Travelers Indem. Co. v. Citgo Petroleum Corp.

• Decision Date: 29 January 1999
• Docket Number: No. 97-20924,97-20924
• Citation: 166 F.3d 761
• Parties: The TRAVELERS INDEMNITY COMPANY; The Travelers Indemnity Company of Connecticut, Plaintiffs-Counter Defendants-Appellees, v. CITGO PETROLEUM CORP.; Citgo Refining and Chemicals, Inc., Defendants-Counter Claimants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 761

166 F.3d 761

The TRAVELERS INDEMNITY COMPANY; The Travelers Indemnity Company of Connecticut, Plaintiffs-Counter Defendants-Appellees, v. CITGO PETROLEUM CORP.; Citgo Refining and Chemicals, Inc. Defendants-Counter Claimants-Appellants.

No. 97-20924.

United States Court of Appeals, Fifth Circuit.

Jan. 29, 1999.

Michael Patrick Morris, Tekell, Book, Matthews & Limmer, Houston, TX, for Plaintiffs-Counter Defendants-Appellees.

William W. Pierson, Royston, Rayzor, Vickery & Williams, Corpus Christi, TX, J. James Cooper, Houston, TX, Robert H. Etnyre, Jr., Chester Joseph Makowski, Royston, Rayzor, Vickery & Williams, Houston, TX, for Defendants-Counter Claimants-Appellants.

Appeal from the United States District Court for the Southern District of Texas.

Before GARWOOD and HIGGINBOTHAM, Circuit Judges. ¹

GARWOOD, Circuit Judge:

Plaintiffs-appellees Travelers Indemnity Company and Travelers Indemnity Company of Connecticut (collectively, Travelers) brought in the district court below this diversity action for declaratory judgment seeking a determination of its duty to defend and indemnify defendants-appellants Citgo Petroleum Corporation and Citgo Refining & Chemicals, Inc. (collectively, Citgo) under three insurance policies. Citgo counterclaimed for breach of the insurance contracts and violation of Texas insurance law. The district court granted summary judgment in favor of Travelers. Citgo appeals. We affirm.

Facts and Proceedings Below

Travelers issued three insurance policies to Wright Petroleum (Wright): a business auto policy, a catastrophe umbrella policy, and a comprehensive general liability policy (CGL policy). Citgo, which had a form of franchise agreement with Wright (a wholesaler and retailer of petroleum products), was made an additional insured as to each of these policies by valid endorsement thereto. ² The business auto and umbrella policies each contained provisions allowing Travelers to settle claims at its discretion, and stated that Travelers' duties under the policy would terminate when the applicable policy limits had been exhausted. The language used in the business auto policy was as follows: "We may investigate or settle any claim or suit as we consider appropriate. Our duty to defend or settle ends when the Liability coverage limit of insurance has been exhausted by payments of judgments or settlements." The umbrella policy contains a similarly worded provision.

The underlying lawsuit that created the current dispute originated in a collision between one of Wright's tanker trucks and an automobile driven by Richard Friedrichs that occurred on October 10, 1992, in McAllen, Texas, and as a result of which both Friedrichs and the tanker truck driver, a Wright employee, were killed. At the time of the accident, the truck was carrying petroleum products for Citgo as well as several other oil companies and allegedly ran a red light at the intersection where the collision occurred. Later the same year, Friedrichs' survivors sued Wright in the 92nd Judicial District Court of Hidalgo County, Texas. Citgo was not then named as a defendant in the suit. Travelers, in accordance with the requirements of the business auto and catastrophe umbrella policy, conducted Wright's defense. On August 30, 1993, the plaintiffs presented a settlement demand. One day before expiration of the plaintiffs' offer, settlement for $1.5 million was agreed to. A disagreement later arose as to the wording of the release. On September 16, 1994, a release was executed releasing Wright, the estate of the tanker truck driver, and all others who were then named defendants in the lawsuit, in exchange for Travelers' tendering the full policy limits--$1.5 million dollars--of both the auto and the umbrella policies to plaintiffs. Citgo, which at that time was not and had never been named a defendant in the lawsuit and as to which plaintiffs had not made any offer to settle, was not included in the release. It can be inferred that at least several months before September 1994, Travelers was aware that plaintiffs insisted on reserving their right to sue Citgo.

