Crocker v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. , 526 F.3d 240 ( 2006 )

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
September 29, 2006
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 05-50813
BEATRICE CROCKER,
Plaintiff-Appellee,
versus
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,
Defendant-Appellant.
Appeal from the United States District Court
for the Western District of Texas
Before GARWOOD, HIGGINBOTHAM, and CLEMENT, Circuit Judges.
PER CURIAM:
This diversity case involves important and determinative
questions of Texas law as to which there is no controlling Texas
Supreme Court precedent. Accordingly, we certify those
unresolved questions to the Supreme Court of Texas.
CERTIFICATION FROM THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT TO THE SUPREME COURT OF TEXAS,
PURSUANT TO THE TEXAS CONSTITUTION ART. 5, § 3-C AND
RULE 58 OF THE TEXAS RULES OF APPELLATE PROCEDURE
TO THE SUPREME COURT OF TEXAS AND THE HONORABLE JUSTICES THEREOF:
I. STYLE OF THE CASE
The style of the case in which this certification is made is
Beatrice Crocker v. National Union Fire Insurance Company of
Pittsburgh, PA, No. 03-10705, in the United States Court of
Appeals for the Fifth Circuit, on appeal from the United States
District Court for the Western District of Texas, San Antonio
Division. Federal jurisdiction is based on diversity of
citizenship.
II. STATEMENT OF THE CASE
Plaintiff-appellee Beatrice Crocker (Crocker) seeks to recover
from defendant-appellant National Union Fire Insurance Company of
Pittsburgh, PA (National Union) on the basis of the default
judgment that Crocker obtained against National Union’s insured,
Richard Morris (Morris). In May 2002, Crocker sued Morris and
Morris’s former employer, Emeritus Corporation (Emeritus), for
injuries suffered in 2000 when Crocker was struck by a swinging
door — allegedly pushed negligently by Morris acting in the course
and scope of his employment — at a nursing home, where Crocker
resided, owned by Emeritus.1 Morris initially refused service of
process but was eventually served in September 2002. Crocker’s
claims against Emeritus were covered by the commercial general
liability insurance policy issued by National Union in which
1
The nursing home where the accident occurred was the Redwood Springs
Nursing Home. Morris was unaware that the Redwood Springs Nursing Home was owned
by Emeritus and, in fact, Morris had never heard of Emeritus.
2
Emeritus was a named insured. Because he was an employee of
Emeritus acting in the course and scope of his employment at the
time of the underlying accident,2 Morris was an additional insured
under the terms of the National Union policy and was also entitled
to defense and indemnity thereunder. National Union provided a
defense for Emeritus but did not provide a defense for Morris,
apparently because Morris failed to forward the suit papers to
National Union or otherwise inform it of the suit against him and
did not request it to provide a defense. Morris never answered
Crocker’s suit and Crocker moved for a default judgment on
September 3, 2003. The case was called to trial on October 27,
2003, but Morris did not enter an appearance. At the conclusion of
all the evidence, the trial court, on Crocker’s motion, severed the
claims against Morris into a separate suit before submitting the
charge to the jury. On October 30, 2003, the jury rendered a take-
nothing verdict against Crocker, specifically finding that
Emeritus, acting through its agents, including Morris, was not
negligent; the conditionally submitted damage question issue was
not answered. On November 4, 2003, the trial court granted a
default judgment for Crocker on the severed claims and entered
judgment against Morris in the amount of $1,000,000. Sometime
2
Morris’s employment at the nursing home was terminated shortly after the
accident resulting in Crocker’s injuries and Morris was not an employee of
Emeritus at the time of Crocker’s suit.
3
shortly after November 4, the trial court entered final judgment on
the jury’s verdict in favor of Emeritus.
In April 2004, after both of the judgments had become final,
Crocker sued National Union in state court as a third-party
beneficiary of Emeritus’s liability policy that covered Morris as
an additional insured. National Union removed the case to federal
court based on diversity of citizenship.
It is not disputed that Crocker’s original claims against both
Emeritus and Morris were covered by National Union’s liability
insurance policy and that National Union knew that Morris was a
named defendant in the lawsuit. In addition, National Union knew
or should have known that Morris had been served in the lawsuit.3
It is also undisputed that Morris was not aware of the terms and
conditions of the Emeritus policy, did not know that he was an
additional insured under the policy, did not forward the suit
papers to National Union or otherwise inform it that he had been
sued, and did not request a defense from either National Union or
Emeritus. Finally, it is undisputed that National Union did not
inform Morris that he was an additional insured and did not offer
to defend Morris against Crocker’s claims.
