Coastal Refining & Marketing, Inc., Coastal Offshore Insurance Limited, and Lexington Insurance Company v. United States Fidelity and Guaranty Company ( 2006 )

Reversed and Remanded and Opinion filed May 30, 2006

Reversed and Remanded and Opinion filed May 30, 2006.

In The

Fourteenth Court of Appeals

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NO. 14-04-00651-CV

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COASTAL REFINING & MARKETING, INC.,

COASTAL OFFSHORE INSURANCE LIMITED, AND

LEXINGTON INSURANCE COMPANY, Appellants

V.

UNITED STATES FIDELITY AND GUARANTY COMPANY, Appellees

On Appeal from the 129th District Court

Harris County, Texas

Trial Court Cause No. 00-43872

O P I N I O N

In this insurance coverage dispute, the insurer argued it had no duty to reimburse its insured and two other carriers for the costs of settling a personal injury suit and moved for traditional summary judgment on the grounds that the insured (a) did not notify the insurer of the suit until less than a month before trial, (b) settled the suit without the insurer=s consent, and (c) allegedly failed to cooperate with the insurer.  Because the insurer produced no evidence that the actions of its insured or the settling carriers caused prejudice to the insurer, and no evidence that the insured failed to cooperate, we reverse the trial court=s grant of summary judgment and remand this case for further proceedings consistent with this opinion.

I. Factual and Procedural Background

Weaver Industrial Service, Inc. (AWeaver@) entered into a AService Contract@ with Coastal Refining & Marketing, Inc. (ACoastal@).  The Service Contract required Weaver to supply labor, supervision, and equipment for maintenance and repairs to Coastal=s refinery equipment and property.  The Service Contract also required Weaver to designate Coastal as an additional insured on insurance policies providing coverage for all claims, demands, and causes of action arising out of Weaver=s work.  The policies were required to be primary to all other valid insurance available to Coastal.

Weaver added Coastal to its United States Fidelity and Guaranty Company (AUSF&G@) commercial general liability and umbrella policies. The policies were occurrence-based, as opposed to Aclaims made@ policies, and provided coverage for property damage and bodily injuries.  On May 13, 1999, Weaver=s employee, Rolando Lopez, was one of several people injured in an explosion at Coastal.  Lopez and his common law wife sued Coastal and its parent company, Coastal Corporation, for negligence and gross negligence in Nueces County, Texas (the ALopez suit@).

Without notifying USF&G of the suit, Coastal retained the firm of Barger, Hermansen, McKibben & Villareal, L.L.P.^[1] as defense counsel.  On May 13, 2000, the Lopez suit failed to settle at a court-ordered mediation during which the plaintiffs demanded $19 million. After the mediation, Coastal tendered its $500,000.00 self-insured retention, $500,000.00 from a fronting policy, and $1 million from Coastal Offshore Insurance Limited (ACOIL@), Coastal=s captive insurance company, to its excess insurer, Lexington Insurance Company (ALexington@).  Lexington assumed the defense of the case through the same counsel, and settlement negotiations continued. 

On or about June 15, 2000, Coastal=s defense attorneys contacted Weaver and Whitney Vaky Insurance Agency, the agent and producer of the USF&G policies at issue, and made a Ademand for insurance coverage@ as an additional insured under the USF&G general liability and umbrella policies.  The demand letter included a copy of the latest petition in the Lopez suit, the Service Contract between Weaver and Coastal, and the certificate of liability insurance showing Coastal as an additional insured on the USF&G policies. The letter stated that a mediation was scheduled for June 17, 2000, and requested Athe presence of the appropriate representatives at the mediation.@  The notice to Weaver appears to have been made in accordance with a provision in the Service Contract that required all notices concerning liability or indemnity to be sent to Weaver at a specified fax number.  The record does not show the date Weaver received the notice; however, the parties agree that the notice was forwarded to USF&G by June 19 or 20, 2000.^[2]

USF&G did not respond to the letter until five days after the referenced mediation had taken place and at least three days after receiving the demand. On June 23, 2000, USF&G senior claim specialist Mitchell Harless telephoned Coastal=s attorneys and learned that the Lopez plaintiffs= final demand at the second mediation was $8.5 million, and that Lexington had offered $6 million.  USF&G also learned that trial was set for July 10, 2000, and that settlement negotiations were continuing.  In a letter to Coastal=s attorneys on June 23, 2000, Harless reserved USF&G=s right to disclaim coverage due to late notice, and to contest Coastal=s status as an additional insured on the basis that Lopez=s injuries did not arise out of Weaver=s work for Coastal.  USF&G also requested Acopies of all reports generated by persons who have investigated this accident . . . [and] reports and information concerning the injury and damages sustained by Mr. Lopez.@

On June 29, 2000, USF&G informed Coastal=s defense attorneys that USF&G Ahad insufficient information about liability or damages to respond to the June 15 demand letter,@ and arranged to visit the offices of Coastal=s attorneys on July 5, 2000 to review the litigation files in the Lopez suit.  USF&G was aware that settlement negotiations were continuing at that time.

