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Click here for the full text of this decision FACTS:In November 1996, an automobile accident occurred in the construction zone of a state of Texas highway project. A westbound car driven by Tony Cooper on the lanes narrowed by construction crossed into oncoming traffic and collided with an eastbound car driven by James Boutin and occupied by his family. All members of the Boutin family suffered substantial injuries. Kinsel Industries was the general contractor on the highway project. Crabtree Barricades was Kinsel’s subcontractor responsible for signs and dividers. The Boutin family sued Cooper, the state, Kinsel and Crabtree in the state district court of Liberty County for damages resulting from the accident. Kinsel was the named insured under Liberty Mutual Insurance Co.’s $1 million comprehensive general liability (CGL) policy. Liberty Mutual also provided Kinsel with $10 million in excess liability insurance. Crabtree was the named insured under Mid-Continent Insurance Company’s $1 million CGL policy. Mid-Continent’s policy identified Kinsel as an additional insured for liability arising from Crabtree’s work. Therefore, Kinsel was a covered insured under two CGL policies, both of which provided Kinsel with $1 million in indemnity coverage for the underlying suit. The insurers had no contract between them that was implicated by the automobile accident. The CGL policies contained identical “other insurance” clauses providing for equal or pro rata sharing up to the co-insurers’ respective policy limits if the loss is covered by other primary insurance. Each policy also contained a “voluntary payment” clause, a subrogation clause and a version of the standard “no action” clause. Liberty Mutual and Mid-Continent do not dispute that each owed some portion of Kinsel’s defense and indemnification. The insurers agreed that a total verdict for the Boutins against all defendants would be around $2 million to $3 million, but they disagreed on the settlement value of the case against Kinsel. Initially, both insurers estimated Kinsel’s percentage of fault between 10 percent and 15 percent, but as the case progressed Liberty Mutual increased its estimate to 60 percent. After repeated refusals by Mid-Continent to increase its contribution to a settlement, Liberty Mutual agreed at a mediation with the Boutins to settle on behalf of Kinsel for $1.5 million (60 percent of a $2.5 million anticipated verdict). Liberty Mutual demanded Mid-Continent contribute half, but Mid-Continent continued to calculate the settlement value of the case against Kinsel at $300,000 and agreed to pay only $150,000. Therefore, Liberty Mutual funded the remaining $1.35 million, paying $350,000 more than its $1 million CGL policy limit. Liberty Mutual reserved the right to seek recovery against Mid-Continent for its portion of the settlement. Sometime later, before trial, Mid-Continent settled the Boutins’ claim against Crabtree for $300,000. Liberty Mutual sued Mid-Continent in the 191st Judicial District Court of Dallas County seeking to recover Mid-Continent’s pro rata share of the sum paid to settle the Boutin family’s claim against Kinsel. Mid-Continent timely removed the case to federal court on diversity grounds. After a bench trial, the U.S. District Court for the Northern District of Texas concluded that Liberty Mutual was entitled through subrogation to recover $550,000 from Mid-Continent. Relying on General Agents Insurance Co. of America v. Home Insurance Co. of Illinois, the district court determined that each insurer owed a duty to act reasonably in exercising its rights under the CGL policies. It found that Mid-Continent was objectively unreasonable in assessing Kinsel’s share of liability and that Liberty Mutual was reasonable in assessing the same and in accepting the Boutins’ settlement offer. Specifically, the district court stated that “Mid-Continent’s recalcitrance to consider any change, despite the changing circumstances, was unreasonable, causing it to unreasonably assess its insured’s exposure,” while on the other hand Liberty Mutual, “[b]y agreeing to settle for [$1.5 million] . . . resolved the case within policy limits, based on a reasonable estimation of Kinsel’s liability, and avoided the real potential of joint and several liability.” Therefore, the district court concluded that, whether apportioned pro rata or in equal shares, Mid-Continent was liable in subrogation for $750,000, one-half of the $1.5 million settlement with Kinsel. Because Mid-Continent already paid $450,000 of its $1 million policy limit in settlement ($150,000 for the suit against Kinsel and $300,000 for the suit against Crabtree), the district court ordered Mid-Continent to pay only $550,000. Although this amount was $50,000 short of Mid-Continent’s $750,000 share of the Kinsel settlement, the district court found no justification for increasing Mid-Continent’s total liability above its $1 million policy limit. Mid-Continent appealed, and the 5th U.S. Circuit Court of Appeals certified questions of law to the Texas Supreme Court. The three questions read as follows: “1. Two insurers, providing the same insured applicable primary insurance liability coverage under policies with $1 million limits and standard provisions (one insurer also providing the insured coverage under a $10 million excess policy), cooperatively assume defense of the suit against their common insured, admitting coverage. The insurer also issuing the excess policy procures an offer to settle for the reasonable amount of $1.5 million and demands that the other insurer contribute its proportionate part of that settlement, but the