Western Alliance Ins. Co. v. Northern Ins. Co. of New York

• Decision Date: 20 May 1999
• Docket Number: No. 97-11194,97-11194
• Citation: 176 F.3d 825
• Parties: WESTERN ALLIANCE INSURANCE COMPANY, Plaintiff-Appellee, v. NORTHERN INSURANCE COMPANY OF NEW YORK, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 825

176 F.3d 825

WESTERN ALLIANCE INSURANCE COMPANY, Plaintiff-Appellee, v. NORTHERN INSURANCE COMPANY OF NEW YORK, Defendant-Appellant.

No. 97-11194.

United States Court of Appeals Fifth Circuit.

May 20, 1999.

Cathlynn H. Cannon, Barry H. Fanning, Fanning, Harper & Martinson, Dallas, TX, for Plaintiff-Appellee.

Richard Brent Cooper, Diana L. Faust, Cooper & Scully, Dallas, TX, for Defendant-Appellant.

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

Before GARWOOD, BARKSDALE and STEWART, Circuit Judges.

GARWOOD, Circuit Judge:

Plaintiff-appellee Western Alliance Insurance Company (Western) brought this equitable subrogation action against defendant-appellant Northern Insurance Company (Northern) seeking reimbursement of proceeds Western paid to its insured on a liability policy it asserts was excess to Northern's policy obligations. The district court granted Western's motion for summary judgment, and Northern appeals. We vacate and remand for the limited purpose of clarifying an evidentiary defect, and for further proceedings consistent herewith.

Facts and Proceedings Below

On October 7, 1991, a fire in a Dallas, Texas, house killed five people. At the time of the accident, the building was owned by the Federal Deposit Insurance Corporation (FDIC) and rented to tenants who lived there. The FDIC had contracted with C.W. Sparks (Sparks) to manage the building. Sparks had two solely-owned proprietorships/DBAs: Sparks Management Company and Southern Building Restoration. Only the former was mentioned in the contract between Sparks and the FDIC. After the fire, the survivors sued Sparks in state court, alleging that he was negligent in not installing smoke alarms in the building and in installing a water heater.

At the time the state suit was commenced, three insurance policies were potentially implicated by the suit. Northern provided the FDIC with two policies providing liability coverage applicable to the property, each of which included as additional insured "any person or organization while acting on your behalf as a real estate manager." The primary Northern policy had a policy limit of $1,000,000, while its umbrella policy had a $10,000,000 limit. Western provided liability insurance to Sparks and both of his sole proprietorships in a single policy. The Western policy had a limit of $500,000, and also contained a clause making the policy excess to any other insurance policy for liability arising out of Sparks' management of property as a real estate manager. Northern concedes that for liability stemming from Sparks' real estate management activities on behalf of the FDIC, it was the primary insurer.

Western defended Sparks in the underlying lawsuit, but it formally demanded that Northern conduct the defense, arguing that Northern owed Sparks a duty to defend and that Western's policy was excess to Northern's obligation. In response, Northern did not unequivocally decline coverage to Sparks. Instead, it asked for more time to study the matter. In March 1992 Sparks informed Western that the plaintiffs in the underlying lawsuit had expressed a willingness to settle their claims for $525,000. After negotiations between Western and Northern, Western tendered its policy limits of $500,000 to settle the underlying suit, and Northern added an additional $25,000. Northern and Western agreed that they would mediate their dispute over coverage of the Sparks settlement after the conclusion of litigation against the FDIC, which the plaintiffs had indicated they would pursue following settlement.

On March 24, 1992, the plaintiffs in the underlying lawsuit released Sparks and his sole proprietorships from any liability stemming from the fire. Immediately following the settlement, the plaintiffs amended their complaint to name the FDIC, rather than Sparks, as the defendant. Northern defended the FDIC in the continued litigation, and had the case removed to federal court. On December 30, 1993, the FDIC settled with the plaintiffs. Pursuant to this settlement, Northern paid out an amount in excess of its $1,000,000 primary policy limit.

Mediation between Northern and Western to determine liability for the $525,000 Sparks settlement was unsuccessful, and Western brought the current action against Northern in state court on February 23, 1996. Northern had the action removed to the Northern District of Texas on diversity grounds. Northern moved for summary judgment, and Western moved for partial summary judgment on the question of breach of the duty to indemnify. The district court granted summary judgment to Western and awarded it the $500,000 Western expended in the Sparks settlement, plus pre- and post-judgment interest thereon. See Western Alliance Insurance Co. v. Northern Insurance Co. of New York, 968 F.Supp. 1162 (N.D.Tex.1997). Thereafter, Western dropped its duty to defend claim, making the partial summary judgment final. This appeal followed.

