TEXAS FARMERS INSURANCE COMPANY, Petitioner, v. Richard R. SORIANO and Auforth, Keas & O‘Reilly, Respondents.
No. D-3363.
Supreme Court of Texas.
Argued Jan. 18, 1994. Decided June 15, 1994.
Rehearing Overruled Sept. 8, 1994.
To reiterate, violation of
By saying that section 25.11 does not, per se, involve moral turpitude, I do not defend the act of the “sale or purchase of a child.”
Harold Tom Hermansen, Jr., Ray Alexander, Carlos Villarreal, Ronald B. Brin, Thomas F. Nye, Alan J. Couture and Lynette Frederick, Corpus Christi, for respondents.
ENOCH, Justice, delivered the opinion of the Court, in which PHILLIPS, Chief Justice, and GONZALEZ, GAMMAGE and SPECTOR, Justices, join.
The issue in this case is whether there is any evidence that the Texas Farmers Insurance Company was negligent or breached a duty оf good faith and fair dealing in failing to settle certain claims against its insured, Richard Soriano. We hold there is no evidence of negligence or bad faith.
I.
In September 1978, Richard Soriano crashed head-on into another car driven by Carlos Medina. Mr. Medina was severely injured and his wife of thirty years was killed. The Medinas’ two children, ages 11 and 12, were injured in the accident as well. Adolfo Lopez, a teenage passenger with Richard Soriano, was also killed. Soriano was charged with involuntary manslaughter, driving while under the influence of alcohol, driving at an unsafe speed, and passing with insufficient clearance. Soriano had only minimum insurance coverage through his parents’ policy with Texas Farmers Insurance Group, which provided for limits of $10,000 per person and $20,000 per occurrence. Farmers offered the full policy limits of $20,000 to the Medinas, but the Medinas rejected this offer because they wished to investigate Soriano‘s personal assets. The Medinas and Alonzo аnd Rafaela Lopez, the parents of Adolfo Lopez, both then sued Richard Soriano, and the cases were consolidated for trial. Shortly before trial, Farmers settled the Lopez wrongful death claim for $5,000 and offered the remaining $15,000 to the Medinas. The Medinas rejected this offer, but then demanded $20,000 (the original policy limits they had previously rejected).
The Medinas’ claims against Soriano went to trial and the jury found Soriano negligent.
The court of appeals, 844 S.W.2d 808, sitting en banc affirmed with five justices holding that there was some evidence that the Lopez settlement was unreasonable, negligent and made in bad faith. 844 S.W.2d at 818. The court of appeals also reformed the judgment to eliminаte double taxation of prejudgment interest and ordered a remittitur of $4 million on the exemplary damages. 844 S.W.2d at 831.1 We conclude that there is no evidence that Farmers was negligent or that Farmers breached a duty of good faith and fair dealing. We therefore reverse and render judgment that Soriano take nothing.
II.
Soriano asserts that, in opting to settle the Lopez claim for $5,000, Farmers was negligent and acted in bad faith by reducing the amount of insurance available for the Medinаs’ claims, thereby subjecting Soriano to excess judgment liability on the more serious Medina claims. Soriano argues that when faced with multiple claims and inadequate proceeds, an insurer must weigh the seriousness of the claims and attempt to settle those claims within policy limits that pose the greatest threat of liability for excess judgments. Farmers responds that it has no duty to determine which claims will result in the greatest liability or to weigh the comparative gravity of the claims in considering settlement. Farmers argues there is no evidence it was negligent or that it breached a duty of good faith and fair dealing to Soriano because, as a matter of law, the Lopez settlement was reasonable.
A.
Stowers Liability for Negligently Failing to Settle
An insured‘s cause of action for negligence in failing to settle a claim is defined by G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544, 547 (Tex.Comm‘n App.1929, holding approved). As we recently reiterated in American Physicians Ins. Exchange v. Garcia, 876 S.W.2d 842, 848 (Tex. 1994), under Texas law insurers must “exercise ‘that degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business’ in responding to settlement demands within policy limits.” Through this Stowers duty, insurers may be liable for negligently failing to settle within policy limits claims made against their insureds. Stowers, 15 S.W.2d at 547-48.
