IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

RLI INSURANCE COMPANY, §

 §

Plaintiff, §

 § Civil Action No. 3:04-CV-0635-D

VS. §

 §

PHILADELPHIA INDEMNITY §

INSURANCE COMPANY, et al., §

 §

Defendants. §

MEMORANDUM OPINION

 AND ORDER 

In this coverage dispute among insurance companies arising

from the settlement of a state-court wrongful death lawsuit, the

court must make an Erie-guess concerning how the Texas Supreme

Court would decide an issue of stacking of insurance policies and

would allocate liability among four policies provided by three

insurance carriers, each of whom moves for summary judgment.

I

This is a diversity action in which plaintiff RLI Insurance

Company (“RLI”) sues defendants Philadelphia Indemnity Insurance

Company (“PIIC”) and USF Insurance Company (“USF”) to recover part

of what it paid to settle a lawsuit filed against its insured, BMW

Healthcare, Inc. (“BMW”). RLI alleges that it contributed a

disproportionate share of the settlement proceeds because neither

PIIC nor USF tendered the full amount it was obligated to

contribute. RLI sues for equitable and/or contractual subrogation

and contribution, breach of contract, and negligence, and it seeks

 

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1In deciding these motions, the court relies on the parties’

July 27, 2005 stipulation of facts.

2

Tutt v. BMW Healthcare, Inc., No. 2001-389 (4th Dist. Ct.,

Rusk County, Tex.).

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attorney’s fees.

The facts are substantially undisputed.1 BMW is in the

business of operating nursing home facilities, including Westridge

Manor (“Westridge”). BMW was sued in Tutt v. BMW Healthcare, Inc.

(“Tutt Lawsuit”)2 arising from the death of Payton Moore (“Moore”),

a Westridge resident from November 12, 1998 to November 21, 1999.

The Tutt plaintiffs alleged that BMW had negligently caused Moore’s

injuries and death by providing a continuing course of substandard,

improper care throughout the duration of his residency at

Westridge.

PIIC insured BMW d/b/a Westridge under a commercial general

liability (“CGL”) insurance policy (“PIIC Primary Policy”) for the

period October 1, 1998 to October 1, 1999, with primary policy

limits of $1 million per occurrence. PIIC also insured BMW under

a commercial excess liability policy (“PIIC Excess Policy”) for the

same period, with excess liability limits of $1 million per

occurrence. Westridge was a covered facility under both PIIC

Policies throughout the Policies’ periods.

On August 25, 1999 PIIC mailed BMW notices that it would not

renew the Policies. The notices of non-renewal indicated that the

policy expiration dates for both the PIIC Primary Policy and the

 

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PIIC Excess Policy would be extended to October 28, 1999. PIIC

also attached a “Policy Change Form” to the PIIC Primary Policy.

This form stated: “In Consideration of No Change in Premium the

Policy is Being Amended as Follows: The Policy Expiration Date

Should Read 10-28-99 in Lieu of 10-1-99. All Other Terms and

Conditions Remain the Same.” Stipulation of Facts 2. PIIC

provided the coverage extension on its own initiative and for no

additional premium to ensure that BMW would be provided with 60

days’ notice of non-renewal. BMW neither requested the coverage

extensions nor paid additional premiums.

At the time PIIC mailed the non-renewal notices, BMW was

insured under a primary CGL policy provided by USF (“USF Policy”)

that covered the period March 18, 1999 to March 18, 2000, with

policy limits of $1 million per occurrence. BMW was also insured

under a commercial umbrella liability policy provided by RLI (“RLI

Policy”) for the period March 18, 1999 to March 18, 2000, with

umbrella liability limits of $5 million. The Westridge facility

was not covered by either policy. Effective October 1, 1999

Westridge was added as an insured location to both the USF Policy

and the RLI Policy.

BMW, RLI, USF, and PIIC settled the Tutt Lawsuit in 2003 for

$3.9 million. During settlement negotiations, two disputes arose

among the insurers. First, RLI and PIIC disputed the Tutt

Lawsuit’s settlement value. RLI valued the settlement at $3.9

 

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million, and PIIC valued it at $3.7 million. Both RLI and PIIC now

concede that the other company’s valuation was reasonable. They

also agree that, because the PIIC Excess Policy had limits of $1

million and the RLI Policy had limits of $5 million, any excess

coverage beyond the primary policy limits is to be allocated

between the excess policies at a ratio of five-to-one. Second,

RLI, PIIC, and USF disputed how the settlement amount was to be

allocated. RLI contended that PIIC and USF should each contribute

the full $1 million limits of their respective primary policies.