Using funds supplied by Coastal, COIL, and Lexington, Coastal=s defense attorneys settled the Lopez suit for $7 million on June 30, 2000. USF&G subsequently filed suit against Coastal, seeking a declaration that USF&G had no duty to indemnify Coastal for the settlement funds.  COIL and Lexington intervened in the suit.

USF&G moved for traditional summary judgment on the grounds that Coastal breached explicit policy conditions by (a) failing to give USF&G notice of the Lopez suit for over a year after it was filed, (b) settling the suit without USF&G=s knowledge or consent, and (c) breaching its duty to cooperate with USF&G.  The court granted USF&G=s summary  judgment motion without stating the grounds for its decision, and Coastal, Lexington, and COIL appeal.

II. Issues Presented

The sole issue presented for our review is whether the trial court erred in granting USF&G=s motion for summary judgment.  Appellants Coastal, COIL, and Lexington argue the motion was improperly granted because USF&G failed to meet its evidentiary burden to establish it was prejudiced by the late notice or settlement of the Lopez suit, or by Coastal=s alleged failure to cooperate.  Appellants additionally argue that any breach of the policy=s cooperation, prompt notice of suit, or voluntary payment clauses is immaterial, and does not discharge USF&G=s duty to indemnify Coastal and the settling carriers for the costs of settlement.

III.  Standard of Review

We examine the summary judgment evidence applying familiar standards of review.  Dolcefino v. Randolph, 19 S.W.3d 906, 916 (Tex. App.CHouston [14th Dist.] 2000, pet. denied).  A summary judgment movant must establish its right to summary judgment by conclusively proving all elements of the movant=s claim or defense as a matter of law.  See Tex. R. Civ. P. 166a(c); Havlen v. McDougall, 22 S.W.3d 343, 345 (Tex. 2000).  When reviewing a summary judgment, we take as true all evidence favorable to the nonmovant, and we indulge every reasonable inference and resolve any doubts in the nonmovant=s favor. Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150, 157 (Tex. 2004).  Under Texas Rule of Civil Procedure 166a(c), a  party moving for summary judgment bears the burden to show that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law.  Id. We will affirm the summary judgment if any of the theories presented to the trial court are meritorious.  Id.

IV. Analysis

A.      Late Notice

Coastal admits it failed to provide USF&G prompt notice of suit as required by the policy, but contends that summary judgment cannot be affirmed on this basis because USF&G produced no evidence it was prejudiced by the late notice. USF&G responds that the policy=s notice provision is a condition precedent to coverage, and therefore Coastal was required to comply in order to invoke coverage. USF&G argues that because Coastal failed to provide prompt notice of the Lopez suit, the suit is not covered under the policy, regardless of whether the lack of notice caused prejudice. In the alternative, USF&G argues that the delay in notice prejudiced USF&G as a matter of law.

The provision at issue states:

With regard to Bodily Injury and Property Damage Liability, unless we are prejudiced by the insured=s or your failure to comply with the requirement, any provision of this Coverage part requiring you or any insured to give notice of Aoccurrence,@ claim or Asuit,@ or forward demands, notices, summonses or legal papers in connection with a claim or Asuit@ will not bar coverage under this Coverage Part.

(emphasis added). Under the express terms of the policy, Coastal=s violation of the notice requirement does not void coverage absent prejudice to USF&G.

Whether an insurer is prejudiced by lack of notice is generally a question of fact. Struna v. Concord Ins. Services, Inc., 11 S.W.3d 355, 359B60 (Tex. App.CHouston [1st Dist.] 2000, no pet.).  USF&G presented no evidence of prejudice, instead arguing that Coastal=s late notice prejudiced USF&G as a matter of law. USF&G analogizes its position to that of an insurer whose insured has allowed a default judgment to be entered against it before informing the insurer of the suit.  According to USF&G, it has sustained similar prejudice because it lost anticipated contractual benefits such as the rights to investigate and defend the suit, participate in negotiations, and control settlement.  We disagree.

