State Farm Mut. Auto. Ins. Co. v. Traver

• Decision Date: 31 December 1998
• Docket Number: No. 96-1201,96-1201
• Citation: 980 S.W.2d 625
• Parties: 42 Tex. Sup. Ct. J. 284 STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Petitioner, v. Ronald H. TRAVER, executor of the Estate of Mary E. Davidson, Respondent.
• Court: Texas Supreme Court

Page 625

980 S.W.2d 625

42 Tex. Sup. Ct. J. 284

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Petitioner, v. Ronald H. TRAVER, executor of the Estate of Mary E Davidson, Respondent.

No. 96-1201.

Supreme Court of Texas.

Argued April 24, 1997.

Decided Dec. 31, 1998.

Anne Gardner, Lori R. Thomas, Melinda Ruth Burke, Fort Worth, for Petitioner.

William L. Kirkman, Fort Worth, for Respondent.

Chief Justice PHILLIPS delivered the opinion of the Court, in which Justice HECHT, Justice ENOCH, Justice SPECTOR, Justice OWEN, Justice BAKER, and Justice HANKINSON join.

We withdraw our opinion of August 25, 1998, and substitute the following in its place. We overrule the motions for rehearing of State Farm and Ronald Traver.

Ronald Traver, an estate executor, argues that the attorney provided by decedent Mary Davidson's liability insurer, State Farm, committed malpractice in defending a personal injury claim against Davidson, resulting in a judgment in excess of policy limits. Traver sued State Farm for negligence, breach of its duty to defend, breach of the Stowers duty, ¹ breach of the duty of good faith and fair dealing, and violations of the Deceptive Trade Practices Act and Insurance Code. The trial court granted summary judgment for State Farm on all causes of action. The court of appeals, holding that an insurer is responsible for the conduct of the attorney it provides to defend an insured, reversed and remanded the malpractice claim, along with the DTPA and Insurance Code claims relating to the malpractice, for trial. 930 S.W.2d 862. The court of appeals further held, however, that Traver could not recover for breach of the Stowers duty, for breach of the duty of good faith and fair dealing, or for any claim under the DTPA or Insurance Code relating to those duties. Because we hold that an insurer is not vicariously liable for the malpractice of an independent attorney it selects to defend an insured, we reverse the judgment of the court of appeals and render judgment for State Farm on all claims based on vicarious liability. Further, because Traver has not separately applied for writ of error, the court of appeals' judgment on the Stowers claim and good faith claim (and related statutory claims) is final. We remand the cause to the trial court to allow Traver to pursue any remaining claims that he pled or might plead against State Farm.

I

In January 1989, Mary Davidson collided with Calvin Klause in an automobile accident. Mary Jordan, a passenger in Klause's car, was severely injured. By coincidence, both Davidson and Klause were insured by State Farm Mutual Automobile Insurance Company. Each had an automobile liability policy with a per-person liability limit of $25,000.

Jordan sued both drivers in one action. State Farm retained separate attorneys to represent Davidson and Klause. After settlement attempts failed, the case went to trial. The jury found Davidson 100 percent responsible for the accident. The trial court rendered judgment on the verdict, awarding Jordan $375,000, plus about $100,000 in prejudgment interest, against Davidson. The record does not disclose whether this judgment was appealed or satisfied.

Davidson died shortly after trial. Her executor, Ronald Traver, brought this present action against State Farm. Traver alleged that State Farm was negligent, breached its duty to defend Davidson in the Jordan lawsuit, breached its Stowers duty, breached a duty of good faith and fair dealing, and violated the Deceptive Trade Practices Act and article 21.21 of the Insurance Code. Traver specifically alleged that Charles Bradshaw, the attorney retained by State Farm to represent Davidson in the Jordan lawsuit, committed malpractice by failing to attend several key depositions and by failing to offer a meaningful defense at trial. Traver further alleged that State Farm deliberately orchestrated this malpractice to avoid potential Stowers liability to Klause arising from the settlement negotiations. ² Thus, Traver alleges State Farm acted in its own self-interest by shifting responsibility from Klause to Davidson. Traver also sued Bradshaw, but the attorney filed Chapter 7 bankruptcy proceedings shortly thereafter, and the trial court severed the claims against him.

