Birmingham Fire Ins. Co. of Pennsylvania v. American Nat. Fire Ins. Co.

• Decision Date: 28 May 1997
• Docket Number: No. 06-96-00054-CV,06-96-00054-CV
• Citation: 947 S.W.2d 592
• Parties: BIRMINGHAM FIRE INSURANCE COMPANY OF PENNSYLVANIA, American International Adjustment Company, Inc., and AIG Claims Services, Appellants, v. AMERICAN NATIONAL FIRE INSURANCE COMPANY, Appellee.
• Court: Texas Court of Appeals

Page 592

947 S.W.2d 592

BIRMINGHAM FIRE INSURANCE COMPANY OF PENNSYLVANIA, American

International Adjustment Company, Inc., and AIG

Claims Services, Appellants, v. AMERICAN NATIONAL FIRE INSURANCE COMPANY, Appellee.

No. 06-96-00054-CV.

Court of Appeals of Texas,

Texarkana.

Argued April 8, 1997.

Decided May 1, 1997.

Rehearing Overruled May 20, 1997.

Rehearing Overruled May 28, 1997.

E. Lawrence Merriman, Merriman, Patterson & Allison, Longview, for Appellant AIG Claims Services.

James D. Wise, Jr., Brown, Sims, Wise & White, Houston, for Appellant Birmingham Fire Ins. Co.

Jack W. Tucker, Jr., Tucker, Hendryx, Snyder & Slade, Houston, for Appellant American International Adjustment.

Herbert Boyland, Harbour, Kenley, Boyland & Smith, T. John Ward, Brown McCarrol & Oaks Hartline, Longview, David W. Holman, Holman, Hogan, DuBose & Townsend, Chris C. Pappas, Charles R. Dunn, Andrew J. Sarne, Dunn, Kacal, Adams, Pappas & Law, Houston, for Appellee American National.

Before CORNELIUS, C.J., and GRANT and ROSS, JJ.

OPINION

ROSS, Justice.

Birmingham Fire Insurance Company of Pennsylvania ("Birmingham") and American International Adjustment Company, Inc., now known as AIG Claims Services, Inc., ("AIAC/AIGCS") appeal a judgment awarding American National Fire Insurance Company ("the appellee") $4 million for breach of contract and breach of the duty to settle under G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544 (Tex.Comm'n App.1929, holding approved). This case arose from a premises liability lawsuit against Avala of Texas ("Avala") and Intershop Real Estate Services, Inc. ("Intershop"). Avala owned and Intershop operated the Plymouth Park Shopping Center ("Plymouth Park") in Irving, Texas. For purposes of that lawsuit, Birmingham was the primary liability insurer of Avala and Intershop, and the appellee was the excess liability insurer. AIAC/AIGCS was a claims-handling company associated with Birmingham. After an excess judgment was entered against Avala and Intershop, the appellee filed this suit, alleging, inter alia, (1) that the appellants negligently failed to negotiate in good faith for settlement of the claim against Avala and Intershop, and (2) that Birmingham breached its insurance contract by failing to tender its full limits to the appellee. The appellants bring several points of error, and the appellee brings several cross-points. We reverse and render for the appellants on the Stowers cause of action. We modify the award of damages for breach of contract, ordering payment to the appellee of an additional $123,415.48 in supplemental payments, as well as an additional $26,109.98 in prejudgment interest. As modified, the breach-of-contract award is affirmed.

Around 9:00 p.m. on April 29, 1988, Patricia Garcia, who was seven months pregnant, was brutally murdered at a postal kiosk in the middle of Plymouth Park's parking lot. The killer was never apprehended. Garcia's husband, minor daughter, and parents ("Garcia plaintiffs") retained a noted Houston trial lawyer, Ronald Krist, to prosecute a premises liability suit against Avala and Intershop. All of the lawyers involved in the case, the appellee's employees, the mediators, and even some of the appellants' employees, evaluated the case as "very dangerous," involving a potential multimillion dollar verdict against Avala and Intershop. They were concerned about the horrible facts and great sympathy value of the case and were concerned that the plaintiffs had retained very able counsel in a favorable venue. Furthermore, discovery revealed that Plymouth Park, a very large shopping complex, had absolutely no security budget. In other words, there was a strong possibility of a large amount of punitive damages.

