General Star Indem. Co. v. Vesta Fire Ins. Corp.
| Citation | 173 F.3d 946 |
| Decision Date | 06 May 1999 |
| Docket Number | No. 98-20211,98-20211 |
| Parties | GENERAL STAR INDEMNITY COMPANY, Plaintiff-Appellant, v. VESTA FIRE INSURANCE CORPORATION; Liberty National Fire Insurance Company; Liberty National Fire Insurance Company, doing business as Vesta Fire Insurance Corporation, Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Daniel D. Gartner, Fitzgerald, Gartner & Follis, Houston, TX, for Plaintiff-Appellant.
Chris Culver Pappas, Houston, TX, Mark A. Cohen, Michael Joseph Prame, Cohen, Prame & Goldberg, Washington, DC, for Defendants-Appellees.
Appeal from the United States District Court for the Southern District of Texas.
Before DAVIS, SMITH and WIENER, Circuit Judges.
Plaintiff-Appellant General Star Indemnity Company ("General Star") appeals the district court's order granting the motion of Defendant-Appellee Vesta Fire Insurance Corporation ("Vesta") to dismiss under Federal Rule of Civil Procedure 12(b)(6). For the reasons expressed below, we reverse the district court's order, and remand the case for further proceedings.
The instant lawsuit arose out of a state wrongful death and survival action filed by the parents and estate of Karen Crawford after she was murdered in the mail room of Champion Woods Apartments (the "Apartments"). Champion Woods Associates Two insurance companies provided coverage for the relevant parties. Under a $1 million general liability policy, Vesta insured CWA and MSI, covering MSI both as general partner and as property manager. General Star provided "primary" liability coverage to MSI as general partner, 1 and, pursuant to a policy endorsement, provided "excess" liability coverage to MSI as property manager. 2
("CWA"), a limited partnership, owned the property on which Crawford was killed. CWA's general partner was Michael Stevens Interests, Inc. ("MSI"), which also served in a separate capacity as the Apartment's property manager. The state court action named MSI as a defendant based both on its ownership interest in the apartment complex and the property management services it performed.
When the underlying action was initiated, Vesta appointed counsel to defend its insureds, both CWA and MSI. General Star, on the other hand, elected not to appoint counsel. Rather, it informed Vesta that it would monitor the case as excess insurer of MSI in its capacity as apartment manager. General Star did not assume any responsibility as primary insurer of MSI in its capacity as general partner.
In a pre-mediation status report, the defense counsel retained by Vesta advised both Vesta and General Star that, although he did not believe that MSI was negligent, an adverse jury verdict could nevertheless be significant. Counsel estimated the settlement value of the case to be $500,000, but maintained that plaintiffs probably would not settle for less than $1 million.
Vesta participated in mediation efforts that proved unsuccessful, but General Star did not participate. According to General Star, Vesta's highest offer during mediation was $100,000. As a result, General Star wrote to Vesta shortly after mediation broke down, complaining that Vesta was not making a concerted effort to settle the claim. In response, Vesta advised General Star that it, rather than Vesta, was the primary insurer for MSI in its role as general partner, and that if General Star believed a higher settlement offer was warranted, it should "get its checkbook out." Thereafter, the Crawfords made a final settlement offer of $1 million which, Vesta contends, was unanimously rejected by both insurers. General Star disputes this contention, arguing that both it and MSI unsuccessfully urged Vesta to accept the offer.
Ultimately, the case proceeded to trial, resulting in a jury verdict for the Crawfords and the decedent's estate in the amount of $9.4 million. The jury apportioned 35% of the liability to CWA, 35% to MSI in its capacity as general partner, and 15% to MSI in its capacity as apartment manager. 3 The parties settled the case prior to initiation of appellate proceedings. In accordance with their respective policy limits, Vesta contributed $1 million and General Star contributed $3.6 million to the $4.6 million settlement.
Thereafter, General Star sued Vesta to recover the money it had paid in settlement, alleging liability under theories of (1) equitable subrogation, (2) breach of the duty of good faith and fair dealing, (3) violations of the Texas Insurance Code, (4) negligence, (5) gross negligence, and (6) breach of contract.