On September 29, 1994, the plaintiffs in the underlying suit amended their complaint to name as defendants Citgo and several other oil companies, charging them with negligence in continuing to deal with Wright when they knew or should have known of its inadequate safety standards. Citgo demanded a defense and indemnity from Travelers in the amended action. Travelers refused, citing the exhaustion of the policy limits of the business auto and umbrella policies and claiming that coverage under the CGL policy was barred by an exclusion regarding the operation of automobiles.

Travelers brought this diversity based declaratory judgment action in district court below seeking a determination that it had no duty to Citgo. Citgo counterclaimed for a declaration that Travelers was bound to defend and indemnify it under the policies and also claimed breach of contract for their failure to do so, fraudulent misrepresentation and unfair or deceptive trade practices under Texas law, breach of the duty of good faith and fair dealing, and negligence. Travelers moved for summary judgment and both parties requested that attorneys' fees be awarded to the prevailing party.

The district court granted Travelers' motion for summary judgment and awarded it attorneys' fees. Citgo appeals.

Discussion

I. Settlement Under the Auto and Umbrella Policies.

Central to all of Citgo's contentions regarding the auto and umbrella policies is its claim that under Texas law an insurer cannot favor one insured over another in obtaining settlements. By settling on behalf of Wright, Travelers favored Wright over Citgo and thus allegedly breached this duty. We conclude that this argument is without merit. Under Texas law, an insurer defending its insured on a covered claim owes that insured a tort law duty to accept a reasonable settlement offer within policy limits rather than unreasonably risk an adverse judgment substantially over the policy limits. Texas courts have also held that an insurer is free to favor a claim by one claimant over a claim by another claimant in pursuit of this duty. We find that the logic of these positions requires that an insurer be free to settle suits against one of its insureds without being hindered by potential liability to co-insured parties who have not yet been sued. Since we reject Citgo's invitation to create a special duty for insurers when multiple parties are covered under the policy, we also reject its contention that settling a claim in accordance with Texas law is a violation of the insurer's independent contractual duty to perform reasonably.

A. The Stowers duty and multiple insured parties.

In Texas, the basic tort duty for insurers facing settlement offers is the Stowers duty. See G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544, 547 (Tex. Comm'n App.1929, holding approved). Under Stowers, an insurer, defending an insured in a lawsuit on a covered claim, when faced with a settlement offer within policy limits, must accept the offer on behalf of its insured when an ordinarily prudent insurer would do so in light of the reasonably apparent likelihood and degree of that insured's potential exposure to a valid judgment in the suit in excess of policy limits. American Physicians Insurance Exchange v. Garcia, 876 S.W.2d 842, 848-49 (Tex.1994). In this context, the Stowers duty is the only tort duty the insurer must comply with; the duty of good faith in handling insurance claims does not apply. See Maryland Insurance Co. v. Head Industrial Coatings and Services, Inc., 938 S.W.2d 27, 28 (Tex.1996).

The Stowers duty creates difficulties, however, when multiple parties and other potential claims in excess of policy limits are involved. In such cases, fulfillment of the Stowers duty will reduce the funds available to satisfy the claims of other plaintiffs or the defense of other insured parties. However, if insurers are subject to both liability for failure to settle under Stowers and liability for disparate treatment of nonsettling insureds, insurers would find the policy limits they carefully bargained for of little utility. Under Stowers, they would be obliged to settle up to the limit of a policy or face a lawsuit by the covered insured as to whom the settlement within policy limits was offered. But if they in fact settled, they would leave themselves open to claims by the insureds excluded from the settlement, and any additional recovery would be in excess of the limits they had originally relied on.

The Texas Supreme Court has definitively resolved this dilemma in regards to claims by multiple plaintiffs. An insurer is allowed to fulfill its Stowers duty to its insured by settling with one claimant, even though the result is to leave the insured exposed to another claim. See Texas Farmers Insurance Co. v. Soriano, 881 S.W.2d 312, 315 (Tex.1994). In Soriano, an insurer opted to settle a relatively minor claim for twenty-five percent of the policy limit when a formal demand was served, despite indications that a settlement with a significantly larger claimant at the policy limit might have been possible. The court held that an insurer could only be liable for settling a claim if (a) they had previously rejected a valid settlement offer within policy limits from the other claimant or (b) the settlement they reached was unreasonable "considering solely the merits of the" settled "claim and the potential liability of its insured on" that "claim." Id. at 316 (emphasis added). Neither condition was met, so the insurer was entitled to settle the initial claim. Once the first settlement was reached, the insurer had no Stowers duty to settle, since the major claimant did not present a settlement offer within the remaining policy limit.

Citgo attempts to distinguish Soriano by pointing out that an insurer owes a higher duty to its...