The abstract loss of the rights to investigate, defend, participate in negotiations, and control settlement are not sufficient to show prejudice. Otherwise, delaying notice to the primary insurer until after settlement would always result in forfeiture of coverage, because the settlement would necessarily foreclose the insurer=s participation.  Such a result is not consistent with our case law.  Texas law does not presume prejudice merely from settlement without the insurer=s consent.  Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 192 (Tex. App.CHouston [14th Dist.] 2003, pet. denied). Moreover, unlike an insured who has permitted a default judgment against it, Coastal did not cause USF&G to lose these contractual rights.^[3]  USF&G was not barred from investigating the case, although it chose to investigate at a pace that lagged behind the settlement negotiations.  As Harless indicated in his deposition, USF&G did not attempt to complete its investigations before trial or settlement, choosing instead to rely on the present declaratory judgment action to resolve the coverage issues:

Counsel:      After you were told after the mediation that negotiations were continuing, did you have a heightened sense of urgency to resolve the coverage issue?

Harless:       I mean, not really.  It justCas a practical matter, it just, to me, wasn=t resolvable.

Counsel:      Why do you sayC

Harless:       In that short amount of time.

Counsel:      Why do you say it was not resolvable?

Harless:       Well, because ultimately, I believe, you knowCultimately, coverage would need to be decided by filing a declaratory judgment.

Notably, Harless did schedule an appointment to review the litigation file of the attorneys retained by Lexington to represent Coastal, but scheduled this appointment for a date more than two weeks after receiving notice of the suit, and just five days before the trial setting:

Counsel:      Okay. Why did you wait to schedule a trip down to Corpus until July 5th?

Harless:       No particular reason.  I mean, that just seemed to be the date we agreed on.

Counsel:      That would have been five days before the scheduled trial?

Harless:       If you=re telling meCif you=re telling me that it=s five days, then that=s right.

Counsel:      Okay. Did you believe five days would have given you enough time to have made your investigation?

Harless:       I=m not sure.

Counsel:      Did [USF&G] have any limitation on your ability to travel from Houston to Corpus Christi?

Harless:       No.

Counsel:      Is there some reason that you didn=t call a lawyer down in Corpus Christi, someone from Bren & Bren or Royston & Rayzor to go over and look at the Barger firm file?

Harless:       No.

Counsel:      Did you have the ability to do that?

Harless:       Yes.

Harless attended the meeting scheduled for reviewing the litigation file, and USF&G has produced no summary judgment evidence that the evidence developed by Coastal=s defense attorneys was deficient, or that USF&G=s investigation was otherwise impaired. 

In sum, Coastal=s delay in notifying USF&G of the Lopez suit did not prevent USF&G from subsequently investigating the claims, defending the suit, or controlling settlement negotiations.  Importantly, when USF&G was notified of the suit, the defense and negotiations were ongoing, and under the terms of the policy, USF&G had the right to assume control of both.  There is simply no indication that USF&G chose to do so.

Therefore, we conclude the summary judgment cannot be sustained on the basis of late notice.

B.      Voluntary Payment

USF&G also argued in its summary judgment motion that Coastal=s failure to obtain USF&G=s consent before settlement rendered the settlement payments voluntary.  Coastal, COIL, and Lexington argue on appeal that USF&G=s summary judgment cannot be sustained on this basis because USF&G failed to show the settlement payments were voluntary and prejudicial. We agree.

The provision at issue states, ANo insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.@  Here, USF&G has not established that its insured voluntarily paid the settlement. AAn insurer who pays a third-party claim against its insured is not a volunteer if the payment is made in good faith and under a reasonable belief that the payment is necessary to its protection.@  Keck, Mahin & Cate v. Nat=l Union Fire Ins. Co. of Pittsburgh, PA, 20 S.W.3d 692, 702 (Tex. 2000).  An excess insurer=s payment to settle a suit against the insured is presumptively involuntary for subrogation purposes.  Id. (citing Argonaut Ins. Co. v. Allstate Ins. Co., 869 S.W.2d 537, 543 (Tex. App.CCorpus Christi 1993, writ denied)).  USF&G does not assert that COIL and Lexington funded the settlement without good faith and a reasonable belief that the payment was necessary for their own protection.