3
Although National Union claims that it did not have actual knowledge of
the service of process on Morris, attorney Jonathan LaMendola, hired by National
Union to defend co-defendant Emeritus, received Crocker’s first amended petition
ninety-six days before the default judgment and Crocker’s motion for default
judgment sixty-eight days before the default judgment. Both of these pleadings
alleged that Morris had been served with process. After considering the summary
judgment evidence, the district court concluded that “National Union had actual
knowledge of the suit against Morris.”
4
National Union did, however, attempt to contact Morris.
National Union’s claims investigator sent a certified letter to
Morris (at the address where he lived) dated February 26, 2001
(prior to Crocker’s lawsuit), expressing the investigator’s desire
to speak with Morris about Crocker’s claims. The letter was
returned unclaimed. In addition, well prior to the beginning of
trail, an associate at the law firm hired by National Union to
defend Emeritus attempted to reach Morris by telephone. On one
such call, the associate was apparently told by Morris’s ex-wife,
with whom and in whose trailer home Morris lived, not to call
again. None of the phone messages the associate left for Morris
were returned. National Union admits, however, that none of these
attempts to make contact with Morris included attempted
notification to Morris that he was an additional insured or that
National Union would provide Morris with a defense.
Jonathan LaMendola, lead counsel hired by National Union to
defend Emeritus, was present on October 2, 2003, when Morris was
deposed by Crocker’s attorney. Prior to the deposition, Morris
spoke in private with Crocker’s attorney but refused to speak in
private with LaMendola. When Morris’s deposition began, LaMendola
learned that Morris was not “comfortable” proceeding without a
lawyer. LaMendola did not inform Morris that he was an additional
insured or that National Union would provide Morris with a defense.
In his affidavit, LaMendola stated: “I asked William [sic] Morris
[before the deposition] if I could speak to him and he refused on
5
the basis that he was waiting for a call from his attorney. I
assumed that William [sic] Morris had an attorney and did not want
to talk to me on that basis.”4
In Crocker’s suit against National Union, both parties moved
for summary judgment. National Union argued that Crocker, who
stands in Morris’s shoes, cannot recover under Texas law as
National Union’s duty to defend Morris was never triggered because
Morris did not forward the suit papers to National Union or
otherwise notify it that he had been sued and he did not ask or
authorize National Union to defend him.5 National Union relied on
its policy provisions that:
“Before coverage will apply, you must notify us in
writing of any claim or suit against you as soon as
possible. You must:
4
Prior to the deposition, Crocker’s attorney told LaMendola that Morris was
waiting for a call from a lawyer. This information was true, but was apparently
misinterpreted by LaMendola. Morris had not retained counsel to defend him
against Crocker’s suit, he had simply called his ex-wife’s lawyer to find out if
Crocker’s allegations against him could lead to a prison term. This was the call
from a lawyer that Morris was waiting for before the deposition.
5
National Union also presented the following alternative summary judgment
arguments: (1) National Union was prejudiced as a matter of law by Morris’s
breach of the policy’s cooperation clause, namely by Morris’s failure to tender
his defense to National Union and by his failure to defend himself against
Crocker’s claims; and (2) National Union is not bound by the default judgment
against Morris because Crocker’s default judgment was not the result of an actual
trial or a genuine contest of the issues as required by the policy. However, if
National Union’s position on the questions certified does not prevail, then these
alternative arguments based on the policy conditions also cannot prevail. See
Gulf Insurance Company v. Parker Products, Inc., 498 S.W.2d 676, 679 (Tex. 1973)
(“The insurance company may ordinarily insist upon compliance with this condition
for its own protection, but it may not do so after it is given the opportunity
to defend the suit . . . and refuses to . . . on the erroneous ground that it has
no responsibility under the policy.”). To the extent that National Union
contends that the state court judgment that Crocker take nothing from Emeritus
estops Crocker from recovery against Morris, or National Union as his insurer,
that argument was not properly raised below and amounts to an impermissible
collateral attack on Crocker’s state court judgment against Morris.
6
" immediately record the specifics of the claim and the
date you received it;
" send us copies of all demands, suit papers or other
legal documents you receive, as soon as possible.”
Crocker argued that National Union was not prejudiced by
Morris’s failure to forward the suit papers because National Union
was aware of the lawsuit against both its named insured, Emeritus,
and its additional insured, Morris, and National Union was on
notice that Morris had been served. Thus, according to Crocker,
because National Union breached its duty to defend Morris as a
matter of law, it is liable to Crocker for the full amount of the
default judgment. The district court agreed with Crocker, finding
first that National Union failed to meet its burden under Texas law
to show prejudice in order to assert a policy defense and therefore
it had a duty to defend Morris, and also that National Union
breached this duty by failing to notify Morris that it would defend
the claims against him. The district court granted Crocker’s
motion for summary judgment and awarded Crocker $1,000,000.
