Multiple Claims And Inadequate Limits In Texas
MULTIPLE CLAIMS AND INADEQUATE LIMITS IN TEXAS: SORIANO PROVIDES THE ANSWER OR AT LEAST PROVIDES GUIDANCE
For the Plaintiff’s lawyer, it is the perfect case, a seriously injured client with objective injuries, a defendant who was guilty of driving while intoxicated, and the state’s most favorable venue. But then you discover that the driver has inadequate limits for your claim, not to mention there are at least three other claimants who have injuries as serious as your client.
For the insurer, it seems like claims that can be disposed of rather efficiently. You have three insureds and a toxic poisoning case. The limits are $1,000,000,00 and there are twenty (20) or so claimants. The math seems simple: $50,000.00 to each claimant. But then you have learned that one of your three insureds is the target defendant. There are also coverage questions regarding the other two defendants. The defense costs are estimated to be $2,500,000 and the Plaintiff’s lawyer is not interested in $1,000,000 for his clients. The three insureds also all have savvy coverage lawyers who are demanding a defense, indemnity, and protection.
Before Soriano, the Texas courts would have to turn to other authorities on how to resolve these predicaments. See Texas Farmers Ins. Co. vs. Soriano, 881 S.W.2d 312 (Tex. 1994). However, since Soriano, the Texas courts have issued several opinions on these dilemmas, almost without exception favorably to insurers.
In September 1978, Richard Soriano had a head on collision with a vehicle driven by Carlos Medina. Id. at 313. Medina was severely injured and his bride of thirty years was killed. Id. The Medinas two children, ages 11 and 12, were likewise injured. Id. Adolfo Lopez, a teenage passenger, in the Soriano vehicle was also killed. Id. Soriano was charged with involuntary manslaughter, driving under the influence of alcohol, driving at an unsafe speed, and unsafe passing. Id.
Unfortunately for the victims, Soriano had a minimum limits policy with Texas Farmers Insurance, $10,000 per person/$20,000 per occurrence. Id. Farmers offered the full $20,000 limits to the Medinas which was declined because they wished to investigate Soriano’s assets. Id. Thereafter, the Medinas and Adolfo and Rafaela Lopez (parents of Lopez) all sued Soriano. Id. Farmers before trial settled with Lopez for $5,000.00, offering the remaining $15,000 to the Medinas. Id. The Medinas rejected the $15,000 and countered with $20,000, the policy limits that they had previously rejected. Id.
The Medinas proceeded to trial and recovered $172,187 plus interest, which was affirmed on appeal. Id. at 314. The Medinas agreed to accept a covenant not to execute and also agreed to drop the criminal charges. Id. In return, Soriano assigned his rights against Farmers to the Medinas. Id. The Medinas then sued Farmers for negligence, gross negligence, and breach of the duty of good faith and fair dealing for failing to settle the Medinas’ claim. The trial court rendered judgment in favor of the Medinas, by virtue of Soriano’s assignment, in the amount of $520,577.24 in actual damages and $5 million in exemplary damages. Id.
The San Antonio Court of Appeals affirmed in part, primarily ordering a $4 million remittor on the punitive damages. Id. The Texas Supreme Court reversed holding there was no evidence of negligence or any breach of the duty of good faith and fair dealing. Id. The Court, in reversing the award, held that when an insurer is faced with a settlement demand arising out of multiple claims and inadequate proceeds, an insurer may enter into a reasonable settlement with one of the several claimants even though such settlement exhausts or diminishes the proceeds available to satisfy other claims. Id. at 315.
The key word obviously is “reasonable.” The Court went on to say that the standard is negligence and Farmers could not be held liable unless: 1) Farmers negligently rejected a demand from the Medinas within policy limits; or 2) the Lopez settlement was itself unreasonable. Id. Additionally, the Court noted that simply because the Medinas claim may be more serious was not evidence that the Lopez settlement was unreasonable.
