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Reversing a lower court’s ruling, the Texas Supreme Court held on May 23 that an insured can sue its liability insurance company for damages incurred because the insurer unfairly delayed settling a third-party’s claim. The decision resulted in a sharp division on the court. The five justices joining in the majority opinion in Rocor International Inc. v. National Union Fire Insurance Co. of Pittsburgh ruled in the insurer’s favor although the decision is considered a victory for insureds because they can sue insurers if they meet certain standards of proof for liability that were noted in the opinion. The court adopted a standard of proof for an insured to establish liability under Article 21.21 of the Texas Insurance Code. Under that standard, Article 21.21 liability can’t be imposed unless the insurer shows that: the policy covers the claim; the insured’s liability is reasonably clear; the claimant made a settlement demand within policy limits; and the demand’s terms would be acceptable to an ordinarily prudent insurer. Those factors were established in a series of the court’s rulings, beginning in 1929 with the decision in Stowers v. American Indemnity Co. “Applying the familiar standard promotes uniformity and prevents insurers from facing conflicting liability standards for failing to settle lawsuits filed by third-party claimants,” Justice Harriet O’Neill, author of the majority opinion, wrote. Tom Wright, who represents National Union, says the court “synchronized” the statutory provision with the common-law Stowers doctrine, thereby clarifying insurers’ obligations. The Legislature amended Article 21.21 in 1995, creating a cause of action for an insured if an insurer fails to make a good-faith effort to reach a settlement once it’s clear that the insured is liable for a third-party’s claim. The majority rendered the statutory duty meaningless, Justice James Baker said in a dissenting opinion in which Justice Deborah Hankinson joined. “In determining the statutory liability standard, the court impermissibly leaps into the legislative realm and completely eliminates a duty and claim the Legislature expressly created,” Baker said in the opinion. Baker said the statute requires insurers to take “good-faith affirmative steps” to reach a settlement once an insured’s liability becomes reasonably clear. The common-law Stowers duty requires insurers to accept reasonable settlement demands within policy limits that an ordinarily prudent insurer would accept after considering the insured’s potential exposure to a judgment for more than the limits, his opinion said. Mark Kincaid, Rocor’s attorney, says the majority “fudged” because the justices didn’t want Article 21.21 to take the place of the Stowers common-law standards that the court has crafted over the years. “It would have created a remedy they [supreme court justices] could not control,” he says. The Legislature, not the supreme court, then would be determining the duties of liability insurance companies, says Kincaid, with Austin’s Kincaid & Horton. Although the ruling went against Rocor, Kincaid says the decision is good for insureds who now know what the standards are and can seek treble damages and attorney fees. “It’s a huge victory for the future, but not for Rocor,” he says. Wright, with the Wright Law Firm in Houston, says the court simply “harmonized” the statute with the common law. The case stems from the 1989 deaths of two Department of Public Safety troopers involved in a highway accident with a Rocor truck driver who allegedly was driving while intoxicated. According to the supreme court’s majority opinion, Rocor retained the duty to defend itself at trial under its primary and excess liability policies. Rocor alleged in a suit that National Union, its excess insurance carrier, was negligent in not settling the claims by the troopers’ families for almost two years after the accident and that the delay caused the firm to incur legal expenses. A San Antonio jury found that National Union acted negligently and in bad faith and awarded Rocor $123,000 in damages, plus interest and attorney fees, but Judge Juan Gallado, then presiding judge of the 131st District Court, threw out the verdict. San Antonio’s 4th Court of Appeals, sitting en banc, reversed Gallado’s judgment and held that Rocor could recover on its common-law negligence claim, but not for alleged Article 21.21 violations. The supreme court reversed, saying that while an insured could recover under Article 21.21, there was no evidence that National Union was presented with a proper settlement demand acceptable to an ordinarily prudent insurer. Justices Nathan Hecht and Priscilla Owen concurred in the result. In a concurring opinion, Hecht criticized the majority for dismissing passages in the court’s 1994 decision in American Physicians Insurance Exchange v. Garcia that limited an insurer’s statutory claims against its insurer for unfair claim settlement practices to first-party claims, such as a claim against an insured’s automobile liability coverage. Wrote Hecht, “The court cannot hold the Legislature strictly to the language of statutes and parties to the language of contracts and then fudge on the language of its own opinions.”

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