The district court granted Vesta's Rule 12(b)(6) motion, concluding that General Star's complaint failed to state a claim on which relief could be granted. In support of this conclusion, the court noted that (1) General Star sought to recover from Vesta on a theory of direct liability not recognized
under Texas law, (2) there was no evidence to support a claim by MSI to which General Star could be subrogated, and (3) because the evidence indicated that General Star was a primary carrier with a duty to defend MSI, General Star was barred from asserting any claim for damage arising out of its failure to do so. General Star appealed from this ruling.
This court reviews de novo a district court's ruling on a motion to dismiss under Fed.R.Civ.P. 12(b)(6), applying the same standard as the district court. 4
Texas law permits actions between insurance carriers under the doctrine of equitable subrogation. 5 Equitable subrogation is the legal fiction through which a person or entity, the subrogee, is substituted, or subrogated, to the rights and remedies of another by virtue of having fulfilled an obligation for which the other was responsible. 6 According to this doctrine, an excess insurer, paying a loss under a policy, "stands in the shoes" of its insured with regard to any cause of action its insured may have against a primary insurer responsible for the loss. 7 It is elementary that, before an excess insurer can recover from a primary insurer under the doctrine of equitable subrogation, the excess insurer must first prove that the primary insurer failed to fulfill a duty owed to the insured. 8
Texas law recognizes only one tort duty in the context of third party claims against an insured, that being the duty owed by a primary insurer to its insured, as set forth seventy years ago in the landmark case of G.A. Stowers Furniture Co. v. American Indemnity Co. 9 In Stowers, the Texas Commission of Appeals held that an insurer which, under the terms of its policy, assumes control of a claim, becomes the agent of the insured and is held to the degree of care and diligence that an "ordinarily prudent person would exercise in the management of his own business." 10 Although Stowers focused specifically on an insurer's obligation to settle within the limits of its policy, 11 the duty owed by an insurer to its insured has since been broadly interpreted by the Texas Supreme Court to include the full range of obligations arising out of an agency relationship. 12 12 A breach of the Stowers duty by an insurer gives rise to a cause of action in negligence against that insurer by its insured. 13
In Foremost County Mutual Insurance Co. v. Home Indemnity Co., 14 we declined to extend directly to co-insurers the duty owed by an insurer to its insured under Stowers. 15 Although some jurisdictions impose both this duty and others on the relationship between excess and primary carriers, and permit actions based on a breach of these duties, 16 Texas has yet to so. 17 Consequently, an excess insurer may only assert a cause of action for a primary insurer's breach of its Stowers duty if it does so while standing in the shoes of its insured. 18
General Star argues that the facts stated in its First Amended Original Complaint were sufficient to state a claim of negligence through equitable subrogation, 19 and that the district court erred in granting Vesta's motion to dismiss. Given the liberal pleading standard required by the federal rules, we agree.
The Federal Rules of Civil Procedure require a "short and plain statement of the claim showing that the pleader is entitled to relief." 20 Pursuant to Rule 8(a), a complaint will be deemed inadequate only if it fails to (1) provide notice of the circumstances which give rise to the claim, or (2) set forth sufficient information to outline the elements of the claim or permit inferences to be drawn that these elements exist. 21
In Paragraph 21 of its amended complaint General Star asserts:
The Defendants, as primary insurers, owed Plaintiff, as provider of excess coverage, a duty to handle the Underlying Litigation in a reasonably prudent manner. This duty includes investigation of the claim, trial defense, and settlement negotiations. The Defendants breached this duty by unreasonably ignoring the recommendations and evaluations of defense counsel; by offering ridiculously low amounts of money to settle a very serious claim; and by allowing an opportunity to settle within primary limits lapse, despite the Plaintiff's urging and the urging of the Defendant's [sic] insured. 22
Vesta submits that this pleading is deficient because it fails to state an essential element of General Star's claim; namely, a duty owed to MSI. Under Texas law, asserts Vesta, General Star is limited to those claims that it can bring as a subrogee. Because Paragraph 21 mistakenly frames General Star's negligence claim in terms of Vesta's alleged breach of a duty owed to General Star rather than MSI, argues Vesta, the complaint fails to set forth facts sufficient to state a claim on which relief can be granted. We reject this hyper-technical reading of General Star's complaint.
Paragraph 21 correctly characterizes the nature of the duty owed by Vesta under Texas law, and succinctly describes the circumstances which gave rise to an alleged breach of this...
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