to additional) insured and vastly greater exposure because of its excess policy, paid most of the settlement.
Insurance companies are not eleemosynary institutions, and where, as here, the insured is protected throughout the litigation process, insurers are entitled to exercise their business judgment in deciding whether to settle a claim and for how much. I see no reason for courts in these circumstances to prohibit insurance companies from engaging in sharp negotiations with each other. To hold that primary carrier A has a claim against primary carrier B, because a “reasonable” insurer would have chipped in more toward the settlement, would recognize a cause of action that is unnecessary for the protection of insured parties or insur-
As a further reason for not recognizing the cause of action Liberty Mutual pursues, claims of this sort present an almost impossibly complex challenge for the fact finder. A jury considering such a claim would have to decide what the reluctant insurer should have paid in settlement, based, I suppose, on (1) considering the range of awards that a jury hearing the underlying claim against the insured might have awarded (given all manner of tangible and intangible factors that inform such an analysis), (2) arriving at an expected value of the judgment in the underlying case, and (3) factoring into the calculus the implications of the Stowers doctrine and what a reasonable insurer would do given this barrage of complicated information.
So I would deny Liberty Mutual’s claim. The result would be different if language from the Mid-Continent policy required it to pay more of the settlement. But I see nothing in the policy obliging Mid-Continent to do so, and I agree with the Court that the “other insurance” clause of the Mid-Continent policy, especially when considered with the “voluntary payment” and “no action” clauses, precludes a claim by Liberty Mutual against Mid-Century for contribution. I also see no claim based on subrogation, whether contractual or equitable, since Liberty Mutual’s right of sub-rogation must be premised on the concept of standing in the shoes of the insured, Kinsel, and here Kinsel has no complaint against Mid-Continent.
The result might also be different in a case involving a primary insurer and an excess carrier, where the primary alone provided the defense and failed to settle within its policy limits,
. See Am. Centennial Ins. Co. v. Canal Ins. Co.,
. See Traders & Gen. Ins. Co. v. Hicks Rubber Co.,
.See Employers Cas. Co. v. Transport Ins. Co.,