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The 5th U.S. Circuit Court of Appeals, wrestling with whether one primary insurer has a duty to reimburse another primary insurer for the costs of settling claims against a contractor that both insured, has punted the issue to the Texas Supreme Court. In an unsigned March 31 opinion, a three-judge panel of the 5th Circuit certified three questions involving the duty issue raised in Liberty Mutual Insurance Co. v. Mid-Continent Insurance Co. to the state Supreme Court. The threshold question is whether a primary insurance carrier that pays less than its proportionate share of a settlement against its insured owes a duty, either directly or by subrogation of the insured’s rights, to the insurance carrier that paid the bulk of that settlement. A secondary question involves whether the result would be different if the insurance carrier brought the claim in its capacity as an excess carrier. Senior Circuit Judge Will Garwood and Judges E. Grady Jolly and Rhesa Barksdale sat on the panel that considered the case. Brian Blakeley, attorney for Mid-Continent, says the issue boils down to whether there is a law or rule that allows one insurance carrier to force the other to open its purse strings. “Can one insurer get into the pocket of another insurer?” Blakeley, a shareholder in San Antonio’s Blakeley & Reynolds, asks. But Richard A. Capshaw, Liberty Mutual’s lead counsel and a partner in Dallas’ Capshaw, Goss & Bowers, says, “We don’t think one insurer ought to be able to hold another insurer and the insured hostage basically on an unreasonable position.” In its brief to the 5th Circuit, Liberty Mutual cited San Antonio’s 4th Court of Appeals’ holding in 2000′s General Agents Insurance Co. of America Inc. v. Home Insurance Co. of Illinois that one primary insurer can hold a co-insurer liable for failing to act reasonably with regard to a settlement. Because the petition in the case was dismissed by agreement of the parties, the Supreme Court never reviewed General Agents. Liberty Mutual stems from a suit that a family of four filed after suffering injuries in a 1996 automobile collision allegedly caused in part by a lack of proper signage in a highway construction zone. Kinsel Industries, a covered insured under two comprehensive general liability policies, each for $1 million, carried by Liberty Mutual and Mid-Content, was a defendant in James Boutin, et al. v. Tony Cooper, et al., filed in the 75th District Court in Liberty County. According to the 5th Circuit’s opinion, each insurer agreed to share the costs of defending and indemnifying Kinsel. As noted in the opinion, Liberty Mutual and Mid-Continent agreed that a total verdict for the Boutins likely would amount to as much as $3 million, but the two insurers disagreed on the settlement value of the case. Liberty Mutual, which also had a $10 million excess policy covering Kinsel, agreed to settle the Boutins’ claims against Kinsel for $1.5 million, of which Mid-Continent paid $150,000, according to the opinion. After paying the remaining $1.35 million of the settlement, Liberty Mutual sued Mid-Continent for $600,000, the amount Liberty Mutual contends that Mid-Continent still owes. Capshaw says that, if the underlying suit had been tried, there would be no question that Liberty Mutual had a claim against Mid-Continent under equitable subrogation rights. If the case settles, he says, does that mean Liberty Mutual loses rights it would have had if the case had gone to trial? Blakeley says Mid-Continent insured Crabtree Barricades, the Kinsel subcontractor responsible for signs and dividers on the construction project. Crabtree also was a defendant in Boutin. Blakeley says the Mid-Continent policy named Kinsel as an additional insured, and Mid-Continent was concerned about paying too much on the Kinsel claim and then not having enough of its policy limit left to protect Crabtree. Mid-Continent paid $300,000 to settle the claims against Crabtree, according to the 5th Circuit opinion. Following a bench trial, U.S. District Judge Ed Kinkeade of Dallas held that Liberty Mutual was entitled to recover Mid-Continent’s one-half share of the settlement but with credit for the $150,000 contribution and consideration of Mid-Continent’s policy limits. Tracking the reasoning in General Agents, Kinkeade held that each insurer “owed a duty to act reasonably” in exercising its rights under its comprehensive general liability policy and awarded $550,000 to Liberty Mutual. “Because the court finds that Mid-Continent was unreasonable in