Striking an Expert Witness in Texas Insurance Indemnity Lawsuit

File: 061624F – From documents transmitted: 04/24/2008
AFFIRMED and Opinion issued April 24, 2008
In The
Court of Appeals
Fifth District of Texas at Dallas
……………………….
No. 05-06-01624-CV
……………………….
WILLIAM BOBBORA AND JAMES THEODORE JONGEBLOED, Appellants
V.
UNITRIN INSURANCE SERVICES F/K/A TRINITY UNIVERSAL
INSURANCE COMPANY, Appellee
…………………………………………………….
On Appeal from the 160th Judicial District Court
Dallas County, Texas
Trial Court Cause No. 04-12458-H
…………………………………………………….
OPINION
Before Justices Moseley, FitzGerald, and Mazzant
Opinion By Justice Moseley
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Unitrin Insurance Services f/k/a Trinity Universal Insurance Company sued William Bobbora and James Theodore
Jongebloed for breach of indemnity agreements, and obtained a jury verdict against Jongebloed. In his first issue, Jongebloed
contends the trial court erred by striking his expert witness. In his second issue, Jongebloed challenges an instruction in the
jury charge. For the reasons set forth herein, we conclude Jongebloed has failed to preserve his first issue for review, and we
resolve Jongebloed’s second issue against him. We affirm the trial court’s judgment.
I. BACKGROUND
Boborra and his wife owned some convenience stores that sold motor vehicle fuel. The stores bought bonds from
Unitrin under which Unitrin, as surety, guaranteed the payment of motor vehicle fuel taxes owed by the stores. Bobbora and
Jongebloed signed indemnity agreements by which they agreed to indemnify Unitrin for “any and all disbursements made by
[Unitrin] in good faith” under those bonds. At issue here are three of these indemnity agreements.
The State claimed that the stores failed to pay their fuel taxes, and the State seized some store accounts and assets. Later,
the State sought payment from Unitrin under the bonds for more than $500,000 for unpaid fuel taxes. Unitrin sought
indemnity from Bobbora and Jongebloed and investigated the amounts owed. The State eventually sued Unitrin. Unitrin
settled the suit regarding some of the stores. The State obtained a judgment regarding other stores, and Unitrin reached a
settlement with the State as to that judgment.
Unitrin sued Bobbora and Jongebloed alleging breach of the indemnity agreements, seeking just over $500,000 for the
amounts it paid the State under the bonds. It also sought expenses in connection with the settlement of the claims under the
bonds, prejudgment interest, and attorney’s fees. Bobbora and Jongebloed initially answered, asserting “defenses and pleas.”
They also asserted counterclaims, one of which was “breach of duty of good faith and fair dealing,” arising from Unitrin’s
“failure to properly evaluate and investigate [the State’s] claim . . . and the amount of credits and offsets due [their
companies] . . . .” Another counterclaim was “bad faith/fraud.”
Bobbora filed for bankruptcy protection, automatically staying the suit. The suit was abated and closed, but
subsequently was reopened and returned to the docket. See Footnote 1 Jongebloed alone filed a second amended answer in
which no counterclaim was asserted. However, Jongebloed asserted the “defenses” of bad faith, lack of good faith, and
breach of the duty of good faith and fair dealing, and he asserted a “credit for payments made.” Before trial, Jongebloed
designated Terry McGee as an expert witness. Unitrin objected and challenged the admissibility of his opinion. After a
hearing, the trial court signed an order striking McGee. See Footnote 2
The case proceeded to a jury trial. The jury found that Unitrin acted in good faith in making payments to the State under
the bonds and that Jongebloed failed to comply with the indemnity agreements. (No liability question was submitted as to
Bobbora.) The jury awarded Unitrin just over $500,000.00 as damages for Jongebloed’s failure to comply with the indemnity
agreements and just over $29,000.00 for investigating and settling claims under the bonds. The trial court rendered judgment
on the jury’s verdict in favor of Unitrin and against Jongebloed in the amount of $529,948.02; the trial court also awarded
pre- and postjudgment interest and attorney’s fees. Appellants’ motion for new trial was denied. This appeal followed. See
Footnote 3
II. EXCLUSION OF EXPERT WITNESS
In his first issue, Jongebloed challenges the trial court’s order striking his expert witness, McGee. Jongebloed argues his
designation of McGee was “procedurally correct” and that McGee was qualified to testify and his testimony was both
relevant and reliable. Unitrin argues, in part, that Jongebloed failed to preserve this error for review by failing to make an
offer of proof of McGee’s testimony.
To preserve error concerning the exclusion of evidence, the complaining party must actually offer the evidence and
secure an adverse ruling from the court. See Fletcher v. Minn. Min. & Mfg. Co., 57 S.W.3d 602, 607 (Tex. App.-Houston [1st
Dist.] 2001, pet. denied). While the reviewing court may be able to discern from the record the nature of the evidence and the
propriety of the trial court’s ruling, without an offer of proof, we can never determine whether exclusion of the evidence was
harmful. See id. at 608 Thus, when evidence is excluded by the trial court, the proponent of the evidence must preserve the
evidence in the record in order to complain of the exclusion on appeal. Id. at 606. See Tex. R. Evid. 103(a), (b). An offer of
proof preserves error for appeal if: (1) it is made before the court, the court reporter, and opposing counsel, outside the
presence of the jury; (2) it is preserved in the reporter’s record; and (3) it is made before the charge is read to the jury.
Fletcher, 57 S.W.3d at 607. When no offer of proof is made before the trial court, the party must introduce the excluded
testimony into the record by a formal bill of exception. See Sw. Country Enters., Inc. v. Lucky Lady Oil Co., 991 S.W.3d 490,
494-95 (Tex. App.-Fort Worth 1999, pet. denied). A formal bill of exception must be presented to the trial court for its
approval, and, if the parties agree to the contents of the bill, the trial court must sign the bill and file it with the trial court
clerk. Bryan v. Watumull, 230 S.W.3d 503, 516 (Tex. App.-Dallas 2007, pet. denied). See Tex. R. App. P. 33.2(c). Failure to
demonstrate the substance of the excluded evidence results in waiver. See Sw. Country Enters., Inc., 991 S.W.2d at 494. See
also Tex. R. App. P. 33.1(a)(1)(B).
As noted above, the record on appeal does not contain a reporter’s record of the hearing on the challenge to McGee. The
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clerk’s record contains an unsworn “Expert Report Prepared by Terry L. McGee” that was attached to Jongebloed’s Second
Supplemental Disclosure Responses. Jongebloed attached this discovery as part of his filed response to Unitrin’s challenge to
McGee. However, filing a document with the trial court is not a sufficient offer of proof. See Malone v. Foster, 956 S.W.2d
573, 577 (Tex. App.-Dallas 1997) (holding deposition on file with trial court not sufficient to make proper bill of exception;
citing McInnes v. Yamaha Motor Corp., U.S.A., 673 S.W.2d 185, 187 (Tex. 1984)), aff’d, 977 S.W.2d 562 (Tex. 1998). There
is nothing in the record showing an offer of proof, a bill of exception, or that the expert report was brought to the trial court’s
attention. Without an offer of proof, Jongebloed has failed to preserve his complaint for review. See Tex. R. Evid. 103; Tex.
R. App. P. 33.1(a)(1)(B); Fletcher, 57 S.W.3d at 607. We need not address Jongebloed’s first issue.
III. JURY CHARGE INSTRUCTION
In his second issue, Jongebloed argues the trial court gave an improper instruction in Question No. 1, specifically, the
italicized language below:
Did [Unitrin] act in good faith in making payments to the State of Texas under the respective bonds?
“Good faith”refers to conduct which is honest in fact, free of improper motive or wilful ignorance of the
facts at hand. It does not require proof of a “reasonable” investigation by the surety.
A.
Applicable Law and Standard of Review
A trial court must submit “such instructions and definitions as shall be proper to enable the jury to render a verdict.”
Tex. R. Civ. P. 277. An instruction is proper if it: (1) assists the jury, (2) accurately states the law, and (3) finds support in the
pleadings and evidence. In re Commitment of Almaguer, 117 S.W.3d 500, 502 (Tex. App.-Beaumont 2003, pet. denied)
(citing Union Pac. R.R. Co. v. Williams, 85 S.W.3d 162, 166 (Tex. 2002)). Rule 277 affords the trial court considerable
discretion in deciding what jury instructions are necessary and proper. Id. (citing Williams, 85 S.W.3d at 166). We review a
trial court’s decision to submit or refuse a particular instruction under an abuse of discretion standard. Shupe v. Lingafelter,
192 S.W.3d 577, 579 (Tex. 2006) (per curiam).
B.
Discussion
At trial, Jongebloed objected as follows to the inclusion of the second sentence:
[W]e have an objection to the definition of good faith that’s being used. We believe the good faith is
defined only by the first sentence that’s there . . . .
The language which is included after that, although it is referenced by the State of Texas, by the Texas
Supreme Court in the Associated Indemnity case [that is, Associated Indemnity Corp. v. CAT Contracting,
Inc., 964 S.W.2d 276, 285 (Tex. 1998)], it seems to be only instructive. It’s not a definition. . . .
The trial court overruled this objection. In his motion for new trial, Jongebloed argued that the second sentence was an
incorrect statement of the law, and, even if correct, it was an improper comment on the weight of the evidence because it was
surplusage.
The instruction in Question No. 1 was taken verbatim from Associated Indemnity Corp. In that case, the supreme court
considered a surety’s duty of good faith to its principal. It concluded that, although no such duty existed at common law, such
a duty did exist as a contract condition in the indemnity agreement before it where the indemnitee was given express
authority to settle claims made in good faith. See id. at 278. The issue before the court was a sufficiency of the evidence
challenge to the trial court’s finding that the surety “acted in bad faith in investigating and settling the claims” with the owner.
Id. at 282. The court analyzed “the appropriate definition of ‘good faith’ (and conversely, ‘bad faith’) under these
circumstances.” Id. at 284. The court considered whether a reasonable investigation was required and rejected that argument,
stating, “[I]n the surety context[,] bad faith requires more than an unreasonable or negligent investigation; it requires wilful
misconduct or improper motive.” Id. Relying on cases concerning settlement of claims by indemnitees in the commercial
paper context, the court said:
We hold that “good faith” in the surety agreement before us refers to conduct which is honest in fact, free
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of improper motive or wilful ignorance of the facts at hand. It does not require proof of a “reasonable”
investigation by the surety. Stating the proposition conversely for purposes of our evidentiary review for this
particular case, “bad faith” means more than merely negligent or unreasonable conduct; it requires proof of an
improper motive or wilful ignorance of the facts.
Id. at 285 (emphasis added).
Here, Bobbora and Jongebloed agreed to indemnify Unitrin for “any and all disbursements made by [Unitrin] in good
faith” under the bonds. The trial court’s submission assisted the jury in understanding the legal meaning of “good faith” in the
surety context and accurately stated the law from Associated Indemnity Corp. See id. Also, it is supported by Jongebloed’s
pleading that Unitrin settled the claims with the State giving rise to the claims at bar “without proper justification and that
such settlements were unreasonable when made” and evidence of Unitrin’s investigation of the amounts owed. Accordingly,
we conclude that, under the facts of this case, submission of the second sentence meets the standard for submitting a proper
instruction or definition. See In re Commitment of Almaguer, 117 S.W.3d at 502.
In reaching this conclusion, we necessarily reject Jongebloed’s argument that the second sentence “directly contradicts
the court’s definition of good faith.” He posits “what is wilful ignorance if it is not the failure to make a reasonable effort to
learn the facts?” The Texas Supreme Court has answered this question adversely to Jongebloed in the surety context, holding
that the indemnitee’s discretion is “limited only by the bounds of fraud.” Assoc. Indem. Corp., 964 S.W.2d at 284 (quoting
Cent. Sur. & Ins. Corp. v. Martin, 224 S.W.2d 773, 776-77 (Tex. Civ. App.-Beaumont 1949, writ ref’d)). As explained more
fully in outlining the standards for good or bad faith in the commercial paper context:
(1) The test is good or bad faith and not diligence or negligence. ([2]) Knowledge of facts merely sufficient to
cause one of ordinary prudence to make inquiry, with failure to make such inquiry, is not evidence of bad
faith. (3) Even gross negligence is not the same thing as bad faith, although it may be evidence tending to
prove bad faith. (4) To constitute evidence of bad faith, the facts known to the taker must be such as
reasonably to form the basis for an inference that in acquiring the instrument with knowledge of such facts he
acted in dishonest disregard of the rights of defendant. (5) Wilful ignorance is the equivalent of bad faith and
bad faith may be shown by a wilful disregard of and refusal to learn the facts when available and at hand.
Citizens Bridge Co. v. Guerra, 152 Tex. 361, 371, 258 S.W.2d 64, 69 (1953) (quoted in part in Associated Indemnity Corp.,
964 S.W.2d at 285).
We also necessarily reject Jongebloed’s argument that the complained-of sentence in the charge is surplusage because
the jury was not asked, in Question No. 1, whether Unitrin conducted a reasonable investigation. The issue being tried was
Unitrin’s good faith, and the instruction as worded informed the jury that whether the surety conducted a reasonable
investigation was not part of that inquiry.
Finally, Jongebloed argues the italicized sentence in the charge is a comment on the weight of the evidence. However, as
noted above, Jongebloed did not object to the charge on this ground before the court read the charge to the jury. Rule of civil
procedure 272 requires a party to object to the court’s charge, either orally or in writing, before the court reads the charge to
the jury. Tex. R. Civ. P. 272; Mitchell v. Bank of Am., N.A., 156 S.W.3d 622, 627 (Tex. App.-Dallas 2004, pet. denied) (citing
State Dep’t of Highways & Pub. Transp. v. Payne, 838 S.W.2d 235, 241 (Tex. 1992)). If the party does not present the
objection to the court before the court reads the charge to the jury, he waives his objection. Tex. R. Civ. P. 274; Mitchell, 156
S.W.3d at 627; Kirkpatrick v. Mem’l Hosp. of Garland, 862 S.W.2d 762, 769 (Tex. App.-Dallas 1993, writ denied). We
conclude Jongebloed has failed to preserve this complaint for review.
We conclude the complained-of sentence meets the standard of a proper instruction or definition. Therefore, we
conclude the trial court did not abuse its discretion in including this sentence in the definition of “good faith.” We resolve
Jongebloed’s second issue against him.
IV. CONCLUSION
Having concluded Jongebloed failed to preserve his first issue for review and resolved Jongebloed’s second issue against
him, we affirm the trial court’s judgment.
JIM MOSELEY
JUSTICE
061624f.p05
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Footnote 1
In an Order Granting Relief from Stay, the bankruptcy judge modified the automatic stay “to authorize and permit [Unitrin]
to proceed to trial in [this case] against Defendant James Theodore Jongebloed.” The bankruptcy judge further ordered “that
if the Trustee elects to pursue the Debtor’s counterclaims against [Unitrin] or abandons the counterclaims or sells the
counterclaims to third party [sic], [Unitrin] shall have the right without further order of this Court to liquidate its claim for
purposes of offset.” The bankruptcy judge also ordered that Unitrin “may take the deposition of [Bobbora] in [this suit] under
the provisions of the Texas Rules of Civil Procedure without further order of this Court.” The case was reopened and
returned to the active docket “so that [Unitrin] can proceed against Defendant James Theodore Jongebloed.”
Footnote 2
No record of this hearing was made.
Footnote 3
Although the style of the case continued to include Bobbora, the only defendant specifically mentioned in subsequent
pleadings was Jongebloed. The judgment states that Jongebloed appeared for trial; it does not so state as to Bobbora, and
indeed does not mention Bobbora. The judgment recites that “it finally disposes of all claims and all parties and is
appealable” and “[a]ll relief not expressly granted herein is denied.” We conclude from the record Bobbora was not part of
the case that was tried and that the judgment is final. See Moritz v. Preiss, 121 S.W.3d 715, 719 (Tex. 2003) (applying
presumption of finality to judgments following trial on merits to judgment not naming all defendants). Both Bobbora and
Jongebloed are listed on the notice of appeal and in appellants’ brief as appellants. Therefore, we retain the style of the case,
as they do, but our opinion addresses the complaints on appeal only as to Jongebloed because no error would result in harm
to Bobbora.
File Date[04/24/2008]
File Name[061624F]
File Locator[04/24/2008-061624F]
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Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Martindale AVtexas[2]

ERISA Litigation and Significant Issues in Litigation–DOL- Employment Law For Texas Employers

Fulghum v. Embarq Corp. (10th Cir.)
The merits issue in this case is whether participants were promised and are entitled under the employer’s plan to certain lifetime medical and life insurance benefits upon retirement. The district court dismissed the case as untimely, agreeing with the majority of courts that hold that the “fraud or concealment” exception to the ERISA section 413’s six-year statute of limitations requires an affirmative act of “fraudulent concealment” separate from the underlying misrepresentation constituting the alleged breach of fiduciary duty. It also decided the claims were untimely because they accrued at the time of the misrepresentation of lifetime benefits, more than six years before suit was brought. The court issued its initial decision on February 14, 2013, and it issued a decision denying reconsideration on July 16, 2013. A notice of appeal was timely filed on September 17, 2013. On December 18, 2013, the Secretary filed an amicus brief arguing that the district court erred in concluding that the “fraud or concealment” standard for statute of limitations purposes only applies when a fiduciary takes steps in additional affirmative steps to conceal the fiduciary misrepresentation. Plan Benefits Security Division

Fuller v. Sun Trust Banks (11th Cir.)

This case involves both the three-year and six-year statutes of limitations under section 413 of ERISA. Appellant’s brief was filed on February 12, 2013, and the Secretary filed an amicus brief in support of the plaintiff-appellant on March 12, 2013. The brief argued, with respect to the three-year actual knowledge standard, that the district court wrongly applied a constructive knowledge standard by relying on certain documents attached to the motion to dismiss that plaintiff never saw, and that she would not have had actual knowledge of all the elements of the alleged fiduciary breach even if she had reviewed those documents. The brief did not address the six-year statute of limitations issues. Oral argument, in which the Secretary participated, was held on November 7, 2013. Plan Benefits Security Division

Hi-Lex Controls, Inc. v. Blue Cross and Blue Shield of Michigan (6th Cir.)

In this private action, the court found that Blue Cross violated its fiduciary duties by charging health care plans sponsors hidden administrative fees and ordered Blue Cross to reimburse the sponsor $5.1 million. The court held that the claims were not time-barred under ERISA’s three or six-year statute of limitations because ERISA’s “fraud or concealment” exception to the normal statutory period applied. In so holding, the district court relied on a Second Circuit decision construing the exception more leniently than the construction applied by other circuits. On December 10, 2013, the Secretary filed an amicus brief agreeing with the court’s analysis of the statute of limitations issue, and also taking the position that the court was correct in deciding that Blue Cross acted as a fiduciary and committed a fiduciary breach in collecting the hidden fees from the plan assets it controlled. Plan Benefits Security Division

In re Revstone Casting Fairfield (N.D. Tex.)

On February 25, 2013, the Secretary obtained an inspection warrant that allowed the Department and an appraiser entry on to property owned by the Revstone Casting Fairfield Plan, in order for the appraiser to prepare a valuation of the property. See also Perez v. Hofmeister, Section K. Financial Institution and Service Provider Cases. Dallas and Chicago Offices

Solis v. Rice (N.D. Ohio)

On January 23, 2013, the court entered an amendment to a consent order and judgment, entered on November 25, 2003, involving the Ohio Industries, Inc. Group Medical, Dental and Weekly Disability Income Plan and the Ohio Locomotive Crane Co., Inc. Savings Investment Plan. The amendment, which appoints a new independent fiduciary to replace the one who withdrew, provides for the new fiduciary to accept $29,562.83 in funds ($25,314.46 for the Group Medical, Dental and Weekly Disability Income Plan and $4,248.37 for the Savings Investment Plan) distributed from Ohio Industries’ bankruptcy case. In addition, the independent fiduciary is to secure unclaimed funds in the name of the plans from the State of Ohio and distribute these assets, along with the bankruptcy funds, to the plans’ participants. Cleveland Office

Smith v. Aegon (6th Cir.)

This is an appeal from a district court decision dismissing an ERISA pension benefits case brought in Kentucky based on a forum selection clause that was incorporated into the plan more than seven years after the participant retired, which clause required him to file suit in Ohio rather than Kentucky. The plaintiff filed his opening brief on July 22, 2013. On August 12, 2013, the Secretary filed an amicus brief arguing that ERISA invalidates the forum selection clause. Plan Benefits Security Division

In re Ormet Corporation (Bankr. Del.)

On November 15, 2013, the Secretary filed two objections in the Ormet Corporation Chapter 11 bankruptcy proceeding. Ormet was an Ohio corporation with four affiliated companies. It had approximately 14 employee benefit plans, some of which were subject to ERISA. The Secretary’s first objection involved the debtors’ motion for the approval of the sale of all of its assets relating to one of its facilities, including the transfer of employee benefit plans. The Secretary objected to the motion because the debtors’ filings failed to include sufficient information for the Secretary to determine whether the sale would violate any provisions of ERISA, including its COBRA provisions, or to determine whether the buyer would incur any successor liability. The Secretary also objected based on the debtors’ attempt to disclaim all ERISA liability with respect to the buyer and non-debtor third parties. In addition, the Secretary also objected to the debtors’ second emergency motion, which sought relief from its current obligations to several ERISA-covered plans and attempted to disclaim all COBRA obligations and some of its plan payment obligations. Chicago Office

In re Robert Plan Corp. (Bankr. E.D.N.Y.)

This case involves an ongoing dispute with a Chapter 7 trustee over a bankruptcy court’s jurisdiction to approve payments to the trustee and his retained professionals for work performed in terminating the debtor’s 401(k) plan. On October 26, 2010, the bankruptcy court held that it had core jurisdiction to rule on the fee requests, but avoided ruling on whether it had jurisdiction to determine the amount of the fees to be paid using plan assets. On March 1, 2011, the bankruptcy court issued a first interim fee award to the trustee and his professionals in amounts greater than the Secretary believed appropriate, but consistent with the October 2010 Order, and refused the trustee’s request to rule on what amounts were payable by the plan. On December 11, 2011, the Secretary filed an objection to the second interim fee request by the trustee and his law firm and a final fee application by the auditor and pension consultant assisting the trustee. On August 20, 2012, the bankruptcy court overruled the Secretary’s objections and granted the fee applications. Departing from the terms of the 2010 Order, which had stated that “[a]ny order awarding fees would contain no determination of whether Plan funds could be used to satisfy the award,” the bankruptcy court expressly provided in the August 2012 decision that the trustee could use plan funds to pay the professionals, thereby effectively asserting jurisdiction over the ERISA plan and its assets. The interim fee award to the trustee of $132,378.24 resulted in an effective hourly rate of approximately $2,000 per hour. As a portion of the relief granted in the 2012 decision was interlocutory, on September 4, 2012, the Secretary filed a motion for leave to appeal to the district court. On September 14, 2012, the trustee filed an opposition to the Secretary’s motion. On September 27, 2012, the Secretary filed a motion for leave to file a reply brief, to which the trustee filed an opposition on October 4, 2012. On April 9, 2013, rather than rule on the Secretary’s request to file a reply brief, the district court granted the Secretary’s request to appeal solely that portion of the August 2012 decision that asserted the bankruptcy court’s jurisdiction to order the payment of fees from plan assets; it determined that the issues regarding the amount of the compensation of the trustee and his law firm would be appealable at a later date when final orders of compensation were issued in the bankruptcy case. The Secretary filed its appeal brief on April 30, 2013, and the trustee filed an opposition on May 15, 2013. The district court has not yet issued an opinion. Plan Benefits Security Division

In re Saetveit (Bankr. D. Colo.)

The Secretary filed a joint stipulation as to non-dischargeability of debt in December 2013 in the bankruptcy case of William Roger Saetveit, a fiduciary responsible, along with others, for committing a series of ERISA violations in the course of investing plan assets and allowing plan participants to direct their plan account assets into a hedge fund that later was revealed to be a Ponzi scheme. Saetveit, the fiduciary debtor, was grossly negligent with regard to his responsibilities as a plan fiduciary and thus committed defalcation. Denver Office

Schoenfeld v. Perez (9th Cir.)

This is an appeal from a case brought by the Secretary in which the Secretary successfully argued that fiduciaries breached their duties to an ESOP by allowing the corporate sponsor to withdraw funds from the ESOP to pay corporate expenses and that the debt is non-dischargeable under the bankruptcy code because of defalcation. The appellants filed their brief on August 20, 2013, and the Secretary filed a response brief on extension on October 25, 2013. San Francisco Office and Plan Benefits Security Division

In re Thelen LLP (Bankr. S.D.N.Y.)

Thelen LLP, a major national law firm and Chapter 7 debtor, was the sponsor and plan administrator for three ERISA-covered plans: a 401(k) plan, a defined benefit plan, and a cash balance plan. Pursuant to section 704(a)(11) of the Bankruptcy Code, Thelen’s Chapter 7 trustee became obligated to fulfill the plan administrator role. On or about July 13, 2010, the trustee filed a motion seeking payment from the plans for legal services provided by Fox Rothschild LLP (“Fox”), the trustee’s law firm. The trustee filed motions on January 13, 2011, and October 13, 2011, seeking: (i) authorization to terminate the plans; (ii) authorization for the plans to pay for services provided by professionals retained by the trustee; (iii) the retention of an independent fiduciary to terminate the plans and pay retained professionals from plan assets; and (iv) to quash an administrative subpoena issued by the Secretary to the trustee. On March 17, 2011, and February 10, 2012, the Secretary objected to the jurisdiction of the bankruptcy court to approve the payment of the fees and expenses of Fox and the other professionals, the appointment of the independent fiduciary, and the quashing of the subpoena. On October 20, 2011, the PBGC filed an objection to the appointment of an independent fiduciary and the failure of the trustee to sign a trusteeship agreement for the transfer of the defined benefit plan to the PBGC for termination. On May 17, 2012 a consensual order was entered by the district court providing for, among other things: (i) a withdrawal of the reference of the motions from the bankruptcy court to the district court; (ii) the appointment of an independent fiduciary for the cash balance and the 401(k) plans to terminate those plans and to pay the plan professionals (including Fox); (iii) fixing Fox’s fees at $125,000, less than half of what Fox would have claimed; (iv) the assignment of the defined benefit plan to the PBGC; and (v) the Secretary’s release of her prohibited transaction claims and certain other claims against the trustee and Fox. The independent fiduciary is now in the process of terminating the cash balance and 401(k) plans; termination of the 401(k) plan is near completion. Plan Benefits Security Division

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Martindale AVtexas[2]

Excess Insurer’s Rights to Reimbursement in Texas Insurance Litigation

IN THE SUPREME COURT OF TEXAS

 

════════════

No. 02-0730

════════════

 

Excess Underwriters at Lloyd’s, London and Certain Companies Subscribing Severally But Not Jointly to Policy No. 548/TA4011F01, Petitioners,

 

v.

 

Frank’s Casing Crew & Rental Tools, Inc., Respondent

 

════════════════════════════════════════════════════

On Petition for Review from the

Court of Appeals for the Fourteenth District of Texas

════════════════════════════════════════════════════

 

 

Argued February 15, 2006

 

 

Justice O’Neill delivered the opinion of the Court, joined by Chief Justice Jefferson, Justice Medina, Justice Johnson, and Justice Willett.

 

Justice Hecht delivered a dissenting opinion, joined by Justice Green.

 

Justice Wainwright delivered a dissenting opinion.

Justice Brister did not participate in the decision.

On January 6, 2006, we granted respondent’s motion for rehearing. We now withdraw our opinion issued May 27, 2005, and substitute the following.

In Texas, an insurer that settles a claim against its insured when coverage is disputed may seek reimbursement from the insured should coverage later be determined not to exist if the insurer “obtains the insured’s clear and unequivocal consent to the settlement and the insurer’s right to seek reimbursement.” Tex. Ass’n of Counties County Gov’t Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128, 135 (Tex. 2000). In this case, which involves excess coverage, the insured consented to the settlement but not to the excess insurer’s asserted reimbursement right. We must decide whether to recognize an exception to the rule in Matagorda County and imply a reimbursement obligation when the policy involves excess coverage, the insurer has no duty to defend under the policy, and the insured acknowledges that the claimant’s settlement offer is reasonable and demands that the insurer accept it. Because none of these distinctions alleviates the concerns that drove the Court’s analysis in Matagorda County, we decline to recognize such an exception. We further hold that the excess insurers failed to establish that Louisiana law regarding an insurer’s right to reimbursement differs from Texas law. Accordingly, we affirm the court of appeals’ judgment.

  1. Background

Frank’s Casing Crew & Rental Tool, Inc. fabricated a drilling platform for ARCO/Vastar. When the platform collapsed, ARCO sued Frank’s Casing and several others. Frank’s Casing had a $1 million primary liability policy, and excess coverage up to $10 million with Excess Underwriters at Lloyd’s, London, and Certain Companies Subscribing Severally But Not Jointly To Policy No. 548/TA4011F01 (collectively “excess underwriters”). The excess policy did not require the underwriters to assume control of the defense or the settlement of any claims, but did give them the right to associate with defense counsel retained by Frank’s Casing or the primary insurer if it was reasonably likely that the excess coverage layer would be reached. After Frank’s Casing notified the excess underwriters of ARCO’s claims, the underwriters issued reservation-of-rights letters asserting that coverage for ARCO’s claims was “limited or negated” under the policy’s terms.

The primary carrier retained defense counsel for Frank’s Casing. As trial approached, ARCO offered to settle its claims against Frank’s Casing for $9.9 million, an amount within the excess policy limits. Frank’s Casing rejected the offer without passing it on to the excess underwriters. Two weeks before trial, the excess underwriters contacted ARCO directly, without Frank’s Casing’s knowledge, and attempted to settle claims the underwriters were willing to concede were covered. No agreement was reached. ARCO later made an $8.8 million global settlement offer to all of the defendants, about $7.55 million of which was allocated to Frank’s Casing. The excess underwriters offered to pay two-thirds of this amount if Frank’s Casing and its primary carrier would pay the balance, and further agreed to waive all coverage defenses if Frank’s Casing accepted that proposal. Alternatively, the excess underwriters offered to pay $5 million and defer all coverage issues to be resolved in arbitration. Frank’s Casing rejected both proposals, insisting that it was covered under the excess policy and therefore the underwriters were obligated to fund the entire settlement.

Shortly before trial, the excess underwriters retained counsel to associate with Frank’s Casing and its primary carrier in defending against ARCO’s claims. As trial began, it quickly became clear that Frank’s Casing was ARCO’s primary target, prompting Frank’s Casing’s in-house counsel to contact ARCO and solicit a settlement demand within the excess coverage limits. Frank’s Casing’s counsel suggested that something in the $7 million range would be reasonable. ARCO responded with a $7.5 million demand. Frank’s Casing forwarded ARCO’s demand to the excess underwriters with a letter suggesting that the settlement offer was a reasonable one that the underwriters should accept. The letter reiterated Frank’s Casing’s disagreement with the underwriters’ coverage position, and stated that Frank’s Casing was looking to the underwriters to fund the settlement. In their response two days later, the underwriters agreed that the case should be settled, but noted that coverage issues remained. The underwriters offered to fund the entire settlement if Frank’s Casing would agree to reserve those issues for resolution later. Frank’s Casing rejected the underwriters’ proposal, contending that the excess insurance policies obligated the underwriters to fund the settlement. In response, the excess underwriters advised Frank’s Casing that they would pay $7.5 million to settle the claim, less any contribution from the primary carrier, and then seek reimbursement from Frank’s Casing. Within hours, the underwriters contacted ARCO and orally accepted its settlement offer, and the primary carrier tendered its remaining policy limits of approximately $500,000. A written settlement agreement among ARCO, Frank’s Casing, and the excess underwriters preserved “any claims that exist presently” between Frank’s Casing and the underwriters. Before that agreement was executed, the excess underwriters filed this suit.

