The Texas Supreme Court ruled that a primary insurer has no actionable right of contribution or subrogation against a co-primary insurer that declined to settle on terms agreed to by the first primary carrier. Mid-Continent Insurance Company v. Liberty Mutual Insurance Company, No. 05-0261 (Tex. October 12, 2007).

Background
In Mid-Continent, two insurers, Mid-Continent Insurance Company (“Mid- Continent”) and Liberty Mutual Insurance Company (“Liberty”) provided the same insured with primary insurance coverage under comprehensive general liability policies with $1 million limits (“CGL policies”). Liberty also provided the insured with $10 million in excess coverage. The CGL policies contained identical “other insurance” clauses providing for equal or pro rata sharing up to the co-insurers’ respective policy limits for losses covered by other primary insurance. The CGL policies also contained a “voluntary payment” clause, a subrogation clause, and a standard “no action” clause. The two insurers had no contract between them. When the insured was named as a defendant in a suit arising from an automobile accident, the co-insurers cooperatively assumed defense of the suit, admitting coverage.

Liberty procured an offer to settle the suit for $1.5 million and demanded that Mid-Continent contribute its proportionate share of that settlement. Valuing the case at no more than $300,000, Mid-Continent agreed to contribute only $150,000. As a result, the suit was settled for $1.5 million, funded $1.35 million by Liberty and $150,000 by Mid-Continent. 

Subsequently, Liberty filed suit against Mid-Continent seeking to recover Mid-Continent’s pro rata share of the sum paid to settle the case. The United States District Court for the Northern District of Texas concluded that Liberty was entitled through subrogation to recover from Mid-Continent its pro-rata share of the settlement payment. After an appeal, the United States Circuit Court of Appeals for the Fifth Circuit certified to the Texas Supreme Court the legal question of whether one primary insurer (Mid-Continent) had a duty to pay a proportionate share of a settlement of a claim that was also covered by another primary insurer (Liberty), which had agreed to the settlement.

Liberty argued that it was entitled to reimbursement from Mid-Continent under a right of contribution. Liberty also contended that it was subrogated to the contractual right of the insured to enforce language in Mid-Continent’s policy that placed a duty on Mid-Continent to defend any claim or suit and pay an equal or pro rata share of settlement. Liberty also suggested that it was subrogated to the insured’s common law right to have Mid-Continent act reasonably when handling the insured’s defense — including reasonable negotiation and participation in settlement.

Mid-Continent countered that it owed no direct duty of contribution to Liberty. Mid-Continent further argued that it did not breach any recognized contractual or common law duty to the insured to which Liberty may be subrogated. With respect to contractual subrogation, Mid-Continent argued that because it complied with its contractual duty to timely assume defense of the suit against the insured and acknowledged policy coverage, the insured — and therefore Liberty — had no contract claim against Mid-Continent.

Mid-Continent added that its only common law duty to the insured was to accept a reasonable settlement offer within  policy limits from the plaintiffs in the underlying suit against its insured.

Court’s Decision
Under the facts of the case, the Texas Supreme Court held that Liberty was not entitled to reimbursement because no direct action for contribution existed between the co-primary insurers and because their common insured had no rights against Mid-Continent to which  Liberty may be subrogated. First, the court recognized the general rule that if two or more insurers bind themselves to pay the entire loss insured against, and one insurer pays the whole loss, the one so paying has a right of action against his co-insurer(s) for a ratable proportion of the amount paid by him, because he has paid a debt which is equally and concurrently due by the other insurer(s). Thus, the elements of contribution require that several insurers share a “common obligation” and that the insurer seeking contribution has made a compulsory payment of more than its fair share of the common obligation. The court explained, however, that a direct claim of contribution between co-insurers does not exist where the insurance policies contain “other insurance” or “pro rata” clauses. The effect of the pro rata clause precludes a direct claim for contribution because the clause makes the contracts several and independent of each other. With independent contractual obligations, the co-insurers do not meet the “common ligation” requirement of a contribution claim, i.e., each co-insurer contractually agreed with the insured to pay only its pro rata share of a covered loss; the co-insurers did not contractually agree to pay each other’s pro rata share. Additionally, the co-insurer paying more than its contractually agreed upon proportionate share does so voluntarily — without a legal obligation to so do. In this context, a co-insurer paying more than its proportionate share cannot recover the excess from the co-insurer(s).

Thus, because the CGL policies at issue in Mid-Continent contained pro rata clauses, and because the co-insurers did not contract with each other to create obligations between themselves or to pay each other’s proportionate share of the insured’s loss, the court found that no right of contribution existed. Next, the court determined that Liberty could not meet the elements of contractual or equitable subrogation. To establish a claim for subrogation, an insurer must step into the shoes of the insured, obtaining only those rights held by the insured against a third party, subject to any defenses held by the third party against the insured. The court acknowledged that the co-insurers’ duties to the insured were specified in the CGL policies and included an independent duty to pay a pro rata share of a covered loss up to their respective policy limits. The court emphasized, however, that such duties must be viewed in the context of the pro rata clause and with consideration of the rules of indemnification, which obligate an insurer to indemnify the insured against a covered loss arising from the insured’s own legal liability. Therefore, because the pro rata clauses precluded a direct claim for contribution (as noted above) and because the insured had been fully indemnified, the court ruled that the insured had no right to recover an additional pro rata portion of the settlement from Mid-Continent to which Liberty could be subrogated.

Finally, the court analyzed an insurer’s common law duty to act reasonably when handling an insured’s defense, stating that such a duty is limited to protecting the insured by accepting a reasonable settlement offer within policy limits. The court found that Mid-Continent did not breach such a duty to the insured because the plaintiffs in the underlying case had not made a settlement offer within Mid- Continent’s policy limits. In addition, the court noted that Liberty had paid a debt for which it was independently liable, thus not satisfying the traditional subrogation requirement that the subrogee pay a debt for which another was primary liable. The court further noted that Liberty, playing a dual role as a primary and excess insurer, may have been motivated by concerns for its excess insurance policy in settling and paying above its primary policy limits. As such, equity did not require Mid-Continent to agree to a settlement that required payment in excess of its remaining coverage to protect Liberty’s excess insurance interest. Consequently, the court rejected Liberty’s suggestion that it was subrogated to the insured’s common law right to have Mid-Continent act reasonably.

Implications
Although the Supreme Court of Texas confined its holding to the facts before it, it effectively overruled the Texas Court of Appeals’ holding in General Agents Insurance Co. of America v. Home Insurance of Illinois, 21 S.W.3d 419 (Tex. App.—San Antonio 2000) that one primary insurer can hold another primary insurer liable for failing to be reasonable with regard to settling claims against an insured they both cover. Thus, primary carriers in matters governed by Texas law should keep Mid-Continent in mind when evaluating settlement in cases involving co-primary insurers and policies containing “other insurance” or “pro rata” clauses. An insurer’s right of reimbursement from the co-insurer in this context will be extremely limited.

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