National Union appeals.
III. LEGAL ISSUES
A. Weaver v. Hartford Accident & Indemnity Company
In 1978, the Supreme Court of Texas considered a case
involving an additional insured that was apparently ignorant of the
policy and did not excuse the additional insured’s failure to
comply with the policy’s notice of suit provision. See Weaver v.
7
Hartford Acc. & Indem. Co., 570 S.W.2d 367 (Tex. 1978). Weaver was
injured in an accident in September 1969 with Busch while Busch was
driving a truck owned by his employer, J.C. Thomas Enterprises
(Thomas). Id. at 368. In March 1971, Weaver served Busch with
process in a suit seeking damages of $11,800; Busch did not file an
answer. In September 1971, Weaver amended his suit, increasing the
damages sought to $201,800, adding Thomas as a defendant, and
alleging that Busch was acting within the course and scope of his
employment at the time of the accident. Although Thomas was served
with the amended petition, Busch was not. Weaver subsequently non-
suited Thomas, obtained a default judgment against Busch for
$114,433.96, and sued Hartford — Thomas’s liability insurer —
alleging that Hartford was liable for the default judgment because
Busch was an additional insured under the Hartford policy.
Answering a special issue, the jury decided that Busch was an
“insured” under the Hartford policy, and the court rendered
judgment for Weaver for $100,000, which was Hartford’s policy
limit. Hartford appealed and the court of civil appeals reversed
and rendered a take-nothing judgment. Id. The Supreme Court of
Texas affirmed the court of civil appeals after noting that Busch
failed to forward the suit papers and “because of Busch’s statement
. . . that he was not operating the vehicle with the permission of
Thomas Enterprises, Hartford had no reason to believe that Busch
expected Hartford to defend him.” Id. at 369. The court stated
8
that the most “basic purpose” of the requirement that the insured
forward suit papers to the insurer “is to advise the insurer that
an insured has been served with process and that the insurer is
expected to timely file an answer.” Id. (emphasis added). In
affirming the judgment for Hartford, the court concluded:
“Under the facts of this case, Hartford would have been
gratuitously subjecting itself to liability if it had
entered an appearance for Busch, who had failed to comply
with the policy conditions, who had stated he was not a
permissive user, and who had never been served with
process, in a suit which sought damages in excess of the
policy limits. Therefore, we hold that Hartford had no
duty to voluntarily undertake a defense for Busch.” Id.
at 370.
Although the majority opinion in Weaver does not explicitly address
the additional insured’s ignorance of his rights and duties under
the Hartford policy, both dissenting opinions do. “[T]here [was]
no showing that [Busch] had ever seen [the insurance policy], or
was advised that he should do anything [to comply with it].” Id.
(Greenhill, C.J., dissenting). Chief Justice Greenhill’s dissent
was based largely on his observation that “[t]he omnibus insured is
really a stranger to the actual provisions of the written insurance
policy.” Id. Justice McGee’s dissent included the same concern:
“[T]here is nothing in the record . . . that would have led Busch
to believe that there was a possibility of him being covered under
the policy.” Id. at 373 (McGee, J., dissenting). The issue of
whether the insurer had a duty to inform the ignorant additional
insured was apparently argued in Weaver:
9
“At oral argument, Hartford took the stance that it was
under no duty to inform Busch that he might be covered by
the policy, although Hartford was apparently aware that
Busch possessed a somewhat minimal education and might
not have comprehended the extent of the coverage of an
insurance agreement between his employer and the
insurer.” Id. (McGee, J., dissenting).
The Weaver majority did not directly address the dissenters’
concerns regarding Busch’s apparent ignorance of the policy
combined with Hartford’s knowledge of the suit, nor did the
majority explicitly address the issue of whether Hartford was under
a duty to inform Busch that he might be covered by the policy.
Nonetheless, Weaver implicitly holds that such ignorance on the
part of the additional insured does not excuse failure to comply
with the policy’s provision requiring notice of service of citation
and also that an insurer has no duty to cure such ignorance, even
when the insurer “has prompt and actual knowledge of the accident,
notice of the accident from the named insured, and has the suit
papers in hand giving the names of all the defendants, well in
advance of trial.” Id. at 370 (Greenhill, C.J., dissenting).
