The University of Texas School of Law Presented: 13 th Annual Insurance Law Institute October 22*, 23-24, 2008 Austin, Texas Liability Insurer s Duty Not to Settle R. Brent Cooper Rebecca S. Fuller Author contact information: R. Brent Cooper Cooper & Scully, P.C. 900 Jackson Street, Suite 100 Dallas, TX 75202 brent.cooper@cooperscully.com 214-712-9501 Continuing Legal Education 512-475-6700 www.utcle.org
Table of Contents Page I. Introduction... 1 II. Duty to Defend and Duty to Indemnify... 2 III. Settlement of all Claims and all Insureds... 3 IV. Settlement Of Less Than All Claims Against The Insured... 4 A. Sources of Duty... 4 B. Elements of Duty... 5 C. Factors to Determine Whether Elements Have Been Met... 6 1. Attempts to Settle All... 6 2. Demands of Insured... 6 3. Funding Plaintiff's Case... 7 4. Full Release of Insured... 7 5. Exposure to Insurer If Not Settle... 7 6. Summary... 8 V. Settlement With Less Than All Insureds... 8 A. Factors to Determine Whether Elements Have Been Met... 8 1. Exposure to Insurer If Do Not Settle... 8 2. Payment of Premium... 9 3. Relative Insolvency of the Insureds... 9 4. Availability of Other Insurance... 9 5. Fund Case Against Other Insured... 10 6. Attempt to Settle All... 10 7. Summary... 10 VI. Conclusion... 10 i
Table of Authorities Page Allstate Ins. Co. v. Watson, 876 S.W.2d 145 (Tex. 1994)... 5, 9 American Physicians Insurance Exchange v. Garcia, 876 S.W.2d 842 (Tex. 1994)... 1, 7 Aranda v. Insurance Co. of N. Am., 748 S.W.2d 210 (Tex. 1988)... 1 Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987)... 1 B & B Auto Supply v. Central Freight Lines, Inc., 603 S.W.2d 814 (Tex. 1980)... 7 Don's Building Supply, Inc. v. One Beacon Insurance Company, No. 07-0639 (Tex. Aug. 29, 2008)... 2 Eklund v. Safeco Ins. Co. of America, 41 Colo.App. 96, 579 A.2d 1185 (1978)... 8 Farinas v. Florida Farm Bureau General Ins. Co., 850 So.2d 555 (Fla.App. 4th Dist. 2003)... 4 Farmers Tex. County Mutual Insurance Co. v. Griffin, 955 S.W.2d 81 (Tex.1997)... 2 G.A. Stowers Furniture Co. v. American Indemn. Co., 15 S.W.2d 544 (Tex. Comm'n App. 1929, holding approved)... 1 GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006)... 2 Lamar Homes, Inc. v. Mid-Continent Cas. Co., 236 S.W.3d 239 (Tex. 2007)... 2 Lyons v. Millers Cas. Ins. Co., 866 S.W.2d 597 (Tex. 1993)... 1 Maryland Ins. Co. v. Head Industrial Coatings & Services, Inc., 938 S.W.2d 27 (Tex. 1996)... 1 ii
Mid-Continent Ins. Co. v. Liberty Mutual Ins. Co., 230 S.W.2d 765 (Tex. 2007)... 1, 5 Peterson v. American Family Mut. Ins. Co., 280 Minn. 482, 160 N.W.2d 541 (1968)... 8 Puritan Ins. Co. v. Canadian Universal Ins. Co., Ltd., 775 F.2d 76 (3rd Cir. 1985)... 7, 8 Saucedo v. Winger, 22 Kan.App.2d 259, 915 P.2d 129 (1996)... 8 State Farm Lloyds Ins. Co. v. Maldonado, 963 S.W.2d 38 (Tex. 1998)... 6, 10 Swicegood ex rel. Estate of Swicegood v. Medical Protective Co., 2003 U.S. Dist. LEXIS 16556 (N.D.Tex. 2003)... 2 Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994)... 4 Travelers Indemnity Co. v. Citgo Petroleum Corp., 166 F.3d 761 (5th Cir. 1999)... 8 Trinity Univ. Ins. Co. v. Bleeker, 966 S.W.2d 489 (Tex. 1998)... 6 Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819 (Tex. 1997)... 2 Universe Life Ins. Co. v. Giles, 950 S.W.2d 48 (Tex. 1997)... 5 Matter of Vitek, Inc., 51 F.3d 530 (5th Cir. 1995)... 8 William C. Dear v. Scottsdale Ins. Co., 947 S.W.2d 908 (Tex. App.--Dallas 1997, pet denied)... 3 MISCELLANEOUS Windt, Insurance Claims and Disputes 5A... 3 iii
Duty of a Liability Insurer Not to Settle I. INTRODUCTION For years, the focus in Texas has been on the duty of an insurer to settle. In Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987), the court recognized a duty of good faith and fair dealing with respect to first-party claims. There, the court held that an insurer may breach its duty of good faith and fair dealing in refusing to pay a first-party claim where (1) the insurer has no reasonable basis for denying or delaying payment of the claim; or (2) the insurer knew or should have know that there was no reasonable basis for denying or delaying payment of the claim. This duty was reiterated in other first-party situations in Aranda v. Insurance Co. of N. Am., 748 S.W.2d 210, 213 (Tex. 1988) and Lyons v. Millers Cas. Ins. Co., 866 S.W.2d 597, 599 (Tex. 1993). With respect to liability claims, the Texas Supreme Court has long recognized liability on the part of the liability insurer for negligence in failing to settle a claim. G.A. Stowers Furniture Co. v. American Indemn. Co., 15 S.W.2d 544 (Tex. Comm'n App. 1929, holding approved). In American Physicians Insurance Exchange v. Garcia, 876 S.W.2d 842 (Tex. 1994), the supreme court reiterated that an insurer must exercise a degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business when responding to demands within policy limits. In Garcia, the court held that a Stowers duty was not activated by a settlement demand unless three prerequisites were met: (1) the claim against the insured is within the scope of