Mid-Continent Ins. Co. v. Liberty Mutual Ins. Co., #05-0261 (Tex. October 12, 2007)
The Texas Supreme Court decides in this case that a primary liability insurer may refuse to contribute its fair share to settle a lawsuit on behalf of its insured without breaching any duties to a co-insurer that pays more than its fair share. The dispute arose out of an auto accident allegedly caused in part by hazardous road signs and barriers set up by a construction contractor. As often happens, the contractor had liability coverage not only from its own policy, but also from subcontractors' policies covering the contractor as an additional insured. In this case, Liberty Mutual provided both primary and excess coverage to the named-insured contractor. Mid-Continent covered the subcontractor but also covered the contractor as an additional insured. Each policy had $1 million limits. Liberty's excess layer was $10 million.
In settlement negotiations, all the carriers agreed that the injured claimants would likely recover $2-$3 million at trial. Liberty agreed at mediation to settle all claims for $1.5 million and demanded that Mid-Continent contribute half of that. However, Mid-Continent insisted on paying no more than $150,000 based on an unreasonable assertion that the claims were worth no more than $300,000. So Liberty paid all of the $1.5 million (less Mid-Continent's $150,000) but reserved rights to pursue Mid-Continent for its proportionate share.
The lower court held that Liberty could recover the overpayment of its fair share either because Mid-Continent owed a direct duty under the "other insurance" clause in its policy, or because Liberty had a right of subrogation to recover the over payment under its "other insurance" rights. (The identical "other insurance" clauses in the two policies said that the insurance was primary and would share proportionately with other primary insurance available to pay the claim.)
The Texas Supreme Court reversed and held that Mid-Continent was within its rights to offer less than its share to the settlement. First, the court re-stated an earlier holding (in American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (Tex. 1992)) that one insurer owes no direct duty to another even though it might owe an indirect duty. In the Canal case, a primary insurer refused to accept a reasonable settlement within its policy limits, forcing an excess insurer to pay a judgment over the primary limits. The primary insurer's act clearly would have breached a duty to the insured if the insured had not had excess coverage. So the Canal court held that the paying excess insurer could step into the shoes of the insured and seek subrogation (the indirect claim) against the breaching primary insurer.
In this case, however, the Court refused to extend the Canal holding where two co-primary insurers were disputing their proportionate obligations to fund a settlement. The Court provided several explanations for its holding, but probably the most compelling reason was stated in a concurring opinion. Since Liberty had a $10 million excess policy, it had its its own selfish reasons for wanting Mid-Continent to split the $1.5 million settlement. "Insurance companies are not eleemosynary institutions" wrote the concurring justice. Where the interests of the insured are not at issue, the Court could find no basis for barring "hard line negotiations" among co-equal primary insurers, particularly where one of the insurers was protecting its own excess exposure.
The big question about this decision is the deterrent effect it may have on settlements. The Court believes its decision will not prejudice insureds because it only limits duties owed to co-insurers. However, policyholders may be adversely affected if fewer cases settle due to inter-insurer bickering. We must wait and see what impact this case has on settlements in general.
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