Both Frank’s Casing and the excess underwriters filed a series of cross motions for partial summary judgment. The trial court initially granted the underwriters’ motions on their right to reimbursement. It also granted their motions for partial summary judgment on coverage, and another concluding that the excess underwriters were entitled to $7,013,612 in damages on their reimbursement claim. Before a final judgment was entered, this Court issued Texas Association of Counties County Government Risk Management Pool v. Matagorda County, declining to recognize an implied-in-fact, an implied-in-law, or an equitable reimbursement right outside of the insurance policy’s provisions. 52 S.W.3d at 128. In light of our decision, the trial court ordered Frank’s Casing to file a motion for new trial only on the reimbursement issue. Frank’s Casing filed the motion and the trial court granted it, withdrew its prior order, and signed a take-nothing judgment in Frank’s Casing’s favor. The court of appeals affirmed. 93 S.W.3d 178. We granted the excess underwriters’ petition for review to decide whether our decision in Matagorda County allows the underwriters to assert a reimbursement right under the circumstances presented.

  1. Reimbursement Under Texas Law

In Matagorda County, we examined an insurer’s asserted reimbursement right in similar, though not identical, circumstances. 52 S.W.3d at 129. There, the Texas Association of Counties (TAC) provided law-enforcement liability coverage to Matagorda County, but the policy excluded coverage for claims “arising out of jail.” When three inmates who had been assaulted by other prisoners in the County’s jail sued the County, TAC initially denied coverage based on the jail exclusion. After some negotiation, TAC agreed to pay defense costs, subject to a reservation of rights to preserve its coverage contest, and filed suit against the County seeking a declaratory judgment that the inmates’ claims were not covered. Ultimately, the plaintiffs in the underlying suit offered to settle for $300,000, an amount within TAC’s policy limits. Although the County did not dispute the reasonableness of the proposed settlement, the County refused to fund or contribute to it, insisting that the claims were covered. At this point, TAC issued a second reservation-of-rights letter, again reserving its right to continue to deny coverage, but adding a statement that it was not waiving “any of its rights to pursue full recovery of this settlement amount from the County . . . in the declaratory judgment action.” Id. at 130. TAC settled the case, then amended its pending declaratory judgment action to seek reimbursement.

We held that, under the circumstances presented, TAC had not established a right to reimbursement. Id. at 133. First, we held that TAC could only reserve rights that were expressed in the policy, and TAC’s policy did not contain a right of reimbursement. Id. at 131 (stating “a unilateral reservation-of-rights letter cannot create rights not contained in the insurance policy”). Second, we held that neither the County’s silence in response to TAC’s reservation of rights, nor its failure to contest the settlement’s reasonableness, were sufficient to create an implied-in-fact reimbursement obligation that did not appear in the policy. Id. at 132–33. Third, we held that TAC had not established a right to reimbursement under quasi-contractual theories of quantum meruit or unjust enrichment. Id. at 134–35. Finally, we held that an insurer could impose a reimbursement obligation on its insured by either drafting policies to specifically include a reimbursement right, or by obtaining the insured’s “clear and unequivocal consent to the settlement and the insurer’s right to seek reimbursement.” Id. at 135.

Our analysis in Matagorda County highlighted the dilemma faced by both insurer and insured when a claimant presents a settlement demand within policy limits and coverage is uncertain. Id. (stating “[w]e recognize that, however the issue is resolved, either insurers or insureds will face a difficult choice when coverage is questioned”). On one hand, an insurer that rejects a reasonable offer within policy limits risks significant potential liability for bad-faith insurance practices if it does not ultimately prevail in its coverage contest. Id.; see G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544, 547 (Tex. Comm’n App. 1929, holdings approved). Denying a reimbursement right in this situation in effect creates coverage in those cases where coverage is ultimately determined not to exist. At the same time, imposing an extra-contractual reimbursement obligation places the insured in a highly untenable position. See Matagorda County, 52 S.W.3d at 135. The insured is forced “to choose between rejecting a settlement within policy limits or accepting a possible financial obligation to pay an amount that may be beyond its means, at a time when the insured is most vulnerable.” Id. at 134.

We resolved this quandary in Matagorda County, determining that the risk of coverage uncertainties was best placed with the insurer. Id. We reasoned that “[r]equiring the insurer, rather than the insured, to choose a course of action is appropriate because the insurer is in the business of analyzing and allocating risk and is in the best position to assess the viability of its coverage dispute.” Id. at 135. An insurer in this situation has a number of options. If the insurer assesses its coverage position as strong, it may refuse to participate in settlement and rely on its coverage action, leaving the insured to negotiate a settlement with its own resources. Or, an insurer may seek prompt resolution of its coverage dispute, a course we have encouraged insurers in this position to take. Id. at 135 (citing State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996); Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 84 (Tex. 1997)). Or, if an insurer’s coverage position is difficult to assess, as is sometimes the case, the insurer can leverage the coverage dispute during settlement negotiations to lower the claimant’s demand; by paying the negotiated claim, the insurer eliminates its own potential bad-faith liability, saves defense costs, and avoids protracted coverage litigation with its insured. Or, at the outset, the insurer may include a reimbursement right in the policy, which may yield a lower premium than a policy that does not contain such a right.

By contrast, recognizing an extra-contractual reimbursement right leaves insureds with fewer options and creates a number of potential problems. As we noted in Matagorda County, allowing an insurer to settle claims and then sue its policyholder “foster[s] conflict and distrust in the relationship between an insurer and its insured,” a situation that has been widely rejected in analogous contexts. Id. at 134; see also Medina v. Herrera, 927 S.W.2d 597, 604 (Tex. 1996). For example, courts have long declined to allow insurers to seek equitable subrogation against their insureds. See Phonenix Ins. Co. v. Erie & W. Transp. Co., 117 U.S. 312, 320–25 (1886). Strong public policy reasons support that rule:

 

The fiduciary relationship between insurer and insured is fraught with conflicting interests . . . . [B]ecause of the fiduciary relationship, the insurer would be able to secure information from its insured under the guise of policy provisions available for later use in a subrogation action against the insured. [Further], the right to sue [its] own insured could be interpreted by an insurer as judicial sanction to breach the policy of insurance.

 

 

Stafford Metal Works, Inc. v. Cook Paint & Varnish Co., 418 F. Supp. 56, 58–59 (N.D. Tex. 1976) (citations omitted).

Several amici further warn that implying a reimbursement right would create a significant conflict for defense counsel during settlement discussions.[1] According to the amici, if an insured’s acknowledgment of a settlement offer’s reasonableness were to expose the insured to an extra-contractual reimbursement obligation, as the underwriters here contend it should, defense counsel’s traditional role in evaluating and recommending settlement could end up advancing the insurer’s interest over that of the insured, necessitating the insured’s retention of its own coverage counsel during what may be a critical point in the proceedings. Indeed, the amici argue, with defense counsel thus hindered from encouraging settlement, both the insured and the insurer will likely feel the need to hire their own “settlement counsel” to evaluate the case and formulate a strategy for the anticipated reimbursement litigation. Whether or not the concerns the amici voice are real or imagined, we believe they do portend significant distrust in the insurer/insured relationship during the settlement process should an equitable reimbursement right be implied.

Several amici also warn that recognizing a reimbursement right risks weakening the insurer’s incentive to negotiate a settlement most favorable to its insured. Knowing that the insured will likely bear the ultimate payment obligation could incentivize the insurer to curtail attorney’s fees and litigation expenses early in the proceedings by negotiating a quick settlement, with the added benefit of extinguishing any risk of Stowers liability. See Stowers, 155 S.W.2d at 547. The potentially protracted coverage/reimbursement litigation likely to follow would be at the insured’s expense, even though the insured purchased insurance for the very purpose of hedging the risk and expense of future litigation.

The Court in Matagorda County weighed the varying risks that arise in this context and decided that insurers, on balance, are better positioned to handle them “either by drafting policies to specifically provide for reimbursement or by accounting for the possibility that they may occasionally pay uncovered claims in their rate structure.” Matagorda County, 52 S.W.3d at 136. We decline to overrule that decision, and now turn to the underwriters’ argument that the circumstances presented here are distinguishable and support their asserted right to reimbursement in this case.

III. Excess Underwriters’ Reimbursement Theories

The excess underwriters contend that by soliciting the settlement demand and agreeing to be bound by it, Frank’s Casing impliedly consented to reimburse the excess underwriters. The underwriters further claim an equitable reimbursement right under the doctrines of quantum meruit and assumpsit. Although we declined to recognize an implied or equitable reimbursement right in Matagorda County, the underwriters contend our decision was limited to the facts presented in that case. They maintain that the rationale underlying our decision does not apply here because the excess underwriters had neither the duty to defend nor unilateral control over settlement, factors they contend were critical underpinnings of our Matagorda County analysis. The underwriters also emphasize that, unlike the insurer in Matagorda County, their policy prevented them from settling the case without Frank’s Casing’s consent.

  1. Implied-in-Fact Agreement

The excess underwriters argue that Frank’s Casing impliedly agreed to reimbursement by taking an active role in procuring the settlement offer, and in demanding that the excess underwriters settle the claim. They also point to Frank’s Casing’s participation in the drafting and negotiation of the settlement agreement.

Undoubtedly, these actions demonstrate that Frank’s Casing believed the claims should be settled, but they say nothing about Frank’s Casing’s agreement to a reimbursement obligation that does not appear in its policy. To the contrary, Frank’s Casing’s letters to the excess underwriters expressed continuing disagreement with the insurers’ coverage position, indicated that Frank’s Casing was looking to the excess underwriters to fund the entire settlement, and made clear that Frank’s Casing would seek recourse against the underwriters if the case was not settled and a judgment in excess of policy limits resulted. In settling the ARCO suit, both Frank’s Casing and the excess carriers expressly sought to preserve their positions in the coverage dispute; in effect, they agreed to disagree on the reimbursement question and let the trial court decide the legal effect. This is a far cry from impliedly consenting to reimbursement. The excess underwriters benefitted from the settlement by eliminating potential Stowers liability in the event ARCO’s claims were later determined to be covered, just as Frank’s Casing benefitted by eliminating the possibility of a large verdict that might turn out not to be covered. Given the parties’ explicit efforts to preserve their positions, it makes no more sense to say that Frank’s Casing impliedly agreed to reimburse the carriers than it would to say that the carriers impliedly agreed to waive their coverage position. Just as an insured’s acceptance of a defense the insurer proffers with a reservation of rights implies the insured’s consent to the reservation, the excess underwriters’ agreement to accept the settlement in light of Frank’s Casing’s reimbursement contest implied the insurers’ consent to Frank’s Casing’s reservation of the reimbursement question. As we reaffirmed in Matagorda County, “a meeting of the minds is an essential element of an implied-in-fact contract.” Matagorda County, 52 S.W.3d at 133 (citing Haws & Garrett Gen. Contractors, Inc. v. Gorbett Bros. Welding Co., 480 S.W.2d 607, 609 (Tex. 1972)). Frank’s Casing’s agreement to reimburse the excess insurers cannot be implied in light of its consistent position that the insurers alone were responsible for the claims.

The excess insurers contend, however, that Frank’s Casing’s agreement may be implied here because, unlike in Matagorda County, Frank’s Casing’s policy did not allow the insurers to settle without Frank’s Casing’s consent. In support, the underwriters cite the following policy language:

 

Liability under this policy with respect to any occurrence shall not attach unless and until the Assured, or the Assured’s underlying insurers, shall have paid the amount of the underlying limits on account of such occurrence. The Assured shall make a definite claim for any loss for which the Underwriters may be liable under this policy within twelve (12) months after the Assured shall have paid an amount of ultimate net loss[2] in excess of the amount borne by the Assured or after the Assured’s liability shall have been fixed and rendered certain either by final judgment against the Assured after actual trial or by written agreement of the Assured, the claimant, and Underwriters. If any subsequent payments shall be made by the Assured on account of the same occurrence, additional claims shall be made similarly from time to time. Such losses shall be due and payable within thirty (30) days after they are respectively claimed and proven in conformity with this policy.[3]

 

 

As we read this language, however, it describes when payment is due to the insured under the policy. Specifically, the insurer must pay Frank’s Casing when the primary coverage layer is exhausted and Frank’s Casing timely presents a claim for any excess amount for which it has been found liable as the result of a trial or a written agreement to which the parties acquiesced. In other words, the policy requires Frank’s Casing to obtain the underwriters’ consent to a settlement to receive payment under the policy. The policy language says nothing about the underwriters’ reimbursement rights should they decide to negotiate a settlement of the claim.

  1. Equitable Theories

The excess underwriters also claim a reimbursement right under the equitable theories of quantum meruit and assumpsit. Under the former theory, one who provides valuable services to another may establish that the service’s recipient has an implied-in-law obligation to pay when the recipient has reasonable notice that the service provider expects to be paid. See Heldenfels Bros., Inc. v. Corpus Christi, 832 S.W.2d 39, 41 (Tex. 1992). Under the latter, a cause of action arises when money is paid for the use and benefit of another. See King v. Tubb, 551 S.W.2d 436, 442 (Tex. Civ. App.—Corpus Christi 1977, no writ).

We held in Matagorda County that TAC could not recover on either quantum meruit or an unjustment enrichment theory, a quasi-contractual doctrine that closely resembles assumpsit. The excess underwriters argue that Matagorda County does not govern because Frank’s Casing sought a settlement demand from ARCO and demanded that the underwriters pay it. They also contend that their status as excess insurers with no duty to defend distinguishes this case from Matagorda County. Neither of those distinctions, however, allays the concerns underlying our analysis in Matagorda County.

The parties’ respective positions were no less firmly drawn in Matagorda County than in this case. There, it was clear that “the County was looking to [TAC] to settle . . . without a contribution from [the County].” Matagorda, 52 S.W.3d at 133 (internal quotations omitted). We fail to see how Frank’s Casing’s suggestion that ARCO submit a settlement demand within policy limits meaningfully distinguishes the decision. In Matagorda County, we concluded that “when coverage is disputed and the insurer is presented with a reasonable settlement demand within policy limits, the insurer may fund the settlement and seek reimbursement only if it obtains the insured’s clear and unequivocal consent to the settlement and the insurer’s right to seek reimbursement.” Id. at 135 (emphasis added). We did so because “[o]therwise, the insured is forced to choose between rejecting a settlement within policy limits or accepting a possible financial obligation to pay an amount that may be beyond its means, at a time when the insured is most vulnerable.” Id. That fundamental concern is unaffected by the fact that the excess underwriters had no duty to defend.

There is an additional reason that the excess underwriters are not entitled to a reimbursement right. That is, “[w]hen a valid agreement already addresses the matter, recovery under an equitable theory is generally inconsistent with the express agreement.” Fortune Prod. Co. v. Conoco, Inc., 52 S.W.3d 671, 684 (Tex. 2000). Here, the insurance policies spell out the parties’ respective obligations in great detail. As set out above, the excess underwriters were not liable under the policy until the primary coverage was exhausted, Frank’s Casing had provided timely notice, and Frank’s Casing had become liable for a judgment either as the result of a trial or a settlement to which the excess underwriters had agreed. To recognize an equitable right to reimbursement would require us to “rewrite the parties’ contract [or] add to its language,” Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 162 (Tex. 2003), which we decline to do.

  1. Other States

The excess underwriters also urge us to overrule Matagorda County and follow the decisions of the California Supreme Court in Blue Ridge Insurance Co. v. Jacobsen, 22 P.3d 313 (Cal. 2001), and a Florida appellate court in Colony Insurance Co. v. G & E Tires & Service, Inc., 777 So. 2d 1034 (Fla. Dist. Ct. App. 2000). In Blue Ridge, the California Supreme Court implied a reimbursement obligation in favor of a liability insurer that funded a settlement of claims ultimately determined not to be covered. Blue Ridge, 22 P.3d at 314. The California court distinguished our decision in Matagorda County on the basis that California provides a much more limited opportunity to resolve coverage issues before the underlying lawsuit is resolved than does Texas. Id. at 322–23. Moreover, the legal background underlying Blue Ridge differs significantly from Texas law. An insurer in Texas cannot be held liable under Stowers for failing to settle a claim that is not covered. Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994). Under California law, however, an insurer may not consider whether claims are covered in evaluating settlement demands. Blue Ridge, 22 P.2d at 318.

In Colony Insurance, the Florida appeals court held that a liability insurer’s reservation of rights letter, coupled with the insured’s acceptance of a defense, entitled the insurer to reimbursement for defense costs it had paid. 777 So. 2d at 1039. We held in Matagorda County, however, that a unilateral reservation-of-rights letter could not create a reimbursement obligation not contained in the insurance contract. Matagorda County, 52 S.W.3d at 131. As we have noted, to follow Colony Insurance would require us to overrule Matagorda County, which we decline to do.

  1. The Dissents

Justice Hecht would impose an equitable reimbursement obligation on Frank’s Casing that is not found in its policy, supplementing the terms these sophisticated parties negotiated based on an unjust-enrichment theory. Justice Wainwright, recognizing that the equities presented cut both ways, does not agree that a reimbursement right may be implied in law; instead, he would apply one in fact, as a matter of law, based on Frank’s Casing’s acquiescence in the settlement, even though both parties expressly reserved their respective positions on the coverage/reimbursement question. On indistinguishable facts, we rejected both of those theories in Matagorda County. 52 S.W.3d at 131–35. In “rewrit[ing] the parties’ contract . . . [because they] believe we should,” Utica Nat’l Ins. Co. of Tex. v. Am. Indem. Co., 141 S.W.3d 198, 208 (Tex. 2004) (Hecht, J., dissenting), and eschewing our own precedent, the dissenting justices would, in the words of one amicus curiae, “take[] a step back from predictability in the law related to business transactions in Texas and, therefore, a step back from the continuing effort to attain a fair, efficient, and predictable civil justice system,” Amicus Curiae Brief of Texas Civil Justice League in Support of Respondent’s Motion for Rehearing, at 2.

In Matagorda County, this Court drew a bright-line rule disallowing reimbursement on an equitable unjust-enrichment theory because insurers are in a superior position to evaluate the risks stemming from a coverage dispute and can expressly allocate that risk by delineating reimbursement rights in their policies. 52 S.W.3d at 135–36. Justice Hecht’s approach would undermine both the predictability that our decision in Matagorda County provided and the “strong public policy in favor of preserving the freedom of contract.” Fortis Benefits v. Cantu, 234 S.W.3d 642, 649 (Tex. 2007). Just a few months ago, we concluded that an insured could not rely on the equitable “made-whole” doctrine to supplant a contractual subrogation clause. Id. at 645. We warned that courts “should not by judicial fiat insert non-existent language . . . into parties’ agreed-to contracts . . . .” Id. at 649 n.41. The Court proclaimed itself “loathe to judicially rewrite the parties’ contract by engrafting extra-contractual standards,” id. at 649, and reaffirmed the reasoning that supported our holding in Matagorda County: “insurers are well equipped to evaluate and reduce risk by, for example, ‘drafting policies to specifically provide for reimbursement,’” id. (quoting Matagorda County, 52 S.W.3d at 136).

Justice Hecht attempts to limit our decision in Matagorda County to its facts, arguing the concerns that drove our decision there do not exist in this case and, even if they did, an equitable remedy could be fashioned to do equity in accordance with general restitution principles. While his dissent asserts that the remedy could be limited to avoid “unfairness,” it offers little guidance as to the remedy’s boundaries. He hints that the concerns underlying Matagorda County do not apply because Frank’s Casing is “a substantial business.” Under Justice Hecht’s construct, then, whether an insured faces a reimbursement obligation would have to be decided on a case-by-case basis: insureds with less economic heft than Frank’s Casing but more than Matagorda County might or might not be on the hook, depending upon how a court might view the “equities” presented. Justice Hecht’s approach would breed uncertainty and “promote litigation rather than settle it.” Gandy, 925 S.W.2d at 709.

Justice Wainwright’s approach is similarly untenable. Agreeing with the Court that the circumstances would not support a reimbursement right implied in law, he would imply one in fact — as a matter of law. As in Matagorda County, however, the record here affirmatively demonstrates just the opposite. Frank’s Casing’s repeated insistence on its coverage position and on the excess underwriters’ obligation to fund any settlement, and its express reservation of the question, belie any meeting of the minds — “an essential element of an implied-in-fact contract.” Matagorda County, 52 S.W.3d at 133. Just as in Matagorda County, Frank’s Casing “consistently contested [the excess underwriters’] coverage position and insisted that [they] pay under the policy.” Id. Undoubtedly, the parties agreed that the case should be settled. But the excess underwriters’ own letter to Frank’s Casing advising that it would contact ARCO and attempt to settle noted that the underwriters had “asked Frank’s to contribute to the settlement [and] Frank’s ha[d] refused.” Furthermore, though Justice Wainwright contends that Frank’s Casing’s agreement to the settlement constituted a manifestation of assent to the terms on which it was offered, there is uncontested evidence that the excess underwriters first mentioned reimbursement in a letter it sent to Frank’s Casing just hours before they contacted the plaintiffs and settled the case. Frank’s Casing’s assent cannot be inferred under these circumstances. See Restatement (Second) of Contracts § 69(1)(a) (1981) (noting that assent may only be inferred “[w]here an offeree takes the benefit of offered services with reasonable opportunity to reject them”). We held on nearly identical facts in Matagorda County that “there was no meeting of the minds” between the insurer and its insureds. Id. Given the parties’ explicit efforts to preserve their respective positions on the coverage/reimbursement question, it makes no more sense to conclude that Frank’s Casing impliedly agreed to reimburse the excess carriers than it would to say that the excess carriers impliedly agreed to waive their coverage position.

  1. Choice of Law

The excess underwriters argue alternatively that Louisiana law recognizes a reimbursement right, and that state’s law should apply to this case because Frank’s Casing’s principal place of business is in Louisiana, the policy was issued through a Louisiana insurance agency, and the underlying incident arose from work Frank’s Casing performed in Louisiana. Frank’s Casing contends that the excess underwriters never requested that the trial court apply Louisiana law to the reimbursement issue, and also never established that it differs from Texas law. We agree with Frank’s Casing.

The excess underwriters never requested that the trial court apply Louisiana law to the reimbursement issue or clearly asserted that Louisiana law applies. Instead, a footnote in their motion for summary judgment simply alluded to Louisiana law “[t]o the extent [it] might apply to this case,” and then cited two Louisiana statutes, Louisiana Civil Code articles 2055 and 2298, and two cases, Edmonston v. A-Second Mortgage Co., 289 So. 2d 116 (La. 1974), and E.F. Minyard v. Curtis Products, Inc., 205 So.2d 422 (La. 1967), generally allowing recovery for unjust enrichment. Neither the statutes nor the cases cited specifically addressed an insurer’s right to reimbursement from its insured when it settles a claim that is ultimately determined not to be covered, absent an express agreement.[4] In addition, after this Court issued its decision in Matagorda County, the excess underwriters again briefly cited general Louisiana unjust-enrichment law in their response to Frank’s Casing’s motion for reconsideration of the trial court’s partial summary judgment on reimbursement. After arguing at length that Matagorda County did not govern reimbursement in this case, they added a final three-paragraph section entitled “Louisiana Law Governs Excess Underwriters’ Right to Reimbursement.” They still did not ask the trial court to apply Louisiana law, however, but instead merely argued that Louisiana law would allow reimbursement “[t]o the extent this Court finds Louisiana law controlling.” Even if the excess underwriters had clearly requested the court to apply Louisiana law, we cannot tell from the authorities they have cited how a Louisiana court would resolve the issue before us. As the party advocating the application of Louisiana law, the excess underwriters bore the burden of establishing that it differed from Texas law to overcome the presumption that it is the same as Texas’s. See Gevinson v. Manhattan Constr. Co. of Ok., 449 S.W.2d 458, 465 n.2 (Tex. 1969); see also Unocal Corp. v. Dickinson Res. Inc., 889 S.W.2d 604, 607 n.2 (Tex. App.—Houston [14th Dist.] 1994), writ denied per curiam, 907 S.W.2d 453 (Tex. 1995).[5] Because they have not, we presume that the outcome would be no different under the foreign state’s law.

  1. Conclusion

We hold that the excess underwriters have not established a right to reimbursement under Texas law, nor have they established that the application of Louisiana law would produce a different result. Accordingly, we affirm the court of appeals’ judgment.

 

___________________________________

Harriet O’Neill

Justice

 

OPINION DELIVERED: February 1, 2008

[1] We received amicus curiae briefs from United Policyholders; Pilco, Inc.; Shell Oil Co., Motiva Enterprises LLC, Burlington Resources Inc., Temple-Inland Inc., and Brad Fish, Inc.; the Texas Association of Defense Counsel; the Texas Civil Justice League; and Fred A. Simpson and Randall L. Smith, opposing a right to reimbursement under these circumstances. These amici argue generally that allowing reimbursement would distort the process of settling third-party liability claims and would allow insurers to extract contributions from their insureds that their policies do not support. The Complex Insurance Claims Litigation Association and the Property Casualty Insurers Association of America submitted briefs supporting the underwriters’ right to reimbursement.

[2] The policy defines “ultimate net loss” as “the total sum which the Assured, or his Underlying Insurers as scheduled, or both, become obligated to pay . . . either through adjudication or compromise . . . . ”

[3] The title of this clause is not clear on any portion of the record; Frank’s Casing refers to it as a “Loss Payable” clause, a characterization that the excess underwriters do not dispute.

[4] In Edmonston, for example, the court held that a widow who had unwittingly conveyed a home worth more than $24,000 to a mortgage company to satisfy a $5,178.24 second mortgage could recover under Louisiana’s unjust- enrichment statutes. 289 So.2d at 122. In Minyard, the court considered when limitations had run on a subcontractor’s claim to recover from a product supplier amounts it had paid to compensate the contractor for defective caulking. 205 So. 2d at 638. The court merely equated the subcontractor’s claim seeking indemnity with an unjust-enrichment claim in determining the appropriate limitations period. Id. at 650, 653. In response to Frank’s Casing’s motion for reconsideration of the trial court’s partial summary judgment on reimbursement, the excess underwriters cited a suit in which a court held that an insurer was not liable for statutory bad-faith penalties because the insurer had sought reimbursement of settlement costs. Peavey Co. v. M/V ANPA, 971 F.2d 1168 (5th Cir. 1992). In reversing the penalties, the Fifth Circuit noted that the the insured had stipulated that it would be liable to reimburse the insurer if coverage was resolved in the insurer’s favor. Id. at 1177.

[5] The excess underwriters contend that the presumption that another state’s law is the same as this state’s does not apply because Louisiana law is not based on the common law, citing 29 Am. Jur. 2d Evidence § 259 (2002). Neither we nor any other Texas court has recognized this distinction. In fact, we recently indicated that the presumption would normally apply in a case involving Louisiana law. Coca-Cola Co. v. Harmar Bottling Co., 218 S.W.3d 671, 685 (Tex. 2006).

 

Justice Hecht, joined by Justice Green, dissenting.

 

By refusing to apply to insurers the same law of unjust enrichment that applies to everyone else, the Court hands Frank’s Casing Crew & Rental Tools, Inc. $7 million for which it paid nothing and to which it has no contractual right. The court does not deny the injustice of this result but argues that such windfalls are necessary to avoid situations in which an insured might be prejudiced by having to pay its own liabilities. Never mind that Frank’s Casing claims no such prejudice in this case, or that no case can be found in which any insured ever claimed such prejudice, or that if any imagined prejudice ever actually did occur, it could easily be remedied. The Court’s holding is contrary to the only other cases it can find on the subject,[1] and it has been expressly rejected in the Restatement (Third) of Restitution and Unjust Enrichment.[2] Worst of all, the burden of the windfalls in this and many other cases will most likely fall on other policyholders who have never tried to get away with demanding more coverage than they bought, so that insureds who stick to their policies will have the privilege of paying extra to satisfy the claims of those who do not.

A blanket rule providing an insurer reimbursement for payment of non-covered claims might work unfairness. An insurer could try to take unfair advantage of its insured’s inexperience in assessing coverage issues and use a weak coverage dispute, coupled with the threat of a reimbursement claim if coverage is found lacking, to force the insured to contribute more toward the settlement of a liability claim than it should, thereby denying the insured the full protection of insurance to which it was entitled. But the Court’s rule denying reimbursement in every situation is more than potentially unfair. As this case demonstrates, it actually allows an insured to take unfair advantage of the extra-contractual liability an insurer faces for failing to resolve claims against the insured and leverage the threat of that liability to force its insurer to settle a claim and abandon a serious coverage issue, thereby effectively obtaining coverage it did not pay for and increasing the risk for which other policyholders must pay. The general law of restitution avoids the problems of both extremes by allowing reimbursement to prevent unjust enrichment but not otherwise.[3] This is reflected in section 35 of the Restatement (Third) of Restitution and Unjust Enrichment, recently adopted by the American Law Institute.[4] Section 35 provides a balanced, practical, and principled rule for resolving the issue presented by this case.

The Court encourages insurers, as it has in the past, to obtain prompt resolution of coverage disputes, but today’s decision leaves them no alternative. Now an insurer must litigate coverage before a liability claim is resolved, even if that means putting an insured in the undesirable position

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of having to fight liability and coverage at the same time, even if it means litigating the liability claim in a declaratory judgment action to determine coverage, and even if it means delaying resolution of the liability claim until coverage has been determined. Otherwise, an insurer will be denied the right to litigate coverage altogether, which the Court surely cannot intend. I suspect that this consequence of the today’s decision, forcing more coverage litigation, will cause far more problems than the hypothetical concerns expressed in the Court’s opinion.

For these reasons, which I now explain more fully, I respectfully dissent.

I

Respondent Frank’s Casing Crew & Rental Tools, Inc. has provided oil well and completion services and products throughout the United States since 1938. Headquartered in Louisiana, it has offices in Texas and transacts business here.

In 1995, an offshore drilling platform that Frank’s Casing had fabricated in Louisiana for ARCO Oil and Gas Co. and its successor, Vastar Resources, Inc., collapsed and sank in the Gulf of Mexico. In May 1996, ARCO filed suit in Texas against two defendants, and after they in turn sued Frank’s Casing as a third-party defendant, ARCO and Vastar (who had joined the suit as plaintiff, collectively “ARCO”) named Frank’s Casing as a defendant in January 1997. Alleging that Frank’s Casing had failed to weld the platform components properly, ARCO sued for breach of contract, negligence, strict products liability, and contractual indemnity, seeking damages for lost profits and production and for costs of investigation, salvage, and repair, as well as exemplary damages and attorney fees.

In addition to a $1 million surplus lines comprehensive general liability insurance policy, Frank’s Casing had a $10 million umbrella policy provided by petitioners, Certain Companies Subscribing Severally But Not Jointly To Policy No. 548/TA4011F01 and Excess Underwriters at Lloyd’s, London (“the Excess Underwriters”). Frank’s Casing notified both insurers of ARCO’s suit. The primary insurer assumed the defense of the lawsuit, as was its right and duty under its policy, and hired counsel to represent Frank’s Casing.

 

In March 1997, counsel for the Excess Underwriters wrote Frank’s Casing a reservation-of-rights letter, stating in part:

Underwriters have commenced an investigation into the claims being made against Frank’s in the [ARCO] Litigation. We are writing to advise you of our representation of Underwriters, to advise that we will be evaluating the coverage provided by the Umbrella Policy, to request your assistance and cooperation in our investigation into the claims being made against Frank’s and the facts relevant to the Litigation, to advise that Underwriters have not yet come to any conclusions as to coverage, to invite Frank’s to provide Underwriters any information that you believe might assist Underwriters in their evaluation of the coverage questions, to solicit your input into our evaluation, and to advise Frank’s as to Underwriters’ preliminary reservation of certain rights under the Umbrella Policy.

