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Click here for the full text of this decision FACTS:Motiva Enterprises’ sulfuric acid storage tank exploded at its Delaware refinery in July 2001. Motiva had approximately $250 million in liability insurance in two “towers” of policies. National Union supplied $25 million in umbrella coverage that included the duties to defend and to indemnify. There was also a “consent to settle” clause that required getting National Union’s consent before settling a claim and a “cooperation” clause, which required Motiva to cooperate the National Union in its investigation, settlement and defense of claims. A year after the explosion, Motiva notified National Union of the first of several lawsuit against it. In February 2003, National Union disclaimed coverage, saying coverage under the other applicable policies had not been exhausted. Motiva responded that the policies issued under one of the “towers” � issued by St. Paul Fire and Marine Insurance Co. � had been exhausted and that National Union would be responsible for the remaining suits, including one filed by John and Pamela Beaver. Motiva asked National Union to send a representative with full settlement authority for an Aug. 8, 2003, mediation of the Beavers’ suit. National Union requested documents relevant to the suit, but Motiva rejected the request, claiming National Union had not acknowledged coverage for the Beavers’ claim. Still, Motiva demanded National Union’s presence at the mediation. On Aug. 6, National Union tendered its offer to defend against the Beavers’ claim, subject to a reservation of rights. National Union asked for Motiva’s cooperation, and said it would attend the mediation. Nonetheless, Motiva still refused to tender the documents requested by National Union. On Aug. 8, National Union sent a representative to attend the Beavers’ mediation. The Beavers made a demand for $40 million, then National Union was asked to leave. Motiva and the Beavers continued negotiations, ending with Motiva agreeing to pay $16.5 million. National Union refused to pay the settlement amount on the grounds that its consent had not been obtained prior to settlement. It also rejected Motiva’s request for reimbursement after Motiva paid the settlement from its own funds. Motiva sued National Union. On cross-motions for summary judgment, the district court granted partial judgment for National Union, saying Motiva breached the consent-to-settle and cooperation clauses. On appeal, Motiva argues that when National Union’s tender of a defense was subject to its reservation of rights to later deny coverage, Motiva was entitled to settle the Beaver claim without consulting National Union. HOLDING:Vacated and remanded. The court notes Motiva’s reliance on its holding in Rhodes v. Chicago Ins. Co., 719 F.2d 116 (5th Cir. 1983), which held that if the insurer properly reserved its rights and the insured elected to pursue its own defense, the insurer is bound to pay damages which resulted from covered conduct and which were reasonable and prudent up to the policy limits. The court states that unfortunately for Motiva, the holding in Rhodes was an “Erie guess,” an attempt to divine what the Texas Supreme Court would hold in similar circumstances. Since the Rhodes holding, the Texas Supreme Court has weighed in on the issue in State Farm Lloyds Ins. Co. v. Maldonado, 963 S.W.2d 38 (Tex. 1998). The court in that case held that where the insurer agreed to defend under a reservation of rights, and the insured failed to satisfy a condition precedent to the policy, the insured could not then sue to recover on the policy. “Under Erie, we are, of course, obliged to decide questions of state law as we believe the state supreme court would decide the issue. Although a different policy condition was at issue in Maldonado, we see no principled basis to distinguish it from today’s case. We conclude therefore that under Maldonado, an insurer which tenders a defense with a reservation of rights is entitled to enforce a consent to settle clause, and our holding in Rhodes does not accurately reflect current Texas law. The district court therefore did not err in holding that Motiva breached its insurance policy by settling without National Union’s consent, even though National Union reserved its right to contest coverage and therefore did not tender to Motiva an unqualified defense.” The court also finds that Motiva’s request that National Union leave the mediation did not amount to a breach of the cooperation clause. Furthermore, even if Motiva breached that clause � or the consent to settle clause � National Union cannot refuse to pay the benefits unless it can show actual prejudice from the breach. Although the district court made a brief reference to prejudice, it did not consider the “actual, concrete” prejudice an insurer must show to avoid payment.” OPINION:Davis, J.; Reavley, Davis and Wiener, JJ.

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