The Texas Supreme Court in Soriano skirted the issue of whether a duty of good faith and fair dealing exists in settling third party claims. Id. at 317. Because neither party questioned whether such a duty exists in the third party context, the Court simply held there was no evidence of the breach of that duty; Farmers had a reasonable basis for paying $5,000 to the Lopezs. Id. Subsequently the Court found no such duty exists in the handling of third party claims. See Maryland Ins. Co. vs. Head Industrial Coatings and Services, Inc., 938 S.W.2d 27, 28 (Tex. 1996) (holding that only a negligence standard applies in handling of third party claims).
What the Texas Supreme Court has articulated in Soriano is that “unreasonableness” is not to be determined by comparing the value of competing claims per se; rather, one must look to what a reasonable prudent insurer would do under the same or similar circumstances or what a reasonable prudent businessman would do in the management of his own business, in this case resolving competing claims. Subsequent cases have indicated the “reasonableness” standard is tough to overcome whether faced with multiple claims, multiple insureds or both.
The Aftermath of Soriano
Subsequent opinions have applied Soriano in different contexts. In the underinsured context, an intermediate appellate court addressed Soriano when there are multiple claimants in the first party context. In Lane vs. State Farm Mutual Automobile Ins. Co., the decedent Michael Fuhrman was the resident of his grandparents’, Donald and Beatrice Merritt, home at the time he was killed as a passenger in an automobile accident. 992 S.W.2d 545, 548 (Tex. App. – Texarkana 1999, writ denied). The grandparents had UIM coverage with State Farm; however, they were not entitled to recover UIM benefits because they were not survival beneficiaries and thus not covered persons with respect to UIM coverage. Id. However, Fuhrman’s parents, Patricia Lane, (the grandparents’ daughter) and Michael J. Fuhrman (Fuhrman Sr.) were covered persons. Id. Fuhrman Sr. had abandoned Michael years previous and had been serving time in prison. Id. Fuhrman Sr. allegedly assigned his rights to recover to the Merritts although there was no evidence of such assignment. Id. Lane, as mother of Michael, demanded that State Farm pay her the entire UIM limits because Fuhrman had abandoned Michael years before and there was no proper assignment to pay the Merritts. Id.
State Farm, relying on the Texas Probate Code, which addressed the disposition of property of one dying intestate, gave the Merritts $10,000 and Lane $10,000, one half of the UIM policy limits each (one half to each surviving parent). Id. Lane sued State Farm claiming breach of contract, breach of the duty of good faith and fair dealing, and statutory violations in paying the $10,000 to the Merritts under a purported assignment. Id. The trial court granted State Farm summary judgment on all Lane’s causes of action. Id. at 549. Lane appealed. Id.
The appellate court affirmed the trial court’s summary judgment except as to Lane’s statutory claims. Id. at 551. The court, in finding State Farm’s conduct reasonable, relied on the Texas Probate Code which provided that the division of property should be 50/50 to each surviving parent. Id. at 552. The appellate court concluded State Farm could make these payments even though there was no administration of Michael’s estate and no approval by any probate court. Id.
The Court also noted that the payment to the Merritts who were not covered persons under the State Farm policy made no difference. While there was no summary judgment evidence of a valid assignment, it was sufficient that Fuhrman Sr. asked State Farm to pay the Merritts his share of the UIM proceeds. Id. at 553.
In sum, the Lane court held that the Soriano threshold is low, even in the first party context, going so far to permit the payment to someone not covered under the policy without even so much as an assignment. The writing was certainly on the wall for Soriano type lawsuits. See also Carter vs. State Farm Mutual Ins. Co., 33 S.W.3d 369 (Tex. App. – Fort Worth 2000, no pet.).
One year later, the same appellate court addressed another Soriano type dilemma in Mid-Century Ins. Co. vs. Childs, 15 S.W.3d 187 (Tex. App. – Texarkana 2000, no pet.). In Childs, the insured sued his insurer for exhausting policy limits and leaving him without a defense. Id. at 188. Childs was involved in a three car pile up in which several people were injured. Id. Mid-Century investigated, determined that Childs was responsible, and that Childs was facing solid liability exposure for the accident. Id. Mid-Century then settled some of the claims against Childs, ultimately exhausting the policy limits for such injuries. Id. One claimant, Nicole Dodson, who did not settle, sued Childs. Id. Childs demanded a defense. Id.
