IN THE SUPREME COURT OF TEXAS
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No. 05-0261
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Mid-Continent Insurance Company, Appellant,
v.
Liberty Mutual Insurance Company, Appellee
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On Certified Questions from the United States
Court of Appeals for the Fifth Circuit
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Argued October 18, 2005
Justice Wainwright delivered the opinion of the Court.
Justice Willett filed a concurring 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 into on-coming traffic and collided with an eastbound car driven by James Boutin and occupied by his family. All members of the Boutin family suffered substantial injuries. Kinsel Industries was the general contractor on the highway project. Crabtree Barricades was Kinsel’s subcontractor responsible for signs and dividers. The Boutin family sued Cooper, the State, Kinsel, and Crabtree in the state district court of Liberty County, Texas, for damages resulting from the accident.
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.
. . .
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,[1] a subrogation clause,[2] and a version of the standard “no action” clause.[3]
Liberty Mutual and Mid-Continent do not dispute that each owed some
portion of Kinsel’s defense and indemnification. The
insurers agreed that a total verdict for the Boutins
against all defendants would be around $2 to $3 million, but they disagreed on
the settlement value of the case against Kinsel.
Initially both insurers estimated Kinsel’s percentage
of fault between ten percent and fifteen percent, but as the case progressed
Liberty Mutual increased its estimate to sixty percent. After repeated refusals
by Mid-Continent to increase its contribution to a settlement, Liberty Mutual
agreed at a mediation with the Boutins to settle on behalf of Kinsel for $1.5 million (sixty percent of a $2.5 million
anticipated verdict). Liberty Mutual demanded Mid-Continent contribute half, but
Mid-Continent continued to calculate the settlement value of the case against
Kinsel at $300,000 and agreed to pay only $150,000.
Liberty Mutual, therefore, funded the remaining $1.35 million, paying $350,000
more than its $1 million CGL policy limit. Liberty Mutual reserved the right to
seek recovery against Mid-Continent for its portion of the settlement. Sometime
later, before trial, Mid-Continent settled the Boutins’ claim against Crabtree for $300,000. Liberty Mutual
sued Mid-Continent in the 191st Judicial District Court of Dallas County, Texas, seeking to recover Mid-Continent’s pro rata share of the sum paid to settle the
Boutin family’s claim against Kinsel. Mid-Continent timely removed the case to federal
court on diversity grounds. After a bench trial, the United States District
Court for the Northern District of Texas concluded that Liberty Mutual was
entitled through subrogation to recover $550,000 from Mid-Continent. Liberty
Mut. Ins. Co. v.
Mid-Continent Ins. Co.,
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.[4] Because Mid-Continent already paid $450,000 of its $1 million policy limit in settlement ($150,000 for the suit against Kinsel and $300,000 for the suit against Crabtree), the district court ordered Mid-Continent to pay only $550,000. Id. Although this amount is $50,000 short of Mid-Continent’s $750,000 share of the Kinsel settlement, the district court found no justification for increasing Mid-Continent’s total liability above its $1 million policy limit. Id. Mid-Continent appealed, and the Fifth Circuit certified questions of law to this Court. Tex. R. App. P. 58.1. We accepted the certified questions.
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 first through Liberty Mutual’s claim of subrogation, involves the ability of an insured to compel an insurer’s proportionate participation in the settlement of a third party claim. Because no statute applies in the third party context, the scenarios are matters of common law contract and tort.
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 Co. 169 S.W.2d at
148. The right of action is one of contribution, the elements of which
require that the several insurers share a common obligation or burden, and that
the insurer seeking contribution has made a compulsory payment or other
discharge of more than its fair share of the common obligation or burden.
Employers Cas. Co. v.
Trans. Ins. Co.,
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. 169
S.W.2d at 148. A pro rata clause operates to ensure that each insurer is
not liable for any greater proportion of the loss than the coverage amount in its policy bears to the entire amount of
insurance coverage available. Id. at
147. The effect of the pro rata clause precludes a direct claim for
contribution among insurers because the clause makes the contracts several and
independent of each other. Id. With independent contractual
obligations, the co-insurers do not meet the common obligation requirement of a
contribution claim—each co-insurer contractually agreed with the insured to pay
only its pro rata share of a covered loss; the
co-insurers did not contractually agree to pay each other’s pro rata share.
Employers Cas. Co.,
The CGL policies at issue here contain pro rata clauses. Liberty Mutual
and Mid-Continent contractually agreed in their respective policies to pay a
proportionate share of Kinsel’s covered loss up to $1
million. The co-insurers did not, however, contract with each other to create
obligations between themselves or to pay each other’s proportionate share of
Kinsel’s loss. There is no contractual right of
contribution between them, and the presence of the pro rata clauses in the CGL
policies precludes an equitable contribution claim. In this situation, no
contractual obligations exist between co-insurers to apportion between
themselves the payment on behalf of the insured, and we are not persuaded to
create such an obligation under the common law. Cf. Canal,
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. 21 S.W.3d at 426. There, two insurers, General Agents Insurance Company of America, Inc. (GAINSCO) and The Home Insurance Company of Illinois (Home), concurrently held identical $1 million policies in favor of Power Equipment. Id. at 421. It is unclear from the opinion whether the policies contained pro rata clauses. Still, both insurers acknowledged coverage and provided defense in a personal injury suit against Power Equipment. Id. at 422. The insurers differed in their assessment of prevailing at trial. Id. Home was willing to offer $1 million in settlement, while GAINSCO would offer no more than $250,000. Id. Home settled for $1.25 million, an amount funded $1 million by Home and $250,000 by GAINSCO. Id. Home sued GAINSCO for $375,000 (one half the $1.25 million settlement less the $250,000 paid by GAINSCO), and recovered judgment based on the jury finding that $1.25 million was “the fair and reasonable amount that should have been paid to settle” the claim against Power Equipment. Id. at 423.
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 co-equal 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.
B. Subrogation
Acknowledging that a right of contribution does not exist in this context, Liberty Mutual contends it can seek reimbursement through contractual or equitable subrogation 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
recovery 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
subrogation 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, 169 S.W.2d at 147. But this duty cannot be viewed independent of the purpose of a pro rata clause, nor without consideration of the rules of indemnification. As Mid-Continent validly asserts, Kinsel has no right, after being fully indemnified, to enforce Mid-Continent’s duty to pay its pro rata share of a loss.
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., 664
S.W.2d 325, 327 (Tex. 1984). An insured’s
right of indemnity under an insurance policy is limited to the actual amount of
loss. Paramount Fire Ins. Co. v. Aetna Cas. & Sur. Co.,
[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. Similarly, 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., 77 Cal. Rptr. 2d at 305.
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 settlement from an insurer regardless of that insurer’s contribution to the settlement. Having fully recovered its loss, an insured has no contractual rights that a co-insurer may assert against another co-insurer in subrogation.
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 Boutins 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.
III. Conclusion
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,
________________________________________
J. Dale Wainwright
Justice
OPINION DELIVERED: October 12, 2007
Notes
[1] 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.”
[2] 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.”
[3] “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.”
[4] 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.
[5]
“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.,