PIIC and USF maintained that they should each pay $500,000 on their

primary policies to meet the $1 million total primary liability

limits.

Each party reserved its rights, and the settlement was

allocated as follows. PIIC and USF each paid $500,000 on their

primary policies, for a total of $1 million in primary coverage.

Because PIIC valued the settlement at $3.7 million, it believed the

excess amount to be $2.7 million. PIIC thus paid the additional

sum of $450,000 on the PIIC Excess Policy, which is one-sixth

(based on the five-to-one ratio) of the $2.7 million excess. RLI,

valuing the settlement at $3.9 million, paid the remainder, which

was $2.45 million. RLI now seeks to recover from PIIC and USF a

portion of the $2.45 million it paid to settle the Tutt Lawsuit.

All parties move for summary judgment. Because they present

 

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3RLI filed a reply brief on September 9, 2005, to which it

attached an appendix. In a September 12, 2005 order the court

stated that it would not consider the reply appendix because it had

been filed without leave of court. On September 15, 2005 RLI filed

a motion for leave to file a reply appendix. The court denies the

motion. Applying Dethrow v. Parkland Health Hospital System, 204

F.R.D. 102, 104 (N.D. Tex. 2001) (Fitzwater J.), the court

concludes that RLI has not shown sufficient cause to file a reply

appendix. Additionally, as the court explains infra at note 9, the

material in the appendix——the docket sheet and pleadings filed in

Commercial Underwriters Insurance Co. v. Royal Surplus Lines

Insurance Co., 345 F.Supp.2d 652 (S.D. Tex. 2004)——does not affect

the court’s decision because it need not address the issue to which

the material relates.

On August 23, 2005 USF filed objections to, and moved to

strike, the affidavit of Janna Robinson (“Robinson”) that RLI

submitted in support of its summary judgment motion. In its August

23, 2005 brief in opposition to RLI’s motion, PIIC objected to

Robinson’s affidavit. Because the court has not relied on

Robinson’s affidavit in deciding the summary judgment motions,

USF’s and PIIC’s objections are overruled, and USF’s motion to

strike is denied, as moot.

4The court decides these motions under Texas law. Although

none of the parties has addressed choice-of-law issues, each party

contends that it is entitled to summary judgment under Texas law.

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related questions, the court considers the motions together.3

II

In its motion for summary judgment, RLI contends that Texas

law4 requires PIIC and USF each to contribute $1 million on its

primary policy toward the Tutt Lawsuit settlement. RLI maintains

that the PIIC Primary Policy and USF Policy obligate each to

contribute its full limits. It posits that because the primary

policies overlapped for 27 days in October 1999, the combined $2

million primary limits would not violate Texas’ rule against

stacking of consecutive coverage limits. RLI additionally asserts

 

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that, even absent the 27-day overlap, its excess liability is not

triggered until PIIC and USF have each exhausted its policy limits.

RLI argues alternatively that PIIC has failed to pay the full

amount required under the PIIC Excess Policy because it contributed

one-sixth of $2.7 million in excess, rather than one-sixth of $2.9

million.

 PIIC and USF move for summary judgment, contending that Texas

law does not permit the primary policies to be stacked to achieve

$2 million in primary policy liability. They also maintain that

RLI’s negligence and contribution claims fail as a matter of law

and that RLI is not entitled to attorney’s fees because it cannot

prevail on its breach of contract claim. Finally, PIIC asserts

that it was entitled to value the settlement at $3.7 million, which

RLI concedes was reasonable, and therefore is not required to

contribute one-sixth of the remainder.

III

The court first considers whether PIIC and USF must each

contribute $1 million toward the settlement of the Tutt Lawsuit. 

