American Physicians Ins. Exchange v. Garcia
| Decision Date | 09 March 1994 |
| Docket Number | No. D-1239,D-1239 |
| Citation | 876 S.W.2d 842 |
| Parties | AMERICAN PHYSICIANS INSURANCE EXCHANGE and American Physicians Service Group, Inc., Petitioners, v. Ramon A. GARCIA, M.D., Respondent. |
| Court | Texas Supreme Court |
J. Sam Winters, Barry Bishop, Jay A. Thompson, Austin, Donald M. Hunt, Lubbock, George Spencer, San Antonio, for petitioners.
Charles Nicholson, San Antonio, David A. Slaughter, Ronald D. Krist, Houston, Pat Maloney, Sr., San Antonio, for respondent.
We grant American Physicians Insurance Exchange's ("APIE's") motion for rehearing, withdraw our prior opinion and judgment, and substitute the following in its place. 1 We decide whether Dr. Ramon Garcia's malpractice insurance carrier, APIE, breached its duty to defend Garcia or its Stowers 2 duty to settle. We hold that the evidence conclusively establishes that APIE discharged its duty to defend Garcia, and that because APIE never received a settlement demand within its policy limits, it did not breach its Stowers duty to settle. We therefore reverse the judgment of the court of appeals and render judgment in favor of APIE.
On March 8, 1984, Araminta Cardenas, individually and as Guardian of the Estate of Gustavo Cardenas, Norma Vasquez Cardenas and Carmen Cardenas ("the Cardenases") filed a medical malpractice lawsuit against Garcia and others. In their Original Petition, the Cardenases alleged that Garcia was guilty of malpractice in his treatment of Gustavo Cardenas from October 3, 1980, to approximately April 12, 1982. The malpractice claim arose out of Garcia's prescription of two drugs, Haldol and Navane, which allegedly caused Cardenas to develop tardive dyskinesia, a debilitating brain disease. The Cardenases initially alleged that "on or about April 12, 1982, Gustavo Cardenas was placed under the care of another physician." At all times alleged in the Original Petition, Garcia was insured against medical malpractice claims by three consecutive Insurance Corporation of America ("ICA") policies.
In 1980, Garcia was covered by an ICA "claims-made" 3 medical malpractice insurance policy with limits of $100,000. In 1981 and 1982, Garcia was covered under two consecutive one-year ICA "occurrence" policies, each providing him with $500,000 in coverage. 4 In 1983, Garcia purchased an APIE occurrence policy with a $500,000 limit per occurrence, the policy involved in this appeal.
On December 23, 1983, several months before they filed their Original Petition, the Cardenases sent Garcia a letter notifying him of their intention to file a lawsuit against him for negligent treatment of Cardenas from September 1980 "to the present time." Garcia reported this letter to APIE. On January 3, 1984, APIE "[n]otified Garcia of his limited coverage with API[E] for this incident." Garcia's records indicated that only one of Cardenases' office visits, on January 18, 1983, occurred during APIE's policy period. APIE therefore concluded in an internal memo that the "lion's share" of the Cardenases' claim arose out of treatment performed during ICA's earlier policy periods. Accordingly, APIE advised Garcia that coverage under its policy turned solely on the January 1983 office visit.
As a result of the Cardenases' letter, APIE wrote to ICA on March 20, 1984, and confirmed their "agree[ment] to share in any settlement or judgment on a pro-rata coverage basis." They also agreed to split evenly the legal fees incurred in Garcia's defense. ICA retained Ross Crossland and his law firm to assume primary responsibility for Garcia's defense. APIE hired another attorney to "simply monitor the developments in this lawsuit." APIE first received a copy of the Cardenases' March 8, 1984 Original Petition on March 23, 1984, three days after it arranged for Garcia's defense.
The Cardenases subsequently filed five amended petitions, none of which alleged malpractice during the APIE policy period. Eventually, on July 24, 1985, APIE notified Garcia that its policy was not applicable because "all allegations made against you occurred prior to your coverage with American Physicians." 5
Questions concerning insurance coverage plagued settlement negotiations. On July 10, 1985, Crossland advised the Cardenases' lawyer, Pat Maloney: "[T]he companies have elected to pro rate any settlement or adverse judgment or jury verdict on an equal basis." Evidently, Crossland mistook the insurers' agreement to divide his legal fees equally as an indication that any settlement or judgment would be split on that basis rather than prorated in proportion to coverage. In this same letter, Crossland stated, "my understanding of this agreement ... is that the total insurance available is ... $600,000," the combined limits of the 1983 APIE policy and a $100,000 ICA claims-made policy for the year 1980. 6 After Crossland sought settlement authority from the insurers, he informed Maloney on July 26, 1985:
Apparently confusion has arisen with regard to the extent of the liability insurance available....