 

 

Specifically, the letter explained that coverage of ARCO’s claims “may be limited or negated” under the umbrella policy because:

  • claims alleging breach of contract and warranties “may not constitute an ‘occurrence’ as that term is defined by the policy” – “an accident or a happening. . . which unexpectedly and unintentionally results in personal injury or property damage or advertising liability” ;

 

  • the policy excluded property damage claims for the failure of Frank’s Casing’s product or work due to deficiencies in its designs, plans, or written instructions;

 

  • the policy also excluded the costs of removal, recovery, repair, or replacement of product or work that failed to perform its function, and the costs of raising, removal, or destruction of any of wreckage or debris or obstruction, however caused;

 

  • the policy expressly excluded coverage for punitive damages and would not cover any damages occurring after September 30, 1995, the end of the policy period; and

 

  • notice of the claim may not have been timely.

 

The letter also stated that the scope of the umbrella policy’s coverage was to follow the form of the primary policy (other than the monetary limits, of course), which counsel had not had an opportunity to review, and that the primary policy might therefore further restrict coverage of ARCO’s claims. In January 1998, the Excess Underwriters sent Frank’s Casing a second reservation-of-rights letter giving an additional reason for lack of coverage: that ARCO’s claims for lost profits and loss of use of the platform were not “property damage” covered by the policy. The record does not reflect whether Frank’s Casing responded to the letters but does indicate that Frank’s Casing took the position that all claims were covered.

Nearing the February 16, 1998 trial setting, the parties discussed settlement. ARCO’s claims totaled $16 million (Frank’s Casing stipulated that property damage was $5,630,360.28), far more than the policy limits of Frank’s Casing’s insurance, but after an unsuccessful mediation, ARCO’s counsel offered to settle for $9.9 million. Although Frank’s Casing had no express right under its primary policy to control settlement,[5] and may or may not have had one under the umbrella policy,[6] its corporate counsel unilaterally rejected the offer as too high, even though it was within policy limits, and did not even forward it to the Excess Underwriters. On January 30, counsel for the Excess Underwriters contacted ARCO directly, without Frank’s Casing’s knowledge, and attempted to settle only the claims they believed were covered, but no agreement was reached. When Frank’s Casing’s counsel learned of this, he objected to any settlement negotiations being conducted without his involvement. ARCO then offered to settle all of its claims against all of the defendants for $8.8 million. In a February 2 letter to corporate counsel for Frank’s Casing, counsel for the Excess Underwriters estimated that, after contributions offered by other defendants, Frank’s Casing would be required to contribute about $7.55 million. Assuming that $750,000 of primary coverage remained, the letter made two proposals: the Excess Underwriters would pay two-thirds of the amount required to meet ARCO’s demand and waive all coverage issues if Frank’s Casing would pay one-third; alternatively, they would contribute $5 million to any reasonable settlement Frank’s Casing reached with ARCO and arbitrate coverage issues later. Frank’s Casing refused both proposals.

Under their policy, the Excess Underwriters had no duty to provide Frank’s Casing a defense but did have the right to associate in the defense with Frank’s Casing’s cooperation when it appeared likely they would be involved,[7] and on February 2, they retained separate trial counsel. Trial commenced February 17, and it immediately became clear for the first time that Frank’s Casing was ARCO’s target defendant. The next day, Frank’s Casing’s corporate counsel requested ARCO’s trial counsel to make a settlement offer within the umbrella policy’s limits, suggesting $7 million. ARCO promptly responded with a $7.5 million offer, which Frank’s Casing’s counsel immediately passed along to the Excess Underwriters in a letter hand-delivered and faxed to their counsel, insisting that since trial was not going well, “Frank’s does now look to Underwriters to settle this claim.” The letter added that the Excess Underwriters’ coverage reservations had “little credence” and that it was “probable” Frank’s Casing would suffer a jury verdict in excess of policy limits. ARCO’s last offer, the letter continued, was “one that an insurer, acting as a reasonably prudent insured, would accept.” Counsel concluded:

 

Should Underwriters in this instance refuse to move forward and resolve this dispute based upon [ARCO’s] current demand, [Frank’s Casing] specifically reserves its rights pursuant to the Stowers doctrine[[8]] to proceed against the Underwriters for any liability Frank’s may incur over and above the limits of its insurance.

 

 

On February 20, counsel for the Excess Underwriters responded by faxed letter that ARCO’s offer should be accepted but stated that they continued to believe “a substantial portion” of the claims were not covered and that it would be “unreasonable for Umbrella Underwriters to assume total responsibility for [ARCO’s] current demand.” The Excess Underwriters again proposed to resolve both ARCO’s claims and the coverage issues by paying two-thirds of ARCO’s settlement demand with Frank’s Casing paying one-third (after contribution of the remainder of the primary policy’s limits, which turned out to be about $500,000). Alternatively, the Excess Underwriters proposed to pay ARCO’s demand, less the contribution from the primary insurer, with Frank’s Casing’s agreement to resolve coverage issues later. When counsel for Frank’s Casing faxed a reply again refusing to contribute to the settlement and reiterating its demand that the Excess Underwriters accept ARCO’s offer, the Excess Underwriters acceded. ARCO had indicated that its offer would remain open only until the trial court’s ruling on a particular issue, which was expected imminently. By letter faxed to Frank’s Casing’s counsel on the morning of February 23, counsel for the Excess Underwriters stated that they were acting “to ensure that the favorable settlement will not be lost to both Frank’s and Umbrella Underwriters.” But, he added, the Excess Underwriters would “continue to reserve all coverage issues” and would “hold Frank’s responsible for and . . . seek reimbursement of all sums paid in settlement of claims for which no coverage exists”.

A few hours later, counsel for the Excess Underwriters’ faxed ARCO’s trial counsel a letter agreeing to pay $7.5 million in settlement. Frank’s Casing contends that it had no opportunity to respond to the Excess Underwriters’ reimbursement claim before the case settled. But when the settlement was announced to the court the next day, counsel for Frank’s Casing and the Excess Underwriters both referred to the latter’s reimbursement claim:

 

[Counsel for Frank’s Casing]: Underwriters have attempted to reserve all rights against Frank’s as to coverage under the umbrella policy. It is Frank’s position that no proper preservation of reservations has been made and Frank’s denies that the Underwriters may preserve coverages. More specifically, Underwriters’ offer to resolve the issue with [ARCO], which [was] made pursuant to Frank’s demand by a Stowers letter dated February 19, 1998 and February 20th, 1998, forwarded by Michael Andrepont to Jay James Cooper, counsel for Underwriters.

 

Underwriters have accepted this offer in order to avoid the possibility of having to pay out funds in excess of policy limits. As a result, it is Frank’s position that Underwriters have either waived their right to reserve cover issues or alternatively [are estopped] from asserting any coverage issues since Underwriters have agreed to the settlement.

 

* * *

 

[Counsel for the Excess Underwriters]: This settlement is being funded by Frank’s Umbrella Underwriters subject to a full reservation of all rights against Frank’s under the umbrella policy No. 548TA4011FO1. And these Underwriters will hold Frank’s responsible for and will seek reimbursement of all sums paid the settlement of claims for which no coverage exists under the umbrella policy.

 

 

The parties later signed and filed a settlement agreement that made no reference to the Excess Underwriters’ reimbursement claim specifically but preserved “any claims that exist presently or may arise in the future between Defendant Frank’s and Frank’s Insurers arising from the claims asserted by Plaintiffs.”

Also on February 23, the Excess Underwriters filed this action against Frank’s Casing to resolve the coverage dispute and to obtain reimbursement for the settlement of any non-covered claims. They asserted seven provisions of the umbrella policy that limited or denied coverage of ARCO’s claims. The policy neither provided for nor prohibited a right of reimbursement; it was entirely silent on the subject. The Excess Underwriters asserted that the right was implied in law and in fact. In its answer, Frank’s Casing asserted in part that the Excess Underwriters had not stated a claim in contract or tort and had acted with unclean hands. Frank’s Casing also counterclaimed for negligence, bad faith, violations of the Texas Insurance Code, breach of contract, business disparagement, and a declaratory judgment that all of ARCO’s claims were covered by the umbrella policy.

The case was presented to the trial court in seven motions for partial summary judgment, five by the Excess Underwriters and two by Frank’s Casing, addressing separately the reimbursement issue, the various coverage issues, and damages. In September 1999, the trial court issued a series of orders granting the Excess Underwriters reimbursement for any non-covered claims and denying most of Frank’s Casing’s counterclaims. Then in March and April 2000, the trial court granted the Excess Underwriters’ motions on the coverage issues and denied Frank’s Casing’s remaining motion. Finally, on December 14, 2000, more than two years and nine months after the case was filed, the trial court granted the Excess Underwriters’ motion on damages, ordering that they were entitled to reimbursement of $7,013,612. But a week later, this Court issued its decision in Texas Association of Counties County Government Risk Management Pool v. Matagorda County, holding that an insurer that pays a claim later determined not to be covered by the policy is entitled to reimbursement “only if it obtains the insured’s clear and unequivocal consent to the settlement and the insurer’s right to seek reimbursement.”[9] The trial court directed Frank’s Casing to move for reconsideration on the issue of the right to reimbursement, and Frank’s Casing complied. After further hearing, the trial court granted the motion, withdrew its orders on that issue, granted summary judgment for Frank’s Casing on that issue, and signed a judgment that the Excess Underwriters take nothing. The trial court did not withdraw its orders resolving the coverage issue in favor of the Excess Underwriters.

Only the Excess Underwriters appealed. The court of appeals affirmed, although it noted:

 

We recognize this case carries Matagorda County to a logical conclusion that is somewhat disquieting — Frank’s was able to resolve the parties’ coverage dispute in its own favor simply by sending a Stowers demand to the Underwriters. Thereafter, the Underwriters had to pay if Arco’s claims were within the policy, but also had to pay if they [were] not within the policy because there was no right to reimbursement. But this is a matter that the Underwriters must take up with the superior court.[10]

 

 

The Court granted the Excess Underwriters petition for review[11] and issued an opinion reversing and remanding the case to the trial court for rendition of judgment in their favor.[12] Though two Justices did not join fully in the Court’s opinion,[13] none dissented from the judgment.[14] When respondent’s motion for rehearing was filed, only four of the Justices present at oral argument remained on the Court. To fully consider respondent’s motion, petitioner’s response, and a number of amicus briefs,[15] the Court granted the motion and ordered the case reargued.[16]

II

Frank’s Casing has not challenged, either in the court of appeals or in this Court, the trial court’s rulings on the coverage issues. Therefore, I assume that none of ARCO’s claims were covered by the umbrella policy. The only issue, then, is whether the Excess Underwriters are entitled to be reimbursed for the amount they paid in settlement.

The parties agree that the coverage issues were governed by Louisiana law, but they disagree whether the reimbursement issue is governed by Louisiana law or Texas law, and whether the two are different. Frank’s Casing contends that the Excess Underwriters never requested the application of Louisiana law in the trial court and that in any event, on the issue before us it is no different than Texas law. The Excess Underwriters alluded to Louisiana law twice in the trial court. A six-sentence footnote in their motion for summary judgment began, “[t]o the extent Louisiana law might apply to this case”, and then cited two Louisiana statutes[17] and two cases[18] generally allowing recovery for unjust enrichment. None of the authorities cited specifically addressed the issue in this case. In response to Frank’s Casing’s motion for reconsideration, after this Court’s decision in Matagorda County issued, the Excess Underwriters again briefly cited general Louisiana authority “[t]o the extent this Court finds Louisiana law controlling”. Neither instance amounted to an actual assertion that the reimbursement issue is controlled by Louisiana law. If Louisiana law were controlling, it is not clear from the authorities cited how it would resolve the issue before us. Without proof that Louisiana and Texas law are different, they should be presumed to be the same,[19] and which of the two states’ law controls need not be resolved.

Accordingly, I turn to the question whether Texas law affords an insurer the right to reimbursement from its insured for settling a non-covered liability claim.

III

When the parties to a contract disagree over what performance is required and that disagreement cannot be resolved before performance is due, the party who must perform is put to the choice of doing more than he thinks is called for or facing the other party’s claim of breach. The potential adverse consequences of the latter course may be severe enough that the party is all but forced to render the performance demanded and forego resolution of the dispute. The other party thus obtains more than he bargained for.

According to the Restatement (Third) of Restitution and Unjust Enrichment:

 

The commonsense solution to this dilemma — allowing performance with reservation of rights — promotes justice and efficiency. Because it offers recourse to a party who might otherwise be effectively compelled to render an extracontractual performance, it serves both to reinforce the parties’ agreement and to prevent the unjust enrichment that would otherwise result. Equally important, the mechanism of contingent or provisional performance (that is, performance subject to an eventual claim in restitution) will serve in many cases to reduce the overall cost of resolving the parties’ dispute. Disputes over contractual requirements commonly arise in the midst of the undertaking, rather than at its outset or conclusion. The cost of interruption is then at its highest; the risk of consequential harms (which must ultimately be borne by one party or the other) leverages the stakes beyond the amount initially in dispute. If the party on whom a questionable demand is made can protect its position only by refusing performance, the costs of resolution are magnified accordingly. Performance with reservation of rights can reduce these costs by deferring dispute resolution to a point at which the risk of consequential harm is lower.[20]

 

Provisional performance is the rule for transactions governed by the Uniform Commercial Code, which provides that “[a] party that with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved.”[21] The UCC imposes no requirement that the other party consent to the reservation for it to be effective.

The point of reserving rights is, of course, is to see them vindicated, which cannot be accomplished without a remedy.[22] The remedy, according to the Restatement (Third) of Restitution and Unjust Enrichment, is restitution. The UCC provision, the Restatement explains, “presume[s] . . . that the ‘rights reserved’ by a performing party — ‘where one party is claiming as of right something which the other believes to be unwarranted’ — take the form of a claim in restitution for the value of any benefit conferred to which the recipient was not entitled.”[23] Texas law recognizes restitution as a remedy for unjust enrichment “[w]hen a person has obtained a benefit by taking undue advantage of another”.[24] The Restatement sets out the following rule, originally suggested by Professor Mark Gergen:[25]

 

  • 35. Performance of Disputed Obligation

 

(1)        If one party to a contract demands from the other a performance that is not in fact due by the terms of their agreement, the party on whom the demand is made may render such performance under protest or with reservation of rights, preserving a claim in restitution to recover the value of the benefit conferred in excess of the recipient’s contractual entitlement.

 

(2)        The claim described in subsection (1) is available only to a party acting in good faith and in the reasonable protection of the claimant’s own interests. It is not available where there has been an accord and satisfaction between the parties, or where a performance with reservation of rights is inadequate to discharge the claimant’s obligation to the recipient.[26]

 

 

The rule restricts restitution to claimants who act in good faith and in the reasonable protection of their own interests. The provisional performance must also go far enough to discharge a claimant’s obligation. In such circumstances, restitution is not precluded by the voluntary-payment rule because, as comment b to section 35 explains, the claimant acts under a kind of coercion — the pressure to take action to avoid consequential harms before uncertainty as to contractual obligations can be resolved.[27]

Section 35 restates the principle of restitution inherent in the UCC provision and applicable to contracts generally. But insurance policies are not governed by the UCC, and as comment c to section 35 recognizes, “disputes between insurers and policyholders over the insurer’s duty to pay a claim, or to settle or defend a claim brought against the policyholder, present special difficulties for the law of restitution, because the insurer’s duty to indemnify and defend is subject to extensive regulation under local insurance law.”[28] Regulation is necessary because an insured is typically at a distinct disadvantage in dealing with an insurer, having little or nothing to say about the policy language, little or no experience in evaluating coverage issues, and neither the wherewithal nor the inclination to litigate disputes. The prospect that a third-party liability claim may not be covered by insurance poses a significant threat to most insureds. As the Restatement observes, “[p]ublic policy strongly favors the prompt discharge of an insurer’s obligations to its policyholder.”[29]

Nevertheless, Texas law permits a liability insurer to defend or settle a claim against its insured while reserving its rights to contest coverage,[30] as long as it acts timely and in good faith.[31] An insured may reject the reservation, demand an unconditional defense, and sue for contractual and extracontractual damages.[32] But if the insured does not reject the reservation, the insurer must be given a meaningful opportunity to resolve the coverage dispute if the reservation is to be anything but an empty formality. Without that opportunity, the Restatement explains:

 

the risk of enhanced liability in coverage disputes may compel a performance by the insurer that is outside the scope of the insurance contract. If the insurer, by denying coverage, risks a potential liability greater than the amount initially in controversy — and if the insurer is obliged to take action before the coverage issue can be adjudicated — the effect of the applicable legal rules may be to subject the insurer to an extracontractual liability. Such a result distorts the parties’ allocation of risks and creates the sort of unjust enrichment with which the present Section is concerned.[33]

 

 

The present case is a prime example of such distortion of risk and unjust enrichment when an insurer is denied restitution from its insured for settling non-covered claims. The Excess Underwriters’ Stowers obligation was to accept a reasonable settlement offer within policy limits or stand to the full recovery against Frank’s Casing, even beyond policy limits. Once ARCO made such an offer, Frank’s Casing had almost no incentive to confront the coverage issues. If ARCO’s claims were covered by the Excess Underwriters’ policy, Frank’s Casing had no exposure, and if the claims were not covered, so what? If the Excess Underwriters settled and won the coverage dispute, Frank’s Casing had nothing to lose without an obligation to reimburse the settlement of the non-covered claims. And if the Excess Underwriters did not settle and lost the coverage dispute, Frank’s Casing would have no obligation. Only if the Excess Underwriters refused to settle and later won the coverage dispute would Frank’s Casing risk any liability. But while Frank’s Casing’s risk of refusing to contribute to the settlement was slight, the Excess Underwriters’ risk of refusing to settle was enormous. Even if they won the coverage dispute, they could not recover without a right of reimbursement, and if they lost the coverage dispute, their Stowers liability would extend to ARCO’s full recovery, perhaps $16 million. Having estimated their ultimate exposure to be $5 million, as reflected in their settlement offer to Frank’s Casing, the Excess Underwriters barely hesitated in paying $2 million more to settle $16 million in claims, especially after trial had begun and Frank’s Casing itself viewed ARCO’s case claims as strong.

If the Excess Underwriters’ assessment of the coverage issues had been correct, they would have paid $2 million more than they owed. As it turned out, the Excess Underwriters were finally determined to have no obligation at all. None of ARCO’s claims were covered. Stowers liability combined with no right of reimbursement effectively forced the Excess Underwriters to extend Frank’s Casing $7 million in coverage for which it had not contracted and had paid nothing. Such disincentive for insurers to resolve coverage issues carries a cost that must be paid in higher premiums.

The purpose of the law of restitution is to prevent such unjust enrichment without permitting abuse. In Matagorda County, the Court noted that an insurer’s right of reimbursement could operate unfairly against an insured. Though the Court did not elaborate, such a situation can occur when the plaintiff’s claims exceed the defendant’s assets, but not its policy limits, coverage is uncertain, and the insurer can settle over the defendant’s objection.[34] But Matagorda County incorrectly asserted that a right of reimbursement might result in a defendant having to pay more than it is worth.[35] It is impossible for an insurer to exact more from an insured than he is worth; you can’t squeeze blood from a turnip. And an insurer has no more incentive or ability to sue for reimbursement that cannot

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be collected than a plaintiff has to demand a settlement that cannot be paid. Indeed, it almost always has less incentive. Not only will the insurer want to leverage the coverage dispute to extract a lower settlement demand from the plaintiff, but an insurer who pursues its insured into bankruptcy does so at a business cost paid in bad customer relations and lower premiums.

In any event, Frank’s Casing does not argue that an obligation to reimburse the Excess Underwriters would have put it in the predicament hypothesized in Matagorda County. Frank’s Casing is a substantial business, and there is nothing to indicate that it lacked the means to meet its liability to ARCO. When both the defendant’s assets and the plaintiff’s demand exceed the insurer’s policy limits, granting the defendant the unilateral power to accept or reject a settlement offer may unfairly prejudice the insurer.[36]

The possibility of prejudice to an insured, not actually present in either this case or in Matagorda County, is avoided under section 35, which would not allow reimbursement because the insurer’s settlement of the claim under a reservation of rights would result in a higher payment by the insured and therefore be “inadequate to discharge [the insurer’s] obligation to the [insured]”. The remedy for unjust enrichment does not come at a price of unfairness to the other party. Further, if the restrictions on restitution contained in section 35 were inadequate to prevent an unjust application of the rule, equity could intervene because restitution is an equitable remedy.[37] If an insured were unfairly prejudiced by affording an insurer a right of reimbursement, the answer is to limit the right in that situation to prevent the prejudice, not to deny it altogether in the many other cases in which it is necessary to prevent unjust enrichment.

The Court rejects section 35, not because it is in any way unfair to insureds, but because it “undermine[s] . . . the predictability that our decision in Matagorda County provided”.[38] Of course, it does. Never is extremely predictable. But section 35 would certainly create no serious unpredictability in this case or any one like it. It is not very hard to see that Frank’s Casing should not be given the benefit of coverage it did not buy.

Frank’s Casing and amici curiae have raised several other arguments against an insured’s right to be reimbursed by its insured for settling non-covered claims.

  1. Such a right disincentivizes insurers to obtain a resolution of coverage issues before a liability claim must be settled. We have encouraged prompt resolution of coverage issues through declaratory judgment actions.[39] The argument that an insurer entitled to reimbursement might delay such resolution is easily answered; an insurer who intentionally delays resolution of coverage issues to prejudice the insured may, in a particular case, forfeit the right of reimbursement by failing to act in the good faith required by section 35.

Denying reimbursement altogether raises a different set of problems. Early resolution of coverage issues is often impossible or imprudent.[40] In many cases, there is simply not time. Here, for example, while Frank’s Casing faults the Excess Underwriters for doing nothing to resolve coverage issues in the eleven months that the liability case was pending against it, the fact that the coverage case took nearly three years and seven motions for summary judgment strongly suggests that it could not have been completed before the trial of ARCO’s claims. In other cases, litigating coverage while the liability claim is pending is prejudicial to the insured. The insured may be forced to take positions in support of coverage that undermine the defense of the liability claim. Pitting the insurer and insured against one another may create intolerable conflict at a time when their interests in defending against liability should be aligned. It may simply be distracting and difficult for the insured to fight the liability claimant on one front and his insurer on another. These problems may now be unavoidable, since the Court’s refusal to allow an insurer to recover payment of a non-covered claim means that unless an insured agrees to defer coverage issues, they must be determined before the liability claim is resolved or be forever lost. It may even be necessary to delay resolution of the liability claim. The Court certainly does not suggest that an insurer should be denied a fair opportunity to litigate coverage issues.

  1. If there is to be such a right, it should be expressed in the policy. It is well settled that the law may imply contractual terms to prevent unjust enrichment. In Ferrous Products Co. v. Gulf States Trading Co., we said, quoting hornbook law:

 

A quasi contractual obligation is one that is created by the law for reasons of justice, without any expression of assent and sometimes even against a clear expression of dissent.

 

* * *

 

Contracts implied in law, or more properly quasi or constructive contracts, are a class of obligations which are imposed or created by law without regard to the assent of the party bound, on the ground that they are dictated by reason and justice, and which are allowed to be enforced by an action ex contractu. . . . Such contracts rest on the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another, and on the principle that whatsoever it is certain that a man ought to do, that the law supposes him to have promised to do.[41]

 

 

This settled law is a part of every contract and governs the transaction.[42] The argument here is that the general law of restitution should not apply. But restitution is necessary if an insurer’s reservation of rights, long allowed by Texas law, is to have any viability in cases in which coverage issues cannot be resolved before the liability claim. To deny restitution in such cases, given an insurer’s Stowers duty to accept a reasonable settlement of a liability claim within policy limits, is effectively to create coverage where none exists. That is what happened in this case.

  1. An express agreement — the policy — precludes an agreement implied in law. This both misstates the law and misapplies it to this case. It is true, as we said in Fortune Production Co. v. Conoco, Inc., that

 

[g]enerally speaking, when a valid, express contract covers the subject matter of the parties’ dispute, there can be no recovery under a quasi-contract theory. . . . That is because parties should be bound by their express agreements. When a valid agreement already addresses the matter, recovery under an equitable theory is generally inconsistent with the express agreement.[43]

 

 

But we also specifically noted that there were certain exceptions which would allow recovery of “overpayments under a contract . . . under a theory of restitution or unjust enrichment.”[44] Moreover, the Excess Underwriters’ policy does not cover the subject of restitution. It required that Frank’s Casing make a claim within a year after its liability became fixed[45] and then allowed the Excess Underwriters thirty days to decide whether to pay it. But this provision neither required nor entitled the Excess Underwriters to defer a decision on a claim until after Frank’s Casing had settled it and thus force a Stowers violation. The policy merely provided an outside time frame for making and paying claims. On the subject of reimbursement in the circumstances before us the policy was entirely silent, and that silence does not preclude restitution.

  1. The risk of any uncertainty about coverage should be borne entirely by the insurer because of its control of the liability litigation and its superior knowledge and experience with coverage issues. There is no question that most insurers are better able to assess coverage issues than most insureds, since insurers are likely to have encountered the issues many times. But as this case illustrates, an insurer must be virtually certain that coverage does not exist before it can justify the risk of refusing to settle a claim within policy limits. Few cases are so clear. As the Restatement recognizes, restitution is an equitable accommodation of the insurer’s and insured’s interests in reserving and later resolving coverage issues. Also, while it may be possible for an insurer to exercise its right to control the defense and settlement of a liability claim in a way that unfairly prejudices an insured sued for restitution, the prejudice can be addressed in any case in which it occurs without denying restitution in all cases. Frank’s Casing makes no claim of such prejudice in this case.
  2. Insurers will use meritless coverage issues and the threat of a suit for reimbursement to force insureds to contribute to settling claims when they should not have to. This is not what happened in the present case. Instead, Frank’s Casing repeatedly refused to contribute anything to the settlement of ARCO’s claims, either settling the coverage issues at the same time or reserving resolution for later, when the umbrella policy provided no coverage at all. The law does not punish insureds for such obduracy as it would insurers, as for example with Stowers liability. But an insured should not be rewarded for forcing coverage when none exists. An insurer who raises bogus coverage issues to extract a settlement contribution from an insured is subject to other sanctions as for any unfair practice.[46]
  3. Defense counsel cannot advise an insured that a settlement offer is reasonable if in so doing he subjects the insured to a reimbursement obligation. The premise is incorrect. Counsel’s advice regarding the reasonableness of an offer does not trigger the insurer’s claim for restitution. That claim depends entirely on the effectiveness of the reservation of rights, the resolution of coverage issues, the reasonableness in fact of the acceptance of the settlement offer, and the insurer’s good faith and absence of inequitable conduct. Of course, if counsel’s advice is communicated beyond persons protected by the attorney-client privilege, it may be evidence of the reasonableness of the offer when the issue arises, but if kept confidential the advice would be privileged from disclosure. A right of restitution does not pose a conflict for defense counsel in advising the insured. In this case, there is no hint of such a conflict. We have no indication what Frank’s Casing’s defense counsel thought of ARCO’s settlement offer, and corporate counsel did not hesitate in pronouncing the offer reasonable and twice insisting that the Excess Underwriters accept it.
  4. If an insurer’s settlement of a non-covered claim can be recovered from the insured, the insurer will settle early, even if unfavorably, to minimize defense expenses and avoid Stowers liability. It is difficult to imagine why an insurer would accept a settlement offer that is unreasonable and to which its insured objects, and then try to seek reimbursement from the insured. If for some reason it occurred, it would exhibit the the lack of good faith that section 35 requires.

These arguments do not support making an exception to the general law of restitution for the defense and settlement of liability insurance claims. The Court cites only one other court of last resort that has considered the issue: Blue Ridge Insurance Co. v. Jacobsen. There, the Supreme Court of California allowed a right of reimbursement in circumstances similar to this case.[47] I agree with the reasoning of that case, as does the Restatement.[48]

* * * * *

I would reverse the court of appeals’ judgment and remand the case to the trial court for rendition of judgment in favor of the Excess Underwriters. Accordingly, I respectfully dissent.

 

___________________         

Nathan L. Hecht

Justice

 

Opinion delivered: February 1, 2008

[1] Blue Ridge Ins. Co. v. Jacobsen, 22 P.3d 313, 318-319 (Cal. 2001); Colony Ins. Co. v. G & E Tires & Serv., Inc., 777 So.2d 1034, 1038-1039 (Fla. Dist. Ct. App. 2000).

[2] Restatement (Third) of Restitution and Unjust Enrichment § 35 & reporter’s note to cmt. c, illus. 10 (Tentative Draft No. 3, 2004) (“it is the dissenting opinion in Texas Ass’n of Counties [County Gov’t Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128, 136 (Tex. 2000) (Owen, J., joined by Hecht, J., dissenting)] that reflects the position of this Restatement”).

[3] Mark P. Gergen, Restitution as a Bridge over Troubled Contractual Waters, 71 Fordham L. Rev. 709, 725-728 (2002).

[4] Restatement (Third) of Restitution and Unjust Enrichment § 35 & reporter’s note to cmt. a (Tentative Draft No. 3, 2004). Tentative Draft No. 3 was approved by the membership of the American Law Institute during its annual meeting on May 18, 2004. American Law Institute, Proceedings at 81st Annual Meeting 259-260 (2004).

[5] The policy provided that the insurer “shall have the right and duty to defend any suit against the Assured . . . and may make such investigation and settlement of any claim or suit as it deems expedient”.

[6] The policy provided: “The Assured shall make a definite claim for any loss for which the Underwriters may be liable under this policy within twelve (12) months after the Assured shall have paid an amount of ultimate net loss in excess of the amount borne by the Assured or after the Assured’s liability shall have been fixed and rendered certain either by final judgment against the Assured after actual trial or by written agreement of the Assured, the claimant, and Underwriters.” (Emphasis added.) The Excess Underwriters argue that the last phrase gives Frank’s Casing the right to consent to any settlement, but Frank’s Casing argues that this stretches the phrase’s meaning.

[7] The policy provided:

 

The Underwriters shall not be called upon to assume charge of the settlement or defense of any claim made or suit brought or proceeding instituted against the Assured but Underwriters shall have the right and shall be given the opportunity to associate with the Assured or the Assured’s underlying insurers or both in the defense and control of any claim, suit or proceeding relative to an occurrence where the claim or suit involves, or appears reasonably likely to involve Underwriters, in which event the Assured and Underwriters shall co-operate in all things in the defense of such claim, suit or proceeding.

[8] See American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 843 n.2 (Tex. 1994) (“The duty of an insurer to exercise ordinary care in the settlement of claims to protect its insureds against judgments in excess of policy limits is generically referred to in Texas as the Stowers duty.”); Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544 (Tex. Comm’n App. 1929, holding approved).

[9] 52 S.W.3d 128, 135 (Tex. 2000) (“[W]e hold that, when coverage is disputed and the insurer is presented with a reasonable settlement demand within policy limits, the insurer may fund the settlement and seek reimbursement only if it obtains the insured’s clear and unequivocal consent to the settlement and the insurer’s right to seek reimbursement.”).

[10] 93 S.W.3d 178, 180 (Tex. App.–Houston [14th Dist.] 2002).

[11] 46 Tex. Sup. Ct. J. 546 (Apr. 3, 2003).

[12] 48 Tex. Sup. Ct. J. 735 (May 27, 2005).

[13] Id. at 744 (O’Neill, J., concurring); id. at 746 (Wainwright, J., concurring).

[14] Justice Brister did not participate in the decision, having authored the opinion for the court of appeals while serving as Chief Justice of that court. Justice Johnson also did not participate, having recently been appointed to the Court.