 A

Whether the total primary policy limits in this case are $1

million or $2 million depends in part on whether the primary

policies’ coverage limits can be “stacked.” The term “stacking”

generally refers to one of two different categories: “(1) losses

which occur across more than one policy period, . . . raising the

 

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question whether the insured may ‘stack’ the limits of consecutive

policies” and “(2) losses which occur at a specific time, but to

which more than one policy coverage applies.” 12 Lee R. Russ &

Thomas F. Segalla, Couch on Insurance § 169:4 (3d ed. 1997). In

the first category, the Texas Supreme Court has adopted a rule

against stacking, holding that “consecutive policies, covering

distinct policy periods, [cannot] be ‘stacked’ to multiply coverage

for a single claim involving indivisible injury.” Am. Phys. Ins.

Exch. v. Garcia, 876 S.W.2d 842, 853 (Tex. 1994). But in the

second category, stacking of coverage is permitted. Under Texas

law, “where there are multiple policies in effect for the same

coverage period, those limits may be stacked.” Bethany Christian

Church v. Preferred Risk Mut. Ins. Co., 942 F. Supp. 330, 337 (S.D.

Tex. 1996) (applying Texas law); see also 12 Russ & Segalla, supra,

§ 169:13 (“Keeping in mind that the definition of ‘stacking’ means

that two or more coverages must be otherwise applicable to a given

loss, an insured should generally have the right to stack these

coverages as long as stacking is not prohibited by any statute,

regulation, unwritten public policy, or valid contract term.”); 12

Russ & Segalla, supra, § 169:110 n.76 (“[I]f multiple policies are

in effect for the same coverage period, those limits may be

stacked.”).

One of the fundamental differences the parties have concerns

the stacking category into which this case falls. RLI, focusing on

 

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the 27-day period from October 1, 1999 to October 28, 1999 when the

two policies briefly overlapped, contends the policy limits can be

stacked. It posits that BMW was entitled to $2 million in primary

coverage during the overlap period and that, as BMW’s subrogee, it

is entitled to $2 million in primary coverage for the claim

occurrence. PIIC and USF maintain that the primary policies did

not actually overlap because PIIC’s 27-day coverage extension was

not supported by consideration. They also contend that, even if

there was an overlap in coverage, it was inadvertent, and

permitting $2 million in primary limits in an inadvertent-overlap

case would violate Texas’ rule against stacking of consecutive

policy limits. Finally, if the court does decide that the primary

policies can be stacked during the 27-day overlap period, PIIC and

USF maintain that the total primary coverage should be calculated

pro-rata.

B

The court will first address PIIC and USF’s argument that the

policies did not actually overlap because PIIC’s coverage extension

was not supported by consideration. “The general rule, which is

followed in Texas, is that ‘consideration is necessary for a valid

modification of the coverage provisions of an insurance policy,

whether the effect of the modification is to extend or limit the

risks against which the contract affords protection.’” Radoff v.

Utica Mut. Ins. Co., 510 S.W.2d 151, 154 (Tex. Civ. App. 1974, writ

 

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5Because the parties have filed multiple appendixes in

litigating these motions, the court will cite the appendix by the

party who filed it and the date filed.

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ref’d n.r.e.) (quoting Md. Cas. Co. v. First Nat’l Bank of Atlanta,

Tex., 82 F.2d 465, 467 (5th Cir. 1936)). The PIIC Primary Policy,

for which there was valid consideration, provided, in pertinent

part: “If notice [of non-renewal] is mailed or delivered less than

60 days before the expiration date, this policy will remain in

effect until the 61st day after the date on which the notice is

mailed or delivered.” USF Aug. 1, 2005 App. 15.5

 The extension in

coverage was thus dictated by the terms of the PIIC Primary Policy

itself. Moreover, it was statutorily required by Tex. Ins. Code

Ann. art. 21.49-2A(e) (Vernon Supp. 1992) (repealed 2005). See

Trinity Universal Ins. Co. v. Fid. & Cas. Co. of N.Y., 837 S.W.2d

202, 204-05 (Tex. App. 1992, no writ) (holding that insurance

policy was automatically extended to 61st day after notice was

mailed because notice was not mailed 60 days prior to expiration).

Thus no additional consideration was required, and both the PIIC

Primary Policy and the USF Policy were in effect during the 27-day

overlap period.

