American Centennial Ins. Co. v. Canal Ins. Co.

• Citation: 843 S.W.2d 480
• Decision Date: 16 December 1992
• Docket Number: No. D-1213,D-1213
• Parties: AMERICAN CENTENNIAL INSURANCE COMPANY and First State Insurance Company, Petitioners, v. CANAL INSURANCE COMPANY, Talbert, Biessel, Stone & Lyman, Giessel, Stone, Barker & Lyman, Henry P. Giessel and Richard S. Joseph, Respondents.
• Court: Texas Supreme Court

Page 480

843 S.W.2d 480

AMERICAN CENTENNIAL INSURANCE COMPANY and First State

Insurance Company, Petitioners, v. CANAL INSURANCE COMPANY, Talbert, Biessel, Stone & Lyman,

Giessel, Stone, Barker & Lyman, Henry P. Giessel

and Richard S. Joseph, Respondents.

No. D-1213.

Supreme Court of Texas.

Dec. 16, 1992.

Larry J. Doherty, Michael H. Norman, Jimmy Williamson, Houston, for petitioners.

Robert A. Black, John D. Rienstra, Jr., Beaumont, William E. Junell, Jr., Richard Warren Mithoff, Scott Rothenberg, Houston, for respondents.

OPINION

DOGGETT, Justice.

We consider whether an excess insurance carrier has a cause of action against a primary carrier and trial counsel for mishandling a claim. We extend this court's holding in G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex.Comm'n App.1929, holding approved), to permit such an action.

General Rent-A-Car International, Inc. was sued for injuries and death allegedly resulting from a blowout of a defective tire on one of its rental cars. At the time of the accident, General was insured by three companies. Canal Insurance Co., the primary carrier, provided coverage to $100,000; First State Insurance Co. insured from $100,000 to $1 million; and American Centennial Insurance Co. was responsible for $1 million to $4 million. Canal investigated and defended the suit, hiring an outside law firm. ¹ Because of alleged mishandling by trial counsel of the litigation, the insurers were forced to settle for $3.7 million.

The two excess carriers, First State and American Centennial brought suit against Canal, the law firm handling the defense and two of the firm's attorneys for negligence, gross negligence, breach of the duty of good faith and fair dealing and violations of the Texas Deceptive Trade Practices--Consumer Protection Act, Tex.Bus. & Com.Code §§ 17.41-.63, and article 21.21 of the Texas Insurance Code. The trial court granted summary judgment, denying all claims as barred by the statute of limitations, determining that the primary insurer and its counsel owed no duties to the excess carriers and finding that no genuine issue of material fact existed. The court of appeals reversed the judgment as to Canal, but affirmed as to defense counsel on the basis of the statute of limitations. 810 S.W.2d 246. Because we hold that the excess carrier may bring an equitable subrogation action against both the primary insurer and defense counsel and that a fact issue was raised in the summary judgment record as to whether the claim was properly handled, we affirm in part and reverse in part.

Texas law vests a clear right in the insured to sue the primary carrier for a wrongful refusal to settle a claim within the limits of the policy. G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544. The insurer's duty to act as an ordinarily prudent person in business management extends to claim investigation, trial defense and settlement negotiations. Ranger County Mut. Ins. Co. v. Guin, 723 S.W.2d 656, 659 (Tex.1987). We have not previously considered whether a similar duty is imposed upon the primary insurer in protecting the excess carrier from damages for wrongful handling of a claim.

Although a question of first impression in Texas, many other states have considered whether the doctrine of equitable subrogation permits actions between carriers. Under this theory, the insurer paying a loss under a policy becomes equitably subrogated to any cause of action the insured may have against a third party responsible for the loss. The excess insurer would thus be able to maintain any action that the insured may have against the primary carrier for mishandling of the claim. Equitable subrogation has been recognized in Texas, although not in this particular context. See, e.g., Employers Casualty Co. v. Transport Ins. Co., 444 S.W.2d 606, 610 (Tex.1969); Interfirst Bank Dallas, N.A. v. United States Fidelity and Guar. Co., 774 S.W.2d 391, 397 (Tex.App.--Dallas 1989, writ denied); International Ins. Co. v. Medical-Professional Bldg. of Corpus Christi, 405 S.W.2d 867, 869 (Tex.Civ.App.--Corpus Christi 1966, writ ref'd n.r.e.).

