Nautilus Ins. v. International House of Pancakes

• Decision Date: 31 March 2009
• Docket Number: Civil Action No. H-03-2182.
• Citation: 622 F.Supp.2d 470
• Parties: NAUTILUS INSURANCE COMPANY, Plaintiff, v. INTERNATIONAL HOUSE OF PANCAKES, INC. and Mohamad Amin, Defendant.
• Court: U.S. District Court — Southern District of Texas

622 F.Supp.2d 470

NAUTILUS INSURANCE COMPANY, Plaintiff, v. INTERNATIONAL HOUSE OF PANCAKES, INC. and Mohamad Amin, Defendant.

Civil Action No. H-03-2182.

United States District Court, S.D. Texas, Houston Division.

March 31, 2009.

COPYRIGHT MATERIAL OMITTED

John Charles Tollefson, Tollefson Bradley et al., Dallas, TX, for Plaintiff.

David Taubenfeld, Deborah S. Coldwell, Haynes and Boone, Dallas, TX, Philoan Marie Tran, Attorney at Law, Houston, TX, for Defendants.

MEMORANDUM AND ORDER

LEE H. ROSENTHAL, District Judge.

Nautilus Insurance Company ("Nautilus") filed this declaratory judgment suit seeking to establish that it had no duty to defend or indemnify the International House of Pancakes ("IHOP") and one of IHOP's franchise owners in two underlying state-court suits. In each suit, a woman alleged that a manager employed in a franchised IHOP restaurant had sexually harassed and raped her. This court held that Nautilus had no duty to defend or indemnify IHOP or the owner of the franchises, Mohamad Amin, against the claims raised by one underlying plaintiff but did have a duty to defend IHOP and Amin against the claims raised by the other underlying plaintiff. (Docket Entry No. 31).

Nautilus then filed a motion for summary judgment seeking a ruling that it was not obligated to pay 18 percent penalty interest and attorneys' fees to IHOP under Article 21.55 of the Texas Insurance Code, the "Prompt Payment Statute" (current version at TEX. INS.CODE §§ 542.051-542.061). Nautilus contended that the Prompt Payment Statute did not apply to an insurer's denial of an insured's claim for a defense against a third-party claimant's suit. Nautilus also contended that the Prompt Payment Statute was both facially unconstitutional and void for vagueness as applied to this claim for defense against a third-party suit. (Docket Entry No. 42). IHOP cross-moved for summary judgment, seeking payment of its defense costs plus the 18 percent penalty interest and attorneys' fees provided under the Prompt Payment Statute. (Docket Entry No 45). Nautilus replied, (Docket Entry Nos. 49, 50), and IHOP surreplied, (Docket Entry No. 53).

At the time of the parties' briefing, the Fifth Circuit had certified to the Texas Supreme Court the following question: "[D]oes Article 21.55 of the Texas Insurance Code apply to a CGL insurer's breach of the duty to defend?" Lamar Homes Inc. v. Mid-Continent Casualty Co., 428 F.3d 193, 201 (5th Cir.2005). This court abstained from ruling on the parties' cross-motions for summary judgment and stayed the case pending the Texas Supreme Court's answer. Nautilus submitted an amicus brief in the Lamar Homes action that argued that the Prompt Payment Statute did not apply to the duty to defend and that the statute was facially unconstitutional and unconstitutional as applied to the duty to defend. (Docket Entry No. 57, Ex. A).

On August 31, 2007, the Texas Supreme Court answered the certified question. In Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex.2007), the court held that the Prompt Payment Statute does apply to an insurer's refusal to defend, or delay in defending, an insured against a third-party claimant's suit. The Texas Supreme Court's opinion did not address the constitutional issues raised in Nautilus's amicus brief.

On March 11, 2008, Nautilus filed an unopposed motion to vacate the stay in this case. Nautilus filed a brief raising one question: the constitutionality of the Prompt Payment Statute in light of the Texas Supreme Court's holding in Lamar Homes. (Docket Entry No. 56). IHOP has responded, (Docket Entry No. 60). IHOP and Nautilus have also supplied supplemental briefing. (Docket Entry Nos. 65, 66).

Based on the motions, responses, and replies; the summary judgment record and the applicable law, this court denies Nautilus's constitutionality challenge and its motion for summary judgment, (Docket Entry Nos. 43, 56), and grants IHOP's cross-motion for summary judgment. (Docket Entry No. 45). By April 30, 2009, IHOP will submit to this court an affidavit attaching documents showing 1) the amount due for IHOP's defense costs; 2) the amount of the 18 percent statutory penalty; and 3) the amount of attorneys' fees IHOP seeks.

The reasons are explained below.

