General Star Indemnity Co. v. Vesta Fire Insurance ( 1999 )

Revised May 25, 1999
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________________________________
No. 98-20211
_______________________________________
GENERAL STAR INDEMNITY COMPANY,
Plaintiff-Appellant,
versus
VESTA FIRE INSURANCE CORPORATION;
LIBERTY NATIONAL FIRE INSURANCE COMPANY;
LIBERTY NATIONAL FIRE INSURANCE COMPANY,
doing business as Vesta Fire Insurance Corporation,
Defendants-Appellees.
_________________________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
_________________________________________________________________
May 6, 1999
Before DAVIS, SMITH and WIENER, Circuit Judges.
WIENER, Circuit Judge:
Plaintiff-Appellant General Star Indemnity Company (“General
Star”) appeals the district court’s order granting the motion of
Defendant-Appellee Vesta Fire Insurance Corporation (“Vesta”) to
dismiss under Federal Rule of Civil Procedure 12(b)(6). For the
reasons expressed below, we reverse the district court’s order, and
remand the case for further proceedings.
I
FACTS AND PROCEEDINGS
The instant lawsuit arose out of a state wrongful death and
survival action filed by the parents and estate of Karen Crawford
after she was murdered in the mail room of Champion Woods
Apartments (the “Apartments”). Champion Woods Associates (“CWA”),
a limited partnership, owned the property on which Crawford was
killed. CWA’s general partner was Michael Stevens Interests, Inc.
(“MSI”), which also served in a separate capacity as the
Apartment’s property manager. The state court action named MSI as
a defendant based both on its ownership interest in the apartment
complex and the property management services it performed.
Two insurance companies provided coverage for the relevant
parties. Under a $1 million general liability policy, Vesta
insured CWA and MSI, covering MSI both as general partner and as
property manager. General Star provided “primary” liability
coverage to MSI as general partner,1 and, pursuant to a policy
endorsement, provided “excess” liability coverage to MSI as
property manager.2
When the underlying action was initiated, Vesta appointed
counsel to defend its insureds, both CWA and MSI. General Star, on
the other hand, elected not to appoint counsel. Rather, it
informed Vesta that it would monitor the case as excess insurer of
1
General Star’s coverage for MSI as general partner was in the
amount of $1 million per occurrence.
2
General Star’s excess coverage was in the amount of $3
million per occurrence.
2
MSI in its capacity as apartment manager. General Star did not
assume any responsibility as primary insurer of MSI in its capacity
as general partner.
In a pre-mediation status report, the defense counsel retained
by Vesta advised both Vesta and General Star that, although he did
not believe that MSI was negligent, an adverse jury verdict could
nevertheless be significant. Counsel estimated the settlement
value of the case to be $500,000, but maintained that plaintiffs
probably would not settle for less than $1 million.
Vesta participated in mediation efforts that proved
unsuccessful, but General Star did not participate. According to
General Star, Vesta’s highest offer during mediation was $100,000.
As a result, General Star wrote to Vesta shortly after mediation
broke down, complaining that Vesta was not making a concerted
effort to settle the claim. In response, Vesta advised General
Star that it, rather than Vesta, was the primary insurer for MSI in
its role as general partner, and that if General Star believed a
higher settlement offer was warranted, it should “get its checkbook
out.” Thereafter, the Crawfords made a final settlement offer of
$1 million which, Vesta contends, was unanimously rejected by both
insurers. General Star disputes this contention, arguing that both
it and MSI unsuccessfully urged Vesta to accept the offer.
Ultimately, the case proceeded to trial, resulting in a jury
verdict for the Crawfords and the decedent’s estate in the amount
of $9.4 million. The jury apportioned 35% of the liability to CWA,
3
35% to MSI in its capacity as general partner, and 15% to MSI in
its capacity as apartment manager.3 The parties settled the case
prior to initiation of appellate proceedings. In accordance with
their respective policy limits, Vesta contributed $1 million and
General Star contributed $3.6 million to the $4.6 million
settlement.