[15] Amicus briefs in support of respondent’s motion for rehearing have been submitted by United Policyholders; Brad Fish, Inc.; Pilco, Inc.; Shell Oil Co.; Motiva Enterprises LLC; Burlington Resources Inc.; Temple-Inland Inc.; Texas Civil Justice League; Texas Ass’n of Defense Counsel, Inc.; and Valero Energy Corp. Amicus briefs opposing the motion have been filed by Property Casualty Insurers Ass’n of America; American Insurance Ass’n; and Complex Insurance Claims Litigation Ass’n, on behalf of its members: AIG; Chubb & Son; Farmers Insurance Group; The Hartford Insurance Group; Liberty Mutual Group Inc.; St. Paul Fire and Marine Insurance Co.; Selective Insurance Co. of America; The Travelers Indemnity Co. and Travelers Indemnity and Surety Co.; and Zurich American Insurance Co.

[16] 49 Tex. Sup. Ct. J. 240 (Jan. 6, 2006).

[17] La. Civ. Code Ann. arts. 2055, 2298.

[18] Edmonston v. A-Second Mortgage Co. of Slidell, 289 So.2d 116 (La. 1974); E.F. Minyard v. Curtis Prods., Inc., 205 So.2d 422 (La. 1968).

[19] Coca-Cola Co. v. Harmar Bottling Co., 218 S.W.3d 671, 685 (Tex. 2006); Gevinson v. Manhattan Constr. Co. of Okla., 449 S.W.2d 458, 465 n. 2 (Tex. 1969); Milner v. Schaefer, 211 S.W.2d 600, 603 (Tex. Civ. App.—San Antonio 1948, writ ref’d); Tempel v. Dodge, 33 S.W. 222, 222 (Tex. 1895).

[20] Restatement (Third) of Restitution and Unjust Enrichment § 35 cmt. a (Tentative Draft No. 3, 2004).

[21] Tex. Bus. & Com. Code §§ 1.102 (“Scope of Chapter” in Uniform Commercial Code); 1.308(a) (“Performance or Acceptance Under Reservation of Rights”).

[22] See Miers v. Brouse, 271 S.W.2d 419, 421 (Tex. 1954) (“The first maxim of equity is that it will not suffer a right to be without a remedy. As Lord Holt early said: ‘If the plaintiff has a right, he must of necessity have a means to vindicate and maintain it . . . . It is a vain thing to imagine a right without a remedy.’” (citation omitted)); Ashby v. White, 92 Eng. Rep. 126, 136 (K. B. 1703) (Lord Holt, C.J., dissenting), reprinted in 1 Smith’s Leading Cases 464, 483 (9th ed. 1889). On writ of error from the King’s Bench, the House of Lords reversed the judgment and ruled in favor of the plaintiff for the reasoning stated in Lord Chief Justice Holt’s dissent. 1 Eng. Rep. 417 (H.L. 1703); see 90 Eng. Rep. 1188 (H.L. 1703); John William Smith et al., A Selection of Leading Cases on Various Branches of the Law: With Notes 509 (9th ed., Charles H. Edson & Co. 1888).

[23] Restatement (Third) of Restitution and Unjust Enrichment § 35 cmt. a (Tentative Draft No. 3, 2004).

[24] Heldenfels Bros., Inc. v. City of Corpus Christi, 832 S.W.2d 39, 41 (Tex. 1992) (“A party may recover under the unjust enrichment theory when one person has obtained a benefit from another by fraud, duress, or the taking of an undue advantage.”).

[25] See Gergen, supra note 3, at 728.

[26] Restatement (Third) of Restitution and Unjust Enrichment § 35 (Tentative Draft No. 3, 2004); id. cmt. a (“The rule of this Section is implicit in the negative statement of U.C.C. § 1-308(a) . . . .”).

[27] Restatement (Third) of Restitution and Unjust Enrichment § 35 cmt. b (Tentative Draft No. 3, 2004) (“When the cost of resistance includes a risk of further loss or liability, beyond the amount already in controversy, the party on whom the demand is made may have no practical alternative but to submit. Performance in such cases is not ‘voluntary,’ and restitution is uniformly available to rectify the overperformance that the claimant has effectively been compelled to render.”); see Dallas County Cmty. Coll. Dist. v. Bolton, 185 S.W.3d 868, 886 (Tex. 2005); BMG Direct Mktg. v. Peake, 178 S.W.3d 763, 776-778 (Tex. 2005).

[28] Id. cmt. c.

[29] Id.

[30] See American Physicians Ins. Exch., 876 S.W.2d at 861 (Hightower, J., dissenting).

[31] See American Eagle Ins. Co. v. Nettleton, 932 S.W.2d 169, 174 (Tex. App.—El Paso 1996, writ denied) (“[A]n insurer may undertake the insured’s defense and later deny coverage if it ‘reserves its rights’ by advising the insured that it may interpose a policy defense following adjudication of the claimant’s suit against the insured. This is a proper course of action only when the insurer has a good faith belief that the complaint alleges conduct which may not be covered by the policy. In such a situation, the reservation of rights will not breach the duty to defend if timely notice of intent to reserve rights is sufficient to inform the insured of the insurer’s position.” (citations omitted)).

[32] Texas Ass’n of Counties County Gov’t Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128, 141 (Tex. 2000) (Owen, J., joined by Hecht, J., dissenting) (“Under Texas law, if an insurance company tenders a defense with a reservation of rights, the insured may either accept that defense with the reservation of rights, or it may refuse the tendered defense and defend the suit itself. If the insured decides to defend itself, it must bear the cost of that defense if the claims against it are not covered by insurance.” (citation omitted)).

[33] Restatement (Third) of Restitution and Unjust Enrichment § 35 cmt. c (Tentative Draft No. 3, 2004).

[34] Suppose the following: at trial, P has a 50% probability of recovering 10 and a 50% probability of recovering 0; coverage is 50/50; policy limits are 10; and D has 2 in assets.

P expects, on average, to recover 3. Half the time P loses at trial and takes nothing. A fourth of the time he wins at trial and there is coverage, so he recovers 10 from I. But another fourth of the time he wins at trial but there is no coverage, so he is limited to D’s assets, 2. With one chance at 10, one at 2, and two at 0, he should expect 3.

With no right of reimbursement, I expects at trial to pay only 2.5 on average, since there is only one chance in 4 that it will owe 10, and D expects to pay only 0.5 on average, since there is only one chance in 4 that it will owe 2. If there is a right of reimbursement, I can pay P 3 to settle and still lower its expected cost to 2 on average, since half the time it will recover nothing from D in the coverage suit and the other half it will recover D’s 2. But D’s expected cost then increases, on average, to 1, since it will lose the coverage fight half the time. In this situation, if I can insist on settling for 3, it benefits itself and harms D.

[35] 52 S.W.3d at 135 (stating that a right of reimbursement might force an insured to “choose between rejecting a settlement within policy limits or accepting a possible financial obligation to pay an amount that may be beyond its means, at a time when the insured is most vulnerable.”).

[36] Now suppose: at trial, P has a 50% probability of recovering 20 and a 50% probability of recovering 0; coverage is 50/50; policy limits are 10; and D has 50 in assets.

At trial, P expects, on average, to recover 10. D expects, on average, to pay 7.5. I expects, on average, to pay 2.5. If D has the unilateral power to accept or reject settlements, even assuming I has a right of reimbursement, I’s average expected cost is increased to 5, and D’s falls to 5. But if D can use the threat of Stowers liability to force I to pay 10, and I has no right of reimbursement, I’s average expected cost is increased to 10, and D’s falls to 0.

[37] BMG Direct Mktg. v. Peake, 178 S.W.3d 763, 771, 775(Tex. 2005) (noting, however, that “an adequate legal remedy may render equitable claims of unjust enrichment and equitable defenses of voluntary-payment unavailable” and citing Matagorda County, 52 S.W.3d 128, 133-135 (Tex.2000)); Dallas County Cmty. Coll. Dist. v. Bolton, 185 S.W.3d 868, 886 (Tex. 2005) (Brister, J., joined by Jefferson, C.J, and O’Neill, J., dissenting to opinion holding that allegedly illegal student activity fees were voluntarily paid as a matter of law). See Restatement (Third) of Restitution and Unjust Enrichment § 1, cmt b (“This equitable conception of the law of restitution is crystallized by Lord Mansfield’s famous statement in Moses v. Macferlan (1761): ‘In one word, the gist of this kind of action is, that the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money.’ Explaining restitution as the embodiment of natural justice and equity gives the subject an undoubted versatility, an adaptability to new situations, and — in the eyes of many observers — a particular moral attractiveness. Restitution in this view is the one aspect of our legal system that makes a direct appeal to standards of equitable and conscientious behavior as a source of obligations that society will enforce with a legal sanction.”).

[38] Ante at ___.

[39] See, e.g., Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 84 (Tex. 1997) (per curiam); State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996).

[40] Griffin, 955 S.W.2d at 84.

[41] 332 S.W.2d 310, 312 (Tex. 1960) (citations omitted).

[42] See, e.g., Wessely Energy Corp. v. Jennings, 736 S.W.2d 624, 626 (Tex. 1987) (“The laws existing at the time a contract is made becomes a part of the contract and governs the transaction. Langever v. Miller, 124 Tex. 80, 76 S.W.2d 1025, 1026-27 (1934).”).

[43] 52 S.W.3d 671, 684 (Tex. 2000) (citations omitted).

[44] Id. (citing Southwestern Elec. Power Co. v. Burlington N. R.R. Co., 966 S.W.2d 467, 469 (Tex. 1998) (“[I]n some circumstances, overpayments under a valid contract may give rise to a claim for restitution or unjust enrichment.”)).

[45] See supra note 6.

[46] See Tex. Ins. Code § 541.060 (prohibiting certain unfair settlement practices).

[47] 22 P.3d 313, 318-319 (Cal. 2001).

[48] Restatement (Third) of Restitution and Unjust Enrichment § 35, illus. 10 & reporter’s note (Tentative Draft No. 3, 2004).

 

Justice Wainwright, dissenting.

In the heat of trial, an insured and its excess insurer reached an agreement to address a situation not covered by the insurance policy. The insured accepted a $7.5 million payment from the insurers (including $500,000 from the primary insurance carrier) to settle the case against it, but later objected to enforcement of an express condition in the agreement to settle the case on its behalf. A deal is a deal, whether the insurer or the insured likes it after the fact. Because the Court’s holding contradicts this principle, I respectfully dissent.

At trial it quickly became clear that defendant Frank’s Casing was the focus of plaintiff ARCO’s attention. Frank’s Casing and its insurers feared a large verdict that might eclipse the limits of its excess coverage. On two prior occasions Frank’s Casing refused offers by the excess underwriters to fund a settlement of the claims brought against it by ARCO, subject to the condition that the excess underwriters could seek a reimbursement if the settled claims were not covered. The third offer to settle the dispute with ARCO for $7.5 million in insurance funds was also expressly conditioned on the right of the excess underwriters to seek reimbursement of the settlement payment if a later declaratory judgment action determined that ARCO’s claims were not covered by the excess policy. Frank’s Casing did not respond verbally or in writing to the third offer, but Frank’s Casing accepted the $7.5 million check and announced on the record in the trial court that it accepted the insurance payment to fund the settlement of the dispute and that the settlement with plaintiffs was consummated “by letter dated February 23, 1998.” The February 23rd letter contained the reimbursement term. The trial court rendered judgment on the settlement. In the subsequent declaratory action brought by the excess underwriters, Frank’s Casing lost its argument that ARCO’s claims were covered by the excess policy on summary judgment and did not appeal the final judgment. Having secured millions of dollars from the excess underwriters by virtue of their offer to settle the dispute, Frank’s Casing now claims that it is not bound by the express condition in the offer to reimburse the payment by the excess underwriters. By its actions and its statements in the trial court confirming the settlement, Frank’s Casing accepted the February 23rd offer. And Frank’s Casing lost on the issue the parties reserved to finally determine whether a right of reimbursement arose—the trial court determined there was no insurance coverage for ARCO’s claims.

Frank’s Casing admits that the excess underwriters paid $7 million to settle the claims on its behalf. Frank’s Casing does not dispute that the third settlement offer conditioned the right to reimbursement on whether coverage was found to exist and did not reject the offer or object to the reimbursement condition. Frank’s Casing lost on the coverage issue. Notwithstanding these facts, the Court surprisingly bifurcates the settlement offer to allow Frank’s Casing to accept the benefits of a contract and reject its obligations. The Court holds that Frank’s Casing consented to the settlement payment but not to the express condition. Frank’s Casing, the Court holds, can keep the $7.5 million benefit from the agreement but is not bound by the obligation to reimburse the excess underwriters when it lost its claim that there was coverage of the settled claims. The Court essentially decides that the insurer is bound by the deal but that the insured can rewrite the deal if it does not like the result.

The Court relies on Texas Association of Counties County Government Risk Management Pool v. Matagorda County. 52 S.W.3d 128 (Tex. 2000). In Matagorda County, the Court restricted an insurer’s right to reimbursement of settlement payments later found not to be covered by an insurance policy to circumstances where the insurer “obtains the insured’s clear and unequivocal consent to the settlement and the insurer’s right to seek reimbursement.” Id. at 135. Matagorda County erected this uncommon standard for contract formation even though the standard eschewed traditional common law contract principles on the tenets necessary to establish a right to recover.

I.

Once upon a time, the relationship between insurer and insured was fully one of contract and was governed by the terms and conditions of the policy. See Progressive County Mut. Ins. Co. v. Sink, 107 S.W.3d 547, 551 (Tex. 2003) (insurance policy is a contract to be interpreted according to contract principles); Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex. 1987) (“It is a fundamental rule of law that insurance policies are contracts and as such are controlled by rules of construction which are applicable to contracts generally.”). Even after common law modifications and legislative regulation of the parties’ consensual relationship, see, e.g., Tex. Bus. & Com. Code §§ 17.41–.63; Tex. Ins. Code §§ 541.001–.454; Arnold v. Nat’l County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987) (holding that insurers owe a duty of good faith and fair dealing toward insureds); G. A. Stowers Furniture Co. v. Am. Indemn. Co., 15 S.W.2d 544, 547 (Tex. Comm’n App. 1929, holding approved) (creating a duty to accept reasonable settlement demands within policy limits), the relationship between insurer and insured is still fundamentally based on the agreement of the parties. See Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 216 (Tex. 2003) (insurance policies are interpreted under rules of contract construction); Barnett, 723 S.W.2d at 665. In an insurance arrangement like the one at issue, the insured and insurer enter an agreement for the insurer to cover prescribed risks. Generally, the insured pays premiums to protect it against certain unrealized fortuitous costs or damages, up to an agreed limit, that it may suffer or be obligated to pay. See Eric Mills Holmes, et al., Holmes’ Appleman on Insurance, § 1.4, at 22–23 (2d ed. 1996). A contract of insurance obligates the insurer to cover only the risks prescribed in the policy. Id. at 29.

The standard of proof for an agreement is straightforward. A contract is established when proven by a preponderance of the evidence that an offer is accepted, accompanied by consideration. See Fed. Sign v. Tex. S. Univ., 951 S.W.2d 401, 408 (Tex. 1997) (“A contract must be based upon a valid consideration, in other words, mutuality of obligation.”); Haws & Garrett Gen. Contractors, Inc. v. Gorbett Bros. Welding Co., 480 S.W.2d 607, 609 (Tex. 1972) (“[T]here must be shown the element of mutual agreement which, in the case of an implied contract, is inferred from the circumstances.”). Unusual to Texas’s common law of contracts, Matagorda County made the existence of a contractual agreement in this context subject to “clear and unequivocal” proof of acceptance.[1] Matagorda County, 52 S.W.3d at 135. Matagorda County provides no reasoning to support its creation of that particular standard, but that remains the law in Texas. Because the parties reached an agreement on reimbursement, we should decide this case by simply enforcing their agreement.

II.

Frank’s Casing agreed to pay premiums for the provision of excess insurance coverage by the excess underwriters in the amount of $10 million. ARCO sued Frank’s Casing and others after an offshore drilling platform partially fabricated by Frank’s Casing for ARCO collapsed in the Gulf of Mexico. The excess underwriters issued a reservation of rights letter contesting coverage under its excess insurance policy with Frank’s Casing. When settlement discussions were unfruitful, the case was tried to a jury. During the heat of trial, with a large verdict appearing increasingly likely, Frank’s Casing entered another round of settlement discussions directly with ARCO and procured a settlement demand of $7.5 million, which Frank’s Casing presented to the excess underwriters. The excess underwriters agreed to pay $7 million (plus $500,000 from the primary insurer) to settle the case, conditioned on their right to seek reimbursement if they were ultimately not required to extend coverage for the claims at issue.

At the time the parties were considering the settlement, both believed they were in difficult positions. The record indicates that both parties believed a substantial verdict, possibly beyond the excess layer of insurance coverage, was likely. Both also knew that their original contract of insurance did not address the issue of the insurer’s ability to obtain reimbursement of a settlement payment for uninsured claims. Under these circumstances, the following decision trees grew.

During the trial, the excess underwriters had to decide whether to fund a settlement for an amount less than their policy limits, which included claims potentially not covered by their policy, to avoid the risk of a larger judgment. By agreeing to pay a settlement amount that was less than the excess underwriters’ policy limits, the excess underwriters would avoid a verdict that could exhaust their policy limits and potential extra-contractual claims. Thus, the excess underwriters would benefit from the proposed settlement.

Frank’s Casing likewise believed that it was faced with the specter of a large jury verdict against it. By settling within the excess underwriters’ policy limits, Frank’s Casing avoided a verdict beyond policy limits, a portion of which Frank’s Casing would be personally liable to pay. The settlement would end the trial and vanquish the risk of a large verdict and Frank’s Casing’s potential exposure for amounts above the excess limits or for the entire verdict if there were no coverage. In other words, the settlement would also benefit Frank’s Casing.

The excess underwriters decided to pay their portion of the settlement but conditioned their payment on their right to seek reimbursement if the claims were proven not to be a risk the parties had agreed to cover under the excess policy. The excess underwriters sent a letter on February 23, 1998, making this offer to Frank’s Casing. The letter further stated that the excess underwriters “w[ould] contact Arco/Vastar’s attorney th[at] morning” to settle the claims against Frank’s Casing. Frank’s Casing concurred that the settlement was reasonable and not only approved but demanded that the excess underwriters consummate the $7.5 million settlement. The excess underwriters sent a second letter on February 23rd to confirm the settlement with ARCO, copied Frank’s Casing on the letter, and then filed a declaratory judgment action contesting coverage that same day. The next day at the hearing before the trial court, which had recessed trial to give the parties the opportunity to resolve the dispute, the parties dictated their settlement into the record. At the hearing, Frank’s Casing did not object to any portion of the settlement, but asserted that by agreeing to the settlement the excess underwriters waived their right to contest “coverage,” making no mention of reimbursement.

Hence, we come to the dispute before this Court. Did Frank’s Casing obtain a windfall—i.e., payment by its insurer of millions of dollars to settle claims against it for which there was no coverage? Or did the excess underwriters voluntarily pay a settlement to obtain the benefits of saving potentially millions of dollars from the expected verdict? Two sophisticated entities carefully exercised their rights and obligations in light of their potential exposure. Both made reasoned decisions they believed to be in their best interests under the circumstances. But for the reimbursement condition included in the excess underwriters’ offer accepted by Frank’s Casing, I would conclude that there is no right to reimbursement. Absent the parties entering into a legally enforceable agreement, I do not believe that the equities of the parties’ respective circumstances alone support allowing a right to recoup the settlement payment.

If Frank’s Casing’s only conduct toward the excess underwriters upon obtaining the $7.5 million settlement offer from ARCO was to acquiesce to a settlement that did not include the reimbursement condition, the excess underwriters would have no right to reimbursement. However, I conclude that Frank’s Casing, by its acceptance of the $7.5 million payment and acquiescence in the settlement, bound itself under principles of contract law to the condition that the excess underwriters would be able to seek reimbursement. Frank’s Casing was not simply a beneficiary of its insurer’s settlement, but demanded in a prior letter dated February 19, 1998, that the excess underwriters act in a “reasonably prudent” manner, accept the settlement offer from ARCO, and do so “BEFORE a ruling by the court on the contract issues . . . [which] could occur at any time, but will occur, at the latest, by beginning of court Tuesday of next week.” Including the weekend, the following Tuesday, February 24, 1998, was five days away. The excess underwriters agreed to pay the settlement conditionally. The second February 23rd letter, which Frank’s Casing told the trial court was the basis of settlement, provided:

 

[The excess underwriters] continue to reserve all rights against Frank’s [Casing] as to coverage under the Umbrella Policy, and will hold Frank’s [Casing] responsible for and will seek reimbursement of all sums paid in settlement of claims for which no coverage exists under the Umbrella Policy.

 

 

(emphasis added). The excess underwriters then settled the case against Frank’s Casing the same day and faxed written confirmation to ARCO with a copy to Frank’s Casing. Frank’s Casing never asserts that it rejected the settlement offer or made a counteroffer. Instead, Frank’s Casing acknowledges that it accepted the settlement offer from the excess underwriters but argues that the excess underwriters did not obtain “Frank’s [Casing’s] agreement nor its clear and unequivocal consent to seek reimbursement.”[2]

The second letter sent on February 23rd to the plaintiffs confirmed the verbal settlement but stated that the excess underwriters would continue to reserve all rights “against Frank’s [Casing] as to coverage” and, for a second time that day, affirmed that they would “hold Frank’s [Casing] responsible for and will seek reimbursement of all sums paid in settlement of claims for which no coverage exists under the Umbrella policy.” Frank’s Casing again did not reject but accepted the settlement. After entering the settlement, the excess underwriters filed a declaratory judgment action contesting coverage that afternoon.

The next morning the trial court recessed the trial to enable the parties to dictate their settlement into the record. Frank’s Casing stated that “by letter dated February 23, 1998” (which conditioned settlement on reimbursement) from the excess underwriters to the plaintiffs, it had agreed to pay $7.5 million to settle the case with the plaintiffs. Frank’s Casing then asserted that the excess “underwriters have either waived their right to reserve cover [sic] issues or alternatively [are estopped] from asserting any coverage issues since underwriters have agreed to the settlement.” Counsel for the excess underwriters reconfirmed on the trial court record:

 

This settlement is being funded by Frank’s [Casing’s] umbrella underwriters subject to a full reservation of all rights against Frank’s [Casing] under the umbrella policy. . . . And these [excess] underwriters will hold Frank’s [Casing] responsible for and will seek reimbursements of all sums paid [for] the settlement of claims for which no coverage exists under the umbrella policy.

 

 

The trial court rendered judgment on the agreement dictated into the record. The Settlement Agreement and Release, signed later by Frank’s Casing and the excess underwriters, confirmed that the excess underwriters’ right to seek reimbursement was not released. The covenants not to sue and the releases between the parties did not apply “to any claims that exist presently . . . between Defendant Frank’s [Casing] and Frank’s [Casing’s] Insurers arising from the claims asserted by Plaintiffs.”

            Frank’s Casing has never disputed that the excess underwriters’ settlement offer was conditioned on a right to seek reimbursement. Frank’s Casing argues that by its actions it accepted the part of the settlement offer providing for the excess underwriters to make a $7 million settlement payment but did not accept the condition on that promise. The facts do not support Frank’s Casing’s position.

III.

A contracting party cannot accept the benefits of a contract and disclaim its obligations. W. H. Putegnat Co. v. Fid. & Deposit Co. of Md., 29 S.W.2d 1004, 1006 (Tex. 1930) (“Where one accepts the benefits of a contract[,] he must assume its burdens.”); United Concrete Pipe Corp. v. Spin-Line Co., 430 S.W.2d 360, 364 (Tex. 1968) (noting that a party may have the right to withdraw his consent before a contract’s performance but not after the promise is accepted or performed); Robert H. Jerry, II, The Insurer’s Right to Reimbursement of Defense Costs, 42 Ariz. L. Rev. 13, 72 (2000) (“[A]cquiescence in and acceptance of the benefits of [the party’s] performance constitute a manifestation of acceptance of the terms on which [the party’s] performance was tendered.”). To effectively decline an offer, some terms of which an offeree disapproves, the offeree must reject the offer or make a counteroffer. See Ashford Dev., Inc. v. USLife Real Estate Servs. Corp., 661 S.W.2d 933, 934–35 (Tex. 1983) (determining that an additional term in a loan commitment was a counteroffer); Komet v. Graves, 40 S.W.3d 596, 601 (Tex. App.—San Antonio 2001, no pet.) (holding an attempt to change an offer before acceptance operates as a rejection and counteroffer). Neither occurred here before the settlement was consummated.

Frank’s Casing accepted the settlement proposed by the excess underwriters, thereby acquiescing in the terms of the offer, and bound itself to the settlement under the law of contracts. See Blue Ridge Ins. Co. v. Jacobsen, 22 P.3d 313, 317 (Cal. 2001) (holding an insurer may seek reimbursement for settlement of uncovered claims where the insured is aware of the reservation but acquiesces). In practice in an insurance context, insureds often communicate acceptance of an offer by conduct, as in the case of an insured accepting a defense from an insurer that reserves its right to deny coverage. In such cases, the insured’s acceptance of the defense is an implied consent to the insurer’s reservation of the coverage issues, “even in the absence of an express consent or acceptance of the offer.” W. Cas. & Sur. Co. v. Newell Mfg. Co., 566 S.W.2d 74, 76 (Tex. Civ. App.—San Antonio 1978, writ ref’d n.r.e.); see also In re Halliburton Co., 80 S.W.3d 566, 568 (Tex. 2002) (“[W]hen an employer notifies an employee of changes to the at-will employment contract and the employee ‘continues working with knowledge of the changes, he has accepted the changes as a matter of law.’”) (quoting Hathaway v. Gen. Mills, Inc., 711 S.W.2d 227, 229 (Tex. 1986)).

Although the excess policy does not address reimbursement, during the trial the parties extended their contractual arrangement to address the risk of a large verdict by settlement and also agreed on a method to allocate the cost. The settlement vanquished the risk of a jury verdict against them. The allocation of the cost of settlement would be based on the outcome of the coverage suit. If the settled claims were found to be covered by the excess policy, the excess underwriters’ payment of the settlement would end the matter. The contractual relationship would function as intended as the excess underwriters were paid premiums to protect Frank’s Casing from covered risks within policy limits. If the settled claims were found not to be covered under the excess policy, the excess underwriters would have a contractual right to seek reimbursement of the settlement payment. The Court agrees that the parties reserved the coverage question but steadfastly ignores both the fact that Frank’s Casing lost on the issue reserved (on which the parties hinged the excess underwriters’ right to seek reimbursement) and the implications of that determination. By the terms of the parties’ arrangement during trial, there arose a right to reimbursement.

The Court concludes that no such agreement was reached or can be implied in fact but nevertheless decides that Frank’s Casing may keep the benefit of the offer to pay $7.5 million to settle the case but reject the reimbursement condition on the offer. As cited, infra, contract law does not allow the Court’s approach of “having my cake and eating it, too.” A deal is a deal, and in Texas we enforce deals. If Frank’s Casing wanted to reject the condition on reimbursement, it should have rejected the $7.5 million payment on its behalf and proceeded with trial, made a counteroffer that excluded the condition on reimbursement, or objected to the condition on reimbursement before the settlement was entered. The Court posits that “the excess underwriters’ agreement to accept the settlement in light of Frank’s Casing’s reimbursement contest implied the insurers’ consent to Frank’s Casing’s reservation of the reimbursement question.” __ S.W.3d __, __. The Court misstates some facts and ignores others. First, the excess underwriters did not accept the offer, Frank’s Casing did; the excess underwriters made the offer. Second, as explained, it is true the parties hinged reimbursement on the answer to the coverage question. However, again, ignoring the facts, the Court refuses to acknowledge that Frank’s Casing lost its claim of coverage, which gave rise to the excess underwriters’ contractual right to reimbursement.

The Court asserts “it makes no more sense to say that Frank’s Casing impliedly agreed to reimburse the carriers than it would to say that the carriers impliedly agreed to waive their coverage position.” Id. at __. The Court’s logic falters as it again ignores material facts. The excess underwriters’ reservation of the right to reimbursement is an express condition in the second February 23rd letter (pursuant to which the parties consummated the settlement) and acknowledged in the language of the subsequent settlement releases. It defies logic in this context to argue that the carriers impliedly waived positions they explicitly reserved in writing when the settlement was consummated, explicitly reserved during the hearing in the trial court, and then provided for in the settlement documents. The facts of Frank’s Casing’s agreement to the settlement are, however, very different. Frank’s affirmed on the trial court record that it settled under the terms of the second February 23rd letter, affirmatively accepted the $7.5 million check, and raised no objection when counsel for the excess underwriters stated, in the same trial court hearing on the record, that under the terms of the settlement they retained the right to seek reimbursement if the settled claims were later held not to be covered.

Frank’s Casing also argues that recognizing the excess underwriters’ contractual right to reimbursement is unfair. I do not agree. A trial court decided that the claims against Frank’s Casing, which the excess underwriters agreed to pay to settle, were not covered claims under the excess policy. Frank’s Casing did not appeal that determination, and it is therefore settled. Frank’s Casing is not entitled to insurance coverage for risks for which it paid no premiums, and the excess underwriters are not obligated to pay for risks they did not agree to cover and for which they received no consideration. Should the parties have desired to cover such risks, they could have consented to such an arrangement by defining the scope of coverage to include the claims at issue and agreeing on premiums to be paid for such coverage. But they did not.

And neither would I create an equitable right to reimbursement in this case. Matagorda County left open a very small window for insurers to seek reimbursement of settlement payments for claims later determined to be outside policy coverage. The parties should sink or swim on the agreements they enter, unless the facts are such that they effect a change in the parties’ agreement under traditional principles of contract law, are changed by the Legislature, or involve fraud, extortion, mutual mistake of fact, or another basis for altering a contract. Deciding this case based on a balancing of equitable rights to reimbursement would significantly widen this window but would invite insurers and insureds to unnecessarily introduce the uncertainty and unpredictability of restitutionary theories into these situations when the relationship is one based on contract.

IV.

In conclusion, I would hold that absent an agreement that the insured reimburse the insurer for paying to settle a claim that is later held not to be covered, there is no right to reimbursement of the settlement payment. Such an agreement may be included in the insurance policy or by subsequent explicit consent or by conduct.

The parties’ contractual relationship should govern an insurer’s right to reimbursement. If our analysis of this reimbursement issue were based on the common law of contract, determined by the agreements between the parties, rather than undefined standards that are foreign to contract law, the law in this area would be less perplexing and more certain. Insureds and insurers alike benefit from predictability and certainty in the law.

 

 

________________________________________

  1. Dale Wainwright

Justice

 

OPINION DELIVERED: February 1, 2008

 

 

[1] The Court has not defined the Matagorda County “clear and unequivocal” standard for entering an agreement for reimbursement. It seems to require more than a simple preponderance of the evidence; beyond that, we do not know what this standard requires. Even evidence supporting a clear and convincing standard may be equivocal, but Matagorda County requires more than that.

[2] Frank’s Casing also complains that it had only a few hours to study the proposed settlement from the excess underwriters. This complaint rings hollow as it was Frank’s Casing’s February 19th letter that imposed the February 23rd deadline on the excess underwriters to settle the case, and Frank’s Casing threatened to pursue extra-contractual claims if the deadline was not met.

 

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Martindale AVtexas[2]

Texas Insurance Coverage Litigation in 1st Party Commercial Policy Lawsuit

United States District Court,

S.D. Texas,

Houston Division.

MEDISTAR TWELVE OAKS PARTNERS, LTD., Plaintiff,

v.

AMERICAN ECONOMY INSURANCE COMPANY, et al., Defendants.

Civil Action No. H-09-3828.

 

May 17, 2010.

 

.

 

 

OPINION AND ORDER

 

MELINDA HARMON, District Judge.

