In re Farmers Tex. Cnty. Mut. Ins. Co.

• Decision Date: 23 April 2021
• Docket Number: No. 19-0701,19-0701
• Citation: 621 S.W.3d 261
• Parties: IN RE FARMERS TEXAS COUNTY MUTUAL INSURANCE COMPANY, Relator
• Court: Texas Supreme Court

621 S.W.3d 261

IN RE FARMERS TEXAS COUNTY MUTUAL INSURANCE COMPANY, Relator

No. 19-0701

Supreme Court of Texas.

Argued September 17, 2020

OPINION DELIVERED: April 23, 2021

Shannon Simmons Pounds, Mary Barrow Nichols, James A. Hemphill, Austin, for Amicus Curiae Texas Mutual Insurance Company.

Kenneth R. ‘Kent’ Chambers, Houston, Don E. Weiss, San Antonio, for Relator.

Thomas G. Kemmy, San Antonio, Benjamin T. Kemmy, Nicholas A. Kemmy, for Real Party in Interest.

Melissa A. Lorber, Austin, for Amicus Curiae State Farm Mutual Auto Insurance Company.

Justice Busby delivered the opinion of the Court in which Justice Guzman, Justice Lehrmann, Justice Devine, Justice Bland, and Justice Huddle joined, and in which Chief Justice Hecht, Justice Boyd, and Justice Blacklock joined as to Parts I and II.

These mandamus petitions, which challenge rulings on a Rule 91a motion to dismiss, require us to examine the legal basis of claims against a liability insurer that solicited its insured to fund part of a settlement. According to the petition, the insurer chose to settle claims against its insured within policy limits but obtained a release that was contingent on the insured paying $100,000 of the $350,000 settlement. The insured paid and filed this suit for reimbursement, which the insurer seeks to dismiss on the ground that the insured's claims for negligent failure to settle and for breach of contract have no basis in law.

We agree with the insurer that the insured has no Stowers claim for negligent failure to settle because there was no judgment or settlement in excess of policy limits. But the insured can pursue her claim that the insurer breached its obligation to indemnify her for amounts she was legally responsible to pay under the settlement. The insurer does not assert that the settlement was unauthorized, but whether the insured can succeed on her claim may depend on other issues including coverage and the reasonableness of the settlement amount. We conditionally grant mandamus relief accordingly.

BACKGROUND

Gary Gibson sued Cassandra Longoria for damages he sustained in an automobile accident when Longoria rear-ended his vehicle. Longoria had purchased liability insurance from Farmers Texas County Mutual Insurance Company, which provided an attorney to represent her. Gibson alleged that Longoria's negligence caused him serious bodily injury and sought damages of $1 million, which was more than Longoria's $500,000 policy limit. Gibson designated experts, but Longoria alleges that the attorney representing her failed to designate an expert by the deadline, and the trial court denied a motion to make a late expert designation.

Two months before trial, Gibson and Longoria attended mediation. Longoria, concerned about her potential liability for damages above her policy limits, brought her own attorney with her. The mediator proposed that the case settle for $350,000. After mediation, Gibson notified Farmers that he would accept the mediator's proposal. Farmers made a counteroffer of $250,000. According to Longoria's petition, Farmers "suggested" or "ma[de] a demand" that she "contribute the additional $100,000 necessary to secure a release." Farmers also stated that Longoria had "created potential liability for gross negligence" even though that claim "had not been asserted by Gibson." Gibson rejected Farmers' $250,000 settlement offer and withdrew his own settlement offer, advising that he would now seek $2 million in damages.

Before trial, Longoria's personal counsel reopened settlement negotiations. Gibson again agreed to settle for $350,000. After Farmers again refused to contribute more than $250,000, Longoria offered to pay the additional $100,000 without waiving her right to seek recovery of that payment from Farmers. Gibson accepted and gave Longoria a release in exchange for Farmers' and Longoria's payments.

Longoria then filed this suit against Farmers for negligent failure to settle, asserting that Farmers "failed to act as a reasonably prudent insurer" and as a result she had to pay $100,000 of her own funds to secure a release from Gibson. Farmers responded with a motion to dismiss under Texas Rule of Civil Procedure 91a on the ground that Longoria's claim had no basis in law. Farmers argued that Texas law does not recognize a cause of action for negligent failure to settle—a Stowers claim—when there has not been a judgment against the insured exceeding policy limits.