To impose a Stowers duty on an insurer when there is a single claim, a settlement demand must propose to release the insured fully in exchange for a stated sum of money. American Physicians, 876 S.W.2d at 848-49. The Stowers duty is not activated by a settlement demand unless three prerequisites are met: (1) the claim against the insured is within the scope of coverage, (2) there is a demand within policy limits, and (3) the terms of the demand are such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the insured‘s potential exposure to an excess judgment. Id. A demand above policy lim
These principles apply with equal force in this case. When Farmers received the Lopez settlement demand of $5,000 ($5,000 to settle a wrongful death claim), Farmers was required under Stowers to exercise reasonable care in responding to that demand. Had Farmers opted not to settle the Lopez wrongful death claim but, in the face of that demand, to renew its offer of the original face amount of the policy to settle the Medinas’ claims instead, Farmers would surely face questions about liability under Stowers for failing to settle the Lopez wrongful death claim. To be sure, in settling the Lopez claim, Farmers necessarily reduced the amount of insurance available to satisfy the Medinas’ claims, but Farmers also reduced Soriano‘s liability exposure. We conclude that when faced with a settlemеnt demand arising out of multiple claims and inadequate proceeds, an insurer may enter into a reasonable settlement with one of the several claimants even though such settlement exhausts or diminishes the proceeds available to satisfy other claims.2 Such an approach, we believe, promotes settlement of lawsuits and encourages claimants to make their claims promptly. See Scurlock Oil Co. v. Smithwick, 724 S.W.2d 1, 4 (Tex.1986).
Once Farmers settled the Lopez claim, the remaining limits available to satisfy the Medinas’ claims were $15,000. Farmers cannot be liable for negligently failing to settle the Medinas’ claims unless there is evidence that either (1) Farmers negligently rejected a demand from the Medinas within policy limits; or (2) the Lopez settlement was itself unreasonable. We conclude there is no evidence of either.
The Medinas never made a demand for the full $20,000 prior to the Lopez settlement. We note that there is evidence in the record that prior to the Lopеz settlement, the Medinas’ attorney indicated to Fred Auforth, the attorney hired by Farmers to represent Soriano, that he would recommend a settlement of $20,000 to the Medinas if Farmers were to again make the offer. In addition, the evidence includes Farmers’ response to the following request for admission:
REQUEST NO. 9. Admit or deny that Farmers intentionally and knowingly settled the Lopez death claim at a time when:
(a) The claims for the death of Maria Medina and the injuries to Carlos Medina could have been settled for policy limits totaling $20,000;
(b) Farmers knew the Lopez settlement would reduce the insurance coverage on its policy to a figure below that needed to meet the settlement offer for such Medina claims; . . .
FARMERS’ RESPONSE: Farmers gave Fred Auforth authority to settle those claims he felt would protect Richard Soriano‘s interest up to the [] $20,000 policy limits. In this respect, Fred Auforth settled the Lopez claim. With this in mind we answer the following request.
(a) Admit.
(b) Admit.
While this evidence indicates that Farmers may hаve been able to settle the Medinas’ claims for $20,000 prior to the Lopez settlement, this is not evidence that the Medinas ever made a demand for $20,000 before the Lopez settlement. In the absence of any evidence of a demand within policy limits prior to the Lopez settlement, Farm
Nor is there any evidence that the Lopez settlement was itself unreasonable. It is undisputed that the Lopez claim, a wrongful death claim alleging negligence and gross negligence, had merit. Soriano contends only that the Lopez settlement was unreasonable when viewed in comparison to the more serious Medina claims. The fact that the Medinas’ claims may be more serious is not evidence that the Lopez claim was unreasonable.3 To be unreasonable, Soriano must show that a reasonably prudent insurer would not have settled the Lopez claim when considering solely the merits of the Lopez claim and the potential liability of its insured on the claim.4 This standard is nothing more than what is required of an insurer under Stowers. We conclude that therе is no evidence that Farmers’ decision to settle the Lopez wrongful death claim for $5,000 was unreasonable.