Discussion

We review a district court's grant of summary judgment employing the same standard as that the district court is required to apply. Dutcher v. Ingalls Shipbuilding, 53 F.3d 723, 725 (5th Cir.1995). Summary judgment is appropriate when the movant identifies undisputed material facts that would entitle it to judgment as a matter of law, and the non moving party is unable to point to evidence that creates a genuine issue of material fact. In reviewing the record, we must view all facts in the light most favorable to the non-movant, and review issues of law de novo. See id.

I. Statute of Limitations and Exhaustion of the Policy

Northern argues that the statute of limitations bars Western's action. Since Western has dropped its breach of contract action based on the duty to defend, the relevant limitations inquiry is whether the current action was filed within four years of Northern's breach of the duty to indemnify. The duty to indemnify may be justiciable in a declaratory judgment action before a determination of the insured's underlying liability if the complaint does not trigger the duty to defend and no facts can be developed in the underlying suit that could trigger the duty to indemnify. See Farmers Texas County Mutual Insurance Co. v. Griffin, 955 S.W.2d 81, 84 (Tex.1997). It does not follow, however, that every breach of the duty to defend automatically breaches the duty to indemnify and begins the running of the statute of limitations on the latter. A clear breach of the duty to defend might perhaps constitute an anticipatory breach of the duty to indemnify, but here Northern never definitively stated that it would not defend Sparks. Instead, it continually asked for more time to examine the situation and strung both its insured and Western along. There is no indication that either Sparks or Western regarded or treated these delaying tactics as a breach of the duty to indemnify. That duty was breached, if it was breached at all, when Northern declined to tender the full settlement amount to its insured Sparks on March 24, 1992. We find, as did the district court, that since the current action was filed on February 23, 1996, within four years of the breach of the duty to indemnify, the action was not barred by the statute of limitations.

Northern also claims that it is entitled to summary judgment on the grounds that, having exhausted the limits of its primary policy in its December 30, 1993, settlement on behalf of the FDIC, it has no further duty to indemnify Sparks. Northern's policies clearly indicated that it had no further obligations under their terms once the relevant policy limits were exhausted. The FDIC settlement exceeded the $1,000,000 limit on the primary policy, and Northern argues that its umbrella policy was excess to Western's policy. Western in substance concedes that Northern's umbrella policy is excess to Western's policy. Thus, we disregard the umbrella policy. We have recently held that under Texas law an insurer may favor one of its insureds (who had been sued) over another insured party (who had not been sued), and thus may exhaust policy limits on behalf of one insured despite the fact that such a settlement leaves its remaining insureds without protection under the policy. See Travelers Indemnity Company v. Citgo Petroleum Corp., 166 F.3d 761, 768 (5th Cir.1999). See also American States Insurance Co. of Texas v. Arnold, 930 S.W.2d 196 (Tex.App.--Dallas 1996, writ denied).

However, in Citgo we faced a situation in which an insurer settled on behalf of one of its insureds, who had been sued, before the other insured party had been named in the action. Here, in contrast, we face the reverse problem. Northern, having struck an agreement deferring resolution of its duty to indemnify Sparks before the FDIC was named in the suit, now claims that its subsequent decision to exhaust settlement limits in settling on behalf of the FDIC mooted any liability it might have incurred by not immediately fulfilling its duty to indemnify Sparks. This argument fails. Under Citgo, Northern was entitled to settle on behalf of Sparks and exhaust policy limits on his behalf. It perhaps might have been entitled to settle on behalf of the FDIC and exhaust policy limits had the FDIC been a party to the action at the time of the Sparks settlement. However, at that time Sparks was the only insured party named in the action, and the primary policy limits were not exhausted. If the facts were sufficient to trigger the duty to indemnify, that duty included the immediate payment of a settlement of up to $1,000,000. Northern's decision to subsequently expend the policy limits on behalf of the FDIC cannot alter the fact that it may be liable to Sparks for the full value of a settlement within policy limits. Under the facts of this case, we hold that the exhaustion of Northern's primary policy liability in a subsequent proceeding could not serve to excuse Northern's asserted earlier breach of its duty to...