Liberty Mut. Ins. Co. v. Mid-Continent Ins. Co.

• Decision Date: 31 March 2005
• Docket Number: No. 03-10705.,03-10705.
• Citation: 405 F.3d 296
• Parties: LIBERTY MUTUAL INSURANCE COMPANY, Plaintiff-Counter-Defendant, Appellee-Cross-Appellant, v. MID-CONTINENT INSURANCE COMPANY, Defendant-Counter-Claimant, Appellant-Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

405 F.3d 296

LIBERTY MUTUAL INSURANCE COMPANY, Plaintiff-Counter-Defendant, Appellee-Cross-Appellant, v. MID-CONTINENT INSURANCE COMPANY, Defendant-Counter-Claimant, Appellant-Cross-Appellee.

No. 03-10705.

United States Court of Appeals, Fifth Circuit.

March 31, 2005.

Richard Anthony Capshaw (argued), Capshaw, Goss & Bowers, Dallas, TX, for Liberty Mut. Ins. Co.

Brian Lynn Blakeley (argued), Carrie Davis Holloway, Blakeley & Reynolds, San Antonio, TX, for Mid-Continent Ins. Co.

Appeals from the United States District Court for the Northern District of Texas.

Before GARWOOD, JOLLY and BARKSDALE, Circuit Judges.

PER CURIAM:

This Texas law diversity case involves important and determinative questions of Texas law as to which there is no controlling Texas Supreme Court precedent. Accordingly, we certify those unresolved questions to the Supreme Court of Texas.

CERTIFICATION FROM THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT TO THE SUPREME COURT OF TEXAS, PURSUANT TO THE TEXAS CONSTITUTION ART. 5, § 3-C AND RULE 58 OF THE TEXAS RULES OF APPELLATE PROCEDURE

TO THE SUPREME COURT OF TEXAS AND THE HONORABLE JUSTICES THEREOF:

I. STYLE OF THE CASE: PARTIES AND COUNSEL

The style of the case in which certification is made is Liberty Mutual Insurance Company v. Mid-Continent Insurance Company, Case No. 03-10705, in the United States Court of Appeals for the Fifth Circuit, on appeal from the United States District Court for the Northern District of Texas, Dallas Division. Liberty Mutual Ins. Co. v. Mid-Continent Ins. Co., 266 F.Supp.2d 533 (N.D.Tex.2003). Federal jurisdiction is based on diversity of citizenship.

The names of all the parties to the case, each of whom is represented by counsel, and the respective names, addresses and telephone numbers of their counsel, are as follows: Liberty Mutual Insurance Company, plaintiff and counter-defendant in the district court, appellee and cross-appellant in this court, represented by Richard A. Capshaw and Mikel J. Bowers of Capshaw, Goss & Bowers, L.L.P., 3031 Allen Street, Suite 200, Dallas, Texas 75204, Tel. 214/761-6610; and Mid-Continent Insurance Company, defendant and counter-claimant in the district court, appellant and cross-appellee in this court, represented by Brian L. Blakeley and Carrie Davis Holloway of Blakeley & Reynolds, P.C., 1250 N.E. Loop 410, Suite 420, San Antonio, Texas 78209, Tel. 210/805-9799.

II. STATEMENT OF THE CASE

In this suit between two liability insurers Liberty Mutual Insurance Company (Liberty Mutual) seeks to recover from Mid-Continent Insurance Company (Mid-Continent) a portion of the sums Liberty Mutual paid to settle a third party claim against Kinsel Industries (Kinsel), a covered insured under each of their respective $1 million comprehensive general liability (CGL) policies. Each insurer assumed defense of Kinsel, and the case ultimately settled for $1.5 million, but Mid-Continent would pay only $150,000, so Liberty Mutual (which also had a $10 million excess policy covering Kinsel) paid the remaining $1,350,000 and then brought this suit against Mid-Continent for $600,000, which it contended Mid-Continent was obligated for as its remaining proportionate part of the $1.5 million settlement. Following a bench trial, the district court awarded Liberty Mutual $550,000. Mid-Continent now appeals that judgment.¹

Kinsel, the general contractor for the State of Texas on a highway construction project, was the named insured under Liberty Mutual's $1 million CGL policy. Mid-Continent insured Crabtree Barricades (Crabtree), Kinsel's subcontractor responsible for signs and dividers on the project. The Mid-Continent $1 million CGL policy issued to Crabtree also identified Kinsel as an additional insured for liability arising from Crabtree's work under the contract. It is undisputed that these two CGL policies were in force and effect and provided Kinsel defense and indemnity coverage respecting the underlying suit against it, of which the insurers were properly notified. Liberty Mutual and Mid-Continent have consistently treated their respective CGL policies as being primary and on the same level with respect to each other and governed by identical "other insurance" clauses in each policy providing for equal or pro rata sharing up to policy limits.² Each CGL policy also contained "voluntary payment" clauses providing:

"No insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent."³

Each CGL policy likewise contained subrogation clauses providing, inter alia,"[i]f the insured has rights to recover all or part of any payment we have made under this Coverage Part [bodily injury or property damage liability], those rights are transferred to us."

