Revised May 25, 1999

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_______________________________________

No. 98-20211

_______________________________________

GENERAL STAR INDEMNITY COMPANY,

Plaintiff-Appellant,

versus

VESTA FIRE INSURANCE CORPORATION;

LIBERTY NATIONAL FIRE INSURANCE COMPANY;

LIBERTY NATIONAL FIRE INSURANCE COMPANY,

doing business as Vesta Fire Insurance Corporation,

Defendants-Appellees.

_________________________________________________________________

Appeal from the United States District Court

for the Southern District of Texas

_________________________________________________________________ May 6, 1999

Before DAVIS, SMITH and WIENER, Circuit Judges.

WIENER, Circuit Judge:

Plaintiff-Appellant General Star Indemnity Company (“General

Star” ) appeals the district court’s order granting the motion of

Defendant-Appellee Vesta Fire Insurance Corporation (“Vesta”) to

dismiss under Federal Rule of Civil Procedure 12(b)(6). For the

reasons expressed below, we reverse the district court’s order, and

remand the case for further proceedings.

I

FACTS AND PROCEEDINGS1 General Star’s coverage for MSI as general partner was in the

amount of $1 million per occurrence.

2 General Star’s excess coverage was in the amount of $3

million per occurrence.

2 The instant lawsuit arose out of a state wrongful death and

survival action filed by the parents and estate of Karen Crawford

after she was murdered in the mail room of Champion Woods

Apartments (the “Apartments”). Champion Woods Associates (“CWA”),

a limited partnership, owned the property on which Craw ford was

killed. CWA’s general partner was Michael Stevens Interests, Inc.

(“MSI”), which also served in a separate capacity as the

Apartment’s property manager. The state court action named MSI as

a defendant based both on its ownership interest in the apartment

complex and the property management services it performed.

Two insurance com panies provided coverage for the relevant

parti es. Under a $1 million general liability policy, Vesta

insured CWA and MSI, covering MSI both as general partn er and as

property manager. General Star provided “primary” liability

coverage to MSI as general partner, 1 and, pursuant to a policy

endorsement, provided “excess” liability cover age to MSI as

property manager. 2

When the underlying action was initiated, Vesta appointed

counsel to defend its insureds, both CWA and MSI. General Star, on

the other hand, elected not to appoint counsel. Rather, it

informed Vesta that it would monitor the case as excess insurer of3

MSI in it s capacity as apartment manager. General Star did not

assume any responsibility as primary insurer of MSI in its capacity

as general partner.

In a pre-mediation status report, the defense counsel retained

by Vesta advised both Vesta and General Star that, although he did

not believe that MSI was negligent, an adverse jury verdict could

nevertheless be significant. Counsel estimated the settlement

value of the case to be $500,000, but maintained that plaintiffs

probably would not settle for less than $1 million.

Vesta participated in mediation efforts that proved

unsuccessful, but General Star did not participate. According to

General Star, Vesta’s highest offer during mediation was $100,000.

As a result, General Star wrote to Vesta shortly after mediation

brok e down, complaining that Vesta was not making a concerted

effort to settle the claim. In response, Vesta advised General

Star that it, rather than Vesta, was the primary insurer for MSI in

its role as general partner, an d that if General Star believed a

higher settlement offer was warranted, it should “get its checkbook

out.” Thereafter, the Crawfords made a final settlement offer of

$1 million which, Vesta contends, was unanimously rejected by both

insurers. General Star disputes this contention, arguing that both

it and MSI unsuccessfully urged Vesta to accept the offer.

Ultimately, the case proceeded to trial, resulting in a jury

verdict for the Crawfords and the decedent’s estate in the amount

of $9.4 million. The jury apportioned 35% of the liability to CWA,3 The remaining 15% of liability was assessed against a

defendant not party to the instant suit.

4 35% to MSI in its capacity as general partner, and 15% to MSI in

its capacity as apartment mana ger. 3 The parties settled the case

prior to initiation of appellate proceedings. In accordance with

their respective policy limits, Vesta contributed $1 million and

General Star contributed $3.6 million to the $4.6 million

settlement.