Justice McGee also disagreed with the Weaver majority’s
conclusion that the basic purpose of the notice provision is “to
advise the insurer that an insured has been served with process and
that the insurer is expected to timely file an answer.” Id. at 372
(McGee, J., dissenting). Instead, Justice McGee would have held
that “the main purpose of the [notice] provision . . . is to enable
the insurer to control the litigation and interpose a defense
10
against any claims on the merits of the case,” and that this
purpose was satisfied in Weaver when the named insured forwarded
the suit papers to Hartford. Id. This particular objection,
however, unlike the ignorance-of-the-policy objection, was met
directly by the Weaver majority:
“Different purposes are served by the requirement that
the insured immediately forward to the insurer ‘every
demand, notice, summons or other process received by him
or his representative.’ It is undoubtedly true, as some
cases hold, that one purpose of the provision is to
enable the insurer to control the litigation and
interpose a defense. . . . However, a more basic purpose
is to advise the insurer that an insured has been served
with process and that the insurer is expected to timely
file an answer.” Id. at 369 (citations omitted)
(emphasis added).
Emphasizing this “more basic purpose” of the notice provision, the
Weaver majority focused on the fact that Hartford had no reason to
think it was expected to defend Busch.6
6
On this basis, Weaver (id. at 369) specifically distinguished the holding
in Employers Casualty Co. v. Glens Falls Ins. Co., 484 S.W.2d 570, 575 (Tex.
1972), that a prompt notice of accident policy provision was satisfied in respect
to an additional insured by the named insured having given timely notice of the
accident.
This “basic purpose” distinction between notice of accident and notice of
suit or service of citation provisions may likewise distinguish opinions such as
Allstate v. Darter, 361 S.W.2d 524 at 255 (Tex. Civ. App.–Fort Worth 1962, no
writ), and Central Surety & Insurance Corporation v. Anderson, 446 S.W.2d 897 at
901 (Tex. Civ. App.–Fort Worth 1969, no writ), in each of which the court of
appeals, in sustaining fact findings that an additional insured who was unaware
of the coverage complied with the policy provision requiring giving notice of the
accident to the insurer as soon as practicable, quoted with approval from
Appleman, Insurance Law and Practice, Vol. 8, at p. 54, § 4738, “[a]n additional
insured could not be expected nor required to give notice before he knew of the
existence of the policy or of the fact that he was covered thereby” and at p. 87,
§ 4745, “An insured’s lack of knowledge of the existence of insurance excused a
delay in giving notice, as a matter of law, where he was not guilty of a lack of
due diligence. And an additional insured was under no duty to give notice until
he had knowledge that he was covered by the policy.” Darter (at 256) and
Anderson (at 901) likewise cite with approval this court’s Texas law decision in
National Surety Corp. v. Wells, 287 F.2d 102, 107-08 (5th Cir. 1961), where
11
If we applied the implicit holding of Weaver to the facts in
this case, then Morris’s ignorance of his rights and obligations
under the policy would be no excuse for his failure to comply with
the notice provisions, National Union would have had no duty to
inform Morris of his rights and obligations as an additional
insured, and National Union’s actual and timely notice of the
accident and the suit would not have satisfied the purposes of the
notice provision because National Union did not know it was
expected to defend Morris.7 However, changes in Texas insurance
essentially identical language from Appleman is cited in sustaining a fact
finding that an additional minor insured, ignorant of coverage, complied with the
policy’s notice of accident provision.
We observe that the current version of Appleman, in Chapter 138, “Duty to
Cooperate,” also provides a relevant perspective:
“An insurer has the duty to exercise reasonable diligence to secure
the assistance of its insured, including a request for assistance
and reasonable efforts in attempting to locate him or her; when the
insured is an additional insured and not a named insured, the
insurer must show that the additional insured knew of the insurance
coverage or that some reasonable effort was made to apprise him or
her of the existence of the policy and its conditions.” Robert C.
Clifford, Appleman on Insurance Law & Practice (2nd Ed.), § 138.9.
In Dairyland County Mutual Ins. Co. v. Roman, 498 S.W.2d 154 (Tex. 1973),
the court addressed whether the named insured’s minority excused him from
compliance with the policy’s requirement that notice of accident be promptly
given, and stated: “We hold that a minor insured is not necessarily excused from
complying with the notice condition . . . The age, experience, capacity and
knowledge of the insured are simply circumstances to be considered in determining
whether the required notice was given as soon as practicable. See . . . Central
Sur. & Ins. Corp. v. Anderson, Tex. Civ. App., 446 S.W.2d 897 (no writ).” Roman
at 158.
