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March 2013

Settling One Insured's Claim in Multidefendant Case Not a Contract Breach

A federal appeals court recently held that under Texas law, an insurer of multiple defendants in a claim does not breach its duty to other insureds by expending policy limits to settle the claim against only one of the insured defendants.

In Pride Transportation v. Continental Cas. Co. and Lexington Ins. Co., plaintiff Wayne Hatley sued Pride Transportation and Krystal Harbin for injuries sustained in a motor vehicle accident. Harbin was the driver of the Pride truck that struck Hatley, rendering him a paraplegic. Pride and Harbin were insured by primary insurer Continental Casualty Co. and excess carrier Lexington Insurance Co. Primary coverage was $1 million and the excess coverage was $4 million. Continental, as the primary insurer, provided a defense to Harbin and Pride.

During discovery, evidence showed that Harbin had falsified her driver logs to avoid restrictions on the hours she could work. Harbin’s counsel estimated that the value of the case exceeded policy limits. Hatley demanded $5 million to settle his claims against Harbin, and made no demand for settlement of the claim against Pride. Continental tendered its $1 million to Lexington, which then settled the claims against Harbin for a total of $5 million. Because the policies were exhausted, the insurers withdrew their defense of Pride. Pride contended that the insurers breached their contractual duties to it.

In a Feb. 6 unpublished opinion, the U.S. Court of Appeals for the 5th Circuit ruled that the district court did not err in holding that Lexington was within its rights to withdraw its defense of one insured after it exhausted its limits by settling claims involving other individuals injured in the same accident. The appellate court relied on Travelers Indemnity Co. v. Citgo Petroleum Corp., 166 F.3d 761 (5th Cir. 1999), which held that an insurer is not subject to liability for proceeding, on behalf of a sued insured, with a reasonable settlement . . . once a settlement demand is made, even if the settlement eliminates coverage for a co-insured as to whom no Stowers demand has been made. Stowers Furniture Co. v. Am. Indemnity Co., 15 S.W.2d 544 (Tex. 1929) provides that an insurer is liable in excess of the policy limits for rejecting a demand where (1) the claim against the insured is within the scope of coverage, (2) the demand is within policy limits, and (3) the terms of the demand are such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the insured’s potential exposure to an excess judgment.

In Pride Transportation, the 5th Circuit held that the insurer cannot be liable for failing to settle remaining claims unless there is evidence that (1) the insurer negligently rejected a demand from the claimant within policy limits (Stowers), or (2) the initial settlement demand was itself unreasonable. Because the insurers did not reject any demands for Harbin or Pride, Pride could only prevail by showing that the Harbin settlement demand was unreasonable. Pride had to show that a reasonably prudent insurer would not have settled the Harbin claim when considering solely the merits of the Harbin claim and the potential liability of its insured on the claim.

The court held that, because of the likelihood and degree of potential exposure to excess judgment for Harbin, the settlement was reasonable as a matter of law and did not result in a breach of the insurance contracts.

Click here for the opinion.

This opinion in Pride Transportation v. Continental Cas. Co. and Lexington Ins. Co., No. 11-10892, is not final. It may be modified on rehearing or review may be granted by the U.S. Supreme Court. These events would render the opinion unavailable for use as legal authority.

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Jordan S. Altura