Ideal Mut. Ins. Co. v. Myers
| Citation | 789 F.2d 1196 |
| Decision Date | 21 May 1986 |
| Docket Number | No. 84-1821,84-1821 |
| Parties | IDEAL MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, v. Roy MYERS and Syble Myers, Independent Executor and Executrix of the Estate of John Dan Myers, Deceased, and Mildred Alice Strother, Individually and as Next friend of Phillip Samuel Strother, Jr., A Minor, and Illinois National Insurance Company, Defendants-Appellants. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Carter, Jones, Magee, Rudberg & Mayes, John E. Agnew, Dallas, Tex., for myers.
John E. Collins, Dallas, Tex., for Strother.
Edwin E. Wright, III, Dallas, Tex., for Ill. Nat. Ins. Bank.
Appeal from the United States District Court for the Northern District of Texas.
Before GEE, GARZA and HIGGINBOTHAM, Circuit Judges.
This case is before us following summary judgment in favor of Ideal Mutual Insurance Company 1 ("Ideal") on its declaratory judgment action against Syble Myers, 2 Independent Executrix of the Estate of John Dan Myers (the "Myers Estate"), Mildred Alice Strother and Phillip S. Strother, Jr., wife and son of Phillip S. Strother (the "Strothers") and Illinois National Insurance Company ("Illinois National"), Strother's workmen's compensation carrier (collectively, the "defendants"). The insurance dispute giving rise to Ideal's suit stems from an airplane accident in which Myers, the pilot, and his sole passenger, Strother, were killed. The accident occurred on the morning of January 7, 1978, shortly after Myers and Strother had taken off from Rockwall Texas Airport in a single-engine aircraft en route to Wichita Falls, Texas.
By letter dated July 14, 1978, the Myers Estate demanded, through Charles S. England of "Aero Adjustment Bureau" (Ideal's adjuster), payment on the insurance policy which Ideal issued to Myers. 3 On April 12, 1979, the Strothers made a wrongful death demand on Don R. Stodghill, the probate attorney representing the Myers Estate. A week later Stodghill forwarded that demand to England. On June 8, 1979, Ideal's counsel informed Stodghill that coverage on the policy would have to await Ideal's investigation of the accident, and asked to be informed of any further demands from the Strothers.
The Strothers filed a wrongful death action against the Myers Estate on January 4, 1980, in the 86th Judicial District Court of Rockwall County. On February 1, 1980, the Myers Estate informed Ideal's counsel of the Strothers' action. By letter dated February 20, 1980, England advised the Myers Estate that Ideal had retained attorney John McElhaney to defend the Estate in the Rockwall action. However, the letter contained a "reservation of rights" based on 1) Ideal's investigation that at the time of the accident the weather conditions required Myers to have an instrument flight rating ("IFR"), and on 2) the fact that Myers only had a visual flight rating ("VFR"). 4 On February 22, 1980, McElhaney, on behalf of the Myers Estate, filed an answer in the Rockwall action.
Ideal, on March 12, 1980, filed a declaratory judgment action, asserting that the policy did not cover the aircraft accident, and that Ideal was not obligated under the policy to defend the Rockwall action or to pay any judgment rendered against the Myers Estate arising out of the January 7, 1978, plane crash. On January 8, 1982, Syble Myers and Mildred Alice Strother entered into a settlement agreement, which resulted in the dismissal of the Rockwall action on June 2, 1982. 5 As a result, on March 22, 1982, Ideal filed a supplemental On April 14, 1982, Ideal moved for summary judgment on the issue of coverage based on its claim 1) that the Myers Estate breached conditions and exclusions of the policy precluding voluntary assumption of liability for the aircraft accident, vis-a-vis the settlement agreement, and 2) that the pilot warranty clause precluded coverage for "occurrences" in weather conditions for which the pilot was not properly qualified. In response defendants contended that they were entitled to enter into a settlement agreement once Ideal refused to defend the Rockwall action and sent its reservation of rights letter, and that the pilot warranty clause did not preclude coverage for the January 7th plane crash. The district court, on August 14, 1984, in a Memorandum Opinion and Order, granted summary judgment for Ideal. We reverse.