Thereafter, General Star sued Vesta to recover the money it

had paid in settlement, alleging liab ility under theories of (1)

equitable subrogation, (2) breach of the duty of good faith and

fair de aling, (3) violations of the Texas Insurance Code, (4)

negligence, (5) gross negligence, and (6) breach of contract.

The district court granted Vesta’s Rule 12(b)(6) motion,

concluding that General Star’s complaint failed to state a claim on

which relief could be granted. In support of this conclusion, the

court noted that (1) General Star sought to recover from Vesta on

a theory of direct liability not recognized under Texas law, (2)

there was no evidence to suppor t a claim by MSI to which General

Star coul d be subrogated, and (3) because the evidence indicated

that General Star was a primary carrier with a duty to defend MSI,

General Star was barred from asserting any claim for damage arising

out of its failure to do so. General Star appealed from this

ruling.

II4 United States ex rel. Thompson v. Columbia/HCA Healthcar e

Corp. , 125 F.3d 899, 901 (5th Cir. 1997).

5 American Centennial Ins. Co. v. Canal Ins. Co.

, 84 3 S.W.2d

480, 482-83 (Tex. 1992)(hereinafter Canal Ins. Co. ).

6 National Union Fire Ins. Co. v. CNA Ins. Cos.

, 28 F.3d 29, 31

n.2 (5th Cir. 1994)(hereinafter CNA Ins. Co. ).

7 Westchester Fire Ins. v. Heddington Ins. , 883 F. Supp. 158,

162 (S.D. Tex. 1995), aff’d

, 84 F.3d 432 (5 th Cir. 1996); C anal

Ins. Co. , 843 S.W.2d at 482-83.

5 ANALYSIS

A. Standard of Review

This court reviews de novo a district court’s ruling on a

motion to dismiss under Fed. R. Civ. P. 12(b)(6), applying the same

standard as the district court. 4

B. Applicable Law

Texas law permits actions between insurance carriers under the

doctrine of equitable subrogation. 5 Equitable subrogation is the

legal fiction through which a person or entity, the subrogee, is

substituted, or subrogated, to the rights and remedies of another

by virtue of having fulfilled an obligation for which the other was

r esponsible. 6 A ccording to this doctrine, an excess insurer,

paying a loss under a policy, “stands in the shoes” of its insured

with regard to any cause of action its insured may have against a

primary insurer responsible for the loss. 7 It is elementary that,

before an excess insurer can recover from a primary insurer under

the doctr ine of equitable subrogation, the excess insurer must8 Employers Nat’l Ins. Co. v. General Accident Ins. Co.

, 857 F.

Supp. 549, 552 (S.D. Tex. 1994); Canal Ins. Co.

, 843 S.W.2d at 482-

83.

9 15 S.W. 2d 544 (Tex. Comm’n App. 1929, holding approved);

Maryland Ins. Co. v. Head Indus. Coatings & Serv., Inc.

, 938 S.W.2d

27, 28-9 (Tex. 1996)(hereinafter Head Indus. Coatings )(stating

that, because an insured is “fully protected against his insurer’s

refusal to defend or mishandling of a third-party claim by his

contractual and Stowers rights,” imposing an additional duty on

insurers is neither necessary nor appropriate).

10 15 S.W.2d at 547.

11 The Stowers court determin ed that an insurer may be held

liable to an insured in excess of its policy limits for failure to

settle if: (1) a third party claim against the insured was within

the scope of coverage; (2) there was an unconditional demand within

the policy limits; and (3) the terms of the demand were such that

an ordinarily prudent insurer would have accepted it, considering

the likelihood and degree of the insured’s potential exposure to an

excess judgment. A merican Physic ians Ins. Exch. v. Garcia , 876

6 first prove that the primary insurer failed to fulfill a duty owed

to the insured. 8

Texas law recognizes only one tort duty in the context of

third party claims against an insured, that being the duty owed by

a primary insurer to its insured, as set forth seventy years ago in

the landmark case of G.A. Stowers Furniture Co. v. American

Indemnity Co.