 

Pending before the Court in the above referenced cause, arising out of an insurance claim by Plaintiff Medistar Twelve Oaks Partners, Ltd. (“Medistar”) for damages to Medistar’s commercial building and its contents caused by Hurricane Ike and removed from the 55th District Court of Harris County, Texas on diversity jurisdiction, are (1) Defendant Nelson Architectural Engineers, Inc.’s (“Nelson’s”) first motion to dismiss (instrument # 4); (2) Defendants American Economy Insurance Company (“American Economy”), Liberty Mutual Insurance Company (“Liberty”), and Safeco Insurance Company of America’s (“Safeco’s”) (collectively, “insurance company Defendants’) motion to dismiss or, alternatively, for more definite statement (# 5); and (3) Plaintiff Medistar Twelve Oaks Partners, Ltd.’s (“Medistar’s”) motion to remand (# 10).

 

According to Medistar’s Original Petition (Ex. A to # 1, Notice of Removal), Medistar’s commercial building was insured under an all-risk policy,FN1 number 02-CE-188659-10, issued by American Economy and Safeco. Safeco is the parent and controlling entity of American Economy, while Liberty is the parent and controlling company of Safeco. Medistar submitted a claim FN2 for damages to the insurance companies and states that it cooperated fully with their investigation. It alleges that American Economy, Safeco, and Liberty had an obligation in good faith and fair dealing to conduct an investigation and an evaluation of the benefits owed to Medistar and to promptly pay all benefits owed to Medistar. Among their good faith duties was an obligation to hire a sufficient number of qualified, properly trained adjustors, investigators and consultants to perform this work. Medistar complains that the insurance company Defendants hired Nelson for an “outcome oriented” and “dishonest” investigation of the cause of and resulting damages to Medistar’s insured property. Medistar asserts that the insurance company Defendants have wrongfully failed or refused to pay Medistar’s covered claims on a timely basis, but have persisted in delay or refusal to pay the full amounts due without giving honest reasons for their payment of an inadequate amount of benefits. Medistar claims that it has been forced to hire its own engineers at its own expense and an attorney to represent it here. It charges Nelson with “misrepresent[ing] survey results during its investigation of Medistar’s Insurance claim,” putting “these misrepresentations in reports,” and “attempt[ing] to manipulate changes to the survey results in a scheme to manufacture desired results which would lower claim payments” made by the insurance company Defendants. Original Petition at ¶ 45.

 

FN1. An “all-risks” policy is “one in which the insurer undertakes the risk for all losses of a fortuitous nature, which, in the absence of the insured’s fraud or other intentional misconduct, is not expressly excluded in the agreement.” Lexington Insurance Co. v. Buckingham Gate, Ltd., 993 S.W.2d 185 (Tex.App.-Corpus Christi 1999) (and cases cited therein).

 

FN2. Assigned claim number 598799873017.

 

Medistar sues the insurance company Defendants for breach of [ insurance] contract, noncompliance with Section 542.055 (failure to pay claim within fifteen business days of receiving all required information) of the Texas Prompt Payment of Claims Act and Texas Insurance Code, Chapter 542, breach of common law duty of good faith and fair dealing, violations of Section 17.50 of the Texas Deceptive Trade Practices Act (“DTPA”) and/or Chapter 541 of the Texas Insurance Code, fraud, and conspiracy to commit fraud. Medistar sues Nelson for fraud, conspiracy to commit fraud, and tortious interference with contract.FN3

 

FN3. The same causes of action were pleaded against Wiss, Janney, Elstner Associates, Inc., but it was voluntarily dismissed on January 11, 2010(# 25).

 

The parties have blended arguments regarding remand with others relating to Rule 12(b)(6) dismissal, at times confusing the standards for removal/remand with federal standards for adequate pleading of claims. Therefore the Court summarizes the arguments in the motions together. Nevertheless, because the motion to remand must be decided on the basis of the pleadings at the time of removal,FN4 and not on any subsequent existing or proposed post-removal amendment, and because that Original Petition determines this Court’s jurisdiction, the Court must address the motion for remand first. The resolution of that motion will determine whether the Court has jurisdiction to consider the Rule 12(b)(6) motions to dismiss.

 

FN4. The right to remove depends upon the plaintiffs’ pleading at the time of the petition for removal. Pullman Co. v. Jenkins, 305 U.S. 534, 537-38, 59 S.Ct. 347, 83 L.Ed. 334 (1939); Cavallini v. State Farm Mutual Auto Ins., 44 F.3d 256, 264 (5th Cir.1995); Ford v. Property & Cas. Ins. Co. of Hartford, No. Civ. A. H-09-1731, 2009 WL 4825222, *2 (S.D.Tex. Dec.9, 2009).

 

Relevant Law

 

Under 28 U.S.C. § 1441(a) any state court action over which federal courts would have original jurisdiction may be removed from state to federal court.   Gasch v. Hartford Accident & Indemnity Co.., 491 F.3d 278, 282 (5th Cir.2007). Moreover, under 28 U.S.C. § 1441(b), when original federal jurisdiction would be based on diversity, a defendant may remove a state court civil action only “if none of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.”

 

The doctrine of improper joinder, or fraudulent joinder,FN5 prevents defeat of federal removal jurisdiction premised on diversity by the presence of an improperly joined, non-diverse defendant. Borden v. Allstate Ins. Co., 589 F.3d 168, 171 (5th Cir.2009). Citizenship of an improperly joined party is totally disregarded in determining the court’s subject matter jurisdiction.   Smallwood v. Illinois Cent. R.R. Co., 385 F.3d 568, 572 (5th Cir.2004) (en banc), cert. denied, 544 U.S. 992, 125 S.Ct. 1825, 161 L.Ed.2d 755 (2005).

 

FN5. The Fifth Circuit prefers the term “improper joinder” to “fraudulent joinder” because it is more consistent with the statutory language in 28 U.S.C. §§ 1141 and 1332. Smallwood v. Ill. Cent. R. Co., 385 F.3d 568, 571 n. 1 and 572-73 (5th Cir.2004) (en banc), cert. denied, 544 U.S. 992, 125 S.Ct. 1825, 161 L.Ed.2d 755 (2005).

 

Improper joinder may be established by showing (1) actual fraud in the pleading of jurisdictional facts or (2) an inability to establish a cause of action against the non-diverse defendant in state court. Gasch, 491 F.3d at 281; Smallwood, 385 F.3d at 573. The latter is alleged here. Defendants claiming improper joinder based on the second type bear a heavy burden of showing that there is no possibility of recovery by the plaintiff against the in-state defendant, i.e., in other words there is no reasonable basis for predicting that state law would allow recovery against the in-state defendant.   Smallwood, 385 F.3d at 576. A “reasonable basis” means more than a mere a hypothetical basis. Griggs v. State Farm Lloyds, 181 F.3d 694, 701 (5th Cir.1999) (“whether the plaintiff has stated a valid state law cause of action depends upon and is tied to the factual fit between the plaintiffs’ allegations and the pleaded theory of recovery”).

 

To determine whether a plaintiff has a “reasonable basis for recovery under state law, the court may “conduct a Rule 12(b) (6)-type analysis.”   Smallwood, 385 F.3d at 573; Anderson v. Georgia Gulf Lake Charles, 342 Fed. Appx. 911, 915 (5th Cir.2009). First the court should look at the pleadings to determine whether the allegations state a claim under state law against the in-state defendant. Smallwood, 385 F.3d at 573. If the “plaintiff has stated a claim, but has misstated or omitted discrete facts that would determine the propriety of joinder,” the court may look beyond the pleadings and consider summary judgment-type evidence. Georgia Gulf, 342 Fed. Appx. at 915-16. That discovery should be very restricted and the summary inquiry should be limited to identifying “discrete and undisputed facts that would bar a plaintiffs’ recovery against an in-state defendant; anything more risks ‘moving the court beyond jurisdiction and into the resolution of the merits ….’ ” Id. at 916, quoting Smallwood, 385 F.3d at 573-74. The court has the discretion to determine what procedure is necessary.   Smallwood, 385 F.3d at 573.

 

The district court must resolve all contested fact issues and ambiguities of state law in favor of the plaintiff and remand. Gasch, 491 F.3d at 281, citing Guillory v. PPG Indus., Inc., 434 F.3d 303, 308 (5th Cir.2005). The Fifth Circuit explains that since “ ‘the effect of removal is to deprive the state court of an action properly before it, removal raises significant federalism concerns.’ The removal statute is therefore to be strictly construed, and any doubt about the propriety of removal must be resolved in favor of remand.” Id. at 281-82, quoting Carpenter v. Wichita Falls Indep. Sch. Dist., 44 F.3d 362, 365-66 (5th Cir.1995).

 

Fed. Rules of Civil Procedure 12(b)(6) and 9(b)

 

When a district court reviews a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), it must construe the complaint in favor of the plaintiff and take all well-pleaded facts as true. Kane Enterprises v. MacGregor (US), Inc., 322 F.3d 371, 374 (5th Cir.2003), citing Campbell v. Wells Fargo Bank, 781 F.2d 440, 442 (5th Cir.1986).

 

“While a complaint attacked by a Rule 12(b)(6) motion to plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do ….” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007) (citations omitted). “Factual allegations must be enough to raise a right to relief above the speculative level.” Id. at 1965, citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-236 (3d ed. 2004) (“[T]he pleading must contain something more … than … a statement of facts that merely creates a suspicion [of] a legally cognizable right of action”). “Twombly jettisoned the minimum notice pleading requirement of Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 … (1957) [“a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”], and instead required that a complaint allege enough facts to state a claim that is plausible on its face.” St. Germain v. Howard, 556 F.3d 261, 263 n. 2 (5th Cir.2009), citing In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007) (“To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead ‘enough facts to state a claim to relief that is plausible on its face.’ ”), citing Twombly, 127 S.Ct. at 1974). See also Alpert v. Riley, No. H-04-CV-3774, 2008 WL 304742, *14 (S.D.Tex. Jan.31, 2008). “Dismissal is proper if the complaint lacks an allegation regarding a required element necessary to obtain relief ….” Rios v. City of Del Rio, Texas, 444 F.3d 417, 421 (5th Cir.2006), cert. denied, 549 U.S. 825, 127 S.Ct. 181, 166 L.Ed.2d 43 (2006).

 

Recently, in Ashcroft v. Iqbal, — U.S. —-, —-, 129 S.Ct. 1937, 1940, 173 L.Ed.2d 868 (2009)(5-4), the Supreme Court, applying the Twombly plausibility standard to a Bivens claim of unconstitutional discrimination and a defense of qualified immunity for government official, observed that two principles inform the Twombly opinion: (1) “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” … Rule 8 “does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions.”; and (2) “only a complaint that states a plausible claim for relief survives a motion to dismiss,” a determination involving “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”

 

Fraud claims must also satisfy the heightened pleading standard set out in Federal Rule of Civil Procedure 9(b): “In allegations alleging fraud …, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” A dismissal for failure to plead with particularity as required by this rule is treated the same as a Rule 12(b)(6) dismissal for failure to state a claim. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1017 (5th Cir.1996). The Fifth Circuit interprets Rule 9(b) to require “specificity as to the statements (or omissions) considered to be fraudulent, the speaker, when and why the statements were made, and an explanation of why they were fraudulent.” Plotkin v. IP Axess, Inc., 407 F.3d 690, 696 (5th Cir.2005).

 

The elements of a fraud claim are (1) the defendant made a representation to the plaintiff; (2) the representation was material; (3) the representation was false; (4) when the defendant made the representation, the defendant a) knew that the representation was false or b) made the representation recklessly, as a positive assertion, and without knowledge of its truth; (5) the defendant made the representation with the intent that the plaintiff act on it; (6) the plaintiff relied on the representation; and (7) the representation caused the plaintiff injury. In re First Merit Bank, 52 S.W.3d 749, 758 ( Tex.2001).

 

To prevail on a conspiracy claim, the plaintiff must show (1) the defendant was a member of a combination of two or more persons; (2) the object of the combination was to accomplish a) an unlawful purpose or b) a lawful purpose by unlawful means; (3) the members had a meeting of the minds on the object or course of action; (4) one of the members committed an unlawful overt act to further the object or course of action; and (5) the plaintiff suffered injury as a proximate result of the wrongful act. Tri v. J.T.T., 162 S.W.3d 552, 556 ( Tex.2005); Insurance Co. of North America v. Morris, 981 S.W.2d 667, 675 ( Tex.1998).

 

The pleading standards of Twombly and Rule 9(b) apply to pleading a state law claim of conspiracy to commit fraud. U.S. ex rel. Grubbs v. Kanneganti, — F.3d —-, No. 07-40963, 565 F.3d 180, 2009 WL 930071, *9 (5th Cir. Apr.8, 2009) (“a plaintiff alleging a conspiracy to commit fraud must ‘plead with particularity the conspiracy as well as the overt acts … taken in furtherance of the conspiracy’ ”), quoting FC Inv. Group LLC v. IFX Markets, Ltd.., 529 F.3d 1087, 1097 (D.C.Cir.2008).

 

If Plaintiffs fail to state a claim for fraud underlying their civil conspiracy claim, the civil conspiracy claim must be dismissed, too.   Allstate Ins. Co. v. Receivable Finance, Inc., 501 F.3d 398, 414 (5th Cir.2007); American Tobacco Co., Inc. v. Grinnell, 951 S.W.2d 420, 438 ( Tex.1997) (“Allegations of conspiracy are not actionable absent an underlying [tort]”); Krames v. Bohannon Holman LLC, No. 3:06-CV-2370-0, 2009 WL 762205, *10 (N.D.Tex. Mar.24, 2009).

 

*5 To prevail on a claim of tortious interference in an existing contract, a plaintiff must establish (1) the plaintiff has a valid contract; (2) the defendant willfully and intentionally interfered with the contract; (3) the interference proximately caused the plaintiff’s injury; and (4) the plaintiff incurred damage or loss. Butnaru v. Ford Motor Co., 84 S.W.3d 198, 207 ( Tex.2002); Prudential Ins. Co. v. Financial Rev. Servs., 29 S.W.3d 74, 77 ( Tex.2000).

 

Motions to dismiss for failure to state a claim are appropriate when a defendant attacks the complaint because it fails to state a legally cognizable claim. Ramming v. United States, 281 F.3d 158, 161, 162 (5th Cir.2001) (“[W] hen considering a Rule 12(b) (6) motion to dismiss for failure to state a claim, the district court must examine the complaint to determine whether the allegations provide relief on any possible theory,” citing Cinel v. Connick, 15 F.3d 1338, 1334 (5th Cir.1994)), cert. denied sub nom. Cloud v. U.S., 536 U.S. 960, 122 S.Ct. 2665, 153 L.Ed.2d 839 (2002).

 

When a plaintiff’s complaint fails to state a claim, the court should generally give the plaintiff at least one chance to amend the complaint under Rule 15(a) before dismissing the action with prejudice. Great Plaints Trust Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 329 (5th Cir.2002) ( “District courts often afford plaintiffs at least one opportunity to cure pleading deficiencies before dismissing a case, unless it is clear that the defects are incurable or the plaintiffs advise the court that they are unwilling or unable to amend in a manner that will avoid dismissal.”);   United States ex rel. Adrian v. Regents of the Univ. of Cal., 363 F.3d 398, 403 (5th Cir.2004) (“Leave to amend should be freely given, and outright refusal to grant leave to amend without a justification … is considered an abuse of discretion. [citations omitted]”). The court should deny leave to amend if it determines that “the proposed change clearly is frivolous or advances a claim or defense that is legally insufficient on its fact ….” 6 Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Proc. § 1487 (2d ed.1990).

 

When addressing a motion to remand, however, the controlling pleading is the viable one at the time of removal; post-removal amendments are not considered.   Pullman Co. v. Jenkins, 305 U.S. 534, 537-38, 59 S.Ct. 347, 83 L.Ed. 334 (1939); Cavallini v. State Farm Mutual Auto Ins., 44 F.3d 256, 264 (5th Cir.1995).

 

Pending Motions

 

The gist of Medistar’s motion to remand is that there is no diversity jurisdiction here: Medistar is a Texas limited partnership, made of up partners who are all Texas citizens; Defendant Nelson is also a Texas citizen.FN6

 

FN6. It is undisputed that the other Defendants are diverse from Plaintiff: American Economy Insurance Company is an Indiana corporation with its principal place of business in Indianapolis, Indiana. Liberty Mutual Insurance Company is a Massachusetts corporation, with its principal place of business in Boston, Massachusetts.

 

Defendants contend that Nelson was fraudulently joined to defeat diversity.

 

In its response, Nelson incorporates its motion to dismiss, or alternatively, for more definite statement, and Nelson combines arguments for dismissal for improper joinder with dismissal for inadequate pleading of claims under Federal Rules of Civil Procedure 12(b)(6) and 9(b). With a supporting affidavit Nelson explains that it was hired not by Medistar, but by an agent of Medistar’s insurer to evaluate Medistar’s damage from Hurricane Ike and to provide engineering services relating to Medistar’s claims. As part of its services, Nelson asserts that it submitted four true and accurate engineering reports about the damage observed at Medistar’s commercial building, based upon site observations, field information, measurements, verbal information, and Mr. Nelson’s experience and structural analysis. Nelson insists Medistar cannot establish a cause of action against it in state court, but in large part argues that Medistar fails to satisfy pleading standards for its causes of action against Nelson.

 

Nelson maintains that Medistar failed to plead specific facts to support its fraud and conspiracy to commit fraud claims, as required by Federal Rules of Civil Procedure 12(b)(6) and 9(b). Medistar charges that Nelson misrepresented its survey results and manipulated its results to cause lower payments by the insurers during its investigation of Medistar’s insurance claim, but it does not identify the circumstances-the who, what when and where-to establish a fraud claim as to each defendant. It makes only broad, blanket statements about all of them generally. Medistar has also conceded that it did not rely on the representations made by Defendants, but instead relied on its own CEO and its own outside engineers to refute the reports and findings of Nelson. The conclusory statements in the Original Petition fail to plead a viable claim for conspiracy because they are merely speculative and fail to identify a specific time or place in which any meeting of the minds occurred.

 

Nelson does maintain that Medistar’s tortious interference claim FN7 against Nelson is not a viable cause of action in Texas against an independent engineer hired by an insurer to assist in the investigation absent a special relationship. Dagley v. Haag Engineering Co., 18 S.W.3d 787, 793-94 (Tex.App.-Houston [14th Dist.] 2000, no pet.), citing Dear v. Scottsdale Ins. Co., 947 S.W.2d 908 (Tex.App.-Dallas 1997) (holding that since there was no insurance contract and therefore no special relationship between the insured and an independent adjustor firm hired by the insured’s insurance carrier, the adjustor firm owed no duty to the insured and is not liable to the insured for improper investigation, settlement advice, negligence, bad faith, breach of contract, tortious interference or DTPA claims), overruled on other grounds, Apex Towing Co. v. Tolin, 41 S.W.3d 118, 122-23 ( Tex.2001). It is undisputed that Nelson did not have a contractual or other special relationship with Medistar at any time.

 

FN7. Paragraph 128 contains the tortious interference claim against Nelson:

 

Nelson interfered with Medistar’s contract with American Economy, Safeco and Liberty Mutual by submitting fraudulent building surveys, reports, and sealed engineering drawings for the purpose of providing a misrepresentation for the investigation of Medistar’s insurance claim that arose from Medistar’s insurance contract with American Economy, Safeco, and Liberty Mutual. Nelson prepared building diagrams which were false and materially misrepresented in such a manner that would indicate Medistar’s claims would be wrongfully denied or underpaid.

 

Nor, argues Nelson, does the pleading of the tortious interference claim satisfy Rule 12(b)(6). The Original Petition does not allege facts demonstrating that Nelson had an intent to interfere with the insurance contract between Medistar and the insurance company Defendants, how he interfered with it, that the interference proximately caused plaintiff’s injury, or that Nelson actively participated in persuading the insurance company Defendants to breach its contract. Instead the petition contains the kind of conclusory allegations and legal conclusions that Rule 12(b)(6) seeks to prevent.

 

Nelson also emphasizes that Plaintiff has failed to move for leave to amend to cure the problem, which has been pointed out in the two pending motions to dismiss. Nelson claims that evidence outside of the pleadings demonstrates that there is no reasonable basis to predict that Plaintiff might recover against Nelson under theories of fraud and/or conspiracy to commit fraud.

 

Finally under the economic loss rule, “mere nonfeasance under a contract creates liability only for breach of contract” and therefore “ ‘tort damages are generally not recoverable unless the plaintiff suffers an injury that is independent and separate from the economic losses recoverable under a breach of contract claim.’ ” Crawford v. Ace Sign, Inc., 917 S.W.2d 12, 13 ( Tex.1996); Heil Co. v. Polar Corp., 191 S.W.3d 805, 815 (Tex.App.-Fort Worth 2006), quoting Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 45-47 ( Tex.1998).FN8 See also M.D. Thompson v. Espey Huston & Assoc., Inc., 26 S.W.3d 103 (Tex.App.-Houston [14th Dist.] 2000, no writ) (holding that the negligence of an engineering firm, if any, in the performance of its inspections caused no injury to the owner beyond the economic loss to the subject of the contract under the economic loss rule). Nelson observes that although Medistar asserts tortious interference against Nelson and breach of contract against the other defendants, Medistar fails to demonstrate or allege that it has sustained a loss beyond the economic loss associated with the alleged delay in coverage under the insurance contract.

 

FN8. Should Medistar assert that its fraud claim is excluded from the economic loss rule under Formosa Plastics, Nelson points out that the Texas Supreme Court in that case held that “tort damages are recoverable for a fraudulent inducement claim irrespective of whether the fraudulent representations are later subsumed in a contract or whether the plaintiff suffers an economic loss related to the subject matter of the contract.” 960 S.W.2d at 47. If a plaintiff only asserts a claim for fraud and makes no allegation that it was fraudulently induced to enter into a contract, as here, Formosa Plastics does not apply and it is proper for the court to apply the economic loss rule to bar the fraud claim. Heil Co. v. Polar Corp., 191 S.W.3d at 816-19; Southwestern Bell Tel. Co. v. John Carlo Tex., Inc., 843 S.W. ed 470, 494-95 ( Tex.1992), citing Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 ( Tex.1986). The Texas Supreme Court subsequently clarified its opinion in Formosa Plastics:

 

In Formosa Plastics we concluded that Presidio could bring a fraudulent inducement claim even though its damages consisted only of economic losses related to the performance and subject matter of the parties’ contract. Some of our language in that opinion suggests that there is no distinction between a claim for fraud and fraudulent inducement. Fraudulent inducement, however, is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof. That is, with a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties. Formosa Plastics involved a fraudulent inducement claim based on representations contained in the bid packet upon which Presidio based its contract offer, which resulted in a written contract between the parties. Thus, the case was correctly decided as to fraudulent inducement. Although economic losses may be recoverable under either fraud or fraudulent inducement, Formosa Plastics should not be construed to say that fraud and fraudulent inducement are interchangeable with respect to the measure of damages that would be recoverable. [citations omitted]

 

R.E. Haase v. Glazner, 62 S.W.3d 795, 798-99 ( Tex.2001). Medistar’s Original Petition asserts only a claim for fraud, and none for fraudulent inducement, and the fraud allegations arise out of the alleged breach of contract. Thus, argues Nelson, Medistar’s tortious interference with an existing contract, fraud, and conspiracy to commit fraud claims must be dismissed under Rule 12(b) (6) for failure to state a claim by application of the economic loss rule.

 

Last of all, Nelson insists that Medistar’s claim for consequential damages must also be dismissed under Rule 12(b)(6) for failure to allege any facts that would show an entitlement to such damages. It is black letter law in Texas that a claimant can only recover damages that are a proximate cause of the injury sustained and of which the defendant has received fair notice. Therefore a plaintiff must plead sufficient facts to give the defendant fair and adequate notice of the damages sought. Horizon/CMS Healthcare Corp. v. Auld, 34 S.W.3d 887, 896-97 ( Tex.2000). Nelson argues that Medistar has failed to plead any facts that would put Nelson on notice as to the type of consequential damages Medistar will seek. Thus the claim for consequential damages must be dismissed under Rule 12(b)(6).

 

Insurance Defendants’ Response to Medistar’s Motion to Remand and Their Motion to Dismiss or for More Definite Statement (# 5)

 

American Economy, Safeco, and Liberty respond to Medistar’s motion to remand by complaining that Medistar did not plead any specific facts for its claims against Nelson, but instead erroneously argued that there could be no remand as long as Nelson could conceivably under some set of facts allege a cause of action against Nelson.FN9

 

FN9. This Court observes that Medistar’s argument invokes the old rule under Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 … (1957) [“a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”], which has been abrogated in federal court by Twombly, 127 S.Ct. at 1965 (“Factual allegations must be enough to raise a right to relief above the speculative level” and plead a claim that is plausible on its face). Moreover, as noted in Smallwood, “A ‘mere possibility of recovery under local law” will not preclude a finding of improper joinder.’ ” 385 F.3d at 573 n. 9, quoting Badon v. RJR Nabisco, Inc., 236 F.3d 282, 286 n. 4 (5th Cir.2000).

 

They urge the Court to deny Medistar’s motion to remand for three reasons: (1) Medistar’s conclusory allegations fail to state a claim against Nelson; (2) Texas law does not permit Medistar to bring tort claims against Nelson, an independent engineer; or (3) the economic loss rule bars Medistar’s tort claims against Nelson.

 

For the first reason, Medistar cites Waters v. State Farm Mutual Automobile Ins. Co., 158 F.R.D. 107, 109 (S.D.Tex.1994), in which this Court held that such conclusory allegations without factual basis are insufficient to state a claim against a non-diverse defendant and constitute fraudulent joinder. Medistar concedes that a proper fraudulent joinder analysis is made under Rule 12(b)(6), but it is well settled law that because Medistar made only conclusory allegations, it cannot survive such an analysis. This is especially true with respect to the fraud claim, which also fails to meet the particularity pleading standard of Rule 9(b). Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 339 (5th Cir.2008) (holding that conclusory allegations of fraud, without setting forth specific facts, are insufficient to survive a Rule 12(b)(6) analysis). In a typical statement, like the others devoid of facts and with legal conclusions masquerading as factual conclusions, Medistar alleged only that Nelson “made false statements, misrepresented material facts, and engaged in actions and/or omissions for the purpose of misleading Medistar as to the actual damages resulting from the peril of wind or the peril of storm surge or flood, and Medistar having relied upon such fraudulent conduct has been injured.” Original Petition as ¶ 120. See Fernandez-Mon tes v. Allied Pilots Ass’n, 987 F.2d 278, 284 (5th Cir.1993) ( “conclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss”). They emphasize that a fraud complaint should be filed only after a wrong is reasonably believed to have occurred; it should serve to seek redress for a wrong, not find one. Segal v. Gordon, 467 F.2d 602, 607-08 (2d Cir.1971). Thus Medistar’s fraud allegations should be dismissed for failure to state a claim under Rule 12(b)(6). The insurance company Defendants also point out that in response to the Rule 12(b)(6) motions filed by the insurance company Defendants and Nelson, Medistar chose not to amend its petition or move for leave to amend or state any facts in its motion to remand or in its responses to the motions to dismiss, but chose to stand on its petition. Furthermore, they note that Medistar makes only two references to alleged misrepresentations by the insurance company Defendants: (1) that they “misrepresented to Medistar that the damage to property was not in excess to the amount paid as of the date of this complaint, even though the damage was caused by a covered peril and clearly in excess of previously paid amounts” (Original Petition ¶ 39); and (2) that the insurance company Defendants did not “offer Medistar adequate compensation without any honest explanations in writing or orally as to why additional payments were not being made” (id. at ¶ 40). Neither supports a fraud claim, and neither pleads the elements of fraud with the requisite particularity. Nor does Medistar allege specific facts to establish that each defendant individually committed fraud, but instead makes impermissibly broad, blanket statements pertaining to all defendants. See, e.g., Medistar alleges that Safeco “through its agents and employees, knowingly and with reckless disregard for Medistar in the course of handling of this subject claim made false statements, misrepresented material facts, and engaged in actions and/or omissions for the purpose of misleading Medistar as to the actual damages resulting from the peril of wind, and Medistar having relied upon such fraudulent conduct, has been injured.” Original Petition, ¶¶ 67, 90, 113. There is no identification of time, context, substance or speaker of the alleged false statements.

 

Insurance company Defendants also argue that because Medistar has failed to state a claim for fraud, its conspiracy to commit fraud claim also fails and should be dismissed. In addition, they contend that the conspiracy claims are also vague and conclusory allegations, not stated with particularity, including a specific time or place in which there was any meeting of the minds. Alternatively, the conspiracy claims should be dismissed under the “intra-corporate conspiracy rule,” which states that in the case of a corporation, “the acts of a corporate agent are the acts of the corporation, and a corporation cannot conspire with itself.” Elliott v. Tilton, 89 F.3d 260, 265 (5th Cir.1996); Wilhite v. H.E. Butt Co., 812 S.W.2d 1, 5 (Tex.App.-Corpus Christi 1991, no writ) (“As a matter of law, a corporation or other company cannot conspire with itself, no matter how many of its agents participated in the complained of action,”).

 

The insurance company Defendants, too, urge that the conspiracy to commit fraud claims against Nelson cannot not survive a Rule 12(b)(6) analysis because they also are conclusory. Original Petition at ¶¶ 123-25. Rule 9(b)’ s requirement of particularity also applies to the allegations of conspiracy to commit fraud. In re Enron Corp. Securities, Derivative and ERISA Litig., 623 F.Supp.2d 798, 811 n. 11 (S.D.Tex.2009).

 

Medistar’s tortious interference claims also do not survive a Rule 12(b)(6) analysis because of conclusory nature of all the allegations, insist Defendants. See Nabors Drilling U.S.A. L.P. v. Twister Exploration, L.L.C., No. Civ. A. 01-2109, 2002 WL 1610957, *2-3 (E.D.La. July 18, 2002) (granting renewed motion for Rule 12(b)(6) dismissal because plaintiff pleaded only conclusory allegations of tortious interference).

 

As for the second reason for denying remand, like Nelson the insurance company Defendants argue that Texas law does not allow an insured to assert tort claims against independent engineer Nelson. Dagley, 18 S.W.3d 787. That bar applies not only to negligence and implied duty of good faith and fair dealing, but to tortious interference and conspiracy claims. Id. Although the rule originally arose to preclude a breach of good faith and fair dealing cause of action against an insurance adjuster ( Natividad v. Alexsis, Inc., 875 S.W.2d 695, 698, 700 ( Tex.1994) (in the absence of a contractual or special relationship between an agent or contractor and an insured, it is the insurance carrier that is liable to the insured for the acts of its agents or contractors)), it was expanded to preclude all manner of tort claims alleged against adjusters, law firms, and engineering companies hired by an insurer to respond to claims. Dear, 947 S.W.2d at 916 (holding that an independent adjusting firm, hired by an insurer to investigate the claim of an insured, has no special relationship with the insured); Castillo v. Professional Serv. Indus., Inc., No. 04-97-00775-CV, 1999 WL 155833, *1-2 (Tex.App.-San Antonio March 24, 1999) (absent a special relationship, soil tester hired by an independent engineer, in turn hired by an insurance company to investigate a claim, does not owe a legal duty to the insured and “cannot be held liable as a matter of law, whether the claim is brought under the Texas Insurance Code, the DTPA, intentional infliction of emotional distress, conspiracy to commit fraud, or tortious interference with contractual relations.”); Dagley, 18 S.W.3d at 791-92 (dismissing multiple tort claims of negligence, DTPA, Insurance Code violations, tortious interference and civil conspiracy against independent engineering firm hired by insurer); Muniz v. State Farm Lloyds, 974 S.W.2d 229, 235-37 (Tex.App.-San Antonio 1998, no pet.), citing Bui v. St. Paul Mercury Ins. Co., 987 F.2d 204, 210 (5th Cir.1993) (applying Texas law and dismissing tort claims against independent adjuster because adjuster owed no duty to insured).

