Mid-Continent Ins. Co. v. Liberty Mut. Ins.

• Citation: 236 S.W.3d 765
• Decision Date: 12 October 2007
• Docket Number: No. 05-0261.,05-0261.
• Parties: MID-CONTINENT INSURANCE COMPANY, Appellant, v. LIBERTY MUTUAL INSURANCE COMPANY, Appellee.
• Court: Supreme Court of Texas

236 S.W.3d 765

MID-CONTINENT INSURANCE COMPANY, Appellant, v. LIBERTY MUTUAL INSURANCE COMPANY, Appellee.

No. 05-0261.

Supreme Court of Texas.

Argued October 18, 2005.

Decided October 12, 2007.

Brian L. Blakeley, Carrie D. Holloway, Blakeley & Reynolds, P.C., San Antonio, for appellant.

Richard A. Capshaw, Capshaw Goss & Bowers, Mikel J. Bowers, Capshaw Weiland Goss & Bowers, Dallas, for appellee.

Justice WAINWRIGHT delivered the opinion of the Court.

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., 405 F.3d 296, 310 (5th Cir.2005). We answer the first question in the negative, and therefore do not reach the second and third questions.

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 oncoming 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., 266 F.Supp.2d 533, 544, 546 (N.D.Tex. 2003). Relying on General Agents Insurance Co. of America v. Home Insurance Co. of Illinois, 21 S.W.3d 419 (Tex.App.-San Antonio 2000, pet. dism'd by agr.), the district court determined that each insurer owed a duty to act reasonably in exercising its rights under the CGL policies. Liberty Mut. Ins., 266 F.Supp.2d at 542. It found that Mid-Continent was objectively unreasonable in assessing Kinsel's share of liability, and that Liberty Mutual was reasonable in assessing the same and in accepting the Boutins' settlement offer. Id. at 543-44. Specifically, the district court stated that "Mid-Continent's recalcitrance to consider any change, despite the changing circumstances, was unreasonable, causing it to unreasonably assess its insured's exposure," while on the other hand Liberty Mutual, "[b]y agreeing to settle for [$1.5 million] . . . resolved the case within policy limits, based on a reasonable estimation of Kinsel's liability, and avoided the real potential of joint and several liability." Id. at 544.

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...