The trial court rendered summary judgment for State Farm on all claims. The court of appeals reversed in part. It held that, under the language of Ranger County Mutual Insurance Co. v. Guin, 723 S.W.2d 656, 659 (Tex.1987), State Farm was responsible for any injury caused by the malpractice of the attorney it retained for Davidson. 930 S.W.2d at 871. Because State Farm had not negated the existence of such malpractice, the court of appeals remanded Traver's negligence claim for trial, along with any claims under the DTPA or Insurance Code relating to this negligence. Id. at 871-72. The court of appeals further held, however, that State Farm had conclusively negated Traver's Stowers claim, id. at 868, and that an insurer owes no duty of good faith to its insured in the context of a third-party liability claim. Id. at 870. See Maryland Ins. Co. v. Head Indus. Coatings & Servs., 938 S.W.2d 27, 28 (Tex.1996). ³

II

Davidson's policy with State Farm required State Farm either to defend or settle covered third-party liability claims. The policy also required Davidson to "[c]ooperate with [State Farm] in the investigation, settlement or defense of any claim or suit." Under this contractual obligation to defend, State Farm selected Bradshaw, an independent attorney who was not a State Farm employee, to represent Davidson against Jordan's claims, and State Farm paid Bradshaw's bills. Traver argues that, under these circumstances, State Farm is vicariously responsible for the attorney's conduct. We disagree.

In determining whether a principal is vicariously responsible for the conduct of an agent, the key question is whether the principal has the right to control the agent with respect to the details of that conduct. See Newspapers, Inc. v. Love, 380 S.W.2d 582, 590 (Tex.1964). We have recognized that a liability policy may grant the insurer the right to take "complete and exclusive control" of the insured's defense. G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544, 547 (Tex. Comm'n App.1929, holding approved); see also Continental Cas. Co. v. Huizar, 740 S.W.2d 429, 434 (Tex.1987); Richmond, Walking a Tightrope: The Tripartite Relationship Between Insurer, Insured, and Insurance Defense Counsel, 73 NEB. L. REV . 265, 269 (1994) ("Because of its financial interest in the effective resolution of a claim, the insurer has a contractual right to control its insured's defense."); Sweeney, Tank v. State Farm: Conducting a Reservation of Rights Defense in Washington, 11 U. PUGET SOUND L. REV. 139, 163 (1987) ("When defending unconditionally, the insurer has complete control of the defense."). Here, the standard form Texas Personal Auto Policy provides that the insurer "will settle or defend, as [it] consider[s] appropriate, any [covered] claim or suit ..." The insurer's control of the insured's defense under this policy thus includes authority to accept or reject settlement offers and, where no conflict of interest exists, to make other decisions that would normally be vested in the client, here the insured. However, even assuming that the insurer possesses a level of control comparable to that of a client, this does not meet the requisite for vicarious liability.

A defense attorney, as an independent contractor, has discretion regarding the day-to-day details of conducting the defense, and is not subject to the client's control regarding those details. See RESTATEMENT (SECOND) OF AGENCY, § 385, cmt. a. While the attorney may not act contrary to the client's wishes, the attorney "is in complete charge of the minutiae of court proceedings and can properly withdraw from the case, subject to the control of the court, if he is not permitted to act as he thinks best." Id. Moreover, because the lawyer owes unqualified loyalty to the insured, see Employers Cas. Co. v. Tilley, 496 S.W.2d 552, 558 (Tex.1973), the lawyer must at all times protect the interests of the insured if those interests would be compromised by the insurer's instructions. Under these circumstances, the insurer cannot be vicariously responsible for the lawyer's conduct. See Ingersoll-Rand Equip. Corp. v. Transportation Ins. Co., 963 F.Supp. 452, 454-55 (M.D.Pa.1997) ("The attorney's ethical obligations to his or her client, the insured, prevent the insurer from exercising the degree of control necessary to justify the imposition of vicarious liability."); Merritt v. Reserve Ins. Co., 34 Cal.App.3d 858, 110 Cal.Rptr. 511, 526 (Cal.Ct.App.1973) ("In our view independent counsel retained to conduct litigation in the courts act in the capacity of independent contractors, responsible for the results of their conduct and not subject to the control and direction of their employer over the details and manner of their performance."); Aetna Cas. & Sur. Co. v. Protective Nat'l Ins. Co., 631 So.2d 305, 306-07 (Fla.Ct.App.1993) (adopting Merritt's reasoning); Feliberty v. Damon, 72 N.Y.2d 112, 531 N.Y.S.2d 778, 527 N.E.2d 261, 265 (N.Y.1988) ("The insurer is precluded from interference with counsel's independent professional judgments in the conduct of the litigation on behalf of its client."); Brown v. Lumbermens Mut. Cas. Co., 90 N.C.App. 464, 369 S.E.2d 367, 372 (N.C.Ct.App.1988), aff'd, 326 N.C. 387, 390 S.E.2d 150 (1990); see also 1 WINDT, INSURANCE CLAIMS AND DISPUTES § 4.40, at 275 (3d ed. 1995) ("There is ... no theoretical justification for imputing a defense counsel's negligence to the insurer."); Sweeney, supra at 163 ("The client, as principal, should turn to his attorney, as agent, for relief if the attorney acts improperly, since the attorney is supposed to be independent of the insurer's influence and must act as though the policyholder is paying the...