Thereafter, General Star sued Vesta to recover the money it
had paid in settlement, alleging liability under theories of (1)
equitable subrogation, (2) breach of the duty of good faith and
fair dealing, (3) violations of the Texas Insurance Code, (4)
negligence, (5) gross negligence, and (6) breach of contract.
The district court granted Vesta’s Rule 12(b)(6) motion,
concluding that General Star’s complaint failed to state a claim on
which relief could be granted. In support of this conclusion, the
court noted that (1) General Star sought to recover from Vesta on
a theory of direct liability not recognized under Texas law, (2)
there was no evidence to support a claim by MSI to which General
Star could be subrogated, and (3) because the evidence indicated
that General Star was a primary carrier with a duty to defend MSI,
General Star was barred from asserting any claim for damage arising
out of its failure to do so. General Star appealed from this
ruling.
II
3
The remaining 15% of liability was assessed against a
defendant not party to the instant suit.
4
ANALYSIS
A. Standard of Review
This court reviews de novo a district court’s ruling on a
motion to dismiss under Fed. R. Civ. P. 12(b)(6), applying the same
standard as the district court.4
B. Applicable Law
Texas law permits actions between insurance carriers under the
doctrine of equitable subrogation.5 Equitable subrogation is the
legal fiction through which a person or entity, the subrogee, is
substituted, or subrogated, to the rights and remedies of another
by virtue of having fulfilled an obligation for which the other was
responsible.6 According to this doctrine, an excess insurer,
paying a loss under a policy, “stands in the shoes” of its insured
with regard to any cause of action its insured may have against a
primary insurer responsible for the loss.7 It is elementary that,
before an excess insurer can recover from a primary insurer under
the doctrine of equitable subrogation, the excess insurer must
4
United States ex rel. Thompson v. Columbia/HCA Healthcare
Corp., 125 F.3d 899, 901 (5th Cir. 1997).
5
American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d
480, 482-83 (Tex. 1992)(hereinafter Canal Ins. Co.).
6
National Union Fire Ins. Co. v. CNA Ins. Cos., 28 F.3d 29, 31
n.2 (5th Cir. 1994)(hereinafter CNA Ins. Co.).
7
Westchester Fire Ins. v. Heddington Ins., 883 F. Supp. 158,
162 (S.D. Tex. 1995), aff’d, 84 F.3d 432 (5th Cir. 1996); Canal
Ins. Co., 843 S.W.2d at 482-83.
5
first prove that the primary insurer failed to fulfill a duty owed
to the insured.8
Texas law recognizes only one tort duty in the context of
third party claims against an insured, that being the duty owed by
a primary insurer to its insured, as set forth seventy years ago in
the landmark case of G.A. Stowers Furniture Co. v. American
Indemnity Co..9 In Stowers, the Texas Commission of Appeals held
that an insurer which, under the terms of its policy, assumes
control of a claim, becomes the agent of the insured and is held to
the degree of care and diligence that an “ordinarily prudent person
would exercise in the management of his own business.”10 Although
Stowers focused specifically on an insurer’s obligation to settle
within the limits of its policy,11 the duty owed by an insurer to
8
Employers Nat’l Ins. Co. v. General Accident Ins. Co., 857 F.
Supp. 549, 552 (S.D. Tex. 1994); Canal Ins. Co., 843 S.W.2d at 482-
83.
9
15 S.W.2d 544 (Tex. Comm’n App. 1929, holding approved);
Maryland Ins. Co. v. Head Indus. Coatings & Serv., Inc., 938 S.W.2d
27, 28-9 (Tex. 1996)(hereinafter Head Indus. Coatings)(stating
that, because an insured is “fully protected against his insurer’s
refusal to defend or mishandling of a third-party claim by his
contractual and Stowers rights,” imposing an additional duty on
insurers is neither necessary nor appropriate).