I. Background

Section 542.060 of the Texas Insurance Code imposes a penalty on insurers for failure to pay claims within certain time frames specified in sections 542.057 and 542.058 of the Prompt Payment Statute. Section 542.060 states:

(a) If an insurer that is liable for a claim under an insurance policy is not in compliance with this subchapter, the insurer is liable to pay the holder of the policy or the beneficiary making the claim under the policy, in addition to the amount of the claim, interest on the amount of the claim at the rate of 18 percent a year as damages, together with reasonable attorney's fees.

(b) If a suit is filed, the attorney's fees shall be taxed as part of the costs in the case.

TEX. INS.CODE § 542.060. In Lamar Homes, the Texas Supreme Court analyzed § 542.060. Nautilus's potential liability arises under the penalty provision of a previous but substantially similar version of the statute, Texas Insurance Code Article 21.55.¹ Nautilus does not argue that differences between the previous and revised versions affect the analysis in this case.

Section 542.051 defines the term "claim" as used in § 542.060:

"Claim" means a first-party claim that:

(A) is made by an insured or policyholder under an insurance policy or contract or by a beneficiary named in the policy or contract; and

(B) must be paid by the insurer directly to the insured or beneficiary.

TEX. INS.CODE § 542.051. The Prompt Payment Statute does not define "first-party claim" or otherwise refer to the term. A different portion of the Texas Insurance Code, the Property Casualty Insurance Guaranty Act, states: "`Claimant' means an insured making a first-party claim or a person instituting a liability claim." TEX. INS.CODE § 462.004(4).

In Lamar Homes, the Texas Supreme Court held that the Prompt Payment Statute's penalty and attorneys' fee provision, § 542.060, applies to an insured's claims for the cost of defending against a suit filed by third-party claimant. 242 S.W.3d at 16-20. The Texas Supreme Court noted that Texas state and federal courts had divided as to the applicability of § 542.060 to such claims, but observed that a majority of courts had concluded that it did apply. The Texas Supreme Court agreed with those courts, holding that "an insured's claim for defense costs is a first-party claim because it concerns a direct loss to the insured; that is, the claim does not belong to a third party." Id. at 17. The Court noted that although the Prompt Payment Statute does not define "first-party claim," the case law had "previously distinguished first-party and third-party claims on the basis of the claimant's relationship to the loss." "[A] first party case is stated when `an insured seeks recovery for the insured's own loss,'" whereas a "third-party claim is stated when `an insured seeks coverage for injuries to a third party.'" Id. (quoting Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 54 n. 2 (Tex. 1997)). The Texas Supreme Court rejected the argument that a "first-party claim" could only arise under a "first-party insurance policy," a term of art that refers to a policy that creates an obligation by the insurer only to the insured, and is distinct from a "third-party" or "liability" insurance policy that protects and indemnifies the insured against the claims of third parties. The Texas Supreme Court found no reason, in logic, the case law, or the plain meaning of the statute, why a "first-party claim" could not arise under a liability policy when the insured under that policy makes a direct claim against the insurer for defense costs. Id. at 17-18. The Texas Supreme Court noted that the Prompt Payment Statute applies "not solely to first-party insurers," but to "any insurer authorized to engage in business as an insurance company or to provide insurance in this state," including liability insurers. Id. at 18. The Texas Supreme Court rejected the argument that defense claims could not be "first-party claims" because payments in some cases might be made to the insured's attorney rather than "directly to the insured," as § 542.051 requires. The Texas Supreme Court reasoned that this construction "would eliminate much of the statute's recognized application. For example, health insurance claims, property damage claims, and claims personal to the insured under an automobile policy are first-party claims that are often paid directly to the service provider rather than the insured." Id. Finally, the Texas Supreme Court rejected criticisms that applying the Prompt Payment Statute to defense claims was "unworkable" because an insurer's liability for defense costs is typically ongoing until the liability issue is resolved. The Texas Supreme Court concluded that the statute simply required that the insurer pay the insured's legal bills as they came due. Id. at 19.

Three justices filed a dissent in Lamar Homes. The dissent argued that the term "first-party claim" "h[as] never been used by anyone familiar with the insurance business to refer to the duty to defend." Id. at 24. The dissent contended that "first party" referred to a claim under a "first party insurance policy," to the exclusion of a claim under a liability policy. Id. at 26-27. The dissent did not raise any constitutional issue. Subsequent cases applying Lamar Homes have not raised any constitutional issues.

In this suit, Nautilus contends that it is not liable to IHOP under the Prompt Payment Statute for its refusal to defend IHOP in the lawsuit filed by one of the underlying plaintiffs. Nautilus argues that the Prompt Payment Statute is penal in nature. Nautilus raises a facial challenge to the Prompt Payment Statute, arguing that a provision...