Soriano argues that Farmers waived its complaint concerning the reasonableness of the Lopez settlement by failing to object to the omission of the Lopez settlement in the jury issue on negligence.5 We disagree. First, Farmers properly preserved its no evidence points, on which our decision today is based, through a motion for judgment notwithstanding the verdict and а motion for new trial. See T.O. Stanley Boot Co., Inc. v. Bank of El Paso, 847 S.W.2d 218, 220 (Tex. 1992). Second, Farmers objected to Special Issue No. 1 complaining specifically that:
The problem I have with special issue number 1, is it doesn‘t address the central issue in this lawsuit and that is the settlement of the Lopez claim. It only addresses the settlement of Maria Medina and Carlos Medina;
And nowhere in the charge does it address the central issue of this case that we spent five days on and that is the settlement of the Lopez claim . . .;
The entire cаse with respect to how the claims handling was handled and all the [expert] opinions address the issue of whether or not the Lopez claim should have been settled or not . . . And to submit the issue as stated is contrary to the pleadings and the theory that this case has been tried upon. For those reasons, Defendant Texas Farmers Insurance Co. objects to the submission of special issue number 1.
We think these objections sufficient to point out distinctly Farmers’ complaint that Spe-
We hold that there is no evidence that Farmers negligently failed to settle the Medinas’ claims.
B.
Liability for Breach of the Duty of Good Faith and Fair Dealing
In addition to negligence, Soriano asserts that Farmers breached a duty of good faith and fair dealing by denying or delaying payment of a settlement demand without a reasonable basis for denying or delaying payment or by failing to determine whether thеre was a reasonable basis for the failure to settle or delay in settling.
At the outset, we note that this Court has never recognized a cause of action for breach of the duty of good faith and fair dealing where the insurer fails to settle third-party claims against its insured. We first articulated the standard of care owed by insurers to their insureds in responding to claims made by the insured in Arnold v. National County Mutual Fire Ins. Co., 725 S.W.2d 165, 167 (Tex.1988). Under Arnold, an insurer may breach its duty of good faith and fair dealing in refusing to pay a first-party claim where (1) the insurer has no reаsonable basis for denying or delaying payment of the claim or (2) the insurer knew or should have known that there was no reasonable basis for denying or delaying payment of the claim. Id. We reiterated an insurer‘s duty of good faith and fair dealing to its insured in Aranda v. Insurance Co. of North America, 748 S.W.2d 210, 213 (Tex.1988), and
most recently in Lyons v. Millers Casualty Ins. Co., 866 S.W.2d 597, 599 (Tex.1993). Significantly, each of these cases involves the insurer‘s duty to its insured in handling first-party claims. We have never held and do not hold today that either of these two standards applies to insurers in responding to third-party claims. However, Farmers does not сhallenge whether Soriano has a claim for breach of the duty of good faith and fair dealing in failing to settle a third-party claim. See Allstate v. Watson, 876 S.W.2d 145, 149-50 (Tex.1993). Farmers only asserts that there is no evidence that it breached a duty of good faith and fair dealing because, as a matter of law, Farmers had a reasonable basis for not settling the Medinas’ claims for more than $15,000.7
In reviewing the legal sufficiency of the evidence supporting a bad faith finding, this Court‘s focus is on the relationship the evidence arguably supporting the bad faith finding has to the elements of bad faith. Lyons, 866 S.W.2d at 600. In this regard, the evidence presented, viewed in the light most favorable to the insured, must be such as to permit at least the logical inference that the insurer had no reasonable basis to delay or deny payment of the claim. Id. Furthermore, the evidence must relate to the tort issue of no reasonable basis for denial or delay in payment of a claim, not just to the contract issue of coverage. Id.
As we statеd above, no duty arose requiring Farmers to pay the Medinas the full $20,000 policy limits before the Lopez settlement. Again, the evidence shows, rather, that prior to the Lopez settlement Farmers had offered the full $20,000 to the Medinas which they refused. Only after the Lopez
III.
Because there is no evidence that Farmers was negligent or that it breached a duty of good faith and fair dealing, we reverse the judgment of the court of appeals and render judgment that Soriano take nothing.
DOGGETT, Justice, concurs in the judgment only.
HIGHTOWER, Justice, concurring.
I join the court‘s judgment in this cause. However, I disagree with the сourt‘s analysis of an insurer‘s duty to settle (including the requirement of a formal settlement demand within policy limits) for the reasons stated in parts V and VI of American Physicians Ins. Exchange v. Garcia, 876 S.W.2d 842 (Tex. 1994) (Hightower, J., dissenting, joined by Doggett, Gammage and Spector, JJ.).