In response, Mid-Century filed a declaratory judgment action claiming it had no duty to defend Childs. Id. The trial court ruled against Mid-Century finding it had a duty to defend because among other things it had acted unreasonably in settling the claims and because the property damage limits had not been exhausted. Id. The trial court’s findings suggested that Mid-Century had acted improperly in settling the claims in order to avoid its defense obligation. Id. at 188-189.
Predictably, the appellate court reversed finding no evidence of unreasonableness citing Soriano. Id. at 189. The Court pointed out that Childs would have faced excess judgments anyway and exhausting the limits would not be unreasonable. Id. The Court also rejected the failure to exhaust property damage limit argument because Dodson did not sue for or seek property damages. Id.
The Childs’ court appears to intimate that an insurer’s motive in wishing to avoid defense obligations is not sufficient under a Soriano type of analysis when the underlying settlements which exhaust the limits are not unreasonable. Stated differently, it makes no difference that an insurer’s motives were impure if the insurer can show the settlements were reasonable.
Another intermediate appellate court applied Soriano in the excess insurer context. In Kings Park Apartments, Ltd. vs. National Union Fire Ins. Co., three hundred (300) Plaintiffs sued various entities as a result of spraying chlordane at an apartment complex. 101 S.W.3d 525 (Tex. App. – Houston [1st Dist.] 2003, pet. denied). The Plaintiffs sought $100 million in damages although the Kings Park Apartments were insured for only $16 million, consisting of a $1 million primary from Aetna, $5 million excess policy from National Union, and a $10 million policy with Chubb. Id.
Before trial, Kings Park executed a settlement agreement with Plaintiffs not to execute in exchange for an assignment of claims against the Kings Park insurers. Id. at 528. Kings Park retained a percentage of interest in any recovery. Id. After a trial of some of the Plaintiffs’ claims which resulted in $10.5 million verdict for three (3) Plaintiffs, the Plaintiffs sued the insurers including National Union for various bad faith claims. Id.
National Union settled its exposure in the second lawsuit by paying the Plaintiffs its full $6 million policy limits. Id. In doing so, National Union’s plan was to exhaust its limit and avoid any further obligation to its insured. Id. National Union in fact copied another insurer’s agreement in similar litigation who had done the same thing and successfully defended its strategy. Id.
Kings Park then sued National Union for wrongfully exhausting its limit to avoid defense obligations. Kings Park also claimed that National Union’s payment was to settle its own bad faith conduct. Id. Kings Park alleged that the payment of a peppercorn to resolve National Union’s bad faith conduct was a sham. Id. at 532.
The appellate court held that the National Union settlement was reasonable for the settlement claims regardless of the fact that National Union may not have secured releases from the Plaintiffs for their claims. Id. at 536. Because the settlement exhausted the National Union limits, Kings Parks had no bad faith claims against National Union for failing to defend or pay on other pending claims. Id.
Quite clearly, the Texas courts have yet to find the fact scenario that will permit a recovery for an unreasonable settlement in the Soriano context.
The Fifth Circuit Experience
Texas is in the Fifth Circuit and the decisions there are no different than the state court experience.
The first case to address Soriano from the federal courts was in the bankruptcy context, In Re Vitek, Inc., 51 F.3d 530 (5th Cir. 1995). Vitek involved a suit by 400 Plaintiffs for allegedly providing defective prostheses. Id. at 531. The Plaintiffs also sued two officers and directors of Vitek, the Homseys. Vitek filed for bankruptcy protection and the bankruptcy was overseen by a trustee. Id.
The trustee petitioned the Court for authority to compromise with Vitek’s liability insurers. Id. The compromises provided that Vitek’s insurers would be protected from third party suits by way of injunctions. In turn, the insurers would pay the remaining liability limits into Vitek’s bankruptcy estate for the benefit of creditors. Id. The bankruptcy court approved the settlements and issued the injunctions to protect the insurers. Id.