Even assuming arguendo that the settlement payments were voluntary, USF&G failed to show the settlement was prejudicial.  All parties acknowledge that Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 691 (Tex. 1994) requires an insurer to demonstrate that the insured prejudiced the insurer by settling an underlying liability claim without the insurer=s consent before coverage will be denied; however, USF&G argues that the holding and the reasoning of Hernandez are specific to uninsured/underinsured motorist (AUIM@) claims.  We disagree.

In Hernandez, the insured settled a case against an underinsured motorist without the consent of his UIM carrier.  The carrier argued the settlement voided coverage because the insured failed to obtain the carrier=s written consent as required by the policy.  See id. at  692, n.1. The Court held that only a material breach voids coverage, and a breach that is not prejudicial is not material. Id. at 693.  The Court therefore analyzed the materiality of the breach to determine if the breach deprived the insurer of an anticipated benefit from the insurance contract.  Within the context of an underinsured motorist claim, the insurer=s anticipated benefit from the insurance contract was Aa valuable subrogation right.@ Id. at 692.  Although the insured=s settlement extinguished the subrogation right, the Court concluded the breach was not prejudicialCand therefore, not materialCwhen the subrogation right had no value because the underinsured motorist was judgment-proof. 

Hernandez was expressly decided on the fundamental principle of contract law that a material breach by one contracting party excuses performance by the other party, and an immaterial breach does not.  See id. at 692 (AInsurance policies are contracts, and as such are subject to rules applicable to contracts generally . . . A fundamental principle of contract law dictates that when a party to a contract commits a material breach of that contract, the other party is discharged or excused from any obligation to perform.@). This principle is not limited to UIM policies.  See, e.g., Comsys Info. Tech. Servs., 130 S.W.3d at 192.

USF&G has produced no evidence that the settlement prejudiced it, but instead argues that if it is required to show prejudice, then the settlement of the Lopez suit prejudiced it as a matter of law.  USF&G claims that by settling the case, Coastal, COIL, and Lexington deprived USF&G of the opportunity to participate in the defense and settlement processes, and placed USF&G in the same posture as one who is presented with a final, appealable judgment and told to pay it.^[4]     

Coastal, COIL, and Lexington presented evidence that the settlement did not prejudice USF&G.  Walter Zimmerman, an adjuster with more than forty years of experience, offered his expert opinion that the settlement paid to settle the Lopez suit was Amore than reasonable.@  In addition, Coastal, COIL, and Lexington presented evidence indicating how a jury would value the Lopez claims. Three other plaintiffs sued Coastal=s parent company, Coastal Corporation, in a separate suit for personal injuries resulting from the same explosion.  Coastal Corp. v. Torres, 133 S.W.3d 776, 777 (Tex. App.CCorpus Christi 2004, pet. denied.).  The Torres plaintiffs alleged that Coastal=s parent company was negligent and grossly negligent because it controlled Coastal=s budget, withholding funds for inspectors and safety maintenance in a way that directly caused the plaintiffs= injuries. Id. at 777B79. After a trial, a jury awarded the Torres plaintiffs $122.5 million.  Id. at 778.  The Thirteenth Court of Appeals reversed the judgment on the grounds that Texas does not recognize a cause of action against a parent company for negligent control of the subsidiary=s budget, and emphasized that the Torres plaintiffs did not claim that Coastal=s parent company exercised negligent control over operational activities.  Coastal was not a party to the Torres suit, but was a party to the Lopez suit, and the Lopez plaintiffs alleged Coastal=s direct negligence caused the explosion.  Torres therefore offers some indication of the exposure Coastal and its insurers faced in the event the Lopez case was tried in the same venue. 

USF&G does not argue that the suit was settled for an unreasonable amount, but contends that prejudice need not be monetary.  Nevertheless, USF&G has produced no evidence of prejudice, monetary or otherwise.  It speculates that it might have settled the case for less money, but there is no evidence USF&G intended to offer any settlement funds at all. There is also no evidence that the Lopez plaintiffs would have accepted a smaller settlement.^[5]  Thus, the only evidence pertaining to prejudice from the settlement indicates that the settlement was reasonable, and that a jury in Corpus Christi, Texas could likely award the Lopez plaintiffs more than $7 million.

Given the existence of fact questions and USF&G=s failure to provide evidence of prejudice, summary judgment in favor of USF&G cannot be sustained on this basis.

C.      Lack of Cooperation      

USF&G moved for summary judgment on the additional ground that Coastal=s alleged breach of its duty to cooperate voided coverage. Coastal contends that the summary judgment cannot be sustained on this basis because USF&G failed to establish that Coastal breached its duty to cooperate and that the breach, if any, prejudiced USF&G.  We agree.