coverage; (2) the amount of the demand is within the policy limits; and (3) the terms of the demand are such that an ordinarily prudent insurer would accept it, considering the likelihood and the degree of the insured s potential exposure to an excess judgment. Under the common law, the court had refused to recognize the duty of good faith and fair dealing with respect to liability insurers. Maryland Ins. Co. v. Head Industrial Coatings & Services, Inc., 938 S.W.2d 27 (Tex. 1996). However, since the Head decision, the legislature has legislatively added such a duty. Mid-Continent Ins. Co. v. Liberty Mutual Ins. Co., 230 S.W.2d 765, 771 (Tex. 2007). In all the cases involving liability insurance previously discussed, there are two common threads running through each of the cases. First, the focus of the decision has been totally on whether the liability insurer has a duty to settle under the indemnity portion of the policy. In each of the cases, it has been assumed that it would be in the best interest of the insured for such a settlement to take place. The second common thread through each of these cases has been the fact that there has been absolutely no focus on the duty to defend. In none of the cases was there a settlement consummated for the purpose of eliminating the duty to defend upon the part of the insurer. The focus of this article is first to examine the relationship between the duty to defend versus the duty to indemnify and what impact each of these duties has on the duty to settle. Second, this article will examine the source of a duty not to settle. Finally, the Continuing Legal Education 512-475-6700 www.utcle.org 1
article will examine those circumstances under Texas statutory and regulatory law where a duty exists on the part of the insurer not to settle liability claims presented to it on behalf of its insured. It is in this area that close scrutiny will be given to the economic interest of the insurer as well as the economic interest of the insured. Both of these competing economic interests will be weighed and the resolution attempted in a number of stated cases. As of this date, the Texas Supreme Court has never addressed the duty of a liability insurer not to settle. However, this article will attempt to extrapolate from prior decisions of the Texas Supreme Court the principles or rules which should be applied in this situation as well as the likely outcome. II. DUTY TO DEFEND AND DUTY TO INDEMNIFY As has been noted by our supreme court on numerous occasions, most liability policies provide for two separate and distinct duties. This is the duty to defend and the duty to indemnify. Lamar Homes, Inc. v. Mid-Continent Cas. Co., 236 S.W.3d 239 (Tex. 2007); Don s Building Supply, Inc. v. One Beacon Insurance Company, No. 07-0639, n.45 (Tex. Aug. 29, 2008). The rules governing each of these duties are separate and distinct. For example, with respect to the duty to defend, this duty is governed by the allegations in the plaintiff s petition. GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006). An insurer or insured may not resort to extrinsic evidence if the extrinsic evidence would contradict allegations in the petition or if the subject to the extrinsic evidence is an item to be determined in the underlying case. Id. On the other hand, the duty to indemnify is governed by an entirely different set of facts. Under Texas law, the duty to indemnify is triggered by the actual facts establishing liability in the underlying suit. Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 821 (Tex. 1997). If the coverage issue is one of law that can be decided on the record of the underlying suit, no new evidence is admissible. See e.g., Farmers Tex. County Mutual Insurance Co. v. Griffin, 955 S.W.2d 81 (Tex.1997). In some cases, coverage may turn on facts actually proven in the underlying lawsuit. If the facts necessary to resolve the controlling coverage question were not conclusively decided in the indemnity suit or if allocation is required, then new evidence may be admitted. However, the finder of fact is still bound by the facts that came in the underlying case if there was an actual trial. Such coverage determination would be determined by facts such as the pleadings, trial transcript, jury charge, verdict and appellate documents, if any. Swicegood ex rel. Estate of Swicegood v. Medical Protective Co., 2003 U.S. Dist. LEXIS 16556 (N.D.Tex. 2003); WL 22234844 (N.D. Tex., September 29, 2003) (No. Civ.A.3:950CV-0335-D) Most courts have discussed these two duties as if they were separate and independent. In many cases, these are separate and one duty does not bear upon the other. However, in a number of cases, the duties are interrelated and actions by the insurer to extinguish one can equally affect the rights of the insured with respect to the other. In addition, in the past, it was assumed that the duty to indemnify was far more important to the insured that the duty to defend. However, this is no longer the case. In Continuing Legal Education 512-475-6700 www.utcle.org 2