Because of an insurance policy giving it the sole right to defend and settle certain claims against Intershop and Avala, Birmingham had the right to take charge of the defense of the Garcia case. However, AIAC/AIGCS, a sister company of Birmingham, handled the entirety of the defense on behalf of Birmingham. Despite the dangerous nature of the case, the appellants dragged their feet in settlement negotiations. They would not offer above $250,000.00 in settlement, while the plaintiffs made various offers ranging from $3.25 to $5 million. The refusal to negotiate unnerved the appellee and Avala and Intershop, all of whom requested Birmingham to tender its limits so that the appellee could attempt a settlement. The Garcia plaintiffs attempted to negotiate a settlement with the appellee, bypassing Birmingham, but the appellee refused to settle around Birmingham.

Apparently to the surprise of everyone except the appellants, the jury came back with a verdict in favor of Avala and Intershop. However, the trial judge determined that the jury's verdict was against the great weight of the evidence and therefore granted the plaintiffs' motion for new trial. Despite the result of the first trial, most of the participants continued to believe that the case involved a potentially huge verdict. Nevertheless, Birmingham still offered no more than $250,000.00 to settle the case. The second jury returned a verdict in excess of $10 million against Avala and Intershop. After the judgment, Birmingham tendered to the appellee $1 million, its claimed limits, and supplementary payments in excess of $400,000.00. The judgment made relevant a contractual dispute between Birmingham and the appellee. Birmingham claimed that its limits were $1 million, whereas the appellee, stepping into the shoes of the insureds, claimed that Birmingham's limits were $2 or $4 million. Regardless, the appellee provided excess coverage for the next $10 million of liability. Therefore, the appellee negotiated a $7.9 million settlement with the Garcia plaintiffs.

The appellee sued the appellants, claiming that it suffered $6.5 million in damages as a result of the appellants' handling of the Garcia case. The appellee alleged negligence, breach of the duty of good faith and fair dealing, violations of the Texas Insurance Code, fraud, and misrepresentation. The trial judge eventually granted a directed verdict against the appellee on all claims except those premised on Stowers. The appellee also brought a breach-of-contract claim, styled as a declaratory judgment action, to recover the disputed $1 million from the primary policies covering Avala and Intershop. The contract cause of action was tried to the judge, while the Stowers cause of action was tried to the jury. The jury was not made aware of the contract dispute. After a lengthy trial, the jury found that the appellants negligently failed to negotiate in good faith for settlement of the case, but also found the appellee responsible for one third of its loss because it negligently disclosed information to the plaintiffs' counsel, thereby exposing the insured to greater liability. The jury found damages of $4 million. The trial judge found that Birmingham still owed $1 million under the terms of its contracts with Avala and Intershop. He therefore awarded the appellee $1 million from Birmingham. It appears that the trial judge subtracted $1 million, representing the amount that Birmingham owed as a result of its breach of contract, from the $4 million in Stowers damages. He then subtracted an additional $1 million based on the one-third comparative negligence determination and awarded the appellee $2 million against both of the appellants. The appellee also recovered attorney's fees on the contract action and prejudgment interest on the entire judgment.

We will first discuss issues related to the Stowers action. Then, we will discuss issues related to the contract action.

I. STOWERS ACTION

A. Stowers Background

Under the holding of Stowers, 15 S.W.2d at 547, an insured can state a cause of action against his insurer for negligently failing to accept a settlement demand from a third-party claimant.

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) the demand is within the 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.

American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex.1994). The insurer's duty of ordinary care also includes "investigation, preparation for defense of the lawsuit, trial of the case and reasonable attempts to settle." Ranger County Mut. Ins. Co. v. Guin, 723 S.W.2d 656, 659 (Tex.1987). However, "[i]n the context of a Stowers lawsuit evidence concerning claims investigation, trial defense, and conduct during settlement negotiations is necessarily subsidiary to the ultimate issue of whether the claimant's demand was reasonable under the circumstances, such that an ordinarily prudent insurer would accept it." American Physicians, 876 S.W.2d at 849. The insurer has no duty "to accept a settlement demand in excess of policy limits or to make or solicit settlement proposals." Id. Although evidence of a formal demand is not an "absolute prerequisite" to a claim, "the Stowers remedy of shifting the risk of an excess judgment onto the insurer is inappropriate absent proof that the insurer was presented with a reasonable opportunity to prevent the excess judgment by settling within the applicable policy limits." Id.

American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480, 483 (Tex.1992), held that an excess carrier may bring a Stowers action against a primary carrier. Because American Centennial was based upon the doctrine of equitable subrogation, it does not "impose new or additional burdens on the primary carrier...." Id.

The jury charge in this case asked whether the appellants were negligent in investigating, preparing to defend, trying, or negotiating in good faith for settlement of the Garcia case. The jury...