In its motion for summary judgment, USF&G argued that Coastal breached its contractual duty to cooperate with USF&G by failing to notify USF&G of the Lopez settlement and by requesting coverage for the settlement Aafter the fact [of settlement].@ This argument, however, is without factual or legal support.  The uncontroverted evidence demonstrates that Coastal requested coverage prior to settlement, and that USF&G was informed of the mediation, settlement negotiations, and the ultimate settlement agreement.  USF&G cites no authority for its contention that requesting coverage evidences a lack of cooperation, nor do we find this to be the case.

USF&G also contends that Coastal breached the duty to cooperate by failing to timely provide suit papers and notice of suit, but this argument simply restates the claim of late notice:

Counsel:      Are you able to tell this jury how Coastal Refining failed to cooperate with USF&G?

Harless:       To the extent that it=s rolled into the late notice, that would be about the only thing that I could say.

As previously discussed, USF&G has not demonstrated that late notice caused it to suffer prejudice. 

Finally, USF&G asserts that Coastal initially failed to provide USF&G with documentation from the Lopez litigation.  This argument is not supported by the record:

Counsel:      Putting aside for a moment the fact that you had asked for status reports while the lawsuit against the Coastal Corporation was continuing and there was some initial hesitation to give you thatC

Harless:       Right.

Counsel:      Cwas there anything else that you ever asked for that you were refused?    

Harless:       Not to my recollection right now.

Counsel:      Okay. And, subsequently, you were given copies of the status reports?

Harless:       I know that we were provided with some information, but I really couldn=t detail exactly what all that was.

* * *

Harless:       I never had the occasion to visit with a Coastal rep who denied me information. My dealings were with [Coastal=s counsel].

Counsel:      Okay. Did you ever ask to sit down and talk with someone from Coastal Refining?

Harless:       No.

Counsel:      Was there anything that you ever asked for that Coastal Refining or Lexington said, AAbsolutely not, no way; we will not provide that to you?@

Harless:       Not that I recall.

Counsel:      Okay.

Harless:       Well, let meClet me back up.  Initially that was told to me after the case settled, but they had some internal discussions.  And apparently they resolved it to their satisfaction that they would not be destroying the attorney/client privilege with regards to the continuing litigation. And then subsequent to them figuring that out, they sent me some information.

(emphasis added). The record does not clearly identify the specific documents that were requested, the date they were requested, from whom they were requested, the basis on which they were withheld, to what extent they were produced, or the date of production.  The only written request for records available for our consideration is contained in USF&G=s letter of June 23, 2000, in which it requested Acopies of all reports generated by persons who have investigated this accident . . . [and] reports and information concerning the injury and damages sustained by Mr. Lopez.@     

Coastal=s defense attorney Augustin Rivera offered uncontradicted testimony that during his June 23, 2000 conversation with Harless, Rivera told Harless he Awas available to meet with [Harless] at any time to provide him with whatever information he needed to get up to speed on where we were in the case.@  The record further shows that USF&G scheduled the meeting to take place on July 5, 2000, and that the meeting did take place on that date.  There is no evidence that the materials USF&G requested were not produced at the meeting.  Thus, USF&G has not established that Coastal failed to cooperate.

In addition, it was USF&G=s burden to prove not only that Coastal failed to cooperate, but that this failure prejudiced USF&G.  See Struna, 11 S.W.3d at 360 (stating that it is the insurer=s burden to prove that the insured=s failure to cooperate prejudiced the insurer).  USF&G offered no evidence that Coastal=s alleged lack of cooperation caused prejudice.

Because the summary judgment proof does not show that Coastal failed to cooperate and that any such failure prejudiced USF&G, the summary judgment cannot be supported on those grounds.

V.  Conclusion

We hold USF&G failed to establish that Coastal violated its duty to cooperate or that USF&G was prejudiced by Coastal=s late notice of the Lopez plaintiffs= claims, by the other carriers= settlement of the Lopez suit, or by Coastal=s alleged lack of cooperation.  Because the summary judgment in favor of USF&G cannot be affirmed on any of the grounds presented, we reverse the judgment of the trial court, and remand the case for further proceedings consistent with this opinion.

/s/      Eva M. Guzman

Justice

Judgment rendered and Opinion filed May 30, 2006.

Panel consists of Justices Fowler, Edelman, and Guzman.