exercising its rights under its policy and that Liberty Mutual was reasonable in exercising its rights, Liberty Mutual is entitled to subrogation,” Kinkeade wrote. Mid-Continent appealed the judgment to the 5th Circuit. Blakeley says a company with bargaining clout, such as the general contractor on a project, often requires that it be named as an additional insured on the policies issued to companies with which it does business. “One of the most disturbing aspects of the General Agents rule is that it pushes the interests of the small insured right off the stage,” Blakeley says. “If the big dog and its insurer want to settle, the insurer for the little dog is forced to contribute even though it reduces or eliminates the policy limits that will be left to settle the claims against the little dog.” The 5th Circuit concluded in Liberty Mutual that the General Agents decision appears to indicate a direct duty from one primary insurance carrier to another primary insurer. However, the 5th Circuit concluded that the authorities that the San Antonio court of appeals cited in General Agents did not indicate the source of that duty. Former 4th Court Chief Justice Phil Hardberger wrote the General Agents opinion in which Justices Catherine Stone and Sarah Duncan joined. WHAT ABOUT ‘STOWERS’ In Liberty Mutual, the 5th Circuit also concluded that the Texas courts are unclear as to whether Kinsel would have a cause of action against Mid-Continent under Stowers Furniture Co. v. American Indemnity Co., a 1929 decision by the state Supreme Court, to which Liberty Mutual could be subrogated. As noted in the opinion, a Stowers claim typically involves an excess judgment after a trial. But according to the opinion, two state Supreme Court decisions — 2002′s Rocor v. Nation Union Fire Insurance Co. and 1992′s American Centennial Insurance Co. v. Canal Insurance — suggest, although not clearly, that a Stowers claim doesn’t always require judgment after an actual trial. According to the opinion, it’s also questionable whether Stowers imposed a duty on Mid-Continent to Kinsel, because Mid-Continent never received an offer to settle within its policy limits, although the settlement was within the combined remaining limits of the Mid-Continent and Liberty Mutual primary policies. The 5th Circuit noted that Liberty Mutual raised questions that the Supreme Court left unresolved in American Physician’s Exchange v. Garcia as to whether the Stowers duty is triggered when a settlement requires funding from multiple insurers. Michael Huddleston, an insurance attorney who is not involved in Liberty Mutual, says a primary carrier has two possible routes for pursuing a claim against another primary carrier that has underpaid on a settlement. He says a carrier either can argue for the establishment of a direct duty between concurrent carriers to reasonably settle a case, or the carrier can sue in the name of the insured under equitable or conventional subrogation for whatever rights an insured might have. “Because Texas has previously found there is no duty of good faith owed by a liability carrier to the insured, it is unlikely any such tort duty will be recognized as existing on the part of one carrier to another,” says Huddleston, a partner in Dallas’ Shannon Gracey Ratliff & Miller. Huddleston also says that it appears there is no basis under current law for a subrogation recovery under Stowers, which has precise elements that must be met. He says an offer of settlement must be within unstacked limits, and the Stowers coverage requirement is likely not triggered if an insured breaches the no-action condition of the policy and thus negates coverage. The Supreme Court may address whether prejudice must be shown for a breach of the no-action clause, and, if so, whether an unreasonably high settlement is proof of prejudice, he says. Huddleston says Liberty Mutual provides the Supreme Court with an opportunity to address a wide variety of topics relating to liability insurance, extra-contractual liability and allocation. As an example, he says, the court may have to address how a Stowers offer is made to multiple carriers, whether primary or excess, which has been an open issue for a number of years. “In short, this case will likely result in an opinion that will have broader application than simply the primary insurer conflict presented,” he says. “It is also possible that the solution might be painfully simple, allowing the Supreme Court to put off to another day a number of thorny insurance law questions.”

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