other insurer, unreasonably valuing the case at no more than $300,000, contributes only $150,000, although it could contribute as much as $700,000 without exceeding its remaining available policy limits. As a result, the case settles (without an actual trial) for $1.5 million funded $1.35 million by the insurer which also issued the excess policy and $150,000 by the other insurer. “In that situation is any actionable duty owed (directly or by subrogation to the insured’s rights) to the insurer paying the $1.35 million by the underpaying insurer to reimburse the former respecting its payment of more than its proportionate part of the settlement? “2. If there is potentially such a duty, does it depend on the underpaying insurer having been negligent in its ultimate evaluation of the case as worth no more than $300,000, or does the duty depend on the underpaying insured’s evaluation having been sufficiently wrongful to justify an action for breach of the duty of good faith and fair dealing for denial of a first party claim, or is the existence of the duty measured by some other standard? “3. If there is potentially such a duty, is it limited to a duty owed the overpaying insurer respecting the $350,000 it paid on the settlement under its excess policy?” HOLDING:The court answered the first question in the negative and therefore did not reach the second and third questions. The court first analyzed whether Liberty Mutual had a direct action for reimbursement under a right of contribution from Mid-Continent. The CGL policies at issue, the court stated, contained pro rata clauses. Liberty Mutual and Mid-Continent contractually agreed in their respective policies to pay a proportionate share of Kinsel’s covered loss up to $1 million. The co-insurers did not, however, contract with each other to create obligations between themselves or to pay each other’s proportionate share of Kinsel’s loss. There is no contractual right of contribution between them, the court stated, adding that the presence of the pro rata clauses in the CGL policies precluded an equitable contribution claim. Thus, the court stated that in this case no contractual obligations existed between co-insurers to apportion between themselves the payment on behalf of the insured. In addition, the court declined to create such an obligation under the common law. Liberty Mutual then contended it could seek reimbursement through contractual or equitable subrogation to the rights of Kinsel. The court, however, held that a fully indemnified insured has no right to recover an additional pro rata portion of settlement from an insurer regardless of that insurer’s contribution to the settlement. Having fully recovered its loss, an insured has no contractual rights that a co-insurer may assert against another co-insurer in subrogation, the court stated. Liberty Mutual, the court stated, also argued that it was subrogated to the common law right of Kinsel to enforce Mid-Continent’s duty to act reasonably when handling an insured’s defense, including reasonable negotiation and participation in settlement. An insurer’s common law duty in this third-party context, the court stated, is limited to the Stowers duty to protect the insured by accepting a reasonable settlement offer within policy limits. The present situation, the court stated, differs from the issue that the Texas Supreme Court addressed in its 1992 opinion American Centennial Insurance Co. v. Canal Insurance Co. In Canal, the court recognized equitable subrogation as a basis for an excess insurer’s recovery against a primary insurer to prevent a primary insurer from taking advantage of an excess insurer, acting solely as such, when a potential judgment approaches the primary insurer’s policy limits. The excess insurer would be forced to pay for a debt for which another insurer was primarily liable. In this case at issue, however, the court stated that Liberty Mutual played a dual role as primary insurer and excess insurer and was in a position to negotiate a good faith settlement on Kinsel’s behalf. Equity demanded a remedy for the excess insurer in Canal, the court stated, but here equity does not favor such a remedy. A reasonable primary insurer, which did not improperly handle the claim, would not pay more than its primary policy limits. In paying $350,000 more than its $1 million policy limits, Liberty Mutual seems to have been motivated by concern for its excess insurance policy. Mid-Continent cannot be required to agree to a settlement that requires payment in excess of its remaining coverage to protect Liberty Mutual’s excess insurance interests. Thus, in response to the first certified question, the court concluded there was no right of reimbursement in the context presented. Therefore, the court did not reach questions two and three. OPINION:Wainwright, J., delivered the opinion of the court. CONCURRENCE:Willett, J., filed a concurring opinion. “I would deny Liberty Mutual’s claim. The result would be different if language from the Mid-Continent policy required it to pay more of the settlement. But I see nothing in the policy obliging Mid-Continent to do so, and I agree with the Court that the”other insurance’ clause of the Mid-Continent policy, especially when considered with the”voluntary payment’ and”no action’ clauses, precludes a claim by Liberty Mutual against Mid-Century for contribution. I also see no claim based on subrogation, whether contractual or equitable, since Liberty Mutual’s right of subrogation must be premised on the concept of standing in the shoes of the insured, Kinsel, and here Kinsel has no complaint against Mid-Continent.”

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