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^[1]  The firm has since changed its name to Hartline, Dacus, Barger, Dreyer & Kern, L.L.P.

^[2]  The record is unclear as to the exact date on which the notice was received, but USF&G admits that it was received by June 20, 2000.

^[3]  Kimble v. Aetna Cas. & Sur. Co., 767 S.W.2d 846, 850B51 (Tex. App.CAmarillo 1989, writ denied) is instructive on why the entry of a default judgment generally leads to the presumption that an insurer has been prejudiced as a matter of law.  In Kimble, the insurer learned of the suit after a default judgment was entered, but before the judgment became final.  Id. at 848.  The insured argued that the insurer had not been prejudiced because it could move for a new trial.  Id. at 850.  In rejecting that argument, the Seventh Court of Appeals explained the particular consequences of the default judgment that rendered it prejudicial:

In contrast . . . to a trial on the merits where a defendant may expect that a plaintiff must establish its claims by a preponderance of the evidence, the burden is upon the movant for a new trial to meet a fairly rigorous standard before such a movant is entitled to a new trial.  It seems clear that [the insurer], by virtue of the default judgment, has been substantially prejudiced by that change in position.  Moreover, under the facts of this case, it is by no means certain that [the insurer], standing in the shoes of its insured, could have established its entitlement to a new trial.  If it was unable to have the default judgment set aside, the prejudice suffered by [the insurer] is obvious. 

Id. at 851. 

Kimble does not stand for the proposition that only a default judgment prejudices an insurer. Rather, analysis of Kimble and similar cases makes clear that a showing of a material change in position is necessary to establish prejudice.  It was not the fact of a change in position, but the particular substance of the change that made the judgment prejudicial.  Prior to the judgment, the insurer could escape liability on a covered claim if the plaintiff failed to meet its burden of proof. After entry of the default judgment, the insurer could no longer defend against the underlying claims unless it first met a new burden of proof.  It would now have to show (a) its insured=s failure to answer or appear was not intentional or the result of conscious indifference, but was instead the result of accident or mistake, (b) the insured has a meritorious defense, and (c) granting a motion for new trial would not cause any delay or injury to the third party claimant.  See Craddock v. Sunshine Bus Lines, Inc., 134 Tex. 388, 393, 133 S.W.2d 124, 126 (1939). The Kimble court implied that, on the facts of the case presented, the insurer might be unable to demonstrate a meritorious defense while Astanding in the shoes of its insured.@  Kimble, 767 S.W.2d at 850B51.  In addition, the insurer would have to prove that the insured=s failure to answer or appear was the result of accident or mistake, a threshold issue which would not have arisen in the absence of the default judgment.  As a result, the judgment caused actual prejudice to the insurer, whereas the cure for that prejudice existed only in theory. Because the Apotential@ cure did not outweigh the Aactual@ prejudice, prejudice was presumed as a matter of law.

^[4]  In support of this argument, USF&G relies upon West Bend Co. v. Chiaphua Indus., Inc., 112 F. Supp. 2d 816 (E.D. Wis. 2000), aff=d, 11 Fed. App=x 616 (7th Cir. 2001) (applying Wisconsin law).  In West Bend, a federal district court was asked to predict whether Wisconsin state courts would find insurance coverage continues when the insured breaches a voluntary payment clause without causing prejudice to the insurer.  112 F. Supp. 2d at 826.  The court did not answer that question; rather, it held that an insurer suffered prejudice as a matter of law where the insured did not report the existence of the liability suit until after the suit had settled.  Id. at 823.  Both the law and the facts of West Bend are distinguishable from the present case.  In Texas, it is established that an insurer may not void coverage based on voluntary settlement unless it can demonstrate that the settlement caused prejudice to the insurer.  See, e.g., Hernandez, 875 S.W.2d at 694 (when the insurer is not prejudiced by the insured=s breach, the breach is not material, and the insurer is not excused from performance); Comsys Info. Tech. Servs., Inc., 130 S.W.3d at 192 (Texas law does not presume prejudice in settlement-without-consent cases); see also Hanson Prod. Co. v. Ams. Ins. Co., 108 F.3d 627, 631 (5th Cir. 1997) (noting the Amodern trend in favor of requiring proof of prejudice@). Additionally, USF&G was aware of the lawsuit and was invited to participate in the continuing negotiations prior to settlement.

^[5]  It is perhaps equally likely that the plaintiffs= demands would have increased proportionately as the number of participating insurers and policies increased, so that USF&G=s participation could have made settlement more costly.