complaint for declaratory judgment, claiming that the settlement agreement violated certain conditions and exclusions of the policy and, therefore, further absolved Ideal of any obligation to the Myers Estate under the Policy. 6 The defendants responded with a counterclaim for the full amount of the settlement agreement, punitive damages in the amount of $500,000, and attorney's fees. The defendants contended that Ideal failed to properly defend, investigate, or settle the Strothers' claim against the Myers Estate, failed to timely notify the Myers Estate of the real conflict of interest, and failed to execute and deliver to the Myers Estate a valid reservation of rights. The defendants further claimed that Ideal's conduct constituted negligence by failing to consider the best interests of the Myers Estate and by intentionally withholding investigative materials, data and other information owing to the Myers Estate. Accordingly, the defendants argued that Ideal waived and was estopped from asserting the defense of "no coverage."
The district court found that the defendants were not entitled to make a claim against Ideal. According to the court, the settlement agreement constituted a breach of the "no action" clause of the policy. The clause provides:
No action shall lie against the Company unless, as a condition precedent thereto, the Insured shall have fully complied with all of the terms of this Policy, nor until the amount of the Insured obligation to pay shall have been finally determined either by judgment against the Insured after actual trial or by written agreement between the Insured, the Claimant and the Company....
Based on the Myers Estate's "breach" of the no action clause, the trial court held that
the Estate has no standing to make a claim upon Ideal because no judgment has been rendered against the Myers Estate, the Myers Estate did not obtain Ideal's consent to the settlement agreement, and the Myers Estate has not paid--and, indeed, is not liable to pay--any In their counterclaim and response to Ideal's motion for summary judgment, the defendants claimed that Ideal failed to defend the Rockwall action, 8 and that, therefore, the Myers Estate was entitled to settle with the Strothers. We agree that a no action clause is not an absolute bar to settlement between the insured and a third party claimant, where the insurer has breached its duty to defend the insured. In Rhodes v. Chicago Insurance Co., 719 F.2d 116, 120 (5th Cir.1983), this Court summarized the applicable Texas law.
amounts under the settlement agreement. 7
It is well settled that once an insurer has breached its duty to defend, the insured is free to proceed as he sees fit; he may engage his own counsel and either settle or litigate, at his option. Great American Indemnity Co. v. Corpus Christi, 192 S.W.2d 917, 919 (Tex.Civ.App.--San Antonio 1946, writ ref'd n.r.e.). Having forfeited its right to conduct the defense, the insurer is bound by the settlement or judgment. Ranger Insurance Co. v. Rogers, 530 S.W.2d 162, 167 (Tex.Civ.App.--Austin 1975, writ ref'd n.r.e.) (settlement); Ridgway v. Gulf Life Insurance Co., 578 F.2d 1026, 1029 (judgment; Texas law), reh'g denied, 583 F.2d 541 (5th Cir.1978). An additional consequence of a breach of the duty to defend is the inability to enforce against the insured any conditions in the policy; the insured is no longer constrained by "no action" or "no voluntary assumption of liability" clauses. Gulf Insurance Co. v. Parker Products, Inc., 498 S.W.2d 676, 679 (Tex.1973). A consequence of breach, therefore, is that an insurer who wrongfully failed to defend its insured is liable for any damages assessed against the insured, up to the policy limits, 4 subject only to the condition that any settlement be reasonable. The insured must demonstrate only that, in settling, his conduct conformed to the standard of a prudent uninsured. The insurer may also be liable for attorneys' fees incurred by the insured in order to defend the suit. Steel Erection Co. v. Travelers Indemnity Co., 392 S.W.2d 713, 716 (Tex.Civ.App.--San Antonio 1965, writ ref'd n.r.e.).
Under Texas law, the general rule is that, "[w]hile a waiver or estoppel may preclude an insurer's policy defense arising out of a condition or forfeiture provision, these doctrines do not normally operate to prevent the assertion of a defense of no coverage." Pacific Indemnity Co. v. Acel Delivery Service, Inc., 485 F.2d 1169, 1173 (5th Cir.1973), cert. denied, 415 U.S....
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