. 9 In S towers

, the Texas C ommission of Appeals held

that an insurer which, under the terms of its policy, assumes

control of a claim, becomes the agent of the insured and is held to

the degree of care and diligence that an “ordinarily prudent person

would exercise in the management of his own business.” 10 Although

Stowers focused specifically on an insurer’s obligation to settle

within the limits of its policy, 11 the duty owed by an insurer toS.W.2d 842, 849 (Tex. 1994).

12 Ranger County Mut. Ins. Co. v . Guin , 723 S.W.2d 656, 659

(Tex. 1987)(holding that an insurer’s duty includes investigation,

preparation for defense of the lawsuit, trial of the case and

reasonable attempts to settle).

13 G.A. Stowers Furniture Co.

, 15 S.W.2d at 547. There is ample

support for the proposition that, in a cause of action arising out

of the mishandling of a claim by an insurer, negligence is the only

tort theory under which an insured is entitled to recover. See

Canal Ins. Co.

, 8 43 S.W.2d at 486 (Hecht, J., concurring)(noting

that “[a]lthough the Court does not expr essly consider which of

these theories [negligence, gross negligence, breach of a duty of

good faith and fair dealing, and violations of the Texas Insurance

Code] is available to the excess carriers by subrogation, I assume

from its reliance on the Stowers and Ranger County cases, and would

so hold, that the excess carr iers’ only cause of action is for

negl igence” —— four Justices joined in this concurring opinion);

National Union Fire Ins. Co. v. Insurance Co. of North America

, 955

S.W.2d 120, 134 (Tex. App.

—— Houston[14th D ist.] 1997, reh’g

overruled)(holding that an excess c arrier cannot, as a matter of

law, bring claims for gross negligence or violations of the

Insurance Code against a primary carrier in a suit based upon

equitable subrogation); Head Indus. Coatings

, 938 S.W.2d at

28(refusing to recognize a cause of action of breach of the duty of

good faith and fair dealing under Stowers ).

14 897 F.2d 754 (5th Cir. 1990).

15 I d. at 758 n.5. This court noted in F oremost that “[t]he

raison d’etre for the Stowers doctrine is that the insurer, when in

7 its insured has since been broadly interpreted by the Texas Supreme

Court to include the full range of obliga tions arising out of an

agency relationship. 12 A breach of the Stowers duty by an insurer

gives rise to a cause of action in negligence against that insurer

by its insured. 13

In Foremost County Mutual Ins urance Co. v. Home Indemnity

Co.

, 14 we declined to extend directly to co-insurers the duty owed

b y an insurer to its insured under S towers

. 15 Although somecontrol of the litigation, might refuse a settlement offer that its

c lient, the insured, would want to accept if it had the option.”

Id.

16 See, e.g.

, St. Paul-Mercury In dem. Co. v. Martin , 190 F.2d

455, 457 (10th Cir. 1951)(applying Oklahoma law); American

Centennial Ins. Co. v. American Home Assurance Co.

, 729 F. Supp.

1228, 1232 (N.D. Ill. 1990).

17 CNA Ins. Cos.

, 28 F.3d at 33 n.5; C anal Ins. Co.

, 843 S.W.2d

at 483.

18 In recogniz ing the availability of this remedy, the Texas

Supreme Court reasoned that, if excess carriers were not subrogated

to the claims of their insureds, primary insurers would have less

incentive to settle within their policy limits and might be tempted

to “gamble ” with excess carriers’ money when potential judgments

approach the primary insurers’ limits. C anal Ins. Co.

, 843 S.W.2d

at 483.

19 At oral argument on appeal, General Star dropped all claims

against Vesta except negligence through equitable subrogation.

Conse quently, in our review of this case, we do not consider the

availability of relief to General Star under any of its previously

advanced theories.

8 jurisdictions impose both this duty and others on the relationship

between excess and primary carriers, and permit actions based on a

b reach of these duties, 16 Texas has yet to so. 17 Consequently, an

excess insurer may only ass ert a cause of action for a primary

insurer’s breach of its Stowers duty if it does so while standing

in the shoes of its insured. 18

General Star argues that the facts stated in its First Amended

Original Complaint were sufficient to state a claim of negligence

through equitable subrogation, 19 and that the district court erred

in granting Vesta’s motion to dismiss. Given the liberal pleading

standard required by the federal rules, we agree.20 F ED

. R. C IV

. P. 8(a).

