Westchester Fire Insurance Company v. Admiral Insurance Company

Page 1

WESTCHESTER FIRE INSURANCE COMPANY, APPELLANT v. ADMIRAL INSURANCE COMPANY, APPELLEE.

NO. 2-01-227-CV.

Court of Appeals of Texas, Second District, Fort Worth.

Delivered June 26, 2003.

FROM THE 48^TH DISTRICT COURT OF TARRANT COUNTY

PANEL A: CAYCE, C.J.; LIVINGSTON and WALKER, JJ.

CAYCE, C.J. filed a dissenting opinion.

OPINION

TERRIE LIVINGSTON, JUSTICE.

Introduction

This is an equitable subrogation case by an excess insurance carrier against the primary carrier for the negligent failure to settle an insurance claim within policy limits. See G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544, 547 (Tex. 1929). Appellant Westchester Fire Insurance Company (Westchester), the excess insurance carrier, challenges the trial court's directed verdict for appellee Admiral Insurance Company (Admiral), the primary carrier. We affirm in part and reverse in part the partial summary judgment upon which the directed verdict was based, reverse the directed verdict, and remand the case for a new trial.

Background

In 1994 PeopleCare Heritage Western Hills, Inc. (PeopleCare), the owner of Heritage Western Hills Nursing Home, had a primary policy of professional medical liability insurance with Admiral with limits of $1,000,000 per occurrence and an excess policy with Westchester with limits of $10,000,000 per occurrence. Beulah Cagle was a patient at Western Hills. In 1994 Beulah and her daughter Lola Cagle sued PeopleCare for negligence, gross negligence, fraud, and violations of the Texas Deceptive Trade Practices Act (DTPA) arising out of PeopleCare's treatment of Beulah. See Tex. Bus. & Com. Code Ann. §§ 17.01-.854 (Vernon 2002 & Supp. 2003).

After a bench trial, the trial court found that PeopleCare was negligent and grossly negligent in its treatment of Beulah and that it knowingly misrepresented the nature of Beulah's injuries to Lola. In findings of fact and conclusions of law, the trial court found that Beulah was entitled to compensatory damages, plus prejudgment interest, and that Lola was entitled to mental anguish damages, treble damages, attorney's fees, and prejudgment interest under the DTPA. The compensatory damages awarded to the Cagles exceeded Admiral's policy limits. The trial court then scheduled a hearing on punitive damages. Before the hearing, PeopleCare settled the Cagles' suit for an amount exceeding the Cagles' compensatory damages, with Admiral tendering its policy limits, less defense costs and PeopleCare's deductible, and Westchester contributing the remainder.

Westchester then filed suit against (a) Admiral, alleging, among other things,¹ that Admiral negligently failed to settle the Cagles' claims against PeopleCare within the limits of the primary insurance policy, and (b) Gardere & Wynne, L.L.P., the law firm that represented PeopleCare in the Cagle suit, for negligence in defending the suit. Before trial, the trial court granted Admiral a partial summary judgment, holding that:

[I]nsurance coverage for punitive damages, now and at the time in question, violates the public policy of the State of Texas. Accordingly, coverage for punitive damages under the Admiral insurance policy is void. . . . [T]his court [also] finds that the award of damages and attorneys' fees for knowing misrepresentation under the DTPA were not covered by the Admiral insurance policy.

Since Westchester Fire's Stowers recovery, if any, only extends to claims that were within the scope of the Admiral policy's coverage, its recovery is limited to [Beulah] and Lola Cagle's actual damages.

Thus, the court held that Westchester's recovery of damages from Admiral, if any, would be limited to the amount of the Cagles' compensatory damages that exceeded Admiral's settlement contribution.

Before Admiral completed its case-in-chief, Westchester settled with Gardere & Wynne for an amount greater than the amount by which the Cagles' compensatory damages exceeded Admiral's settlement contribution. Accordingly, on Admiral's motion, the trial court granted Admiral a directed verdict on the ground that Admiral was entitled to a credit in the amount of Gardere & Wynne's settlement with Westchester, and the amount of the credit exceeded the damages Westchester could recover from Admiral. See Tex. Civ. Prac. & Rem. Code Ann. §§ 33.012, 33.014 (Vernon 1997).

Analysis

In a single point on appeal, Westchester challenges the directed verdict on the ground that the trial court erred in granting the partial summary judgment for Admiral that limited the amount of damages Westchester could recover from Admiral because punitive damages were insured under Admiral's policy.² Westchester does not challenge the validity of the directed verdict independently of the partial summary judgment; therefore, we will address only whether the trial court erred in granting partial summary judgment on Westchester's Stowers claim.