 

As the third and final reason for denying the motion to remand, Texas law does not permit tort claims which allege merely the economic loss suffered by breach of the insurance policy, insist the insurance company defendants. Agreeing with Nelson, the insurance company Defendants contend that under the economic loss rule, “tort damages are generally not recoverable unless the plaintiff suffers an injury that is independent and separate from the economic losses recoverable under a breach of contract claim.” Heil Co. v. Polar Corp., 191 S.W.3d 805, 815 (Tex.App.-Fort Worth 2006, pet. denied). Insurance company Defendants assert that Medistar acknowledges the rule, but tries to avoid it by stating that it “it will show additional independent extra contractual damages, as a result of the claim,” without providing any facts to support such damages now. Motion to Remand at 6-7. The conclusory allegations of independent injury are insufficient to defeat a claim of fraudulent joinder. Waters, 158 F.R.D. at 109 (“[F]ailure to specify the factual basis for recovery against a non-diverse party constitutes failure to state a claim and fraudulent joinder of that party.”).

 

In response to Nelson (# 12), Medistar admits its allegations regarding Nelson’s fraudulent activity do not satisfy Rule 9(b) particularity requirements but says “a more particular statement should be forthcoming.” Because Medistar’s tortious interference claim against Nelson is not a fraud claim, it is subject only to “notice pleading” requirements of Rule 8, Medistar insists that it has met that standard. Medistar also maintains that Dagley and Nativida, premised on negligence or a breach of implied duty of good faith and fair dealing, do not apply to the issues in this case. Moreover the cases were decided at summary judgment stage, not at a motion to dismiss stage. It responds to Nelson’s Economic Loss Rule argument by citing Nazareth Int’l Inc. v. J.C. Penny Corp., Inc., 2005 U.S. Dist. LEXIS 14473 (N.D.Tex. July 19, 2005) for the proposition that the Economic Loss Rule does not bar recovery for any tort claim if an additional injury exists outside the parameter of contract damages. Medistar points to paragraph 141(f) of the Original Petition requesting actual damages, exemplary damages, punitive damages and other relief the Court deems just and proper-all outside contractual damages. It also argues that Rule 8 does not require its claim for consequential damages to be pleaded with particularity. If remanded, the issue can be addressed in state court.

 

In response (# 11) to the insurance Company Defendants’ motion to dismiss or for more definite statement, Medistar urges the court to deny the motion or to allow it to amend. Medistar concedes that some of its allegations do not satisfy the particularity requirement and “that a more particular statement will be forthcoming” if the Court denies remand. It maintains that its conspiracy claim does not fall under the intra-corporate conspiracy rule because it is alleging that the insurers conspired with Nelson. It reiterates that the Economic Loss Rule does not apply because paragraph 141(f) of the Original Petition requests actual damages, exemplary damages, punitive damages and other relief the Court deems just and proper-all outside contractual damages. Medistar argues that it has adequately pleaded a claim against the insurance company Defendants for violations of the DTPA, breach of the duty of good faith and unfair dealing, Chapter 542, and breach of contract.

 

Court’s Ruling

 

*10 Because the motion to remand must be decided on the basis of the pleadings at the time of removal, and not on any subsequent existing or proposed post-removal amendment, and because that pleading determines this Court’s jurisdiction, the Court addresses the remand issues first, separately from the motions to dismiss.

 

As a matter of law in Texas, since Medistar has no contractual or special relationship with Nelson, Medistar fails to state a claim agsinst Nelson for tortious interference with contract and for conspiracy to defraud relating to Nelson’s alleged improper negligent investigation of the insurance claims and manipulation of its reports to limit Medistar’s recovery on its claim against the insurance company Defendants.

 

In Natividad v. Alexsis, Inc., 875 S.W.2d 695, 698 ( Tex.1994), the Texas Supreme Court held that in the insurance context because the duty of good faith and fair dealing arises only from a contract giving rise to a special relationship as a result of unequal bargaining power between the parties to the insurance contract, where there is no privity of contract, as with an independent adjusting firm hired by the insurer, the adjusting firm did not owe an insured such a duty and therefore could not be liable for a breach of that duty. The duty of good faith and fair dealing is non-delegable. Id. Therefore the Texas Supreme Court concluded that the insurer “remains liable for actions by its employees, agents or contractors that breached the duty of good faith and fair dealing owed to” the insured by the insurer. Id. at 698 & n. 7 (“The insurance companies must answer for the ‘sins’ of their agents.”)

 

Relying on the rationale in Navidad, the Fifth Circuit in Bui v. St. Paul Mercury Ins. Co., 981 F.2d 209, 210 (5th Cir.1993) (applying Texas law), determined that any claim for negligent investigation brought by an insured against an independent claims adjusting firm hired by the insurer must fail as a matter of law. Subsequently that rule was expanded by the Dallas Court of Appeals in Dear, which found the independent adjusting firm “established its status as Scottsdale’s agent” to cover allegations of improper investigation and settlement advice regardless of whether the plaintiff framed his allegations as negligence, bad faith, breach of contract, tortious interference with contract, or DTPA violations. Dear. 947 S.W.2d at 917.

 

In the much-cited Dagley action, 18 S.W.3d 787, charging wrongful denial of insurance claims, the plaintiffs alleged that Haag Engineering Company, an independent engineering firm hired by insurer State Farm to evaluate hail storm damage, was liable for negligence, conspiracy, tortious interference, violations of the DTPA and the Texas Insurance Code. The appellate court, in affirming a summary judgment’s dismissal of the tortious interference claim inter alia, concluded, “[A]bsent a special relationship, Haag cannot be held liable for tortious interference.” 18 S.W.3d at 794, citing Dear, 947 S.W.2d at 917. In Dear, the Court reasoned that the defendant independent adjuster was retained and paid for by the insurer, had never entered into a contract with the insured, had no duty to the insured, had performed its role as an independent adjusting firm, and therefore was an agent or independent contractor of the insurance company. Id. at 791 & n. 3, citing Dear, 947 S.W. at 917. Moreover the Fourteenth Court of Appeals also affirmed the trial court’s summary judgment dismissing the claim that State Farm and Haag conspired in their investigation of the plaintiffs’ claims in an attempt to deny them the insurance benefits rightfully due them:

 

“The mere agreement to resist a claim, however, is not an actionable civil conspiracy,” Massey v. Armco Steel Co., 652 S.W.2d 932, 934 ( Tex.1983). For liability to attach there must be an unlawful, overt act to support a conspiracy. See id. We cannot conclude that submitting a report to State Farm with the conclusion that there was no hail storm damage to appellants’ home is an unlawful, overt act to support a conspiracy. Moreover, having found that Haag is not liable to appellants on their other claims, Haag cannot be liable for conspiracy.

 

18 S.W.3d at 795.

 

Thus the only remaining claim against Nelson is for fraud. Because the Original Petition was drafted in Texas state court, it was subject only to the requirements for adequate pleading under state law. There is no counterpart to Federal Rule 9(b) in the Texas Rules of Civil Procedure for pleading fraud. Nor has Texas followed Twombly. Instead Texas Rule of Civil Procedure 45(b) states that in the district and county courts the petition should “consist of a statement in plain and concise language of the plaintiff’s cause of action …. That an allegation be evidentiary or be of legal conclusion shall not be grounds for objection when fair notice to the opponent is given by the allegations as a whole.” Rule 47 also requires only notice pleading:

 

An original pleading which sets forth a claim for relief whether an original petition, counterclaim, cross-claim, or third party claim, shall contain

 

(a) a short statement of the cause of action sufficient to give fair notice of the claim involved,

 

(b) in all claims for unliquidated damages only the statement that the damages sought are within the jurisdictional limits of the court, and

 

(c) a demand for judgment for all the other relief to which the party deems himself entitled.

 

“A pleading provides sufficient fair notice of the claim involved when ‘an opposing attorney of reasonable competence could examine the pleadings and ascertain the nature and basic issue of the controversy and the relevant testimony.’ ” UMLIC VP LLV v. T & M Sales and Environmental Systems, 176 S.W.3d 595 (Tex.App.-Corpus Christi 2005) (citation omitted). “The pleadings must be sufficiently adequate so the court is able, from an examination of the pleadings alone, to ascertain with reasonable certainty and without resorting to information from another source, the elements of a plaintiff’s cause of action and relief sought with sufficient information upon which to base a judgment. Id., citing Tone v. Lawyers Title Ins. Corp., 578 S.W.2d 679, 683 ( Tex.1979). The petition must be liberally construed in favor of the pleader. Id., citing Stone v. Lawyers Title Ins. Corp., 554 S.W.2d 183, 186 ( Tex.1977). “ ‘The court will look to the pleader’s intendment’ and uphold the pleading as to a cause of action even if some element of that cause of action has not been specifically alleged.” Id., citing Gulf, C. & S.F. Ry. Co. v. Bliss, 368 S.W.2d 594, 599 ( Tex.1963), and Boyles v. Kerr, 855 S.W.2d 593, 601 ( Tex.1993). “ ‘Every fact will be supplied that can reasonably be inferred from what is specifically stated.’ ” Id., citing Bliss, 368 S.W.2d at 599. “ ‘Mere formalities, minor defects and technical insufficiencies’ will not invalidate a cause of action in a petition so long as the pleading gives fair notice to the opposing party.” Id., citing Stoner, 578 S.W.2d at 683.

 

Because Nelson was not a party to any contract with Medistar, Medistar cannot assert a claim against Nelson for breach of contract or any cause of action that arises out of a contract.FN10 To be viable, its claim for fraud against Nelson must be independent of the contract. Because there are essentially no facts, but only vague and conclusory statements regarding Medistar’s fraud claim, a summary judgment-type inquiry is required to determine who said or wrote what, where, and when and facts demonstrating reliance on those particular representations by Medistar. Frisby v. Lumbermens Mut. Cas. Co., 500 F.Supp.2d 697, 699 (S.D.Tex.2007), citing Smallwood, 385 F.3d at 573. At present it appears to the Court that Medistar would have difficulty showing that it relied on Nelson’s allegedly erroneous reports since it contends that they were incorrect, but it will give Medistar an opportunity to state supporting facts if it has any.

 

FN10. For this reason the Economic Loss Rule does not apply to the fraud claim.

 

Accordingly, the Court

 

ORDERS Medistar to submit within twenty days either an affidavit or a deposition of someone with personal knowledge who can provide the necessary supporting facts satisfying Fifth Circuit pleading standards FN11 to support the elements of its fraud claim FN12 against Nelson. Defendants may file responses within ten days after Medistar submits its summary judgment-type evidence. The Court reminds the parties that such inquiry will be limited to identifying “discrete and undisputed facts that would bar a plaintiffs’ recovery against an in-state defendant; anything more risks ‘moving the court beyond jurisdiction and into the resolution of the merits ….’ ” Smallwood, 385 F.3d at 573-74. The Court defers ruling on the motions to dismiss until the motion to remand has been resolved.

 

FN11. The Fifth Circuit has ruled, “State law fraud claims are subject to the heightened pleading requirements of Rule 9(b). To plead fraud adequately, the plaintiff must ‘specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.’ ” Sullivan v. Leor Energy, LLC., 600 F.3d 542d, 550-51 (5th Cir.2010), citing Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 338-39 (5th Cir.2008), and ABC Arbitrage v. Tchuruk, 291 F.3d 336, 350 (5th Cir.2002).

 

FN12. The elements of common law fraud are (1) a material representation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker made the representation with the intent that the other party should act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered injury. Allstate Ins. Co. v. Receivable Finance Co., L.L.C., 501 F.3d 398, 406 (5th Cir.2007), citing In re First Merit Bank, N.A., 52 S.W.3d 749, 758 ( Tex.2001).

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Martindale AVtexas[2]

The Money Laundering Exclusion in Texas Insurance Coverage Law

United States District Court,

S.D. Texas,

Houston Division.

Laura PENDERGEST-HOLT, et al., Plaintiffs,

v.

CERTAIN UNDERWRITERS AT LLOYD’S OF LONDON and Arch Specialty Insurance Co., De-fendants.

Civil Action No. H-09-3712.

 

 

May 10, 2010.

 

MEMORANDUM AND ORDER

 

NANCY F. ATLAS, District Judge.

 

Plaintiffs, each an executive in one or more com-pany founded by R. Allen Stanford, seek in this suit reimbursement of defense costs in criminal and civil litigation under directors’ and officers’ insurance policies (collectively, “D & O Policy”) issued by Defendants (“Underwriters”). On January 26, 2010, the District Court, Judge Hittner presiding, entered a preliminary injunction prohibiting Underwriters from “withholding payment” for costs “already incurred” by Plaintiffs and to be “incurred by them in the future … until a trial on the merits in this case or such other time as this Court orders.” Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, 681 F.Supp.2d 816, 2010 WL 317684, at *14 (S.D.Tex. Jan.26, 2010). Following an expedited appeal by Defendants, the Fifth Circuit modified the injunction, affirmed the District Court’s order as modified, and remanded the case for further proceedings on the coverage question. Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, 600 F.3d 562, 576 (5th Cir. Mar.15, 2010). Specifically, the Fifth Circuit held that “[t]he under-writers are enjoined from refusing to advance defense costs as provided for in the D & O Policy unless and until a court determine[s] that the alleged act or alleged acts [of Money Laundering] did in fact occur.” Id. (internal quotation marks omitted, brackets in the original).

 

On remand, this Court announced that this “in fact” determination would be made in the context of a preliminary injunction hearing. At a status conference on April 27, 2010, the Court requested briefing on: (1) which elements of the preliminary injunction standard are in issue at this stage of the case; and (2) the ap-plicable burden of proof for the in fact determination of whether Money Laundering occurred.FN1 Both parties have filed the requested briefing. FN2 The Court now turns to these two issues.

 

FN1. The Court also requested background briefing on an insured’s right to reimburse-ment of defense costs under an insurance policy that does not impose a duty to defend. The Court will take the parties’ submissions on this issue under advisement.

 

FN2. Plaintiffs filed a Brief in Support of Miscellaneous Relief [Doc. # 81] (“Plaintiffs’ Brief”), and Underwriters filed a “Response to Plaintiffs’ Brief on Elements of the Pre-liminary Injunction at Issue and Burden of Proof (“Response”). Plaintiffs’ also filed a Reply [Doc. # 90].

 

  1. PRELIMINARY INJUNCTION ELEMENTS IN ISSUE

 

“A plaintiff seeking a preliminary injunction must establish that [1] he is likely to succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of preliminary relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public interest.” Id. at 568-69. Both parties agree that the Court’s focus at the preliminary injunction hearing should be on the first prong, i.e., the Plaintiffs’ likelihood of success on the merits.FN3 Considering the Fifth Circuit’s mandate in this case, the Court concurs. See Henderson v. Stalder, 407 F.3d 351, 354 (5th Cir.2005) (“ ‘[T]he mandate rule compels compliance on remand with the dictates of a superior court and forecloses relitigation of issues expressly or impliedly decided by the appellate court.’ ”) (quoting United States v. Lee, 358 F.3d 315, 321 (5th Cir.2004)). The Court’s focus at the preliminary injunction hearing will be on the first prong of the preliminary injunction test. This inquiry will turn on a determination, as to each Plaintiff, of whether money laundering, as defined by the D & O Policy (“Money Laundering”), in fact occurred.

 

FN3. Plaintiffs’ Brief, at 6-7; Response, at 4-5.

 

  1. BURDEN OF PROOF

 

Underwriters will bear the burden of proving that Money Laundering in fact occurred. Plaintiffs argue that the Money Laundering policy provision on which Underwriters rely in denying reimbursement costs is an exclusion, and that Underwriters therefore bear the burden of proving its applicability. FN4 Underwriters agree.FN5 The Court holds that Underwriters have the burden of proving the applicability of the Money Laundering exclusion in the D & O Policy. See Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365, 370 (5th Cir.2008) (“Texas law places the burden of proving that an exclusion applies on the insurance company .”) (citing TEX. INS.CODE § 554.002); Texas Farmers Ins. Co. v. Murphy, 996 S.W.2d 873, 879 ( Tex.1999) ( “If there are any con-tractual provisions that could limit or bar recovery, it is incumbent on the insurer to plead and prove them.”).

 

FN4. Plaintiffs’ Brief, at 14-15.

 

FN5. Response, at 3.

 

The Fifth Circuit expressly reserved the question of whether a decision on the Money Laundering exclu-sion should be made by a preponderance standard or only by clear and convincing evidence. See Penderg-est-Holt, 600 F.3d at 575. Based on the Court’s current research, the Court will apply a preponderance of the evidence standard. Although there appears to be li-mited Texas authority on this point,FN6 the cases cited by Underwriters, and those located through the Court’s own research, indicate that an insurer must prove the applicability of a policy exclusion by a preponderance of the evidence. See Routis v. Clarendon Am. Ins. Co., 2007 WL 1412566, at *8 (Tex.App.-Houston [1st Dist.] 2007, no pet.) (stating that to establish arson by an insured, the insurer bears the burden of proving that the insured set the fire, “[h]owever, the insured’s burden of proof is not to show by an absolute cer-tainty, but rather, by a preponderance of the evidence that the insured set the fire”) (citing Murphy v. Texas Farmers Ins. Co., 982 S.W.2d 79, 84 (Tex.App.-Houston [1st Dist.] 1998) (“To establish arson as a defense to a civil suit for insurance proceeds, the insurance company must show by a preponderance of the evidence that the insured set the fire or caused the fire to be set.”), aff’d on other grounds, 996 S.W.2d 873 ( Tex.1999)); Nobles v. Employees Retirement Sys. of Texas, 53 S.W.3d 483, 486 (Tex.App.-Austin 2001, no pet.) (an insurer has the burden to plead, and prove, by a preponderance of the evidence, a policy exclusion and present some evidence of its applicability).

 

FN6. TEX. INS.CODE § 554.002 provides that the insurer has the burden of proof on an exclusion but does not specify the applicable standard.

 

Plaintiffs do not expressly argue that another standard should apply.FN7 Plaintiffs’ cite the following passage from Couch on Insurance: “While the degree of proof required for both coverage and exclusions is generally described as being a preponderance of the evidence, there may be a slightly heavier weight required for proof of exclusions.” FN8 However, Plaintiffs admit that they have not located a single Texas case apply-ing a clear and convincing standard in this context.FN9 In the absence of any applicable Texas case or statute, Plaintiffs’ citations to Couch on Insurance are insufficient to trigger the use of a standard of proof other than preponderance of the evidence.

 

FN7. See generally Reply. Plaintiffs state that they did not brief the issue in Plaintiffs’ Brief because they believed that the issue to be addressed was who had the burden of proof rather than the appropriate standard. Id. at 2 n. 3.

 

FN8. 17A COUCH ON INSURANCE § 254.14.

 

FN9. Reply, at 2.

 

III. CONCLUSION

 

For the foregoing reasons, it is

 

ORDERED that the Court’s focus at the preliminary injunction hearing will be the first element of the preliminary injunction standard, i.e., the Plaintiffs’ likelihood of success on the merits. It is further

 

ORDERED that Underwriters will have the burden of proving that Money Laundering in fact occurred.

 

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Martindale AVtexas[2]

 

Duty to Defend and Indemnify in Texas Insurance Claim Litigation

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
MID-CONTINENT CASUALTY §
COMPANY, §
§
Plaintiff, §
§
v. § CIVIL ACTION NO. H-06-3451
§
HAMMONDS TECHNICAL SERVICES, §
INCORPORATED, §
§
Defendant. §
MEMORANDUM AND ORDER
Pending is Plaintiff Mid-Continent Casualty Company’s Motion
for Summary Judgment (Document No. 14). Defendant filed no
response, and the motion is therefore deemed unopposed pursuant to
Local Rule 7.4. After carefully considering the motion and the
applicable law, the Court concludes as follows.
I. Background
Plaintiff Mid-Continent Casualty Company (“Plaintiff”) brought
this case for declaratory judgment that it has no duty to defend or
indemnify Defendant Hammonds Technical Services, Incorporated,
(“Defendant”) in a products liability lawsuit filed in Illinois by
Nancy Shaw (“Ms. Shaw”), styled Cause No. 05-L-773 (“Underlying
1 The Underlying Suit is captioned: Nancy Shaw, Individually
and as Special Administrator of the Estate of Francis N. Shaw,
Deceased v. Ashland, Inc. et al. See Document No. 14, ex. A at 1.
It was filed in the Third Judicial Circuit Court of Madison County,
Illinois. Id.
2
Suit”).1 Ms. Shaw filed the Underlying Suit against about 50
parties, including Defendant, a manufacturer of fuel injectors and
fuel pumps for the airline industry, for the wrongful death of her
husband Francis N. Shaw (“the deceased” or “Decedent”). See
Document No. 14, ex. A at 1. The complaint in the Underlying Suit
alleges that the deceased was an aircraft mechanic who worked for
27 years for various employers at Lambert International Airport in
St. Louis, Missouri, including for Trans-World Airlines from 1986
to 2001 and for American Airlines from 2001 to 2003. Id., ex. A
at 3. In 2003, he was diagnosed with Non-Hodgkin’s Lymphoma and
died in February, 2005. Id. It is alleged that the deceased was
an ordinary user of benzene and benzene products during the course
of his long employment at the airport in St. Louis, and elsewhere
while engaged in non-occupational work projects (including, but
not limited to, home and automotive repairs, maintenance and
remodeling), that the numerous defendants’ benzene products
resulted in an unreasonably dangerous condition, and that his
exposure to these products caused his fatal illness and death.
Id., ex. A at 4.
The commercial general liability insurance policies and excess
coverage policies issued by Plaintiff to Defendant were in effect
2 The policies at issue are: CGL-221374 and XS-103555, the
commercial general liability insurance policy and excess coverage
policy, respectively, effective from July 18, 1996 to July 18,
1997; and CGL-236255 and XS-104484, the commercial general
liability insurance policy and excess coverage policy,
respectively, effective from July 18, 1997 to July 18, 1998. See
id., ex. B1-B4.
3
from July 18, 1996 to July 18, 1998.2 Id. at 3, 4, ex. B1 at
MC0001. After Ms. Shaw’s suit was filed, Defendant sought defense
and indemnity from Plaintiff under the insurance policies. Id. at
3-4.
Both of the commercial general liability policies and both of
the excess coverage policies exclude coverage for bodily injury
included in the “products-completed operations hazard” exclusion.
See Document No. 14, ex. B1 at MC0019, B2 at MC0065, B3 at MC0097,
B4 at MC0131. The policies define “products-completed operations
hazard” as
all “bodily injury” . . . occurring away from premises
[Defendant] own[s] or rent[s] and arising out of
“[Defendant’s] product” or “[Defendant’s] work” except:
(1) Products that are still in [Defendant’s]
physical possession; or
(2) Work that has not yet been completed or
abandoned.
[]“[Defendant’s] work” will be deemed completed at the
earliest of the following times:
(1) When all of the work called for in [Defendant’s]
contract has been completed.
(2) When all of the work to be done at the site has
been completed if [Defendant’s] contract calls
for work at more than one site.
(3) When that part of the work done at a job site
has been put to its intended use by any person
4
or organization other than another contractor
or subcontractor working on the same project.
Work that may need service, maintenance, correction,
repair or replacement, but which is otherwise complete,
will be treated as completed.
Id., ex. B1 at MC0032-33; see also id., ex. B2 at MC0057, B3 at
MC0093, B4 at MC0124 (using substantially similar language in the
other three policies to define “products-completed operations
hazard”). In other words, bodily injuries occurring away from
Defendant’s premises, or arising out of completed products no
longer controlled by Defendant, are not covered under these
policies. See id. According to the policies, Defendant’s premises
were located in Houston, Texas. See id., ex. B1 at MC0039, ex. B3
at MC0080.
Additionally, the insurance policies exclude coverage for
bodily injuries expected or intended from the standpoint of the
insured, see id., ex. B1 at MC0022, B2 at MC0043, B3 at MC0083, B4
at MC0110; and bodily injury occurring outside the policy period,
see Document No. 14, ex. B1 at MC0022, ex. B2 at MC0042, B3 at
MC0083, B4 at 0109.
Plaintiff contends its policies provide no coverage and it has
no duty to defend for the Underlying Suit because: (1) the claims
are excluded by the products-completed operations hazard
exclusions; (2) the claims are excluded by the expected or intended
5
injury exclusions; and (3) the deceased’s illness did not occur
until after the policy periods expired. See Document No. 15.
II. Standards of Review
A. Summary Judgment Standard
Rule 56(c) provides that summary judgment “shall be rendered
forthwith if the pleadings, depositions, answers to interrogatories,
and admissions on file, together with the affidavits,
if any, show that there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a matter of
law.” FED. R. CIV. P. 56(c). The moving party must “demonstrate
the absence of a genuine issue of material fact.” Celotex Corp. v.
Catrett, 106 S. Ct. 2548, 2553 (1986).
Once the movant carries this burden, the burden shifts to the
nonmovant to show that summary judgment should not be granted.
Morris v. Covan World Wide Moving, Inc., 144 F.3d 377, 380 (5th
Cir. 1998). A party opposing a properly supported motion for
summary judgment may not rest upon mere allegations or denials in
a pleading, and unsubstantiated assertions that a fact issue exists
will not suffice. Id. “[T]he nonmoving party must set forth
specific facts showing the existence of a ‘genuine’ issue
concerning every essential component of its case.” Id.
In considering a motion for summary judgment, the district
court must view the evidence “through the prism of the substantive
6
evidentiary burden.” Anderson v. Liberty Lobby, Inc., 106 S. Ct.
2505, 2513 (1986). All justifiable inferences to be drawn from the
underlying facts must be viewed in the light most favorable to the
nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 106 S. Ct. 1348, 1356 (1986). “If the record, viewed in
this light, could not lead a rational trier of fact to find” for
the nonmovant, then summary judgment is proper. Kelley v. Price-
Macemon, Inc., 992 F.2d 1408, 1413 (5th Cir. 1993) (citing
Matsushita, 106 S. Ct. at 1351). “If, on the other hand, the
factfinder could reasonably find in [the nonmovant’s] favor, then
summary judgment is improper.” Id. Even if the standards of Rule
56 are met, a court has discretion to deny a motion for summary
judgment if it believes that “the better course would be to proceed
to a full trial.” Anderson, 106 S. Ct. at 2513.
A motion for summary judgment cannot, of course, be granted
simply because there is no opposition. Hetzel v. Bethlehem Steel
Corp., 50 F.3d 360, 362 n.3 (5th Cir. 1995). When no response is
filed, however, the Court may accept as undisputed the facts set
forth in support of the motion and grant summary judgment when a
prima facie showing for entitlement to judgment is made. See
Eversley v. Mbank Dallas, 843 F.2d 172, 174 (5th Cir. 1988); Rayha
v. United Parcel Serv., Inc., 940 F. Supp. 1066, 1068 (S.D. Tex.
1996).
3 Texas law governs this dispute. See Klumpe v. IBP, Inc.,
309 F.3d 279, 281 (5th Cir. 2002) (“In diversity cases, we apply
state substantive law together with the federal rules of
procedure.” (footnote omitted)); see also TEX. INS. CODE ANN. art.
21.42 (Vernon 2006) (“Any contract of insurance payable to any
citizen or inhabitant of this State by any insurance
company . . . shall be held to be a contract made and entered into
under and by virtue of the laws of this State relating to
insurance, and governed thereby . . . .”).
7
B. Legal Standards Governing the Duty to Defend
“Under Texas law, an insurer may have a duty to defend a
lawsuit against its insured.”3 Primrose Operating Co. v. Nat’l Am.
Ins. Co., 382 F.3d 546, 552 (5th Cir. 2004). Texas courts employ
an “eight corners” or “complaint allegation” rule in determining
whether an insurer has a duty to defend. See id.; Northfield Ins.
Co. v. Loving Home Care, Inc., 363 F.3d 523, 528 (5th Cir. 2004)
(citing King v. Dallas Fire Ins. Co., 85 S.W.3d 185, 187 (Tex.
2002)); see also GuideOne Elite Ins. Co. v. Fielder Road Baptist
Church, 197 S.W.3d 305, 308-09 (Tex. 2006). “This rule ‘requires
the trier of fact to examine only the allegations in the
[underlying] complaint and the insurance policy in determining
whether a duty to defend exists.’” Canutillo Indep. Sch. Dist. v.
Nat’l Union Fire Ins. Co., 99 F.3d 695, 701 (5th Cir. 1996)
(quoting Gulf Chem. & Metallurgical Corp. v. Associated Metals
& Minerals Corp., 1 F.3d 365, 369 (5th Cir. 1993)); see also
Guideone, 197 S.W.3d at 308 (explaining the eight corners rule).
8
“Thus, the duty to defend arises only when the facts alleged
in the complaint, if taken as true, would potentially state a cause
of action falling within the terms of the policy.” Northfield, 363
F.3d at 528. “If a petition does not allege facts within the scope
of coverage, an insurer is not legally required to defend a suit
against its insured.” Nat’l Union Fire Ins. Co. of Pittsburgh, Pa.
v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.
1997)). An insurer can absolve itself of the duty to defend by
showing, within the confines of the eight corners rule, “that the
plain language of a policy exclusion or limitation allows the
insurer to avoid coverage of all claims.” Northfield, 363 F.3d at
528.
The focus of the inquiry is on the alleged facts, not on the
asserted legal theories. St. Paul Fire & Marine Ins. Co. v. Green
Tree Fin. Corp.-Tex., 249 F.3d 389, 392 (5th Cir. 2001). “Facts
outside the pleadings, even those easily ascertained, are
ordinarily not material to the determination[,] and allegations
against the insured are liberally construed in favor of coverage.”
GuideOne, 197 S.W.3d at 308 (citing Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa., 939 S.W.2d at 141). Additionally, a court may not
attempt to “imagine factual scenarios which might trigger
coverage.” Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 939
S.W.2d at 142 (emphasis added).
9
III. Discussion
Plaintiff contends that the injuries alleged in the Underlying
Suit were caused away from Defendant’s premises or by exposure to
completed fuel injectors and fuel pumps, thus bringing the injuries
under the products-completed operations hazard exclusions from
coverage under Defendant’s policies. See Document No. 14 at 10-14.
The policies state, in similar language, that Defendant does
not have coverage for bodily harm included within the “productscompleted
operations hazard” exclusion. See id., ex. B1 at MC0019,
B2 at MC0065, B3 at MC0097, B4 at MC0131. The policies define a
“products-completed operations hazard” to include all bodily injury
occurring away from the premises owned or leased by Defendant and
arising out of Defendant’s completed products unless the products
remain in Defendant’s physical possession or have not yet been
completed. See id., ex. B1 at MC0032, B2 at MC0057, B3 at MC0093,
B4 at MC0124; see also supra Section I (quoting the language of the
policies defining “products-completed operations hazard”). Thus,
injuries from completed products and off-premises injuries are
excluded under Defendant’s policies. Id. Moreover, the policies
treat products that require service, but are otherwise complete–
like fuel injectors or fuel filters on airplanes–as complete, and
therefore outside coverage as well. Id.
The Underlying Suit makes no allegation that the deceased ever
came onto Defendant’s premises in Houston, Texas. In fact, the
10
injuries are alleged to have occurred at distant locations, where
the deceased worked at Lambert International Airport in St. Louis,
Missouri, and in non-occupational projects such as home and
automotive projects. Id., ex. A at 3-4. Never is it alleged that
any of this occurred on or even near Defendant’s premises in
Houston, Texas.
The Underlying Suit also fails to allege that any unfinished
fuel injectors or fuel pumps of Defendant contributed to the
deceased’s illness and subsequent death. The policies require
injuries from products to arise from either uncompleted products or
products still under the control of Defendant–neither of which is
alleged in the underlying complaint. Additionally, the policies
expressly treat items requiring maintenance, such as fuel injectors
or fuel pumps encountered by airplane mechanics, as completed
products not subject to coverage.
In sum, the Underlying Suit fails to allege bodily harms to
the deceased that occurred either on the premises of Defendant, or
as the result of a non-completed fuel injector or fuel pump. The
“products-completed operation hazards” exclusions therefore apply.
Applying the eight corners rule, the policies issued by Plaintiff
to Defendant do not cover the harms alleged in the Underlying Suit.
See LaBatt Co. v. Hartford Lloyd’s Ins. Co., 776 S.W.2d 795, 798-
800 (Tex. App.–Corpus Christi 1989) (holding that a similar
11
products-complete hazard exclusion negated the insurers duty to
defend).
C. Duty to Indemnify
Plaintiff further seeks a declaration that it has no duty to
indemnify Defendant. Although Texas law generally considers that
issue justiciable only after the underlying action has been
concluded, there is an exception where, as here, “‘the same reasons
that negate the duty to defend likewise negate any possibility the
insurer will ever have a duty to indemnify.’” Northfield, 363 F.3d
at 536 (quoting Farmers Tex. County Mut. Ins. Co. v. Griffin, 955
S.W.2d 81, 84 (Tex. 1997)).
IV. Order
For the reasons set forth, it is hereby
ORDERED that Plaintiff Mid-Continent Casualty Company’s Motion
for Summary Judgment (Document No. 13) is GRANTED, and it is
ORDERED and ADJUDGED that:
1. Mid-Continent Casualty Company does not owe Hammonds Technical
Services, Inc., defense, indemnity or coverage under the
policies above for claims in the Underlying Suit because such
claims are excluded by the products-completed operations
hazard exclusions;
2. Mid-Continent Casualty Company is not obligated or liable to
Hammonds Technical Services, Inc., in connection with any
judgment or settlement which may be entered in the Underlying
Suit; and
12
3. Mid-Continent Casualty Company is not obligated to pay any
costs taxed upon Hammonds Technical Services, Inc., in the
Underlying Suit, nor to pay on behalf of Hammonds Technical
Services, Inc., any sum that Hammonds Technical Services,
Inc., shall become legally obligated to pay as damages because
of or attendant to the Underlying Suit.
The Clerk will enter this Order, providing a correct copy to
all counsel of record.
SIGNED in Houston, Texas, this 27th day of November, 2007.
____________________________________
EWING WERLEIN, JR.
UNITED STATES DISTRICT JUDGE

 

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Martindale AVtexas[2]

Breach of Insurance Contract and Duty of Good Faith and Fair Dealing in Texas Homeowner’s Policy Case

Court of Appeals of Texas,Texarkana.