CORNYN, Justice, joined by HECHT, Justice, concurring.
I concur in the court‘s judgment, and join in its opinion except for Part II.B. Contrary to the court‘s view, I would hold that the question of whether third-party insurers responding to settlement demands are subject to this duty has been preserved for our review. I would hold that Texas law recognizes only one tort duty in this contеxt, that being the duty stated in Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544 (Tex.Comm‘n App.1929, holding approved). Cf. American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 847 & nn. 10-11, 849 & nn. 14, 17-18 (Tex.1994) (discussing tort duties other than the duty to settle).
The court writes: “Farmers does not challenge whether Soriano has a claim for breach of the duty of good faith and fair dealing in failing to settle a third-party claim,” 881 S.W.2d at 317, stating that, “Farmers only asserts that there is no evidence that it breached a duty of good faith and fair dealing.” 881 S.W.2d at 317. The court then proceeds to search the record for any evidence to support this nonexistent cause of action, and concludes that there is none.
Whether Farmers owed Soriano a duty of good faith and fair dealing is plainly preserved by Farmers’ first point of error: “The court of appeals erred as a matter of law in concluding that Farmers breached any legal duty in this case.” Application for Writ of Error at 7. Moreover, Farmers argues that its no evidence points, including its challenge to the jury finding of bad faith, must be sustained because “the court is barred by rules of law or of evidence from giving weight to the only evidence offered to prove a vital fact.” Id. at 41 (citing Robert W. Calvert, “No Evidence” and “Insufficient Evidence” Points of Error, 38 TEX.L.REV. 359, 362-363 (April 1960)); see also Juliette Fowler Homes, Inc. v. Welch Assoc., Inc., 793 S.W.2d 660, 666 n. 9 (Tex.1990) (quoting Chief Justice Calvert‘s formulation with approval). Farmers argues that because Texas law does not recognize a duty of good faith under these facts, the court cannot give any weight to the evidence claimed to support this duty. Finally, Farmers cites authority for the proposition that the “interpret[ation] by some” that the negligence standard set forth in Stowers is in fact a duty of “good faith” has been rejected in Texas. Application for Writ of Error at 32 n. 5. On this basis, I would hold that the issue of whether a duty of good faith and fair dealing exists in the present context has been preserved for our review.
The court also states: “At the outset, we note that this court has never recognized a cause of action for breach of the duty of good faith and fair dealing where the insurer fails to settle third-party claims against its insured.” 881 S.W.2d at 317. I agree, but I would in this case hold that no such duty exists under Texas law. See Ranger County Mut. Ins. Co. v. Guin, 704 S.W.2d 813, 818 (Tex.App.—Texarkana 1985), aff‘d, 723 S.W.2d 656 (Tex.1987) (“Texas has rejected the good faith test of an insurer‘s liability which is used in the majority of the states in a case of this nature, and instead adopted a negligence [Stowers doctrine] standard.“).1
Notes
Arnold, 725 S.W.2d at 167.[An] indemnity company is held to that degree of care and diligence which a man of ordinary care and prudence would exercise in the management of his own business. G.A. Stowers Furniture Company v. American Indemnity Company, 15 S.W.2d 544, 548 (Tex. Comm‘n App.1929, holding apрroved).
A cause of action for breach of the duty of good faith and fair dealing is stated when it is alleged that there is no reasonable basis for denial of a claim or delay in payment or a failure on the part of the insurer to determine whether there is any reasonable basis for the denial or delay....
Was Texas Farmers Insurance Co. negligent in the manner in which it handled the claim asserted for the death of Maria Medina and the injuries to Carlos Medina against its insured, Richard Soriano, and was such negligence, if any, a proximate cause of the excess Judgment in Webb County, Texas, against Richard R. Soriano?
Our complaint is, under the evidence in this case, not so much that they settled Lopez in and of itself, but that by doing so they reduced the amount needed to take advantage of the offer to settle the other two claims and that‘s the way we choose to touch, I mean, I‘m willing to ride on that. I think that‘s negligence in the way they handled—their failure to handle by settlement those two claims and so the idea about Lopez is just an evidentiary issue.