7
Weaver, id. at 369, also cites Lummus v. Western Fire Ins. Co., 443 S.W.2d
767 (Tex. Civ. App.–El Paso, 1969, no writ), which Justice McGee’s dissent,
though disagreeing with, regarded as “[a]pparently . . . the only prior Texas
appellate court decision on point” and as one in which the “relevant facts are
very similar to those in” Weaver. Id. at 372 (McGee, J., dissenting). In Lummus
the named insured, an automobile dealership, and the driver of one of its cars,
a dealership customer allowed to try out the car who was allegedly an additional
insured under the dealership’s policy, were sued following a collision with a car
12
law since the Weaver opinion lead us to question whether Weaver
controls.
B. The Prejudice Requirement
The principal change in Texas insurance law that may call
into question the applicability of Weaver to the facts of this case
is the requirement, mandated in 1973 by the State Board of
Insurance, that an insurer be prejudiced by an insured’s failure to
provide notice before the insurer can avoid liability due to such
failure.8 This prejudice requirement was implemented by the Board
mandating the following endorsement for all general liability
policies:
“As respects bodily injury liability coverage and
property damage liability coverage, unless the company is
prejudiced by the insured’s failure to comply with the
requirement, any provision of this policy requiring the
insured to give notice of action, occurrence or loss, or
driven by the plaintiff. Notice of the accident and of the suit were given by
the dealership but not by the driver, the dealer’s insurer successfully defended
the suit for the dealer but did not defend for the driver, against whom a default
judgment was taken. The Court of Civil Appeals affirmed a judgment for the
insurance company on the basis that even if no notice of accident were required
beyond that given by the named insured and even if the driver were an additional
insured, “he never sent any suit papers or citation to the insurance company, nor
did he ask them to defend him. Therefore, no action could lie against the
company as this, too, was a condition precedent which was not carried out.” Id.
at 771.
8
The State Board of Insurance, by mandating this endorsement, was
apparently responding to Member’s Mutual Insurance Company v. Cutaia, 476 S.W.2d
278 (Tex. 1972), in which the Supreme Court of Texas held that it was “better
policy for the contracts of insurance to be changed by the . . . State Board of
Insurance, or by the Legislature, rather than for this Court to insert a
provision that violations of conditions precedent will be excused if no harm
results from their violation.” Id. at 281. The Weaver majority relied on Cutaia
without discussion of the response to Cutaia by the State Board of Insurance.
There was no requirement for Weaver to mention the Board’s action, however,
because the policy and the events in Weaver pre-dated the 1973 mandatory
endorsement.
13
requiring the insured to forward demands, notices,
summons or other legal process, shall not bar liability
under this policy.” State Bd. of Ins., Revision of Texas
Standard Provision For General Liability Policies —
Amendatory Endorsement — Notice, Order No. 23080 (March
13, 1973) quoted in Chiles v. Chubb Lloyds Ins. Co., 858
S.W.2d 633, 635 (Tex. App.—Houston [1st Dist.] 1993 writ
denied).
C. Subsequent Supreme Court of Texas cases discussing prejudice
or Weaver
In Liberty Mutual Insurance Company v. Cruz, 883 S.W.2d 164
(Tex. 1993) (per curiam), the insurer became aware through a
newspaper article that its named insured had been involved in an
accident. The insurer did not, however, receive notice of the
resulting lawsuit against its insured until forty-one days after
entry of an adverse default judgment. Id. at 165. The court
observed that “[a]lthough notice, the condition precedent to the
policy, was not given according to the policy, [the insurer] does
not escape liability, unless it was ‘prejudiced’ because of the
lack of notice.” Id. It went on to hold that the insurer had been
prejudiced as a matter of law: “[A]n insurer that is not notified
of suit against its insured until a default judgment has become
final, absent actual knowledge of the suit, is prejudiced as a
matter of law.” Id. at 166 (emphasis added). Apparently, the
finding of prejudice as a matter of law was based on the insurer’s
inability to prevent the default judgment due to the lack of
notice. See id. (“Had [the insurer] known of the suit, it might
have chosen to answer for [the insured] and litigate the merits of
14
the underlying suit.”). In Cruz, the court did not discuss the
purpose of the notice provision as it had in Weaver, nor did it
cite Weaver.
In Hernandez v. Gulf Group Lloyds, the court again addressed
the issue of prejudice. 875 S.W.2d 691 (Tex. 1994). In Hernandez,
however, the court was dealing with the insured’s failure to comply
with the consent-to-settle exclusionary provision. Although the
Board of Insurance’s mandatory endorsement did not by its terms
apply to the consent-to-settle provision and the policy in question
did not otherwise contain a prejudice requirement, the court held
that the consent-to-settle exclusion is unenforceable unless the
insurer was prejudiced by the settlement made without its consent.