10
15 S.W.2d at 547.
11
The Stowers court determined that an insurer may be held
liable to an insured in excess of its policy limits for failure to
settle if: (1) a third party claim against the insured was within
the scope of coverage; (2) there was an unconditional demand within
the policy limits; and (3) the terms of the demand were such that
an ordinarily prudent insurer would have accepted it, considering
the likelihood and degree of the insured’s potential exposure to an
excess judgment. American Physicians Ins. Exch. v. Garcia, 876
6
its insured has since been broadly interpreted by the Texas Supreme
Court to include the full range of obligations arising out of an
agency relationship.12 A breach of the Stowers duty by an insurer
gives rise to a cause of action in negligence against that insurer
by its insured.13
In Foremost County Mutual Insurance Co. v. Home Indemnity
Co.,14 we declined to extend directly to co-insurers the duty owed
by an insurer to its insured under Stowers.15 Although some
S.W.2d 842, 849 (Tex. 1994).
12
Ranger County Mut. Ins. Co. v. Guin, 723 S.W.2d 656, 659
(Tex. 1987)(holding that an insurer’s duty includes investigation,
preparation for defense of the lawsuit, trial of the case and
reasonable attempts to settle).
13
G.A. Stowers Furniture Co., 15 S.W.2d at 547. There is ample
support for the proposition that, in a cause of action arising out
of the mishandling of a claim by an insurer, negligence is the only
tort theory under which an insured is entitled to recover. See
Canal Ins. Co., 843 S.W.2d at 486 (Hecht, J., concurring)(noting
that “[a]lthough the Court does not expressly consider which of
these theories [negligence, gross negligence, breach of a duty of
good faith and fair dealing, and violations of the Texas Insurance
Code] is available to the excess carriers by subrogation, I assume
from its reliance on the Stowers and Ranger County cases, and would
so hold, that the excess carriers’ only cause of action is for
negligence” —— four Justices joined in this concurring opinion);
National Union Fire Ins. Co. v. Insurance Co. of North America, 955
S.W.2d 120, 134 (Tex. App. —— Houston[14th Dist.] 1997, reh’g
overruled)(holding that an excess carrier cannot, as a matter of
law, bring claims for gross negligence or violations of the
Insurance Code against a primary carrier in a suit based upon
equitable subrogation); Head Indus. Coatings, 938 S.W.2d at
28(refusing to recognize a cause of action of breach of the duty of
good faith and fair dealing under Stowers).
14
897 F.2d 754 (5th Cir. 1990).
15
Id. at 758 n.5. This court noted in Foremost that “[t]he
raison d’etre for the Stowers doctrine is that the insurer, when in
7
jurisdictions impose both this duty and others on the relationship
between excess and primary carriers, and permit actions based on a
breach of these duties,16 Texas has yet to so.17 Consequently, an
excess insurer may only assert a cause of action for a primary
insurer’s breach of its Stowers duty if it does so while standing
in the shoes of its insured.18
General Star argues that the facts stated in its First Amended
Original Complaint were sufficient to state a claim of negligence
through equitable subrogation,19 and that the district court erred
in granting Vesta’s motion to dismiss. Given the liberal pleading
standard required by the federal rules, we agree.
control of the litigation, might refuse a settlement offer that its
client, the insured, would want to accept if it had the option.”
Id.
16
See, e.g., St. Paul-Mercury Indem. Co. v. Martin, 190 F.2d
455, 457 (10th Cir. 1951)(applying Oklahoma law); American
Centennial Ins. Co. v. American Home Assurance Co., 729 F. Supp.
1228, 1232 (N.D. Ill. 1990).
17
CNA Ins. Cos., 28 F.3d at 33 n.5; Canal Ins. Co., 843 S.W.2d
at 483.
18
In recognizing the availability of this remedy, the Texas
Supreme Court reasoned that, if excess carriers were not subrogated
to the claims of their insureds, primary insurers would have less
incentive to settle within their policy limits and might be tempted
to “gamble” with excess carriers’ money when potential judgments
approach the primary insurers’ limits. Canal Ins. Co., 843 S.W.2d
at 483.
19
At oral argument on appeal, General Star dropped all claims
against Vesta except negligence through equitable subrogation.