Westchester contends that the trial court erroneously relied on a federal case construing Texas law in determining that insurance coverage for punitive damages is void as against public policy. In addition, Westchester claims the trial court erred in not relying on several Texas court of appeals cases holding that punitive damages are insurable in Texas. Westchester further claims that the trial court erroneously relied upon the "volunteer doctrine" in granting the partial summary judgment, averring that this case turns upon whether in 1995 Westchester had a good faith, reasonable belief that punitive damages were insurable in Texas.

Standard of Review

Questions of law are appropriate matters for summary judgment. Rhone-Poulenc, Inc. v. Steel, 997 S.W.2d 217, 222 (Tex. 1999). When reviewing a summary judgment granted on specific grounds, this court can affirm the summary judgment only if the ground on which the trial court granted relief is meritorious. Cincinnati Life Ins. Co. v. Cates, 927 S.W.2d 623, 625-26 (Tex. 1996). However, if a party preserves other grounds presented in the summary judgment motion that were not ruled on by the trial court, a court of appeals must also consider any other grounds that the trial court did not rule on. Id. at 626. To preserve these grounds, the party must raise them in the summary judgment proceeding and present them in an issue or cross-point on appeal. Id. at 625-26.

Insurance Coverage for Punitive Damages

Public Policy

Admiral's Motion for Partial Summary Judgment contends that, as a matter of law, any portion of Westchester's claim attributable to punitive damages must fail because insurance coverage for punitive damages is void as against public policy and, therefore, not within the scope of coverage of Admiral's policy.

Because Westchester tried this case under Stowers, its ability to recover damages is limited to that of PeopleCare as Admiral's insured. See Am. Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480, 483 (Tex. 1992); Nat'l Union Fire Ins. Co. v. Ins. Co. of N. Am., 955 S.W.2d 120, 134 (Tex. App.—Houston [14^th Dist.] 1997), aff'd sub nom., Keck, Mahin & Cate, Grant Cook v. Nat'l Union Fire Ins. Co., PA, 20 S.W.3d 692 (Tex. 2000). TheStowers duty to settle is not activated unless three prerequisites are met: (1)the claim against the insured is within the scope of coverage, (2) the claimant has made a settlement demand that is within the 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. Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994). "[A]n insurer has no duty to settle a claim that is not covered under its policy." Id. at 848. Thus, Admiral argues that if public policy precludes the insurability of punitive damages, then any excess judgment attributable to punitive damages is not recoverable in a Stowers action. Cf. St. Paul Fire & Marine Ins. Co. v. Convalescent Servs., Inc., 193 F.3d 340, 343 (5^th Cir. 1999) (holding under Texas law that insured could not recover from insurer portion of excess judgment attributable to punitive damages when policy specifically excluded coverage for punitive damages).

The supreme court has long held that "contracts against public policy are void and will not be carried into effect by courts of justice." James v. Fulcrod, 5 Tex. 512, 520 (1851). Generally, a contract is against public policy if it is illegal or injurious to the public good. See 14 Tex. Jur. 3D Contracts § 143 (1997). Courts look to state statutes and judicial decisions to determine public policy. Stubbs v. Ortega, 977 S.W.2d 718, 722 (Tex. App.—Fort Worth 1998, pet. denied).

Neither the Texas Legislature nor the Supreme Court of Texas has addressed whether insurance coverage for punitive damages violates the public policy of Texas. In 1998 a federal district court in Texas faced with the same issue made an "Erie guess" that the supreme court would hold that, at least in the context of third-party coverage for automobile insurance claims, insurance coverage for punitive damages is void as against public policy. Hartford Cas. Ins. Co. v. Powell, 19 F. Supp. 2d 678, 696 (N.D. Tex. 1998). Westchester claims that the trial judge erred in relying on this case in ruling on Admiral's partial summary judgment motion. The record shows that in a letter to trial counsel, the trial judge stated that he "paid particular attention to" the Powellcase; however, he did not state that he relied on it as authority. We disagree with Westchester's contention that a Texas trial court may not consider a federal case construing Texas law. Although these cases are not binding as precedent on Texas state courts, they may be instructive on state law issues, and state courts are not prohibited from considering the federal courts' reasoning in cases determining matters of Texas law. See Davenport v. Garcia, 834 S.W.2d 4, 20 (Tex. 1992) (orig. proceeding).

Because neither the legislature nor...