Id. at 692–93. The court held that the stipulated facts in
Hernandez established, as a matter of law, that the insurer had not
been prejudiced by the unconsented settlement. The Hernandez court
described the prejudice faced by the insurer in the Cruz case
decided a few months before Hernandez: “The insured’s failure to
comply with the notice provision prejudiced the insurer by denying
its opportunity to answer for the insured and litigate the merits
of the suit or to appeal any adverse judgment.” Hernandez, 875
S.W.2d at 693 n.3.
One year later, in Harwell v State Farm Mutual Automobile
Insurance Company, 896 S.W.2d 170 (Tex. 1995), the court again, as
it had in Cruz, addressed the prejudice resulting from a failure to
15
comply with the notice of suit provisions of a policy. The case
involved a two car collision in which one of the drivers (Hubbard)
died and the other (Leatherman) was seriously injured. Hubbard had
been an additional insured under her mother’s automobile liability
insurance policy issued by State Farm Mutual Automobile Insurance
Company (State Farm). Almost two years after the accident,
Leatherman sued Hubbard’s estate. On the same day, Leatherman’s
attorney, Groce, filed an application with the probate court
seeking the appointment of Groce’s legal secretary, Harwell, as
administrator of Hubbard’s estate. After Harwell was appointed
temporary administrator of Hubbard’s estate, Leatherman served
Harwell with citation in the lawsuit. Harwell, however, at the
time of service, had not yet qualified as administrator. Groce
informed State Farm of the suit against Hubbard’s estate by a
letter with, inter alia, a copy of the petition enclosed, and
advised State Farm to answer the suit to prevent a default
judgment. Groce later called State Farm’s attorney, Anderson, to
tell him that Leatherman would amend the petition when Harwell
became the estate’s permanent administrator and re-serve Harwell.
After Harwell qualified as administrator of Hubbard’s estate,
Leatherman filed his first amended petition. Harwell waived
service and filed a general denial, but she never forwarded any
papers pertaining to the Leatherman suit against Hubbard’s estate
to State Farm. When the case went to trial, Harwell appeared pro
16
se and offered no defense. Judgment was rendered against Hubbard’s
estate. However, Groce waited to notify State Farm, and it did not
otherwise become aware, of the judgment, until after the time to
appeal or file a motion for a new trial had expired. State Farm
then sued Harwell and Leatherman seeking a declaratory judgment
that it was not liable for the judgment against Hubbard’s estate.
In the unanimous Harwell opinion, the court reiterated its
Weaver observation that “[o]ne of the purposes of a notice of suit
provision in an insurance policy is to notify the insurer that the
insured has been served with process and that the insurer is
expected to defend the suit.” Id. at 173 (citing Weaver, 570
S.W.2d at 369). Although State Farm’s agent had notice from Groce
of Leatherman’s claim against the estate, the court observed that
notice of a claim is not notice of a suit. Id. at 174 (citing
Cruz, 883 S.W.2d at 165 n.2). In addition, the court stated that
State Farm’s notice of Leatherman’s intent to serve Harwell when
she qualified as administrator was not the same as actual knowledge
of service of process: “[I]t was Harwell’s duty to notify State
Farm of the suit against its insured when she received service of
process; it was not State Farm’s duty to determine when or if
Harwell was served.” Id. at 174. The court stated, “Until State
Farm received notice of the suit, it had no duty to undertake
17
Hubbard’s defense.” Id.9 The court further observed that “State
Farm would have gratuitously subjected itself to liability if it
appeared on the insured’s behalf before it received notice that
Harwell was joined in the lawsuit and properly served, or that she
had accepted service and appeared in the suit.” Id. (citing
Weaver, 570 S.W.2d at 370).
The court then stated, “The insured’s failure to notify the
insurer of a suit against her does not relieve the insurer from
liability for the underlying judgment unless the lack of notice
prejudices the insurer.” Id. (citing Cruz, 883 S.W.2d at 165).
The court found that Harwell’s failure to notify State Farm of the
suit prevented State Farm from undertaking a defense and minimizing
its insured’s liability, and it “prejudice[d] the insurer as a
matter of law.” Id. The court also observed in a footnote,
however, that “this is not a case in which the insurer received
actual knowledge of a suit against the insured from a third party,”
id. at 174 n.3 (emphasis in original), arguably implying that the
insurer’s actual knowledge of the served suit might result in a
different outcome.