Darrell McKNIGHT and Michael Palmer, Appellants

v.

AMERICAN MERCURY INSURANCE COMPANY, Appellee.

No. 06-08-00004-CV.

 

Submitted May 19, 2008.

Decided Sept. 24, 2008.

 

MORRISS, C.J., CARTER and MOSELEY, JJ.

 

OPINION

 

 

Opinion by Justice CARTER.

 

Darrell McKnight and Michael Palmer made a claim with their insurer, American Mercury Insurance Company (American Mercury), seeking payment for damage to their metal building resulting from a hailstorm in March of 2000. Initially, American Mercury issued a check to pay for the damage assessed. When McKnight and Palmer, dissatisfied with the amount paid, refused to accept the check and, instead, filed suit in Upshur County (Upshur County litigation), American Mercury reinvestigated the claim. Upon its reinvestigation, American Mercury discovered that the damage, if there ever was any, had been cured by natural processes. So, during the Upshur County litigation, American Mercury maintained its position that it owed nothing to McKnight and Palmer because there was no remaining discernible damage to the building.

 

Several years later and following a trial to an Upshur County jury, the trial court entered judgment that McKnight and Palmer take nothing. McKnight and Palmer then tried to deposit the check that American Mercury had initially issued several years earlier. Not surprisingly, American Mercury refused to honor that check. McKnight and Palmer then sued again, this time in Gregg County FN1 (Gregg County litigation). American Mercury moved for summary judgment on the ground that the doctrine of res judicata barred the Gregg County litigation. The trial court agreed and granted summary judgment that McKnight and Palmer take nothing. They now appeal that judgment to this Court. We first discuss the details and factual allegations of both suits.

 

FN1. This second suit was originally filed in Upshur County as well under cause number 690-06. American Mercury moved to transfer venue based on the fact that the property at issue was actually located in Gregg County, a fact that McKnight and Palmer later conceded. Although the order is not included in the our record, the parties refer to an agreed order by which the cause was indeed transferred to Gregg County under cause number 2007-612-A.

 

  1. FACTUAL AND PROCEDURAL HISTORY

 

  1. Upshur County Litigation

 

Again, before either suit was filed, American Mercury tendered a check in the amount of $24,055.70.FN2McKnight and Palmer disagreed with the amount of the check and filed suit in Upshur County seeking damages. See McKnight v. Am. Mercury Ins. Co., cause number 401-02. In their petition, filed in June 2002, McKnight and Palmer described the case as one “involving, breach of contract, violation of the Texas Deceptive Trade Practices Act, and violations of the Texas Insurance Code.”They alleged that American Mercury “failed to provide full coverage for certain damage” and that, as a result, they “herein [sue] for payment of all property damage covered under the terms of this policy of insurance.”

 

FN2. Although the date of the check is not clear from the record before us, we note that the estimate upon which American Mercury issued the check was completed on August 12, 2000.

 

Attached to American Mercury’s designation of expert witnesses, filed February 24, 2005, are three reports important to the analysis of the Upshur County litigation: (1) a report dated November 10, 2003, following a reinspection by the claims service that originally inspected the building, (2) a follow-up report dated November 12, 2003, summarizing the November 10 report’s findings, and (3) an engineering firm’s report dated February 14, 2005. The November 10 reinspection report included the findings following an examination of the structure:

 

Our inspection of the building found no damage to the exterior metal walls related to hail. We also gained access to the roof and verified that no damage to this metal structure was found. We did find areas where hail had left marks on the roof, however no dents, dings, or impressions from hail were found. As you can tell in our photographs, there are areas where hail appears to have struck the roof and left marks on the chalking or acid build up on the roof. As you can tell in our photographs, these areas are easily wiped away and have not reduced the life expectancy of this roof. These marking[s] are sometimes misconstrued as being hail damage. The chalking or acidation of this roof is due to weather and can be found on all metal structures. Once again, we found no evidence of hail damage to the exterior walls or the roof of this building.

 

The follow-up report explained that the original inspection in 2000 did show hail damage and concluded that it was “possible that due to heat and severe weather conditions in East Texas that these dings are no longer visible.”The report continued, suggesting that the previously visible dings “may have potential [sic] cured themselves through time and weather.”It plainly stated that “there is no visible damage evident during our recent inspection.”

 

The engineering firm’s report detailed the property’s characteristics and outlined the process by which it investigated the building and the claim of hail damage. First, the report noted that the company maintains a national database of hailstone reports in excess of 3/4 inch using government records. Using this database, the firm concluded that there was no hail reported within a three-mile radius of the building on March 29, 2000, the date McKnight and Palmer allege as the date of the damaging storm. In fact, according to the database, no hail was reported within a three-mile radius of the building in the years 2000, 2001, and 2003. Going further, the report noted that no hail was reported within a six-mile radius on the date at issue. The firm conceded that the lack of reports does not necessarily “mean that hail did not fall in a particular location.”

 

On ground level, the firm reported “no evidence of hail impact, spatter marks, or dents in the metal siding.”Regarding the roof, the report noted that some hail spatter marks had removed the surface grime of the metal roof, but there were “no observable dents associated with the spatter marks” and the impact had not removed the paint coating. The firm reported no evidence of hail damage to the trim or other features of the metal building. The firm discussed in detail its findings, confirmed the structural integrity of the building, and noted as well that even the visible spatter marks that had removed the surface grime on the roof had probably been sustained in the most recent hailstorm since “[s]patter marks fade over time, usually six months to a year.”So, the firm, too, observed no damage to the metal building. Even the spatter marks, which here, the report suggests, were cosmetic, temporary blemishes, were not likely the result of the hailstorm McKnight and Palmer allege happened in March 2000. Again, these three reports were filed along with American Mercury’s designation of expert witnesses on February 24, 2005.

 

Additionally, on January 31, 2006, American Mercury responded with the following in its supplemental response to a request for disclosure:

 

Defendant American Mercury Insurance Company denies the allegations of the Plaintiffs’ petition. The Plaintiffs have failed to state any specific violation of the Texas Insurance Code or Deceptive Trade Practices Act which Plaintiffs allege have been violated by Defendant, so Defendant cannot respond specifically other than to state that Defendant denies it committed any violation. Defendant adjusted the claim and sent a check based on its adjustment of the claim that was refused by Plaintiffs. Defendant’s position is that the original adjustor either misadjusted the extent of the damage or that any damage to the roof was “repaired” by physical processes described by Defendant’s expert Robert Fleishmann. Defendant further alleges that Plaintiff Michael Palmer is not a proper party to this cause of action. Plaintiffs have failed to comply with the conditions of the insurance policy in question in bringing this cause of action. Plaintiffs have no damages because the building in question was sold to Dr. Jody Syring in an arm’s length transaction. Dr. Syring was not told of and was not aware of any damage to the building as alleged by Plaintiffs.

 

American Mercury relied on the reinspection and engineering reports.

 

On April 13, 2006, the Upshur County jury answered the following question in the negative: “Did American Mercury Insurance Company fail to comply with the insurance agreement?”FN3The trial court signed a take-nothing judgment on June 5, 2006.

 

FN3. As instructed, the jury did not answer any of the other five questions subsequent to its negative answer to this question.

 

  1. Gregg County Litigation

 

After the Upshur County litigation, McKnight and Palmer attempted to deposit the check issued several years earlier, only to discover that American Mercury refused payment on the check. As explained, during the course of the Upshur County litigation American Mercury maintained that further investigation revealed that there was no hail damage to the property and, thus, nothing owed on the claim.

 

In their petition filed on March 15, 2007,FN4 in the Gregg County litigation, McKnight and Palmer alleged that American Mercury breached the insurance contract by refusing to honor the check issued years earlier on the claim prior to the Upshur County litigation. They also alleged that American Mercury’s refusal breached its duty of good faith and fair dealing. They sought to recover the amount of the check ($24,055.70) and exemplary damages.

 

FN4. McKnight and Palmer originally filed their petition in Upshur County on October 2, 2006. Following the previously-noted transfer, the petition was filed in Gregg County on March 15, 2007.

 

McKnight and Palmer now take the position that the Upshur County suit is distinguishable from the Gregg County suit because, in Upshur County, the two claimed that American Mercury breached the insurance agreement by paying an insufficient amount on the claim whereas, in Gregg County, the two claimed that American Mercury breached the insurance agreement by refusing to honor the check initially issued on the claim. In other words, McKnight and Palmer contend that they seek different damages in this case than they did in the Upshur County suit. American Mercury, of course, disagrees with this characterization and successfully argued to the trial court its position that the Gregg County litigation was barred by the doctrine of res judicata.

 

  1. APPLICABLE LAW: DOCTRINE OF RES JUDICATA

 

Essentially, the doctrine of res judicata, or claim preclusion,FN5 gives a plaintiff one bite at the cause of action apple. Weiman v. Addicks-Fairbanks Road Sand Co., 846 S.W.2d 414, 418 (Tex.App.-Houston [14th Dist.] 1992, writ denied). If the defendant wins the original suit, then, the plaintiff is barred from bringing another action on the claims actually litigated in the action, as well as on claims that could have been litigated in the original action. See Barr v. Resolution Trust Corp., 837 S.W.2d 627, 628 ( Tex.1992); Fiallos v. Pagan-Lewis Motors, Inc., 147 S.W.3d 578, 584 (Tex.App.-Corpus Christi 2004, pet. denied); Dresser Indus., Inc. v. Underwriters at Lloyd’s, London, 106 S.W .3d 767, 770 (Tex.App.-Texarkana 2003, pet. denied). Thus, a party may not pursue a claim determined by the final judgment of a court of competent jurisdiction in a prior suit as a ground of recovery in a later suit against the same parties. Igal v. Brightstar Info. Tech. Group, Inc., No. 04-0931, 2008 Tex. LEXIS 422, at *18 ( Tex. May 2, 2008); Tex. Water Rights Comm’n v. Crow Iron Works, 582 S .W.2d 768, 771-72 ( Tex.1979). In short, res judicata precludes parties from relitigating claims that have been finally adjudicated by a competent tribunal. Igal,2008 Tex. LEXIS 422, at *18; Barr, 837 S.W.2d at 628.

 

FN5. Although American Mercury’s motion for summary judgment and the briefs to this Court limit their discussion to res judicata generally, we note the distinctions between the related doctrines of res judicata, also referred to as claim preclusion and of collateral estoppel, also known as issue preclusion. Collateral estoppel, or issue preclusion, is more narrow than res judicata in that it only precludes the relitigation of identical issues of facts or law that were actually litigated and essential to the judgment in a prior suit. Van Dyke v. Boswell, O’Toole, Davis & Pickering, 697 S.W.2d 381, 384 ( Tex.1985). Once an actually litigated and essential issue is determined, that issue is conclusive in a subsequent action between the same parties. See id.;Wilhite v. Adams, 640 S.W.2d 875, 876 ( Tex.1982). Thus, unlike the broader res judicata doctrine, collateral estoppel analysis does not focus on what could have been litigated, but only on what was actually litigated and essential to the judgment. Van Dyke, 697 S.W.2d at 384.

 

To successfully assert the affirmative defense of res judicata, a defendant must prove the following well-established elements: (1) a prior final judgment on the merits by a court of competent jurisdiction; (2) identity of parties or those in privity with them; and (3) a second action based on the same claims as were raised or could have been raised in the first action.See Igal, 2008 Tex. LEXIS 422, at *17-18; Citizens Ins. Co. of Am. v. Daccach, 217 S .W.3d 430, 449 ( Tex.2007); Amstadt v. United States Brass Corp., 919 S.W.2d 644, 652 ( Tex.1996); Crow Iron Works, 582 S.W.2d at 771-72;Cherokee Water Co. v. Freeman, 145 S.W.3d 809, 812-13 (Tex.App.-Texarkana 2004, pet. denied).

 

Here, McKnight and Palmer challenge only the third element, contending that the Gregg County litigation involves different claims than those advanced in the Upshur County litigation. Since the case comes to us in summary judgment posture and since res judicata is an affirmative defense on which the defendant bears the burden of proof, we will review the record to determine whether American Mercury conclusively proved as a matter of law that the claims in the Gregg County litigation were barred by the doctrine of res judicata. SeeTEX.R. CIV. P. 166a(c); Shah v. Moss, 67 S.W.3d 836, 842 ( Tex.2001).

 

III. DISCUSSION

 

McKnight and Palmer’s claims that American Mercury breached the insurance agreement or its duty of good faith and fair dealing by refusing payment on McKnight and Palmer’s insurance claim are claims that have been determined in the Upshur County litigation. The record shows us that, as early as November 2003, American Mercury had taken the position that there was no damage to the building and, therefore, it owed nothing on the claim. At the very latest, McKnight and Palmer learned of this position in February 2005 when American Mercury filed its designation of expert witnesses in which it explained that the designated experts’ testimony would reflect “no evidence of a hailstorm in 2000 having produced any current hail damage to the building.”American Mercury again made its position clear in its supplemental response to a request for disclosure, plainly stating its position “that the original adjustor either misadjusted the extent of the damage or that any damage to the roof was ‘repaired’ by physical processes described [in the attached expert’s report].”

 

So, by the time trial was held in April 2006, it was clear that American Mercury maintained its position that it owed nothing on the claim. Included in the evidence put before the Upshur County jury were the reinspection and engineering reports that indicated no damage to the building. The jury’s answer, then, that American Mercury did not breach the insurance contract would have been made on that basis: that by refusing payment at all on the claim, American Mercury did not breach the agreement. It follows, then, that the judgment stands for the proposition that American Mercury does not owe the $24,055.70 previously issued on the claim and refused by McKnight and Palmer. McKnight and Palmer’s post-Upshur County litigation position that American Mercury breached the insurance agreement by refusing payment on the check, then, has already been litigated and was determined when the Upshur County jury determined that American Mercury’s refusal to pay any amount on the claim was not a breach of the insurance agreement. Although the Gregg County suit attempts to shift the focus onto the refusal to honor a check, even McKnight and Palmer’s own pleadings show that the check was originally issued in connection with the insurance claim. And the Upshur County litigation resulted in a judgment that American Mercury did not owe McKnight and Palmer any amount of money on that insurance claim.

 

Based on this reading of the record, we conclude that the summary judgment evidence establishes as a matter of law that the claims that American Mercury breached its contract and its duty of good faith and fair dealing by refusing payment on the 2000 insurance claim were litigated and that relitigation of these issues, even cast under a different legal theory, is barred. We overrule McKnight and Palmer’s point of error and affirm the trial court’s judgment.

 

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Martindale AVtexas[2]

 

Texas Common Law Fraud and Misrepresentation Law in Insurance Case

United States District Court,

S.D. Texas,

Houston Division.

MEDISTAR TWELVE OAKS PARTNERS, LTD., Plaintiff,

v.

AMERICAN ECONOMY INSURANCE COMPANY, et al., Defendants.

Civil Action No. H-09-3828.

 

May 17, 2010.

 

.

 

 

OPINION AND ORDER

 

MELINDA HARMON, District Judge.

 

Pending before the Court in the above referenced cause, arising out of an insurance claim by Plaintiff Medistar Twelve Oaks Partners, Ltd. (“Medistar”) for damages to Medistar’s commercial building and its contents caused by Hurricane Ike and removed from the 55th District Court of Harris County, Texas on diversity jurisdiction, are (1) Defendant Nelson Architectural Engineers, Inc.’s (“Nelson’s”) first motion to dismiss (instrument # 4); (2) Defendants American Economy Insurance Company (“American Economy”), Liberty Mutual Insurance Company (“Liberty”), and Safeco Insurance Company of America’s (“Safeco’s”) (collectively, “insurance company Defendants’) motion to dismiss or, alternatively, for more definite statement (# 5); and (3) Plaintiff Medistar Twelve Oaks Partners, Ltd.’s (“Medistar’s”) motion to remand (# 10).

 

According to Medistar’s Original Petition (Ex. A to # 1, Notice of Removal), Medistar’s commercial building was insured under an all-risk policy,FN1 number 02-CE-188659-10, issued by American Economy and Safeco. Safeco is the parent and controlling entity of American Economy, while Liberty is the parent and controlling company of Safeco. Medistar submitted a claim FN2 for damages to the insurance companies and states that it cooperated fully with their investigation. It alleges that American Economy, Safeco, and Liberty had an obligation in good faith and fair dealing to conduct an investigation and an evaluation of the benefits owed to Medistar and to promptly pay all benefits owed to Medistar. Among their good faith duties was an obligation to hire a sufficient number of qualified, properly trained adjustors, investigators and consultants to perform this work. Medistar complains that the insurance company Defendants hired Nelson for an “outcome oriented” and “dishonest” investigation of the cause of and resulting damages to Medistar’s insured property. Medistar asserts that the insurance company Defendants have wrongfully failed or refused to pay Medistar’s covered claims on a timely basis, but have persisted in delay or refusal to pay the full amounts due without giving honest reasons for their payment of an inadequate amount of benefits. Medistar claims that it has been forced to hire its own engineers at its own expense and an attorney to represent it here. It charges Nelson with “misrepresent[ing] survey results during its investigation of Medistar’s Insurance claim,” putting “these misrepresentations in reports,” and “attempt[ing] to manipulate changes to the survey results in a scheme to manufacture desired results which would lower claim payments” made by the insurance company Defendants. Original Petition at ¶ 45.

 

FN1. An “all-risks” policy is “one in which the insurer undertakes the risk for all losses of a fortuitous nature, which, in the absence of the insured’s fraud or other intentional misconduct, is not expressly excluded in the agreement.” Lexington Insurance Co. v. Buckingham Gate, Ltd., 993 S.W.2d 185 (Tex.App.-Corpus Christi 1999) (and cases cited therein).

 

FN2. Assigned claim number 598799873017.

 

Medistar sues the insurance company Defendants for breach of [ insurance] contract, noncompliance with Section 542.055 (failure to pay claim within fifteen business days of receiving all required information) of the Texas Prompt Payment of Claims Act and Texas Insurance Code, Chapter 542, breach of common law duty of good faith and fair dealing, violations of Section 17.50 of the Texas Deceptive Trade Practices Act (“DTPA”) and/or Chapter 541 of the Texas Insurance Code, fraud, and conspiracy to commit fraud. Medistar sues Nelson for fraud, conspiracy to commit fraud, and tortious interference with contract.FN3

 

FN3. The same causes of action were pleaded against Wiss, Janney, Elstner Associates, Inc., but it was voluntarily dismissed on January 11, 2010(# 25).

 

The parties have blended arguments regarding remand with others relating to Rule 12(b)(6) dismissal, at times confusing the standards for removal/remand with federal standards for adequate pleading of claims. Therefore the Court summarizes the arguments in the motions together. Nevertheless, because the motion to remand must be decided on the basis of the pleadings at the time of removal,FN4 and not on any subsequent existing or proposed post-removal amendment, and because that Original Petition determines this Court’s jurisdiction, the Court must address the motion for remand first. The resolution of that motion will determine whether the Court has jurisdiction to consider the Rule 12(b)(6) motions to dismiss.

 

FN4. The right to remove depends upon the plaintiffs’ pleading at the time of the petition for removal. Pullman Co. v. Jenkins, 305 U.S. 534, 537-38, 59 S.Ct. 347, 83 L.Ed. 334 (1939); Cavallini v. State Farm Mutual Auto Ins., 44 F.3d 256, 264 (5th Cir.1995); Ford v. Property & Cas. Ins. Co. of Hartford, No. Civ. A. H-09-1731, 2009 WL 4825222, *2 (S.D.Tex. Dec.9, 2009).

 

Relevant Law

 

Under 28 U.S.C. § 1441(a) any state court action over which federal courts would have original jurisdiction may be removed from state to federal court.   Gasch v. Hartford Accident & Indemnity Co.., 491 F.3d 278, 282 (5th Cir.2007). Moreover, under 28 U.S.C. § 1441(b), when original federal jurisdiction would be based on diversity, a defendant may remove a state court civil action only “if none of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.”

 

The doctrine of improper joinder, or fraudulent joinder,FN5 prevents defeat of federal removal jurisdiction premised on diversity by the presence of an improperly joined, non-diverse defendant. Borden v. Allstate Ins. Co., 589 F.3d 168, 171 (5th Cir.2009). Citizenship of an improperly joined party is totally disregarded in determining the court’s subject matter jurisdiction.   Smallwood v. Illinois Cent. R.R. Co., 385 F.3d 568, 572 (5th Cir.2004) (en banc), cert. denied, 544 U.S. 992, 125 S.Ct. 1825, 161 L.Ed.2d 755 (2005).

 

FN5. The Fifth Circuit prefers the term “improper joinder” to “fraudulent joinder” because it is more consistent with the statutory language in 28 U.S.C. §§ 1141 and 1332. Smallwood v. Ill. Cent. R. Co., 385 F.3d 568, 571 n. 1 and 572-73 (5th Cir.2004) (en banc), cert. denied, 544 U.S. 992, 125 S.Ct. 1825, 161 L.Ed.2d 755 (2005).

 

Improper joinder may be established by showing (1) actual fraud in the pleading of jurisdictional facts or (2) an inability to establish a cause of action against the non-diverse defendant in state court. Gasch, 491 F.3d at 281; Smallwood, 385 F.3d at 573. The latter is alleged here. Defendants claiming improper joinder based on the second type bear a heavy burden of showing that there is no possibility of recovery by the plaintiff against the in-state defendant, i.e., in other words there is no reasonable basis for predicting that state law would allow recovery against the in-state defendant.   Smallwood, 385 F.3d at 576. A “reasonable basis” means more than a mere a hypothetical basis. Griggs v. State Farm Lloyds, 181 F.3d 694, 701 (5th Cir.1999) (“whether the plaintiff has stated a valid state law cause of action depends upon and is tied to the factual fit between the plaintiffs’ allegations and the pleaded theory of recovery”).

 

To determine whether a plaintiff has a “reasonable basis for recovery under state law, the court may “conduct a Rule 12(b) (6)-type analysis.”   Smallwood, 385 F.3d at 573; Anderson v. Georgia Gulf Lake Charles, 342 Fed. Appx. 911, 915 (5th Cir.2009). First the court should look at the pleadings to determine whether the allegations state a claim under state law against the in-state defendant. Smallwood, 385 F.3d at 573. If the “plaintiff has stated a claim, but has misstated or omitted discrete facts that would determine the propriety of joinder,” the court may look beyond the pleadings and consider summary judgment-type evidence. Georgia Gulf, 342 Fed. Appx. at 915-16. That discovery should be very restricted and the summary inquiry should be limited to identifying “discrete and undisputed facts that would bar a plaintiffs’ recovery against an in-state defendant; anything more risks ‘moving the court beyond jurisdiction and into the resolution of the merits ….’ ” Id. at 916, quoting Smallwood, 385 F.3d at 573-74. The court has the discretion to determine what procedure is necessary.   Smallwood, 385 F.3d at 573.

 

The district court must resolve all contested fact issues and ambiguities of state law in favor of the plaintiff and remand. Gasch, 491 F.3d at 281, citing Guillory v. PPG Indus., Inc., 434 F.3d 303, 308 (5th Cir.2005). The Fifth Circuit explains that since “ ‘the effect of removal is to deprive the state court of an action properly before it, removal raises significant federalism concerns.’ The removal statute is therefore to be strictly construed, and any doubt about the propriety of removal must be resolved in favor of remand.” Id. at 281-82, quoting Carpenter v. Wichita Falls Indep. Sch. Dist., 44 F.3d 362, 365-66 (5th Cir.1995).

 

Fed. Rules of Civil Procedure 12(b)(6) and 9(b)

 

When a district court reviews a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), it must construe the complaint in favor of the plaintiff and take all well-pleaded facts as true. Kane Enterprises v. MacGregor (US), Inc., 322 F.3d 371, 374 (5th Cir.2003), citing Campbell v. Wells Fargo Bank, 781 F.2d 440, 442 (5th Cir.1986).

 

“While a complaint attacked by a Rule 12(b)(6) motion to plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do ….” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007) (citations omitted). “Factual allegations must be enough to raise a right to relief above the speculative level.” Id. at 1965, citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-236 (3d ed. 2004) (“[T]he pleading must contain something more … than … a statement of facts that merely creates a suspicion [of] a legally cognizable right of action”). “Twombly jettisoned the minimum notice pleading requirement of Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 … (1957) [“a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”], and instead required that a complaint allege enough facts to state a claim that is plausible on its face.” St. Germain v. Howard, 556 F.3d 261, 263 n. 2 (5th Cir.2009), citing In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007) (“To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead ‘enough facts to state a claim to relief that is plausible on its face.’ ”), citing Twombly, 127 S.Ct. at 1974). See also Alpert v. Riley, No. H-04-CV-3774, 2008 WL 304742, *14 (S.D.Tex. Jan.31, 2008). “Dismissal is proper if the complaint lacks an allegation regarding a required element necessary to obtain relief ….” Rios v. City of Del Rio, Texas, 444 F.3d 417, 421 (5th Cir.2006), cert. denied, 549 U.S. 825, 127 S.Ct. 181, 166 L.Ed.2d 43 (2006).

 

Recently, in Ashcroft v. Iqbal, — U.S. —-, —-, 129 S.Ct. 1937, 1940, 173 L.Ed.2d 868 (2009)(5-4), the Supreme Court, applying the Twombly plausibility standard to a Bivens claim of unconstitutional discrimination and a defense of qualified immunity for government official, observed that two principles inform the Twombly opinion: (1) “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” … Rule 8 “does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions.”; and (2) “only a complaint that states a plausible claim for relief survives a motion to dismiss,” a determination involving “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”

 

Fraud claims must also satisfy the heightened pleading standard set out in Federal Rule of Civil Procedure 9(b): “In allegations alleging fraud …, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” A dismissal for failure to plead with particularity as required by this rule is treated the same as a Rule 12(b)(6) dismissal for failure to state a claim. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1017 (5th Cir.1996). The Fifth Circuit interprets Rule 9(b) to require “specificity as to the statements (or omissions) considered to be fraudulent, the speaker, when and why the statements were made, and an explanation of why they were fraudulent.” Plotkin v. IP Axess, Inc., 407 F.3d 690, 696 (5th Cir.2005).

 

The elements of a fraud claim are (1) the defendant made a representation to the plaintiff; (2) the representation was material; (3) the representation was false; (4) when the defendant made the representation, the defendant a) knew that the representation was false or b) made the representation recklessly, as a positive assertion, and without knowledge of its truth; (5) the defendant made the representation with the intent that the plaintiff act on it; (6) the plaintiff relied on the representation; and (7) the representation caused the plaintiff injury. In re First Merit Bank, 52 S.W.3d 749, 758 ( Tex.2001).

 

To prevail on a conspiracy claim, the plaintiff must show (1) the defendant was a member of a combination of two or more persons; (2) the object of the combination was to accomplish a) an unlawful purpose or b) a lawful purpose by unlawful means; (3) the members had a meeting of the minds on the object or course of action; (4) one of the members committed an unlawful overt act to further the object or course of action; and (5) the plaintiff suffered injury as a proximate result of the wrongful act. Tri v. J.T.T., 162 S.W.3d 552, 556 ( Tex.2005); Insurance Co. of North America v. Morris, 981 S.W.2d 667, 675 ( Tex.1998).

 

The pleading standards of Twombly and Rule 9(b) apply to pleading a state law claim of conspiracy to commit fraud. U.S. ex rel. Grubbs v. Kanneganti, — F.3d —-, No. 07-40963, 565 F.3d 180, 2009 WL 930071, *9 (5th Cir. Apr.8, 2009) (“a plaintiff alleging a conspiracy to commit fraud must ‘plead with particularity the conspiracy as well as the overt acts … taken in furtherance of the conspiracy’ ”), quoting FC Inv. Group LLC v. IFX Markets, Ltd.., 529 F.3d 1087, 1097 (D.C.Cir.2008).

 

If Plaintiffs fail to state a claim for fraud underlying their civil conspiracy claim, the civil conspiracy claim must be dismissed, too.   Allstate Ins. Co. v. Receivable Finance, Inc., 501 F.3d 398, 414 (5th Cir.2007); American Tobacco Co., Inc. v. Grinnell, 951 S.W.2d 420, 438 ( Tex.1997) (“Allegations of conspiracy are not actionable absent an underlying [tort]”); Krames v. Bohannon Holman LLC, No. 3:06-CV-2370-0, 2009 WL 762205, *10 (N.D.Tex. Mar.24, 2009).

 

*5 To prevail on a claim of tortious interference in an existing contract, a plaintiff must establish (1) the plaintiff has a valid contract; (2) the defendant willfully and intentionally interfered with the contract; (3) the interference proximately caused the plaintiff’s injury; and (4) the plaintiff incurred damage or loss. Butnaru v. Ford Motor Co., 84 S.W.3d 198, 207 ( Tex.2002); Prudential Ins. Co. v. Financial Rev. Servs., 29 S.W.3d 74, 77 ( Tex.2000).

 

Motions to dismiss for failure to state a claim are appropriate when a defendant attacks the complaint because it fails to state a legally cognizable claim. Ramming v. United States, 281 F.3d 158, 161, 162 (5th Cir.2001) (“[W] hen considering a Rule 12(b) (6) motion to dismiss for failure to state a claim, the district court must examine the complaint to determine whether the allegations provide relief on any possible theory,” citing Cinel v. Connick, 15 F.3d 1338, 1334 (5th Cir.1994)), cert. denied sub nom. Cloud v. U.S., 536 U.S. 960, 122 S.Ct. 2665, 153 L.Ed.2d 839 (2002).