The Homseys objected but the bankruptcy court overruled their objections finding that the Homseys had no property interests in the policies. Id. The Homseys appealed to the district court which reversed, finding that the Homseys had independent rights to the policies. Id. The district court remanded to the bankruptcy court to extend the injunction to the Homseys. Id. The trustee appealed. Id.
Central to the appeal was the notion that an insurance company cannot prefer one of its insureds to the exclusion of the other. Id. at 533. The Fifth Circuit found that even if this notion was valid, it was misapplied by the district court. Id. at 535.
The Fifth Circuit noted that only one legal treatise seemed to espouse this principle. Id. at 536. Setting aside this treatise was A. Windt, Insurance Claims and Disputes, § 5.09 (2d ed. 1988), the Court was quick to point out that this was not binding authority. Id.
The Court went on to discuss that the Smoral case out of New York did not aid the Homseys. See Smoral vs. Hanover Ins. Co., 322 N.Y.S.2d 12 (1971). The Court found Smoral merely stood for the proposition that an insured could sue for damages if an unfair settlement had been made. Id. at 537.
The Court then noted that the Texas Supreme Court had decided Soriano and the notion of favoring one insured over another was not the holding of that Court. The Court pointed out that the Homseys had not sued the insurers but only objected to the settlement reached. Id. The Homseys were seeking to prevent a settlement, not suing for damages.
The Fifth District reversed the district court and reinstated the settlements and injunctions, but modified the injunctions to permit the Homseys to sue the insurers. Id. at 557. In doing so, the Court was quick to point out that they were not doing so as an endorsement of the success of such a suit, only the Homseys right to bring it. Id.
The best that can be said in Vitek is that the Court would not permit an injunction to prevent an insured suing an insurer involving Soriano related claims. That cannot be read as the Fifth Circuit embracing an expansion of Soriano.
The Fifth Circuit also resolved another Soriano type case involving multiple insureds in Travelers Indem. Co. vs. Citgo Petroleum Corp., 166 F.3d 761 (5th Cir. 1999). Travelers issued three liability policies to Wright Petroleum to which Citgo, as the franchisor, was an additional insured. Id. at 763. A Wright tanker truck was involved in a collision in which two people, the Fredichs, and the Wright driver were killed. Id. At the time of the accident, the Wright driver was delivering Citgo petroleum products. Id. The estate of the Fredichs sued Wright but not Citgo. Thereafter, Travelers, in accordance with its policies defended and then settled the Fredichs’ lawsuit for $1.5 million, the full policy limits. Id. Travelers, in settling the lawsuit, was aware that the Fredichs were reserving their claims against Citgo. Id.
Predictably, the Fredichs sued Citgo and Citgo demanded a defense and indemnity from Travelers. Id. Travelers refused citing exhaustion of limits; Travelers then sought declaratory relief. Id. at 763-764.
Again, the Court was faced with the proposition that an insurer cannot favor one insured over another. Id. at 764. The Fifth Circuit easily rejected Citgo’s claims to the policy citing Soriano. Id.
Citgo attempted to distinguish Soriano by saying that an insurer owes a higher duty to insureds than third party claimants. Id. at 765. The Court found this argument meritless as the complaining party in Soriano was the insured. Moreover, any attempt to examine the settlement in light of all potential claims is not the test; rather, “reasonableness” is viewed from looking at the demand for settlement in isolation, without comparing the merits of the other claims. Id.
The Court pointed to two cases that addressed the multiple insured situation as it relates to Soriano citing Vitek and a recent state case, American States Ins. Co. vs. Arnold, 930 S.W.2d 196 (Tex. App. – Dallas 1996, writ denied). In each case, the Court found that exhaustion of policy limits ended the insurer’s obligations where the settlements were found to be reasonable. Id. at 765-766. The Court refused to carve out an exception to Soriano, relying on authorities from other jurisdictions outside of Texas. Id. at 768.