9
This court has on several occasions stated generally, albeit in contexts
not similar to the present, that “under Texas law, ‘the duty to defend does not
arise until a petition alleging a potentially covered claim is tendered to the
insurer.’” Royal Ins. Co. v. Hartford Underwriters Ins. Co., 391 F.3d 639, 644
(5th Cir. 2004) (quoting LaFarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389,
400 (5th Cir. 1995)). See also Travelers Indem. Co. v. Citgo Petroleum Corp.,
166 F.3d 761, 768 (5th Cir. 1999) (“[a]n insurer’s duty to defend an insured is
only triggered by the actual service of process upon its insured and its relay
to the insurer”).
18
D. Knowledge of the suit by the insurer
Texas courts of appeals have reached different conclusions
when dealing with cases in which the named insured failed to comply
with the policy’s notice-of-suit provision but the insurer
nonetheless had actual knowledge of the suit. In Allstate
Insurance Company v. Pare, the evidence showed that the named
insured notified the insurer of the accident and that the insurer
had been sent a copy of the pleadings by the plaintiff’s attorney,
not by the insured. 688 S.W.2d 680, 682 (Tex. App.—Beaumont 1985,
writ ref’d n.r.e.). The evidence in Pare showed that, even though
the insurer had actual knowledge of the suit, it “let the matter go
to default.” Id. at 684. The court held this evidence was
sufficient to support the jury’s findings that the named insured’s
failure to give notice of the lawsuit to the insurer did not
prejudice the insurer. Id. at 682. In Member’s Insurance Company
v. Branscum, on the other hand, a different court of appeals held
that the insurer was prejudiced as a matter of law where the named
insured failed to comply with the policy’s notice-of-suit
provisions and suffered a default judgment, even though the
plaintiff’s attorney told the insurer’s adjuster that the lawsuit
had been filed. 803 S.W.2d 462 (Tex. App.—Dallas 1991, no writ).
Based on this holding, the court reversed the trial court’s
judgment for the insured and rendered judgment for the insurer.
The court distinguished Pare by noting that there were more
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communications between the plaintiff’s attorney and the insurer in
Pare, and that the plaintiff’s attorney in Pare sent a copy of the
petition to the insurer. Id. at 466. The court also emphasized
that no duty was created when the plaintiff’s attorney informed the
insurer that suit had been filed, noting instead,
“It is the service of citation upon the insured which
imposes on the insured the duty to answer to prevent a
default judgment. No duty is imposed on an insurer until
its insured is served and sends the suit papers to the
insurer. This action by the insured triggers the
insurer’s obligation to tender a defense and answer the
suit.” Id. at 466–67.
More recently, in Ohio Casualty Group v. Risinger, the named
insured never forwarded the suit papers to the insurer but the
evidence showed that the insurer “had actual knowledge of the
filing of the lawsuit against its insured because [the plaintiff]
sent it a complimentary copy of the petition.” 960 S.W.2d 708, 712
(Tex. App.— Tyler 1997, writ denied). The court relied on Pare
and Cruz to support its statement that proof of the insurer’s
actual knowledge of suit “would show that the insurer was not
prejudiced by its insured’s failure [to comply with the policy’s
notice-of-suit condition precedent].” Id. at 711. It also noted
that such proof would defeat the insurer’s “affirmative defense of
non-liability under the policy.” Id. Although this Risinger
language suggests that the insurer’s actual knowledge means that it
is not prejudiced as a matter of law, the Risinger court actually
only concluded that the evidence was sufficient to affirm the trial
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court’s fact finding of no prejudice and consequent judgment
against the insurer.
In Struna v. Concord Insurance Services, Inc., the insurer was
granted summary judgment on the argument that it was prejudiced as
a matter of law by its named insured’s failure to provide notice of
the suit and subsequent default judgment. 11 S.W.3d 355, 357 (Tex.
App.—Houston [1st Dist.] 2000, no pet.). The court of appeals
reversed and remanded for a factual determination of whether the
insurer had been prejudiced because the insurer’s evidence did not
establish prejudice as a matter of law. Id. at 360. Specifically,
there was “uncontroverted evidence of their actual notice.” Id.
As seen by its remand, the Struna court did not treat the insurer’s
actual notice as sufficient, as a matter of law, to defeat the
insurer’s claim of prejudice.10
Although the insurers in both Risinger and Struna had actual
knowledge of the suit, the opinions do not address whether the
insurer “had no reason to believe that [the insured] expected [the
insurer] to defend him.” Weaver at 369. By rejecting the
insurers’ argument for prejudice as a matter of law without
addressing that matter, the Risinger and Struna courts derogated
the second prong of the notice of suit (and service) requirement’s
10
It is unclear whether Struna involved a policy provision concerning
notice of suit or service of citation as opposed to merely notice of accident and
cooperation. See id. at 369 (quoting policy provision requiring prompt notice
of “the accident” and “cooperation . . . in the investigation, settlement or
defense of any claim or suit”).