 

When a plaintiff’s complaint fails to state a claim, the court should generally give the plaintiff at least one chance to amend the complaint under Rule 15(a) before dismissing the action with prejudice. Great Plaints Trust Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 329 (5th Cir.2002) ( “District courts often afford plaintiffs at least one opportunity to cure pleading deficiencies before dismissing a case, unless it is clear that the defects are incurable or the plaintiffs advise the court that they are unwilling or unable to amend in a manner that will avoid dismissal.”);   United States ex rel. Adrian v. Regents of the Univ. of Cal., 363 F.3d 398, 403 (5th Cir.2004) (“Leave to amend should be freely given, and outright refusal to grant leave to amend without a justification … is considered an abuse of discretion. [citations omitted]”). The court should deny leave to amend if it determines that “the proposed change clearly is frivolous or advances a claim or defense that is legally insufficient on its fact ….” 6 Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Proc. § 1487 (2d ed.1990).

 

When addressing a motion to remand, however, the controlling pleading is the viable one at the time of removal; post-removal amendments are not considered.   Pullman Co. v. Jenkins, 305 U.S. 534, 537-38, 59 S.Ct. 347, 83 L.Ed. 334 (1939); Cavallini v. State Farm Mutual Auto Ins., 44 F.3d 256, 264 (5th Cir.1995).

 

Pending Motions

 

The gist of Medistar’s motion to remand is that there is no diversity jurisdiction here: Medistar is a Texas limited partnership, made of up partners who are all Texas citizens; Defendant Nelson is also a Texas citizen.FN6

 

FN6. It is undisputed that the other Defendants are diverse from Plaintiff: American Economy Insurance Company is an Indiana corporation with its principal place of business in Indianapolis, Indiana. Liberty Mutual Insurance Company is a Massachusetts corporation, with its principal place of business in Boston, Massachusetts.

 

Defendants contend that Nelson was fraudulently joined to defeat diversity.

 

In its response, Nelson incorporates its motion to dismiss, or alternatively, for more definite statement, and Nelson combines arguments for dismissal for improper joinder with dismissal for inadequate pleading of claims under Federal Rules of Civil Procedure 12(b)(6) and 9(b). With a supporting affidavit Nelson explains that it was hired not by Medistar, but by an agent of Medistar’s insurer to evaluate Medistar’s damage from Hurricane Ike and to provide engineering services relating to Medistar’s claims. As part of its services, Nelson asserts that it submitted four true and accurate engineering reports about the damage observed at Medistar’s commercial building, based upon site observations, field information, measurements, verbal information, and Mr. Nelson’s experience and structural analysis. Nelson insists Medistar cannot establish a cause of action against it in state court, but in large part argues that Medistar fails to satisfy pleading standards for its causes of action against Nelson.

 

Nelson maintains that Medistar failed to plead specific facts to support its fraud and conspiracy to commit fraud claims, as required by Federal Rules of Civil Procedure 12(b)(6) and 9(b). Medistar charges that Nelson misrepresented its survey results and manipulated its results to cause lower payments by the insurers during its investigation of Medistar’s insurance claim, but it does not identify the circumstances-the who, what when and where-to establish a fraud claim as to each defendant. It makes only broad, blanket statements about all of them generally. Medistar has also conceded that it did not rely on the representations made by Defendants, but instead relied on its own CEO and its own outside engineers to refute the reports and findings of Nelson. The conclusory statements in the Original Petition fail to plead a viable claim for conspiracy because they are merely speculative and fail to identify a specific time or place in which any meeting of the minds occurred.

 

Nelson does maintain that Medistar’s tortious interference claim FN7 against Nelson is not a viable cause of action in Texas against an independent engineer hired by an insurer to assist in the investigation absent a special relationship. Dagley v. Haag Engineering Co., 18 S.W.3d 787, 793-94 (Tex.App.-Houston [14th Dist.] 2000, no pet.), citing Dear v. Scottsdale Ins. Co., 947 S.W.2d 908 (Tex.App.-Dallas 1997) (holding that since there was no insurance contract and therefore no special relationship between the insured and an independent adjustor firm hired by the insured’s insurance carrier, the adjustor firm owed no duty to the insured and is not liable to the insured for improper investigation, settlement advice, negligence, bad faith, breach of contract, tortious interference or DTPA claims), overruled on other grounds, Apex Towing Co. v. Tolin, 41 S.W.3d 118, 122-23 ( Tex.2001). It is undisputed that Nelson did not have a contractual or other special relationship with Medistar at any time.

 

FN7. Paragraph 128 contains the tortious interference claim against Nelson:

 

Nelson interfered with Medistar’s contract with American Economy, Safeco and Liberty Mutual by submitting fraudulent building surveys, reports, and sealed engineering drawings for the purpose of providing a misrepresentation for the investigation of Medistar’s insurance claim that arose from Medistar’s insurance contract with American Economy, Safeco, and Liberty Mutual. Nelson prepared building diagrams which were false and materially misrepresented in such a manner that would indicate Medistar’s claims would be wrongfully denied or underpaid.

 

Nor, argues Nelson, does the pleading of the tortious interference claim satisfy Rule 12(b)(6). The Original Petition does not allege facts demonstrating that Nelson had an intent to interfere with the insurance contract between Medistar and the insurance company Defendants, how he interfered with it, that the interference proximately caused plaintiff’s injury, or that Nelson actively participated in persuading the insurance company Defendants to breach its contract. Instead the petition contains the kind of conclusory allegations and legal conclusions that Rule 12(b)(6) seeks to prevent.

 

Nelson also emphasizes that Plaintiff has failed to move for leave to amend to cure the problem, which has been pointed out in the two pending motions to dismiss. Nelson claims that evidence outside of the pleadings demonstrates that there is no reasonable basis to predict that Plaintiff might recover against Nelson under theories of fraud and/or conspiracy to commit fraud.

 

Finally under the economic loss rule, “mere nonfeasance under a contract creates liability only for breach of contract” and therefore “ ‘tort damages are generally not recoverable unless the plaintiff suffers an injury that is independent and separate from the economic losses recoverable under a breach of contract claim.’ ” Crawford v. Ace Sign, Inc., 917 S.W.2d 12, 13 ( Tex.1996); Heil Co. v. Polar Corp., 191 S.W.3d 805, 815 (Tex.App.-Fort Worth 2006), quoting Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 45-47 ( Tex.1998).FN8 See also M.D. Thompson v. Espey Huston & Assoc., Inc., 26 S.W.3d 103 (Tex.App.-Houston [14th Dist.] 2000, no writ) (holding that the negligence of an engineering firm, if any, in the performance of its inspections caused no injury to the owner beyond the economic loss to the subject of the contract under the economic loss rule). Nelson observes that although Medistar asserts tortious interference against Nelson and breach of contract against the other defendants, Medistar fails to demonstrate or allege that it has sustained a loss beyond the economic loss associated with the alleged delay in coverage under the insurance contract.

 

FN8. Should Medistar assert that its fraud claim is excluded from the economic loss rule under Formosa Plastics, Nelson points out that the Texas Supreme Court in that case held that “tort damages are recoverable for a fraudulent inducement claim irrespective of whether the fraudulent representations are later subsumed in a contract or whether the plaintiff suffers an economic loss related to the subject matter of the contract.” 960 S.W.2d at 47. If a plaintiff only asserts a claim for fraud and makes no allegation that it was fraudulently induced to enter into a contract, as here, Formosa Plastics does not apply and it is proper for the court to apply the economic loss rule to bar the fraud claim. Heil Co. v. Polar Corp., 191 S.W.3d at 816-19; Southwestern Bell Tel. Co. v. John Carlo Tex., Inc., 843 S.W. ed 470, 494-95 ( Tex.1992), citing Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 ( Tex.1986). The Texas Supreme Court subsequently clarified its opinion in Formosa Plastics:

 

In Formosa Plastics we concluded that Presidio could bring a fraudulent inducement claim even though its damages consisted only of economic losses related to the performance and subject matter of the parties’ contract. Some of our language in that opinion suggests that there is no distinction between a claim for fraud and fraudulent inducement. Fraudulent inducement, however, is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof. That is, with a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties. Formosa Plastics involved a fraudulent inducement claim based on representations contained in the bid packet upon which Presidio based its contract offer, which resulted in a written contract between the parties. Thus, the case was correctly decided as to fraudulent inducement. Although economic losses may be recoverable under either fraud or fraudulent inducement, Formosa Plastics should not be construed to say that fraud and fraudulent inducement are interchangeable with respect to the measure of damages that would be recoverable. [citations omitted]

 

R.E. Haase v. Glazner, 62 S.W.3d 795, 798-99 ( Tex.2001). Medistar’s Original Petition asserts only a claim for fraud, and none for fraudulent inducement, and the fraud allegations arise out of the alleged breach of contract. Thus, argues Nelson, Medistar’s tortious interference with an existing contract, fraud, and conspiracy to commit fraud claims must be dismissed under Rule 12(b) (6) for failure to state a claim by application of the economic loss rule.

 

Last of all, Nelson insists that Medistar’s claim for consequential damages must also be dismissed under Rule 12(b)(6) for failure to allege any facts that would show an entitlement to such damages. It is black letter law in Texas that a claimant can only recover damages that are a proximate cause of the injury sustained and of which the defendant has received fair notice. Therefore a plaintiff must plead sufficient facts to give the defendant fair and adequate notice of the damages sought. Horizon/CMS Healthcare Corp. v. Auld, 34 S.W.3d 887, 896-97 ( Tex.2000). Nelson argues that Medistar has failed to plead any facts that would put Nelson on notice as to the type of consequential damages Medistar will seek. Thus the claim for consequential damages must be dismissed under Rule 12(b)(6).

 

Insurance Defendants’ Response to Medistar’s Motion to Remand and Their Motion to Dismiss or for More Definite Statement (# 5)

 

American Economy, Safeco, and Liberty respond to Medistar’s motion to remand by complaining that Medistar did not plead any specific facts for its claims against Nelson, but instead erroneously argued that there could be no remand as long as Nelson could conceivably under some set of facts allege a cause of action against Nelson.FN9

 

FN9. This Court observes that Medistar’s argument invokes the old rule under Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 … (1957) [“a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”], which has been abrogated in federal court by Twombly, 127 S.Ct. at 1965 (“Factual allegations must be enough to raise a right to relief above the speculative level” and plead a claim that is plausible on its face). Moreover, as noted in Smallwood, “A ‘mere possibility of recovery under local law” will not preclude a finding of improper joinder.’ ” 385 F.3d at 573 n. 9, quoting Badon v. RJR Nabisco, Inc., 236 F.3d 282, 286 n. 4 (5th Cir.2000).

 

They urge the Court to deny Medistar’s motion to remand for three reasons: (1) Medistar’s conclusory allegations fail to state a claim against Nelson; (2) Texas law does not permit Medistar to bring tort claims against Nelson, an independent engineer; or (3) the economic loss rule bars Medistar’s tort claims against Nelson.

 

For the first reason, Medistar cites Waters v. State Farm Mutual Automobile Ins. Co., 158 F.R.D. 107, 109 (S.D.Tex.1994), in which this Court held that such conclusory allegations without factual basis are insufficient to state a claim against a non-diverse defendant and constitute fraudulent joinder. Medistar concedes that a proper fraudulent joinder analysis is made under Rule 12(b)(6), but it is well settled law that because Medistar made only conclusory allegations, it cannot survive such an analysis. This is especially true with respect to the fraud claim, which also fails to meet the particularity pleading standard of Rule 9(b). Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 339 (5th Cir.2008) (holding that conclusory allegations of fraud, without setting forth specific facts, are insufficient to survive a Rule 12(b)(6) analysis). In a typical statement, like the others devoid of facts and with legal conclusions masquerading as factual conclusions, Medistar alleged only that Nelson “made false statements, misrepresented material facts, and engaged in actions and/or omissions for the purpose of misleading Medistar as to the actual damages resulting from the peril of wind or the peril of storm surge or flood, and Medistar having relied upon such fraudulent conduct has been injured.” Original Petition as ¶ 120. See Fernandez-Mon tes v. Allied Pilots Ass’n, 987 F.2d 278, 284 (5th Cir.1993) ( “conclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss”). They emphasize that a fraud complaint should be filed only after a wrong is reasonably believed to have occurred; it should serve to seek redress for a wrong, not find one. Segal v. Gordon, 467 F.2d 602, 607-08 (2d Cir.1971). Thus Medistar’s fraud allegations should be dismissed for failure to state a claim under Rule 12(b)(6). The insurance company Defendants also point out that in response to the Rule 12(b)(6) motions filed by the insurance company Defendants and Nelson, Medistar chose not to amend its petition or move for leave to amend or state any facts in its motion to remand or in its responses to the motions to dismiss, but chose to stand on its petition. Furthermore, they note that Medistar makes only two references to alleged misrepresentations by the insurance company Defendants: (1) that they “misrepresented to Medistar that the damage to property was not in excess to the amount paid as of the date of this complaint, even though the damage was caused by a covered peril and clearly in excess of previously paid amounts” (Original Petition ¶ 39); and (2) that the insurance company Defendants did not “offer Medistar adequate compensation without any honest explanations in writing or orally as to why additional payments were not being made” (id. at ¶ 40). Neither supports a fraud claim, and neither pleads the elements of fraud with the requisite particularity. Nor does Medistar allege specific facts to establish that each defendant individually committed fraud, but instead makes impermissibly broad, blanket statements pertaining to all defendants. See, e.g., Medistar alleges that Safeco “through its agents and employees, knowingly and with reckless disregard for Medistar in the course of handling of this subject claim made false statements, misrepresented material facts, and engaged in actions and/or omissions for the purpose of misleading Medistar as to the actual damages resulting from the peril of wind, and Medistar having relied upon such fraudulent conduct, has been injured.” Original Petition, ¶¶ 67, 90, 113. There is no identification of time, context, substance or speaker of the alleged false statements.

 

Insurance company Defendants also argue that because Medistar has failed to state a claim for fraud, its conspiracy to commit fraud claim also fails and should be dismissed. In addition, they contend that the conspiracy claims are also vague and conclusory allegations, not stated with particularity, including a specific time or place in which there was any meeting of the minds. Alternatively, the conspiracy claims should be dismissed under the “intra-corporate conspiracy rule,” which states that in the case of a corporation, “the acts of a corporate agent are the acts of the corporation, and a corporation cannot conspire with itself.” Elliott v. Tilton, 89 F.3d 260, 265 (5th Cir.1996); Wilhite v. H.E. Butt Co., 812 S.W.2d 1, 5 (Tex.App.-Corpus Christi 1991, no writ) (“As a matter of law, a corporation or other company cannot conspire with itself, no matter how many of its agents participated in the complained of action,”).

 

The insurance company Defendants, too, urge that the conspiracy to commit fraud claims against Nelson cannot not survive a Rule 12(b)(6) analysis because they also are conclusory. Original Petition at ¶¶ 123-25. Rule 9(b)’ s requirement of particularity also applies to the allegations of conspiracy to commit fraud. In re Enron Corp. Securities, Derivative and ERISA Litig., 623 F.Supp.2d 798, 811 n. 11 (S.D.Tex.2009).

 

Medistar’s tortious interference claims also do not survive a Rule 12(b)(6) analysis because of conclusory nature of all the allegations, insist Defendants. See Nabors Drilling U.S.A. L.P. v. Twister Exploration, L.L.C., No. Civ. A. 01-2109, 2002 WL 1610957, *2-3 (E.D.La. July 18, 2002) (granting renewed motion for Rule 12(b)(6) dismissal because plaintiff pleaded only conclusory allegations of tortious interference).

 

As for the second reason for denying remand, like Nelson the insurance company Defendants argue that Texas law does not allow an insured to assert tort claims against independent engineer Nelson. Dagley, 18 S.W.3d 787. That bar applies not only to negligence and implied duty of good faith and fair dealing, but to tortious interference and conspiracy claims. Id. Although the rule originally arose to preclude a breach of good faith and fair dealing cause of action against an insurance adjuster ( Natividad v. Alexsis, Inc., 875 S.W.2d 695, 698, 700 ( Tex.1994) (in the absence of a contractual or special relationship between an agent or contractor and an insured, it is the insurance carrier that is liable to the insured for the acts of its agents or contractors)), it was expanded to preclude all manner of tort claims alleged against adjusters, law firms, and engineering companies hired by an insurer to respond to claims. Dear, 947 S.W.2d at 916 (holding that an independent adjusting firm, hired by an insurer to investigate the claim of an insured, has no special relationship with the insured); Castillo v. Professional Serv. Indus., Inc., No. 04-97-00775-CV, 1999 WL 155833, *1-2 (Tex.App.-San Antonio March 24, 1999) (absent a special relationship, soil tester hired by an independent engineer, in turn hired by an insurance company to investigate a claim, does not owe a legal duty to the insured and “cannot be held liable as a matter of law, whether the claim is brought under the Texas Insurance Code, the DTPA, intentional infliction of emotional distress, conspiracy to commit fraud, or tortious interference with contractual relations.”); Dagley, 18 S.W.3d at 791-92 (dismissing multiple tort claims of negligence, DTPA, Insurance Code violations, tortious interference and civil conspiracy against independent engineering firm hired by insurer); Muniz v. State Farm Lloyds, 974 S.W.2d 229, 235-37 (Tex.App.-San Antonio 1998, no pet.), citing Bui v. St. Paul Mercury Ins. Co., 987 F.2d 204, 210 (5th Cir.1993) (applying Texas law and dismissing tort claims against independent adjuster because adjuster owed no duty to insured).

 

As the third and final reason for denying the motion to remand, Texas law does not permit tort claims which allege merely the economic loss suffered by breach of the insurance policy, insist the insurance company defendants. Agreeing with Nelson, the insurance company Defendants contend that under the economic loss rule, “tort damages are generally not recoverable unless the plaintiff suffers an injury that is independent and separate from the economic losses recoverable under a breach of contract claim.” Heil Co. v. Polar Corp., 191 S.W.3d 805, 815 (Tex.App.-Fort Worth 2006, pet. denied). Insurance company Defendants assert that Medistar acknowledges the rule, but tries to avoid it by stating that it “it will show additional independent extra contractual damages, as a result of the claim,” without providing any facts to support such damages now. Motion to Remand at 6-7. The conclusory allegations of independent injury are insufficient to defeat a claim of fraudulent joinder. Waters, 158 F.R.D. at 109 (“[F]ailure to specify the factual basis for recovery against a non-diverse party constitutes failure to state a claim and fraudulent joinder of that party.”).

 

In response to Nelson (# 12), Medistar admits its allegations regarding Nelson’s fraudulent activity do not satisfy Rule 9(b) particularity requirements but says “a more particular statement should be forthcoming.” Because Medistar’s tortious interference claim against Nelson is not a fraud claim, it is subject only to “notice pleading” requirements of Rule 8, Medistar insists that it has met that standard. Medistar also maintains that Dagley and Nativida, premised on negligence or a breach of implied duty of good faith and fair dealing, do not apply to the issues in this case. Moreover the cases were decided at summary judgment stage, not at a motion to dismiss stage. It responds to Nelson’s Economic Loss Rule argument by citing Nazareth Int’l Inc. v. J.C. Penny Corp., Inc., 2005 U.S. Dist. LEXIS 14473 (N.D.Tex. July 19, 2005) for the proposition that the Economic Loss Rule does not bar recovery for any tort claim if an additional injury exists outside the parameter of contract damages. Medistar points to paragraph 141(f) of the Original Petition requesting actual damages, exemplary damages, punitive damages and other relief the Court deems just and proper-all outside contractual damages. It also argues that Rule 8 does not require its claim for consequential damages to be pleaded with particularity. If remanded, the issue can be addressed in state court.

 

In response (# 11) to the insurance Company Defendants’ motion to dismiss or for more definite statement, Medistar urges the court to deny the motion or to allow it to amend. Medistar concedes that some of its allegations do not satisfy the particularity requirement and “that a more particular statement will be forthcoming” if the Court denies remand. It maintains that its conspiracy claim does not fall under the intra-corporate conspiracy rule because it is alleging that the insurers conspired with Nelson. It reiterates that the Economic Loss Rule does not apply because paragraph 141(f) of the Original Petition requests actual damages, exemplary damages, punitive damages and other relief the Court deems just and proper-all outside contractual damages. Medistar argues that it has adequately pleaded a claim against the insurance company Defendants for violations of the DTPA, breach of the duty of good faith and unfair dealing, Chapter 542, and breach of contract.

 

Court’s Ruling

 

*10 Because the motion to remand must be decided on the basis of the pleadings at the time of removal, and not on any subsequent existing or proposed post-removal amendment, and because that pleading determines this Court’s jurisdiction, the Court addresses the remand issues first, separately from the motions to dismiss.

 

As a matter of law in Texas, since Medistar has no contractual or special relationship with Nelson, Medistar fails to state a claim agsinst Nelson for tortious interference with contract and for conspiracy to defraud relating to Nelson’s alleged improper negligent investigation of the insurance claims and manipulation of its reports to limit Medistar’s recovery on its claim against the insurance company Defendants.

 

In Natividad v. Alexsis, Inc., 875 S.W.2d 695, 698 ( Tex.1994), the Texas Supreme Court held that in the insurance context because the duty of good faith and fair dealing arises only from a contract giving rise to a special relationship as a result of unequal bargaining power between the parties to the insurance contract, where there is no privity of contract, as with an independent adjusting firm hired by the insurer, the adjusting firm did not owe an insured such a duty and therefore could not be liable for a breach of that duty. The duty of good faith and fair dealing is non-delegable. Id. Therefore the Texas Supreme Court concluded that the insurer “remains liable for actions by its employees, agents or contractors that breached the duty of good faith and fair dealing owed to” the insured by the insurer. Id. at 698 & n. 7 (“The insurance companies must answer for the ‘sins’ of their agents.”)

 

Relying on the rationale in Navidad, the Fifth Circuit in Bui v. St. Paul Mercury Ins. Co., 981 F.2d 209, 210 (5th Cir.1993) (applying Texas law), determined that any claim for negligent investigation brought by an insured against an independent claims adjusting firm hired by the insurer must fail as a matter of law. Subsequently that rule was expanded by the Dallas Court of Appeals in Dear, which found the independent adjusting firm “established its status as Scottsdale’s agent” to cover allegations of improper investigation and settlement advice regardless of whether the plaintiff framed his allegations as negligence, bad faith, breach of contract, tortious interference with contract, or DTPA violations. Dear. 947 S.W.2d at 917.

 

In the much-cited Dagley action, 18 S.W.3d 787, charging wrongful denial of insurance claims, the plaintiffs alleged that Haag Engineering Company, an independent engineering firm hired by insurer State Farm to evaluate hail storm damage, was liable for negligence, conspiracy, tortious interference, violations of the DTPA and the Texas Insurance Code. The appellate court, in affirming a summary judgment’s dismissal of the tortious interference claim inter alia, concluded, “[A]bsent a special relationship, Haag cannot be held liable for tortious interference.” 18 S.W.3d at 794, citing Dear, 947 S.W.2d at 917. In Dear, the Court reasoned that the defendant independent adjuster was retained and paid for by the insurer, had never entered into a contract with the insured, had no duty to the insured, had performed its role as an independent adjusting firm, and therefore was an agent or independent contractor of the insurance company. Id. at 791 & n. 3, citing Dear, 947 S.W. at 917. Moreover the Fourteenth Court of Appeals also affirmed the trial court’s summary judgment dismissing the claim that State Farm and Haag conspired in their investigation of the plaintiffs’ claims in an attempt to deny them the insurance benefits rightfully due them:

 

“The mere agreement to resist a claim, however, is not an actionable civil conspiracy,” Massey v. Armco Steel Co., 652 S.W.2d 932, 934 ( Tex.1983). For liability to attach there must be an unlawful, overt act to support a conspiracy. See id. We cannot conclude that submitting a report to State Farm with the conclusion that there was no hail storm damage to appellants’ home is an unlawful, overt act to support a conspiracy. Moreover, having found that Haag is not liable to appellants on their other claims, Haag cannot be liable for conspiracy.

 

18 S.W.3d at 795.

 

Thus the only remaining claim against Nelson is for fraud. Because the Original Petition was drafted in Texas state court, it was subject only to the requirements for adequate pleading under state law. There is no counterpart to Federal Rule 9(b) in the Texas Rules of Civil Procedure for pleading fraud. Nor has Texas followed Twombly. Instead Texas Rule of Civil Procedure 45(b) states that in the district and county courts the petition should “consist of a statement in plain and concise language of the plaintiff’s cause of action …. That an allegation be evidentiary or be of legal conclusion shall not be grounds for objection when fair notice to the opponent is given by the allegations as a whole.” Rule 47 also requires only notice pleading:

 

An original pleading which sets forth a claim for relief whether an original petition, counterclaim, cross-claim, or third party claim, shall contain

 

(a) a short statement of the cause of action sufficient to give fair notice of the claim involved,

 

(b) in all claims for unliquidated damages only the statement that the damages sought are within the jurisdictional limits of the court, and

 

(c) a demand for judgment for all the other relief to which the party deems himself entitled.

 

“A pleading provides sufficient fair notice of the claim involved when ‘an opposing attorney of reasonable competence could examine the pleadings and ascertain the nature and basic issue of the controversy and the relevant testimony.’ ” UMLIC VP LLV v. T & M Sales and Environmental Systems, 176 S.W.3d 595 (Tex.App.-Corpus Christi 2005) (citation omitted). “The pleadings must be sufficiently adequate so the court is able, from an examination of the pleadings alone, to ascertain with reasonable certainty and without resorting to information from another source, the elements of a plaintiff’s cause of action and relief sought with sufficient information upon which to base a judgment. Id., citing Tone v. Lawyers Title Ins. Corp., 578 S.W.2d 679, 683 ( Tex.1979). The petition must be liberally construed in favor of the pleader. Id., citing Stone v. Lawyers Title Ins. Corp., 554 S.W.2d 183, 186 ( Tex.1977). “ ‘The court will look to the pleader’s intendment’ and uphold the pleading as to a cause of action even if some element of that cause of action has not been specifically alleged.” Id., citing Gulf, C. & S.F. Ry. Co. v. Bliss, 368 S.W.2d 594, 599 ( Tex.1963), and Boyles v. Kerr, 855 S.W.2d 593, 601 ( Tex.1993). “ ‘Every fact will be supplied that can reasonably be inferred from what is specifically stated.’ ” Id., citing Bliss, 368 S.W.2d at 599. “ ‘Mere formalities, minor defects and technical insufficiencies’ will not invalidate a cause of action in a petition so long as the pleading gives fair notice to the opposing party.” Id., citing Stoner, 578 S.W.2d at 683.

 

Because Nelson was not a party to any contract with Medistar, Medistar cannot assert a claim against Nelson for breach of contract or any cause of action that arises out of a contract.FN10 To be viable, its claim for fraud against Nelson must be independent of the contract. Because there are essentially no facts, but only vague and conclusory statements regarding Medistar’s fraud claim, a summary judgment-type inquiry is required to determine who said or wrote what, where, and when and facts demonstrating reliance on those particular representations by Medistar. Frisby v. Lumbermens Mut. Cas. Co., 500 F.Supp.2d 697, 699 (S.D.Tex.2007), citing Smallwood, 385 F.3d at 573. At present it appears to the Court that Medistar would have difficulty showing that it relied on Nelson’s allegedly erroneous reports since it contends that they were incorrect, but it will give Medistar an opportunity to state supporting facts if it has any.

 

FN10. For this reason the Economic Loss Rule does not apply to the fraud claim.

 

Accordingly, the Court

 

ORDERS Medistar to submit within twenty days either an affidavit or a deposition of someone with personal knowledge who can provide the necessary supporting facts satisfying Fifth Circuit pleading standards FN11 to support the elements of its fraud claim FN12 against Nelson. Defendants may file responses within ten days after Medistar submits its summary judgment-type evidence. The Court reminds the parties that such inquiry will be limited to identifying “discrete and undisputed facts that would bar a plaintiffs’ recovery against an in-state defendant; anything more risks ‘moving the court beyond jurisdiction and into the resolution of the merits ….’ ” Smallwood, 385 F.3d at 573-74. The Court defers ruling on the motions to dismiss until the motion to remand has been resolved.

 

FN11. The Fifth Circuit has ruled, “State law fraud claims are subject to the heightened pleading requirements of Rule 9(b). To plead fraud adequately, the plaintiff must ‘specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.’ ” Sullivan v. Leor Energy, LLC., 600 F.3d 542d, 550-51 (5th Cir.2010), citing Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 338-39 (5th Cir.2008), and ABC Arbitrage v. Tchuruk, 291 F.3d 336, 350 (5th Cir.2002).

 

FN12. The elements of common law fraud are (1) a material representation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker made the representation with the intent that the other party should act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered injury. Allstate Ins. Co. v. Receivable Finance Co., L.L.C., 501 F.3d 398, 406 (5th Cir.2007), citing In re First Merit Bank, N.A., 52 S.W.3d 749, 758 ( Tex.2001).

 

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Martindale AVtexas[2]

Subrogation Interest of Workers’ Compensation Insurer Must Be Protected Under Texas Law

The Supreme Court said in Texas Mut. Ins. Co. v. Ledbetter, 251 S.W.3d 31 (Tex. 2008) :

“When an injured worker settles a case without reimbursing a compensation carrier, everyone involved is liable to the carrier for conversion – the plaintiffs, the plaintiffs’ attorney, and the defendants. As between those parties, we have held that generally those who received the funds unlawfully (the plaintiffs and their attorney) should disgorge them rather than making the tortfeasors pay twice.”

In this case, plaintiff’s attorney attempted to manipulate a settlement by dismissing all claims in a death case, except for the claims of the deceased’s estate. The Court ordered that the carrier’s intervention be reinstated. It also remanded the case with instructions for the trial court to protect the carrier’s subrogation interests.

 

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Martindale AVtexas[2]

Federal Jury Reaches $391 Million Verdict Against Trustee for Pre-Need Funeral Contract Trusts

A St. Louis federal jury has awarded $391 million, including $35.5 million in punitive damages, against PNC Bank following a five-week jury trial.

The plaintiffs were the Special Deputy Receiver (SDR), Jo Ann Howard and Associates, appointed by the Commissioner of the Texas Department of Insurance; the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) on behalf of 28 state guaranty associations, and the state guaranty associations of Missouri, Texas, Illinois, Arkansas, Kansas, Oklahoma, and Kentucky.

The SDR, NOLHGA and the state guaranty associations joined forces to pursue breach of fiduciary duty and negligence claims against PNC, which was the successor to Allegiant Bank and Trust Company, a St. Louis-based bank that had served as a trustee for multiple pre-need funeral trusts.

“This has been a superb team effort with the guaranty associations.  We are very pleased with the jury’s award,” said David Mattax, the Commissioner of Insurance for the State of Texas.

Peter Gallanis, president of NOLHGA, said, “We are proud that the guaranty associations have met their obligations to ensure that the consumer losses were covered.  The jury’s verdict is the next step in the process.”

Thousands of consumers and multiple funeral homes had entered into contracts with a company known as National Prearranged Services (NPS), which was run by a number of individuals who were indicted and convicted of fraud.  NPS sold pre-need funeral contracts initially in Missouri and used two affiliated Texas-based life insurance companies to back the pre-need funeral contracts.  In 2008, NPS and the two insurance companies were placed in receivership in Austin, Texas.  The SDR and state guaranty association system worked together to ensure that thousands of funerals were paid for.  Since 2008, the guaranty associations have paid more than $300 million for in excess of 50,000 funerals in 40 states.  The guaranty associations will pay for all covered future funerals, which will be additional millions of dollars.

 

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Martindale AVtexas[2]