C

Because both primary policies were in effect at the same time

during only a portion of the claim occurrence, this case is in a

sense a hybrid of the two categories of stacking. It fits within

 

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6The PIIC Primary Policy and USF Policy are “occurrence”

policies that provide up to $1 million in coverage for each claim

occurrence. The PIIC Primary Policy and USF Policy both define

“occurrence” as “an accident, including continuous or repeated

exposure to substantially the same general harmful conditions.”

USF Aug. 1, 2005 App. 95, 173. The parties have not explicitly

stipulated that the conduct that caused Moore’s injuries

constituted only one occurrence. They have stipulated, however,

that the Tutt Lawsuit alleged that BMW “provid[ed] a continuing

course of substandard, improper care for Mr. Moore during the

period of his residency at Westridge Manor.” Stipulation of Facts

2 (emphasis added). Because the alleged continued course of

improper care falls within the Policies’ definition of

“occurrence,” the parties have implicitly agreed that the conduct

complained of in the Tutt Lawsuit constituted one occurrence that

extended over both policy periods.

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the first because the claim was for a single, indivisible injury6

that occurred across more than one policy period. It also falls

within the second because, during a portion of the claim period,

more than one policy’s coverage applied. The parties agree that

Texas law is unsettled as to whether policy limits can be stacked

in a case like this one. “The court must therefore make an

Erie-guess as to how the Texas Supreme Court would decide the

question.” Nutmeg Ins. Co. v. Pro-Line Corp., 836 F. Supp. 385,

388 (N.D. Tex. 1993) (Fitzwater, J.).

When making an Erie-guess, this court’s task is to determine

how the Texas Supreme Court would decide the question. See, e.g.,

Batts v. Tow-Motor Forklift Co., 66 F.3d 743, 749 (5th Cir. 1995)

(Fitzwater, J.). “While decisions of intermediate state appellate

courts provide guidance, they are not controlling. If a state’s

highest court has not ruled on the issue in question, a federal

 

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court must determine, to the best of its ability, what the highest

court of the state would decide.” United Teacher Assocs. Ins. Co.

v. Union Labor Life Ins. Co., 414 F.3d 558, 565-66 (5th Cir. 2005)

(citations omitted). The court can consider treatises in making an

Erie-guess. See Am. Indem. Lloyds v. Travelers Prop. & Cas Ins.

Co., 335 F.3d 429, 435 (5th Cir. 2003). It is not, however, this

court’s “role to create or modify state law, rather only to predict

it.” Batts, 66 F.3d at 750.

D

In Garcia the Texas Supreme Court addressed the first category

of stacking and held that “consecutive policies, covering distinct

policy periods, could not be ‘stacked’ to multiply coverage for a

single claim involving indivisible injury.” Garcia, 876 S.W.2d at

853. In Garcia the insured was a physician who had purchased three

consecutive, non-overlapping malpractice policies. Id. at 843.

Each policy provided $500,000 in coverage per occurrence. Id. The

insured physician was held liable for negligent conduct that

extended throughout all three policy periods. Id. at 845. The

extended period of negligence was “a single claim involving

indivisible injury” and was thus one occurrence as defined by the

insurance policies. Id. at 853.

The insured physician argued that he was entitled to aggregate

the policy limits of the individual policies to achieve $1.5

 

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7

In Garcia the “plaintiff” to whom the court referred was in

fact the plaintiffs who had sued the physician in a prior medical

malpractice suit. They brought a lawsuit in the name of the

physician, as his assignees, to recover against the physician’s

liability carriers for breaching the duty to defend and the Stowers

duty. See Garcia, 876 S.W.2d at 845.

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million in coverage. Id. at 854.7 The Texas Supreme Court

rejected this argument, holding that the consecutive policies’

limits could not be stacked. Id. at 854-55. The court reasoned:

Simply because a “Claim Occurrence”

extends throughout several policy periods does

not raise the per-occurrence indemnity cap

established in every policy . . . .

. . .

The . . . claim . . . rests on the

assumption that Garcia had three times more

insurance than he purchased. At no time

during the four relevant coverage years did

any two policies overlap. Thus, at no time

during the four years did Garcia carry

liability insurance with a per-occurrence

limit greater than $500,000. Garcia did not

purchase malpractice insurance for $1.5

million in coverage, as he might have done by

purchasing excess or umbrella coverage, and

therefore he may not claim to benefit from

$1.5 million in coverage by stacking

temporally distinct policies.