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“basic purpose” — identified in Weaver and repeated in Harwell — to
notify the insurer that it is expected to defend the suit. On the
other hand, the insureds in Risinger and Struna were the named
insureds, while the insured in Weaver was an additional insured —
perhaps an insurer can safely assume his named insured would expect
to be defended whereas such an assumption may be inappropriate with
an additional insured as to whom the insurer normally has no direct
contractual (or other) relationship.
E. The special case of the ignorant additional insured11
The post-Weaver cases discussed above primarily dealt with the
failure of a named insured to comply with the policy’s notice
provisions; in contrast, Aetna Casualty & Surety Company v. Martin,
689 S.W.2d 263 (Tex. App.—Houston [1st Dist.] 1985, writ ref’d
n.r.e.), dealt with an additional insured. In Martin’s underlying
suit, the additional insured, Martin, was a co-defendant with the
named insured, Myers-Carter, but provided its own defense because
it was unaware that a defense was available from the insurer,
Aetna. Aetna was aware that Martin was a co-defendant and that
Martin was a customer of Myers-Carter and, therefore, that Martin
was entitled to a defense under the policy. Nonetheless, Aetna did
not disclose this entitlement to Martin. Id. at 266. After Martin
11
Of course, not all additional insureds are ignorant of their coverage
under the named insured’s policy. Some may be sophisticated parties that might
be charged with knowledge that they are (or are likely) additional insureds. We
deal here with the additional insured that does not know of coverage and is not
shown to be so situated as to be presumed to know.
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learned of the coverage, it demanded reimbursement of its legal
expenses from Aetna, which denied the claim because Martin “did not
timely request coverage and voluntarily incurred its legal
expense.” Id. Martin then sued Aetna, alleging breach of
contract, violation of the Texas Deceptive Trade Practices Act
(DTPA), violation of art. 21.21 of the Texas Insurance Code, and
fraudulent misrepresentation. Id. Martin prevailed on its DTPA
claim after the jury found that Aetna’s failure “to disclose
[coverage] was a ‘false, misleading, or deceptive act or practice’
. . . and that such failure to disclose was a producing cause of
financial loss to Martin.” Id. at 269. The court of appeals
affirmed the DTPA recovery. Martin lost on its breach of contract
claim, however, because the jury found that “Martin or its
attorneys failed to exercise reasonable diligence in determining
whether Martin was covered by a policy of insurance issued by
Aetna.” Id. at 270–71. The court of appeals also affirmed this
portion of the judgment, noting that the “finding of lack of due
diligence on Martin’s part, coupled with Martin’s failure to comply
with the policy’s notice provision, relieved Aetna from liability
for breach of contract under the policy.” Id.
F. Summary
With the requirement for an insurer to show prejudice to avoid
liability in certain cases, the landscape of insurance law in Texas
has in some respects changed since the Texas Supreme Court’s
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opinion in Weaver. Just how it has changed as applied to the
present context is the question faced in this case. Does an
insurer have any right or duty to defend a covered suit against an
additional insured with whom it has no direct relationship and who,
knowing of the suit, has not expressly or impliedly requested a
defense? If the insurer knows of the covered suit, what duty, if
any, does it have to notify a sued additional insured (who does not
know of the coverage) of the applicable coverage. What duty, if
any, does a sued additional insured have in such a situation.
As to none of these related questions of law does there appear
to be any controlling Texas Supreme Court precedent.
IV. QUESTIONS CERTIFIED
We accordingly hereby certify the following three
determinative questions of law to the Supreme Court of Texas:
1. Where an additional insured does not and cannot be
presumed to know of coverage under an insurer’s liability policy,
does an insurer that has knowledge that a suit implicating policy
coverage has been filed against its additional insured have a duty
to inform the additional insured of the available coverage?
2. If the above question is answered in the affirmative, what
is the extent or proper measure of the insurer’s duty to inform the
additional insured, and what is the extent or measure of any duty
on the part of the additional insured to cooperate with the insurer
up to the point he is informed of the policy provisions?
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3. Does proof that an insurer’s actual knowledge of service
of process in a suit against its additional insured, when such
knowledge is obtained in sufficient time to provide a defense for
the insured, establish as a matter of law the absence of prejudice
to the insurer from the additional insured’s failure to comply with
the notice-of-suit provisions of the policy?
We disclaim any intention or desire that the Supreme Court of
Texas confine its reply to the precise form or scope of the
questions certified.
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