In recent years, few Texas Supreme Court decisions have generated as much commentary, questions, and concern as Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., 236 S.W.3d 765 (Tex. 2007). In Mid-Continent, the Court appeared to have severely curtailed, if not eliminated entirely, any contribution and/or subrogation rights an insurer may have against a jointly settling insurer which does not pay its fair share of a settlement against a common insured. In deciding Mid-Continent, the Court overlooked some of its prior decisions, as well as the practical considerations insurers face when settling claims against their insureds and the sometimes difficult task of bringing recalcitrant insurers to the table when negotiating settlement agreements. It was feared that the Court gave the most difficult and obstinate insurers free license via Mid-Continent to undervalue cases against their insureds without repercussion (that is, so long as the insurer has included a pro rata clause in its policy, as is so often the case). Fortunately for insurers and policyholders alike, the Fifth Circuit Court of Appeals and several other courts have distanced themselves from the Mid-Continent decision by limiting it to the very narrow set of factual circumstances from which it arose.
I. THE MID-CONTINENT DECISION
A. Where Did the Mid-Continent Decision Come From?
While negotiating signs and dividers on a westbound Texas highway, Tony Cooper collided with a car occupied by James Boutin and his family. Mid-Continent, 236 S.W.3d at 768–69. The Boutin family sued several parties, including the general contractor of the highway project, Kinsel Industries (“Kinsel”). Id. Kinsel sought coverage as a named insured under two policies issued by Liberty Mutual Insurance Company (“Liberty Mutual”) and as an additional insured under a single policy issued by Mid-Continent Casualty Company (“Mid-Continent”). Id.
Liberty Mutual and Mid-Continent accepted coverage but disagreed on Kinsel’s proportionate liability and the settlement value of the Boutins’ claims. Id. at 769–70. Consistent with Liberty Mutual’s assessment of Kinsel’s proportionate liability at 60% and total anticipated damages of between $2 and $3 million, the case settled for $1.5 million, of which Liberty paid $1.35 million and Mid-Continent paid $150,000, reflective of its estimate that Kinsel was only 10% liable for the Boutins’ damages. Id.
In a subsequent suit by Liberty Mutual against Mid-Continent to recover the disproportionate amount it paid to settle Kinsel’s liability, the trial court ordered Mid-Continent to pay half of the Boutin settlement, less amounts already contributed, within Mid-Continent’s $1 million policy limit, or, in other words, $550,000. Id. at 770. On appeal before the Fifth Circuit, the court certified the following three questions to the Texas Supreme Court:
- Assuming the foregoing facts, is any actionable duty owed (directly or by subrogation to the insured’s rights) to the insurer paying the $1.35 million by the underpaying insurer to reimburse the former respecting its payment of more than its proportionate part of the settlement?
- If there is potentially such a duty, does it depend on the underpaying insurer having been negligent in its ultimate evaluation of the case as worth no more than $300,000, or does the duty depend on the underpaying insured’s evaluation having been sufficiently wrongful to justify an action for breach of the duty of good faith and fair dealing for denial of a first party claim, or is the existence of the duty measured by some other standard?
- If there is potentially such a duty, is it limited to a duty owed the overpaying insurer respecting the $350,000 it paid on the settlement under its excess policy?
Id. at 768.
B. No Direct Claim for Contribution
The Texas Supreme Court answered the first question in the negative and, consequently, did not reach the second two questions. With regard to the first question, the majority, led by Justice Wainwright, analyzed Liberty Mutual’s rights vis-à-vis Mid-Continent under theories of contribution and contractual and equitable subrogation. Ultimately, Liberty Mutual was found not to have a right of contribution from Mid-Continent. Central to this determination is the finding that: (1) the “other insurance” provisions in Liberty Mutual’s and Mid-Continent’s policies are “pro-rata” clauses; and (2) “[a] pro-rata clause operates to ensure that each insurer is not liable for any greater proportion of the loss than the coverage amount in its policy bears to the entire amount of insurance coverage available.” Id. at 772.
Relying on the Court’s 1943 decision in Traders & Gen. Ins. Co. v. Hicks Rubber Co., 169 S.W.2d 142 (Tex. 1943), the majority concluded that the “other insurance” clauses in Mid-Continent’s and Liberty Mutual’s policies rendered each carrier’s obligations several and independent of one another. Id. at 772. Because a claim for contribution requires: (1) “that the several insurers share a common obligation or burden” and (2) “that the insurer has made a compulsory payment or other discharge of more than its fair share of the common obligation or burden,” the Court concluded that “[w]ith independent contractual obligations, [Liberty Mutual] and [Mid-Continent] do not meet the common obligation requirement of a contribution claim.” Id.