Id. at 853-55.

The Garcia court also explained how to calculate the claim’s

total coverage limits when different triggered policies had

different limits:

 

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If a single occurrence triggers more than

one policy, covering different policy periods,

then different limits may have applied at

different times. In such a case, the

insured’s indemnity limit should be whatever

limit applied at the single point in time

during the coverage periods of the triggered

policies when the insured’s limit was highest.

. . . Once the applicable limit is identified,

all insurers whose policies are triggered must

allocate funding of the indemnity limit among

themselves according to their subrogation

rights.

Id. at 855; accord Keene Corp. v. Ins. Co. of N. Am., 667 F.2d

1034, 1049-50 (D.C. Cir. 1981) (“Keene may select the policy under

which it is to be indemnified.”).

E

Garcia is not directly on point with the facts of this case

because the insurance policies in Garcia were consecutive and nonoverlapping, whereas the primary policies here overlapped for 27

days. The parties disagree, however, about the effect of Garcia on

this case. RLI posits that under Garcia the primary policy limits

are whatever primary limits applied at the single point in time

when the limits were the highest——here, $2 million. PIIC and USF

maintain that, although Garcia is not directly on point, its

rationale suggests that stacking is prohibited in the case of an

“inadvertent” overlap.

The court begins by examining the 27-day overlap period in

isolation. Had the claim occurred entirely within the overlap

period, the case would have lain squarely within the second

 

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stacking category because the claim would have occurred entirely

during a period when more than one primary policy’s coverage

applied. BMW would have been entitled to stack the primary limits

to achieve $2 million in primary coverage. See Bethany Christian

Church, 942 F. Supp. at 337; 12 Russ & Segalla, supra, §§ 169:13,

169:110 n.76. As BMW’s subrogee, RLI would have the same

entitlement. Hence, RLI’s assertion that the primary policy limits

can be stacked during the overlap period is correct. Prior to

October 1, 1999 BMW’s primary limits were $1 million; from October

1, 1999 to October 28, 1999 BMW’s primary limits were $2 million;

and on and after October 28, 1999 BMW’s primary limits were again

$1 million.

The court next addresses the effect of the overlap period’s $2

million primary coverage limits. Garcia held that “the insured’s

indemnity limit should be whatever limit applied at the single

point in time during the coverage periods of the triggered policies

when the insured’s limit was highest.” Garcia, 876 S.W.2d at 855.

RLI relies on this portion of Garcia to assert that since the

primary limits during the overlap period were $2 million, BMW was

entitled to $2 million in primary coverage for the entire claim.

But Garcia is not directly on point because this statement of law

expressly applies when “a single occurrence triggers more than one

policy, covering different policy periods.” Id. (emphasis added).

Here, the policy periods overlapped.

 

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PIIC and USF maintain that, although the policies overlapped

for 27 days, the overlap in coverage was inadvertent and an

unintended consequence of PIIC’s extension of coverage. They

emphasize that BMW did not request or pay any additional premium

for the coverage extension and that PIIC provided the extension on

its own initiative to ensure that BMW had sufficient time to

acquire replacement coverage. PIIC and USF contend that Garcia’s

rationale compels the conclusion that the PIIC Primary Policy and

USF Policy cannot be stacked. They focus on a portion of the

opinion that rejects the idea that an insured can get more out of

the insurance contract than he bargained for: “Garcia did not

purchase malpractice insurance for $1.5 million in coverage, as he

might have done by purchasing excess or umbrella coverage, and

therefore he may not claim to benefit from $1.5 million in coverage

by stacking temporally distinct policies.” Id. at 854-55.

PIIC and USF’s argument is misplaced. Garcia was decided

wholly within the context of consecutive, non-overlapping coverage.

Nothing in the opinion purports to address stacking in the context

of overlapping coverage. Moreover, although Garcia may reasonably

be read to stand for the proposition that an insured cannot get

more than it bargained for from an insurance contract, see Lafarge

Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389, 404 (5th Cir. 1995),

in the instant case BMW did not get more. It purchased $1 million

in primary coverage from PIIC for the period October 1, 1998 to

 

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October 1, 1999. PIIC extended the coverage to October 28, 1999 to

give BMW 60 days’ notice of non-renewal. Because PIIC did not

charge a premium for the coverage extension, BMW did not need to do

anything to maintain its $1 million in primary coverage from

October 1, 1999 to October 28, 1999. BMW bargained for additional

coverage from USF when it added Westridge as a covered facility on

the USF Policy beginning October 1, 1999 rather than waiting until

October 28, 1999. BMW did not pay nothing for $1 million in

coverage during this period; it paid USF a premium, resulting in a

total of $2 million in coverage for 27 days.