Longoria amended her petition to add claims for breach of contract, alleging that Farmers breached the policy by: failing to defend the suit by timely designating expert witnesses, failing to accept an offer to settle within policy limits, failing to use its coverage to secure a release, withholding $100,000 in coverage that it had a duty to pay, and demanding that Longoria contribute personal funds to settle a potential claim of gross negligence that had not been raised. Farmers filed another motion to dismiss, asserting that Longoria had no cause of action for breach of contract for the following reasons: Farmers had no contractual duty to pay damages because Longoria had not been held legally responsible for any damages, Farmers had a right under the policy to settle or defend "as we consider appropriate," and its only duty to settle was the extra-contractual Stowers duty. The trial court denied both motions to dismiss.

Farmers sought mandamus relief in the court of appeals, arguing that the trial court abused its discretion by denying the motions to dismiss. 604 S.W.3d 421 (Tex. App.—San Antonio 2019). The court of appeals agreed as to Longoria's claim for breach of contract. Id. at 428. Regarding Longoria's allegation that Farmers failed to timely designate experts, the court reasoned that it had had no basis in fact because she did not allege any damages as a result of the alleged breach. Id. at 427. Turning to Longoria's allegation regarding Farmers' failure to pay the settlement, the court concluded it had no basis in law because Farmers fulfilled its contractual obligation to "settle or defend" by electing to settle. Id.

A majority of the court of appeals held, however, that the trial court properly denied Farmers' motion to dismiss Longoria's claim for negligent failure to settle. Id. at 429. Farmers argued that Longoria could not assert a Stowers claim absent a judgment in excess of policy limits. But the majority held that whether a Stowers claim always required an excess judgment was not so clearly established as to be free from doubt. Id. at 428.

Both Farmers and Longoria seek mandamus relief in this Court. The parties disagree regarding whether Longoria's claims for negligent failure to settle and breach of contract have a basis in law.

ANALYSIS

We explained over 25 years ago that it is "troubl[ing] for obvious reasons" when a liability insurer "solicit[s] a contribution to [a] settlement from its insured without committing its own policy limits." Am. Physicians Ins. Exch. v. Garcia , 876 S.W.2d 842, 850 n.15 (Tex. 1994). Early in the last century, "the first qualifications to what had been unlimited insurer discretion to settle tort litigation came in situations where the insurance company bargained strategically with its insured ...[,] us[ing] the risk of excess liability to coerce [the] insured to contribute to a settlement within the [policy] limits and below the expected [amount of a] judgment [against the insured]." Kent D. Syverud, The Duty to Settle , 76 VA. L. REV. 1113, 1153 (1990).

As courts recognized various legal theories to limit this strategic behavior, many insurance companies "chose[ ] simply to get out of the game [of suggesting contributions by their insureds] altogether," id. at 1156, but Longoria alleges that Farmers engaged in such behavior here. In reviewing Farmers' Rule 91a motion to dismiss, we must decide whether this alleged behavior fits into certain of the modern doctrinal pigeonholes of Texas insurance law: specifically, whether an insured who contributes to a within-limits settlement in response to a solicitation or demand by her insurer can bring a claim for reimbursement under Stowers or the insurance policy.

I. Standard of review

Under Rule 91a, a party may move for dismissal on the ground that a cause of action has no basis in law. "A cause of action has no basis in law if the allegations, taken as true, together with inferences reasonably drawn from them, do not entitle the claimant to the relief sought." TEX. R. CIV. P. 91a.1. In ruling on a Rule 91a motion to dismiss, a court may not consider evidence but "must decide the motion based solely on the pleading of the cause of action, together with any [permitted] pleading exhibits." TEX. R. CIV. P. 91a.6. We review the merits of a Rule 91a ruling de novo; whether a defendant is entitled to dismissal under the facts alleged is a legal question. City of Dallas v. Sanchez , 494 S.W.3d 722, 724 (Tex. 2016) (per curiam). Mandamus relief is appropriate when the trial court abuses its discretion in denying a Rule 91a motion to dismiss. See In re Essex Ins. Co. , 450 S.W.3d 524, 528 (Tex. 2014).

II. Longoria has no Stowers claim against Farmers for negligent failure to settle because her liability did not exceed policy limits.

Longoria's first claim against Farmers is a Stowers action for negligent failure to settle, and she contends that Farmers failed to act as a reasonably prudent insurer would have done. In particular, she alleges that Farmers owed her a duty to accept a reasonable settlement offer within policy limits, that Gibson's offer to settle for $350,000 was reasonable especially considering Farmers' failure to designate an expert, and that Farmers' failure to pay that amount in full was a breach of its duty. Farmers moved to dismiss this claim, arguing that a cause of action for negligent failure to settle exists only if the insurer's failure results in a judgment against the insured in excess of policy limits, which did not occur here.

Under...