....
Although I have been advised by representatives of APIE that I do not in any manner represent their interests, based on information and belief ... Garcia was covered by an insurance policy with that company for $500,000.00.
It is my understanding that these policies cannot be totaled or aggregated in any manner to establish coverage in an amount in excess of $500,000. 7
The Cardenases' attorney made his first written settlement demand to Crossland on July 15, 1985. In this letter, Maloney made a settlement demand of $600,000, and conditioned the demand on acceptance within ten days. Garcia's personal attorney, Clem Lyons, wrote to Crossland on July 22, urging ICA and APIE to accept Maloney's demand.
On July 26, 1985, however, after learning of an additional ICA policy with a $500,000 limit, Maloney raised his demand to $1.1 million. Crossland responded to this increased demand the same day by informing Maloney in the letter quoted above that Garcia's coverage was limited to $500,000. This letter also disclosed a second $500,000 ICA policy.
On the day of trial, July 29, 1985, Maloney raised his demand again, to $1.6 million, and imposed a deadline for acceptance of 10:00 a.m. the same day. Lyons also wrote to Crossland on the day of trial to urge acceptance of the $1.6 million settlement demand. ICA and APIE made no settlement offer at this time. The record does not indicate that the Cardenases ever communicated any settlement demand of less than $600,000, or that any demand was made that did not require the two insurers to accept jointly.
After APIE informed Garcia that there was no coverage under its policy, but before trial on July 29, 1985, the Cardenases, Garcia, and their attorneys entered into a non-execution agreement whereby the Cardenases agreed to look solely to ICA and APIE for satisfaction of any judgment that might be rendered against Garcia. The non-execution agreement also indemnified Garcia for any judgment that might be rendered in excess of the amounts actually collected from ICA and APIE. In return, Garcia assigned any claims he might have against APIE or ICA to the Cardenases.
On the day of trial, the Cardenases filed a Sixth Amended Original Petition that alleged for the first time that Garcia's malpractice continued into 1983, and thus into APIE's policy period. That petition alleged that even though Mrs. Cardenas advised Garcia that her husband had suffered adverse side effects from drugs Garcia prescribed "during the course of several office visits from September 1980 to February or March 1983," Garcia "continued to treat Gustavo Cardenas" with neuroleptic drugs, "until February or March 1983." Lyons testified at the subsequent Stowers trial that the Cardenases' attorney filed the Sixth Amended Original Petition at his urging because he believed it to be in Garcia's best interest for the pleadings to invoke the maximum possible insurance coverage for Garcia.
The malpractice case, Cardenas v. Garcia, was tried to the court. The court found that Garcia's course of treatment constituted continuing negligence beginning September 1980 and ending February 1983, and rendered judgment for $2,235,483.30 plus costs and interest. Under the terms of the Non-Execution Agreement, the $2,235,483.30 judgment against Garcia could not be executed against him personally. Thereafter, the Cardenases, solely in their capacity as Garcia's assignees, filed suit in Garcia's name against his liability insurers alleging that Garcia had suffered actual damages in the amount of the $2,235,483.30 judgment.
In this suit, the Cardenases alleged that the insurers violated their duty to defend Garcia and their Stowers duty to accept a reasonable settlement demand within policy limits. Subsequent to filing but before trial of this case, however, the Cardenases and the insurance companies entered into two settlement agreements. The first agreement, dated May 1, 1986, released ICA from all liability in both the malpractice lawsuit and the Stowers suit in exchange for $2,000,000.00. Under the second agreement, dated May 5, 1987, and entitled "Partial Settlement Agreement," APIE paid the Cardenases and their attorneys $500,000 for their agreement not to contest APIE's motion for a six-month continuance of the Stowers case, their agreement to offset the amount paid against any further judgment, and their release of liability for any judgment in excess of $2.5 million against APIE or American Physicians Service Group, Inc. ("APSG"), an affiliate of APIE. Thus, the Cardenases received $2.5 million for Garcia's claims before the Stowers suit even proceeded to trial.
The Stowers suit was tried to a jury beginning November 9, 1987. The jury found that (1) APIE negligently failed to settle Garcia's case prior to entry of...
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