While many states recognize an action by an excess carrier against a primary insurer, ² a majority of those permitting suit do so on grounds of equitable subrogation. ³ In recognizing a cause of action for equitable subrogation, these courts have sought to encourage fair and reasonable settlement of lawsuits. See Northwestern Mut. Ins. Co. v. Farmers Ins. Group, 76 Cal.App.3d 1031, 1050-51, 143 Cal.Rptr. 415, 427 (1978); Ranger Ins. Co. v. Travelers Indem. Co., 389 So.2d 272, 275 (Fla.Dist.Ct.App.1980). If the excess carrier had no remedy, the primary insurer would have less incentive to settle within the policy limits. Hartford Accident & Indem. Co. v. Aetna Casualty & Sur. Co., 164 Ariz. 286, 792 P.2d 749, 757 (1990); Commercial Union Ins. Co. v. Medical Protective Co., 426 Mich. 109, 393 N.W.2d 479, 483 (1986) ("[A]llowing the excess insurer to enforce the primary insurer's duty to settle in good faith serves the public and judicial interests in fair and reasonable settlements of lawsuits by discouraging primary carriers from 'gambling' with the excess carrier's money when potential judgments approach the primary insurer's policy limits."). Additionally, the wrongful failure to settle would likely result in increased premiums by excess carriers. See id.; Peter v. Travelers Ins. Co., 375 F.Supp. 1347, 1350-51 (C.D.Cal.1974).

These courts have also employed equitable subrogation "to prevent an unfair distribution of losses among primary and excess insurers." Hartford Accident & Indem. Co. v. Aetna Casualty & Sur. Co., 792 P.2d at 757; see Continental Casualty Co. v. Reserve Ins. Co., 238 N.W.2d at 865.

Because we find the reasoning of these cases persuasive, we hold that an excess carrier may bring an equitable subrogation action against the primary carrier. This does not, however, impose new or additional burdens on the primary carrier, since our prior decisions in Stowers and Ranger County imposed clear duties on the primary carrier to protect the interests of the insured. The primary carrier should not be relieved of these obligations simply because the insured has separately contracted for excess coverage. See Peter v. Travelers Ins. Co., 375 F.Supp. at 1350; Commercial Union Ins. Co. v. Medical Protective Co., 393 N.W.2d at 483. In this situation, where the insured has little incentive to enforce the primary carrier's duties, the excess carrier should be permitted to do so through equitable subrogation.

American Centennial and First State urge the court to recognize a direct duty running from the primary to the excess insurer. Only a few jurisdictions have permitted a direct action, rather than limiting the excess carrier to an equitable subrogation claim. ⁴ Excess insurers prefer a direct action because, under the theory of equitable subrogation, they are subject to any defenses assertable against an insured, including the refusal to settle and the failure to cooperate. Because none of these circumstances is present in the case before us, however, and the excess insurers appear to have an adequate remedy using equitable subrogation, we decline at this time to permit a direct action. See Twin City Fire Ins. Co. v. Superior Court, 164 Ariz. 295, 792 P.2d 758, 759 (1990).

The court of appeals correctly held that the equitable subrogation claim against Canal was not time-barred. Since the applicable statute of limitations parallels that of a traditional Stowers action, this action was timely brought. We also agree that any claims against Canal for negligence, gross negligence and violations of the DTPA and Insurance Code were barred by the applicable statutes of limitations. Thus we need not, and do not, decide whether the doctrine of equitable subrogation would extend to permit such actions by an excess carrier against the primary insurer.

The court of appeals held the action against the attorneys was barred by the statute of limitations, finding the excess insurers' cause of action accrued at the time of the alleged malpractice. This conflicts with our recent writing in Hughes v. Mahaney & Higgins, 821 S.W.2d 154, 157 (Tex.1991), that "when an attorney commits malpractice in the prosecution or defense of a claim that results in litigation, the statute of limitations is tolled until all appeals on the underlying claim are exhausted." The court of appeals' holding is thus in error.

Because the malpractice suit is not time-barred, we must consider whether an excess carrier may bring such a cause of action. Under Texas law, attorneys are not ordinarily liable for damages to a nonclient, because privity of contract is absent. See, e.g., Parker v. Carnahan, 772 S.W.2d 151, 156 (Tex.App.--Texarkana 1989, writ denied); First Mun. Leasing Corp. v. Blankenship, Potts, Aikman, Hagin and Stewart, 648 S.W.2d 410, 413 (Tex.App.--Dallas 1983, writ ref'd n.r.e.); Bell v. Manning, 613 S.W.2d 335, 339 (Tex.Civ.App.--Tyler 1981, writ ref'd n.r.e.). Texas courts have been understandably reluctant to permit a malpractice action by a nonclient because of the potential interference with the duties an attorney owes to the client. See, e.g., Supreme Court of Texas, State Bar Rules art. X, § 9 (Texas Disciplinary Rules of Professional Conduct), Rule 2.01 (1990) (requiring exercise of independent professional judgment on behalf of client). None of these prior cases, however, have considered whether an excess carrier may be equitably subrogated to an insured's action against counsel.

The few jurisdictions to have considered this question are divided on whether to permit suit. ⁵ The single Texas decision to consider this issue held that the excess carrier may bring a malpractice action. Stonewall Surplus Lines Ins. Co. v. Drabek, 835 S.W.2d 708 (Tex.App.--Corpus Christi 1992, writ denied) (en banc).

Although in the context of insurance...