Once more, an appellate court has validated Soriano in favor of insureds. And once again, an insured is left to defend and indemnify itself without aid of an insurance policy to which it is an insured. The race to settlement is on and to the winner gets the policy limits of the applicable insurance policy(s). The insured in Texas loses.
Comparing Soriano and Farinas A Contrast in Night and Day
On one end of the continuum sits Soriano and on the other is the friendly Florida policyholder decision in Farinas vs. Florida Farm Bureau Gen. Ins. Co., 850 S.W.2d 555 (Fla. App. 2003, review denied). Farinas involves a multi vehicle collision where seven (7) people were injured (one quadriplegic) and five (5) people tragically killed and a 100/300 liability policy was at issue. Id. at 557. The insurer in Farinas exhausted the $300,000 limits by paying three claims, two involving deaths. Id. After exhausting the limits, the insurer filed a declaratory judgment action to determine any continuing duty. The claimants intervened and also filed third party bad faith claims. Id. at 557-558.
In a per curiam opinion, the Florida intermediate appellate court answered three questions: 1) what was the insurer’s good faith duty to the insureds in a multiple claim situation; 2) did the insurer satisfy that duty; and 3) what were the remaining fact issues for the jury. Id. In answering these questions, the Court pointed out that the duty is “that degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business.” Id. (This is the same standard for negligence in Texas where no good faith duty exists). Moreover, as to the insured, the insurer should not exhaust limits without “an attempt to settle as many claims as possible.” Id. at 559 citing Liberty Mut. Ins. Co. vs. Davis, 412 F.2d 475, 481 (5th Cir. 1969). Emphasis added. Thus, the insurer had the duty to settle as many claims as possible and “to avoid indiscriminately settling selected claims and leaving the insured at risk of excess judgments” by using a wiser settlement practice. Id. at 560. The settlements had to be reasonable which is a fact question for the jury. Id. at 561.
The holding of Farinas is stated as follows:
We now answer the three questions posed by resolution by this opinion. First, Farm Bureau’s good faith duty to the insured requires it to fully investigate all claims arising from a multiple claim accident, keep the insured informed of the claim resolution process, and minimize the magnitude of possible excess judgments against the insured by reasoned claim settlement. This does not mean that Farm Bureau has no discretion in how it elects to settle claims, and may even choose to settle certain claims to the exclusion of others, provided this decision is reasonable and in keeping with its good faith duty. Second, whether Farm Bureau has met its good faith duty and undertaken a reasonable claims settlement strategy are questions for a jury to decide. Consequently, in answer to the third question, there are many factual issues for the jury to resolve, including whether Farm Bureau’s quick settlement with three of the possible claimants was reasonable, whether Farm Bureau’s rejection of global and other settlement options contemplated the best interests of the insured, whether Farm Bureau adequately investigated the facts of all of the claims, and whether Farm Bureau properly rejected advice of legal counsel and suggested settlement strategies proposed by Farm Bureau employees.
Id. at 561.
Comparing the two cases, it is clear that Farinas demands far more of the insurer’s conduct that Soriano:
Look only at the demands and the settlements made not what the potential or value of the other unpaid claims maybe.
Can be a question of law for the Court.
Reasonably prudent insurer and/or business person (negligence standard).
Problems for the insurer:
Basically none unless no coverage, overpayment, or fraud.
Look at all the claims including: fully investigating each, keeping the insured informed of settlements, and minimize any possible excess judgments.
A question of fact for the jury
Good faith duty to insured as a fiduciary and may include negligence type standard.
The insurer in almost every case will have a fact question whether it acted reasonably – other settlement options will have to be disproved.
The conclusion, for me, of course, is that I need Florida law in Texas. All kidding aside, the insured in Florida is provided much more protection in Soriano situation than one living in Texas. There appears no middle ground.
Soriano is the law in Texas with respect to multiple insureds/multiple claimants and inadequate insurance limits. It is the exception that a court will hold the insurer accountable in Soriano dilemmas as long as the insurer can demonstrate some degree of reasonableness. Reasonableness is not something that a jury will likely get to decide in Texas as long as Soriano remains the law.