Consequently, in our review of this case, we do not consider the
availability of relief to General Star under any of its previously
advanced theories.
8
The Federal Rules of Civil Procedure require a “short and
plain statement of the claim showing that the pleader is entitled
to relief.”20 Pursuant to Rule 8(a), a complaint will be deemed
inadequate only if it fails to (1) provide notice of the
circumstances which give rise to the claim, or (2) set forth
sufficient information to outline the elements of the claim or
permit inferences to be drawn that these elements exist.21
In Paragraph 21 of its amended complaint General Star asserts:
The Defendants, as primary insurers, owed Plaintiff,
as provider of excess coverage, a duty to handle
the Underlying Litigation in a reasonably prudent
manner. This duty includes investigation of the
claim, trial defense, and settlement negotiations.
The Defendants breached this duty by unreasonably
ignoring the recommendations and evaluations of
defense counsel; by offering ridiculously low
amounts of money to settle a very serious claim;
and by allowing an opportunity to settle within
primary limits lapse, despite the Plaintiff’s
urging and the urging of the Defendant’s [sic]
insured.22
Vesta submits that this pleading is deficient because it fails to
state an essential element of General Star’s claim; namely, a duty
owed to MSI. Under Texas law, asserts Vesta, General Star is
limited to those claims that it can bring as a subrogee. Because
Paragraph 21 mistakenly frames General Star’s negligence claim in
terms of Vesta’s alleged breach of a duty owed to General Star
20
FED. R. CIV. P. 8(a).
21
Walker v. South Cent. Bell Tel. Co., 904 F.2d 275, 277 (5th
Cir. 1990).
22
(Emphasis added).
9
rather than MSI, argues Vesta, the complaint fails to set forth
facts sufficient to state a claim on which relief can be granted.
We reject this hyper-technical reading of General Star’s complaint.
Paragraph 21 correctly characterizes the nature of the duty
owed by Vesta under Texas law, and succinctly describes the
circumstances which gave rise to an alleged breach of this duty.
General Star’s only misstep in Paragraph 21 was attributing Vesta’s
duty as owed to General Star rather than to MSI. General Star
mitigates the potentially damaging effect of this error, however,
by further alleging in Paragraph 23 that “[a]s the excess carrier
for MSI, . . . General Star is equitably subrogated to MSI’s rights
against Vesta and hereby asserts MSI’s claim against Vesta.”23
Despite General Star’s inelegant pleading, we conclude that, when
read as a whole, the complaint provides sufficient information to
put Vesta on notice of General Star’s claim of negligence through
equitable subrogation.
Although the district court set forth the appropriate legal
standard by which it was to review Vesta’s Rule 12(b)(6) motion, it
is unclear from the court’s memorandum opinion whether it in fact
treated Vesta’s motion as a motion to dismiss or as a motion for
summary judgment. To the extent that the district court supported
its order with legal conclusions drawn from unsubstantiated and
impermissible fact determinations, we reverse.
23
(Emphasis added).
10
Specifically, we reject as premature the district court’s
conclusion that there is insufficient evidence to support a claim
by MSI against Vesta to which General Star could be equitably
subrogated. Taking the facts alleged in the body of the complaint
together with the specific allegation of breach in Paragraph 21,
General Star has alleged —— as subrogee —— a Stowers claim
sufficient to survive a Rule 12(b)(6) motion. Whether General Star
ultimately will be able to adduce evidence sufficient to support
this claim on its merits is not a question for our consideration at
this early stage in the proceedings any more than it was for the
district court.
Likewise, we reject the district court’s conclusion that
General Star’s status as a primary insurer prohibits it from
obtaining relief under any set of facts. Based on the pleadings
alone, neither General Star’s status as a primary insurer nor its
duty to defend MSI under the circumstances of this case can be
determined conclusively.
For the foregoing reasons, we reverse the order of the
district court dismissing General Star’s suit, and remand for
further proceedings consistent herewith.
REVERSED and REMANDED.
11
12