Moreover, when an insurer’s policy contains a “pro-rata” clause, the Court reasoned that “the co-insurer paying more than its contractually agreed upon proportionate share does so voluntarily; that is, without a legal obligation to do so.” Id. Therefore, Liberty Mutual was denied “contribution” from Mid-Continent for amounts paid to settle the Boutin lawsuit. Id. at 773.
C. No Subrogation Rights
Liberty Mutual fared no better in its attempt to recover from Mid-Continent through subrogation. Beginning its discussion of subrogation as a possible basis for recovery, the Court stated that the mere fact a general right of subrogation may exist does not answer the questions of when the insurer is actually entitled to subrogation or how much it should receive. Id. at 774.
There are two types of subrogation. Contractual subrogation is created by an agreement that grants an insurer the right to pursue reimbursement from a third party in exchange for payment of a loss. Equitable subrogation does not depend on contract, but arises when an insurer involuntarily pays a debt that another insurer is primarily liable for and should have paid. Noting that an insurer’s right of subrogation is derivative of the insured’s rights, the majority held that Kinsel, and therefore Liberty Mutual, “had no right, after being fully indemnified, to enforce Mid-Continent’s duty to pay its pro-rata share of a loss.” Id. at 775–76. As a result of the Court’s rationale and the facts of the case, Liberty Mutual recovered nothing from Mid-Continent.
D. Justice Willet’s Concurring Opinion
In his concurring opinion, Justice Willett readily acknowledged that the Court frequently finds itself deciding “high stakes” insurance law questions which can be “fiendishly difficult.” Mid-Continent, 236 S.W.3d at 777. Justice Willett recognized that the outcomes are often driven by “unique factual circumstances” and that the Court must confine itself to the “factual circumstances presented.” Id. For example, Justice Willet suggested that had Mid-Continent denied coverage it may have been prevented from enforcing its policy’s “other insurance” clause and defeating Liberty Mutual’s efforts to obtain reimbursement. Id. at 778. It is well settled that an insurer is estopped from relying on the conditions in its policy once it denies coverage. See, e.g., Gulf Ins. Co. v. Parker Products, Inc., 498 S.W.2d 676, 679 (Tex. 1973). Justice Willet presumably felt that a hypothetical denial by Mid-Continent would have prevented the carrier from enforcing its “other insurance” clause and preventing Liberty Mutual’s efforts to obtain reimbursement.
II. THE FIFTH CIRCUIT’S AMERISURE DECISION
Mid-Continent’s key practical consequence is that it eliminated the traditional mechanism (i.e., subrogation) by which an insurer could seek reimbursement for a disproportionate payment. The Fifth Circuit’s recent holding in Amerisure has cast doubt on the Mid-Continent decision and breathed new life into subrogation claims.
A. Like the Mid-Continent Decision, Amerisure Arose Out of an Automobile Accident.
In Amerisure, the Fifth Circuit grappled with a dispute between two insurers over their respective duties to indemnify their mutual insured for personal injuries sustained in an automobile accident. Amerisure Ins. Co. v. Navigators Ins. Co., 611 F.3d 299, 303 (5th Cir. 2010). Amerisure Insurance Company (“Amerisure”), the primary insurer, argued that it did not have a duty to indemnify the insured as several exclusions applied. Id. Navigators Insurance Company (“Navigators”), the excess insurer, disagreed and demanded that Amerisure pay its $1 million policy limits. Id. at 304. The insurers both agreed that the personal-injury lawsuit should be settled, and they agreed on the amount of the settlement at $2.35 million. Id. Amerisure ultimately contributed its limits, but reserved its right to seek reimbursement. Id. Amerisure then sought reimbursement from Navigators through contractual and equitable subrogation. Id.
On cross-motions for summary judgment, the district court granted summary judgment for Navigators, finding that, although the Amerisure policy did not cover the incident, Amerisure could not recover through subrogation. Id. Notably, the district court held that under Mid-Continent, “Amerisure had no contractual right to be subrogated” because the insured was fully indemnified. Id. On appeal, the Fifth Circuit vacated the grant of summary judgment. Id.