21 Walker v. South Cent. Bell Tel. Co.

, 904 F.2d 275, 277 (5th

Cir. 1990).

22 (Emphasis added).

9 The Federal Rules of Civil Procedure require a “short and

plain statement of the claim showing that the pleader is entitled

to relief.” 20 Pursuant to Rule 8(a), a complaint will be deemed

inadequate only if it fails to (1) provide notice of the

circumstances which give rise to the claim, or (2) set forth

sufficient information to outline the elements of the claim or

permit inferences to be drawn that these elements exist. 21

In Paragraph 21 of its amended complaint General Star asserts:

The Defendants, as primary insurers, owed Plaintiff

,

as p rovider of excess coverage, a duty to handle

the Underlying Litigation in a reasonably prudent

manner. This duty includes investigation of the

claim, trial defense, and settlement negotiations.

The Defendants breached this duty by unreasonably

ignoring the recommendations and evaluations of

defense counsel; by offering ridiculously low

amounts of money to settle a very serious claim;

and by allowing an opportunity to settle within

primary limits lapse, despite the Plaintiff’s

urging and t h e urging of the Defendant’s [sic]

insured. 22

Vesta submits that this pleading is deficient because it fails to

state an essential element of General Star’s claim; namely, a duty

o wed to MSI. Under Texas law, asserts Vesta, General Star is

limited to those claims that it can bring as a subrogee. Because

Paragraph 21 mistakenly frames General Star’s negligence claim in

terms of Vesta’s alleged breach of a duty owed to General Star23 (Emphasis added).

10 rather than MSI, argues Vesta, the complaint fails to set forth

facts sufficient to state a claim on which relief can be granted.

We reject this hyper-technical reading of General Star’s complaint.

Paragraph 21 correctly characterizes the nature of the duty

owed by Vesta under Texas law, and succinctly describes the

circumstances which gave rise to an alleged breach of this duty.

General Star’s only misstep in Paragraph 21 was attributing Vesta’s

duty as owed to G eneral Star rather than to MSI. General Star

mitigates the potentially damaging effect of this error, however,

by further alleging in Paragraph 23 that “[a]s the excess carrier

for MSI,

. . . General Star is equitably subrogated to MSI’s rights

against Vesta and hereby asserts MSI’s claim against Vesta.” 2 3

Despite General Star’s inelegant pleading, we conclude that, when

read as a whole, the complaint provides sufficient information to

put Vesta on notice of General Star’s claim of negligence through

equitable subrogation.

Although the district court set fo rth the appropriate legal

standard by which it was to review Vesta’s Rule 12(b)(6) motion, it

is unclear from the court’s memorandum opinion whether it in fact

treated Vesta’s motion as a m otion to dismiss or as a motion for

summary judgment. To the extent that the district court supported

its order with legal conclusio ns drawn from unsubstantiated and

impermissible fact determinations, we reverse.11

Specifically , we reject as premature the district court’s

conclusion that there is insufficient evidence to support a claim

by MSI against Vesta to which General Star could be equitably

subrogated. Taking the facts alleged in the body of the complaint

together with the specific allegation o f breach in Paragraph 21,

General Star has alleged

—— as subrogee

—— a Stowers claim

sufficient to survive a Rule 12(b)(6) motion. Whether General Star

ultimately will be able to adduce evi dence sufficient to support

this claim on its merits is not a question for our consideration at

this early stage in the proceedings any more than it was for the

district court.

Likewise, we reject the district court’s conclusion that

General Star’s status as a primary insurer prohibit s it from

obtaining relief under any set of facts. Based on the pleadings

alone, neither General Star’s status as a primary insurer nor its

duty to defend MSI under the circumstances of this case can be

determined conclusively.

For the foregoing reasons, we reverse the order of the

district court dismissing General Star’s suit, and remand for

further proceedings consistent herewith.

REVERSED and REMANDED.12