In November 1996, an automobile accident occurred in the construction zone covered by Kinsel's contract with the State. Due to the construction, the two eastbound lanes of the normally four-lane highway were closed, so that eastbound and westbound traffic were each routed into one of the two (normally) westbound lanes. A westbound driver (Cooper) crossed into the lane assigned to eastbound traffic and collided head-on with an eastbound car, driven by James Boutin and carrying his wife and their two children. The Boutin family members suffered substantial injuries, and they all sued Cooper (the westbound driver), the State, Kinsel, and Crabtree in the district court of Liberty County, Texas, in July 1997.

In April 1998, Mid-Continent agreed to share with Liberty Mutual the costs of defending and indemnifying Kinsel.⁴ Although Liberty Mutual and Mid-Continent agreed that a total verdict for all the Boutins of about $2-3 million was likely, they ultimately differed significantly in their assessments of the settlement value of the case against Kinsel specifically. Both had initially viewed Kinsel's likely percentage of fault at between 10% and 15%; Mid-Continent remained of that view, but Liberty Mutual, due to developments in the case, later increased its assessment to 60%. At a second mediation with the plaintiffs in May 1999, Liberty Mutual agreed to settle for $1.5 million on behalf of Kinsel and demanded that Mid-Continent contribute half of that amount. Mid-Continent, calculating the settlement value of the case against Kinsel at $300,000, agreed to pay only $150,000 toward that settlement and so Liberty Mutual funded the remaining $1,350,000 thereof.⁵ At the same time, Mid-Continent settled the Boutins' claims against Crabtree for $300,000.⁶

Liberty Mutual filed this action against Mid-Continent in Texas state court, and Mid-Continent removed the case to federal court on the basis of diversity. After a bench trial in February 2003, the district court concluded that Liberty Mutual was entitled to recovery from Mid-Continent in the amount of $550,000. That amount was determined on the basis that under the "Other Insurance" and "Method of Sharing" provisions of the Mid-Continent and Liberty Mutual $1 million CGL policies (see note 2 above) Mid-Continent was obligated to contribute one half of the $1.5 million Kinsel settlement, or $750,000, and, having contributed $150,000, now owed $600,000 more; but, Mid-Continent's liability was capped at $550,000 because its policy limits were $1 million and it had already paid $450,000 thereof ($150,000 for the Kinsel settlement and $300,000 to settle the claims against Crabtree), leaving only $550,000. Liberty Mutual, 266 F.Supp.2d at 546.

The district court, following General Agents Insurance Company of America, Inc. v. Home Insurance Company of Illinois, 21 S.W.3d 419 (Tex.App.-San Antonio 2000, pet. dism'd by agr.) ("General Agents"), held that each insurer "owed a duty to act reasonably" in exercising rights under its CGL policy. See id. at 542. The court noted that Mid-Continent determined "that the claims against Kinsel should settle for no more than $300,000." Then, after reviewing the developments in the underlying litigation, the court found in relevant part as follows:

"... it was objectively unreasonable for Mid-Continent to refuse to change its estimate that Kinsel's potential exposure was only 10-15% of the total liability.... Mid-Continent's continued insistence that Kinsel was responsible for only 10-15% of the total liability did not account for the actual exposure faced by Kinsel, and was therefore, unreasonable.... Mid-Continent's recalcitrance to consider any change, despite the changing circumstances, was unreasonable, causing it to unreasonably assess its insured's exposure.

Unlike Mid-Continent, Liberty Mutual remained flexible in the changing environment of the Boutin case.... Kinsel faced a significant risk of being jointly and severally liable for a verdict in the range of $2-3 million.... Liberty Mutual determined Kinsel could be found as much as 60% responsible. Sixty percent of the average potential verdict, $2.5 million, is $1.5 million. By agreeing to settle for that amount, Liberty Mutual resolved the case within policy limits, based on a reasonable estimation of Kinsel's liability, and avoided the real potential of joint and several liability. Accordingly, Liberty Mutual's assessment of Kinsel's liability and the ultimate settlement reached was reasonable.

Because the Court finds that Mid-Continent was unreasonable in exercising its rights under its policy and that Liberty Mutual was reasonable in exercising its rights, Liberty Mutual is entitled to subrogation." Id. at 543-44.

Mid-Continent appeals. In its appeal, Mid-Continent does not challenge the district court's fact findings as being clearly erroneous or not adequately supported by the evidence, and we accept the district court's findings of fact.

III. LEGAL ISSUES

Mid-Continent's principal contention on appeal is that, having timely assumed (together with Liberty Mutual) defense of the suit against Kinsel and acknowledged policy coverage, it...