B. The Insured’s Full Indemnification Does Not Automatically Preclude Subrogation.
Mid-Continent’s most troubling aspect is its seemingly blanket holding that an insurer has no subrogation rights when the insured has been made whole, which is the case in many, if not most, subrogation actions. The Fifth Circuit correctly recognized that such a holding would “effectively end contractual subrogation in Texas” and firmly rejected the notion that Mid-Continent automatically precludes subrogation whenever the insured has been fully indemnified. Id. at 306-7.
The Fifth Circuit reached its conclusion in large part on another recent Texas Supreme Court decision, Texas Health Insurance Risk Pool v. Sigmundik, 315 S.W.3d 12 (Tex. 2010). In Sigmundik, a health insurer fully indemnified its insured for medical expenses. Id. at 13. The insured’s family and estate later sued the tortfeasor that caused the insured’s injuries. Id. The insurer intervened and asserted contractual subrogation rights based on the policy’s subrogation clause. Id. The court recognized that the insurer had a valid claim to recover the amount it paid to cover the insured’s medical expenses from any settlement or judgment based on contractual subrogation. Id. at 14-16.
The Fifth Circuit noted that the Texas Supreme Court did not specifically address Mid-Continent in Sigmundik, but found that “[t]he court could not have reached this result if the broad view of Mid-Continent was in fact the law of Texas.” Amerisure, 611 F.3d at 307. In light of Sigmundik, the court held that “Mid-Continent does not bar contractual subrogation simply because the insured is fully indemnified.” Id.; see also Employers Ins. Co. v. Penn-Am. Ins. Co., 705 F. Supp. 2d 696, 708-09 (S.D. Tex. 2010) (rejecting the argument that Mid-Continent automatically precludes a subrogation claim when the insured is “fully indemnified”).2
C. The Fifth Circuit and Several Other Courts Refuse To Apply Mid-Continent Outside Its Unique Facts.
In Amerisure, the Fifth Circuit refused to blindly follow the Mid-Continent decision by pointing out that the majority of courts have cabined Mid-Continent to its facts. Amerisure, 611 F.3d at 306. Indeed, the court drew special attention to a well-reasoned opinion issued by Judge Rosenthal wherein he aptly limited Mid-Continent “to situations where the insurers (1) were co-primary insurers, (2) did not dispute that both covered the loss, and (3) were subject to pro rata clauses.” Id. (citing Employers Ins. Co. v. Penn-Am. Ins. Co., 705 F. Supp. 2d 696 (S.D. Tex. 2010)).
In his concurring opinion, Justice Willet emphasized that the Mid-Continent decision must be confined to the factual circumstances presented and that the result might be different in other cases. Mid-Continent, 236 S.W.3d at 777-78. For example, Justice Willett noted that the outcome might have been different if the one insurer “had denied coverage and had refused to pay anything or defend the insured.” Id. at 778.
In Amerisure, the Fifth Circuit followed Justice Willett’s lead and found that Mid-Continent does not bar contractual subrogation when an insurer has denied coverage.” Amerisure, 611 F.3d at 308.
The Fifth Circuit reasoned that when an insurer initially denies coverage, the insured is not fully protected. Id. at 307. Limiting Mid-Continent to situations where the insurers acknowledge their coverage duties is consistent with the “longstanding view . . . that dueling coinsurers must place the interests of their insureds before their own.” Id. at 307-08 (citing Hardware Dealers Mut. Fire Ins. Co. v. Farmers Ins. Exch., 444 S.W.2d 583, 588-89 (Tex. 1969)). Applying Mid-Continent in cases where a co-insurer disputes coverage would “deviate from settled principles of Texas insurance law by discouraging insurers from first defending and indemnifying and then seeking reimbursement for the costs that a coinsurer should have paid.” Id. 3
Mid-Continent was a novel case because it changed the framework for allocating responsibility between insurers that had existed in Texas for decades. At least initially, the decision left policyholders in the lurch by effectively putting an end to the practice of “pay and chase.” The decision cast a chilling effect on insurers’ willingness to settle claims on behalf of their insureds and then sort out coverage issues later. Fortunately, several courts have heeded Justice Willet’s concurring opinion and limited Mid-Continent to its unique facts. The Amerisure decision has gone a long way to restoring the status quo that existed prior to the Texas Supreme Court’s landmark Mid-Continent decision.