Although Garcia does not directly support either side’s

position, it does inform this court’s conclusion. Consider the

following hypothetical: What would have been the primary policy

limits in the instant case had the occurrence triggered three

consecutive, non-overlapping primary policies: a $1 million primary

policy, followed by a $2 million primary policy, followed by

another $1 million primary policy? In that situation, BMW’s

primary limits would have been “whatever limit applied at the

single point in time during the coverage periods of the triggered

policies when the insured’s [primary] limit was highest.” Garcia,

876 S.W.2d at 855; see also CNA Lloyds of Tex. v. St. Paul Ins.

Co., 902 S.W.2d 657, 660 (“[T]he total coverage available must be

the highest liability limit available under any of the multiple

policies covering the claim.”). BMW would have been entitled to $2

 

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million in primary limits for the entire claim occurrence, and it

would have been entitled to these limits regardless of how long the

$2 million policy was in effect, even if it was in effect for only

27 days.

The facts of the instant case, although not literally

equivalent, are analogous to this hypothetical. The coverage

period in this case can be viewed for analytical purposes as three

consecutive, non-overlapping periods: a period with $1 million

limits, followed by a period with $2 million limits, followed by

another period with $1 million limits. BMW’s single, indivisible

claim is thus entitled to $2 million in primary limits——the limits

that applied at the single point in time when BMW’s primary limits

were highest. See Garcia, 876 S.W.2d at 855; CNA Lloyds, 902

S.W.2d at 660.

F

PIIC’s alternative argument that the $2 million stacked limits

should be prorated is also misplaced. PIIC contends that, if the

court concludes the primary policies can be stacked during the 27-

day overlap period, the court should calculate the claim’s primarycoverage limits on a pro-rata basis. PIIC calculates the prorated

primary limits as follows. For 348 of the 375 days of Moore’s

residency at Westridge, BMW’s primary limits were $1 million; for

the remaining 27 days, they were $2 million. The weighted average

of BMW’s primary limits during Moore’s residency were thus

 

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8

($1,000,000 x 348 + $2,000,000 x 27) ÷ 375 = $1,072,000

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$1,072,000,8 which would be the prorated policy limits. PIIC

maintains that it and USF are at most responsible for an equal

share of the additional $72,000.

PIIC concedes that no authority exists for its proffered prorata approach. Indeed, Texas intermediate courts have rejected

this method of calculating an insurer’s liability both for its duty

to indemnify and its duty to defend. See Tex. Prop. & Cas. Ins.

Guar. Ass’n v. Sw. Aggregates, Inc., 982 S.W.2d 600, 605 (Tex. App.

1998, no pet.); CNA Lloyds, 902 S.W.2d at 661. This conclusion is

entirely consistent with Garcia, which did not hold that the

insured’s liability limits are calculated on a pro-rata basis, but

concluded that the limits are “whatever limit applied at the single

point in time during the coverage periods of the triggered policies

when the insured’s limit was highest.” Garcia, 876 S.W.2d at 855.

 Texas intermediate courts have adopted the approach set out

by the D.C. Circuit in Keene. See Sw. Aggregates, 982 S.W.2d at

605. Keene was an asbestos liability case where the insured

asbestos manufacturer was covered by multiple, consecutive CGL

policies. See Keene, 667 F.2d at 1038. The Keene court rejected

an insurer’s argument for proration of its liability based on its

time on the risk. Id. at 1047-48. The court interpreted the

policies as the insurers’ promises of certainty to the insured,

focusing on the insured’s reasonable expectations. Id. It held

 

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that once a particular insurer’s coverage is triggered, that

insurer is liable to the insured to the “full extent” of the

insured’s liability up to its policy’s limits, subject to “other

insurance” clauses. Id. at 1048. The court reasoned: “There is

nothing in the policies that provides for a reduction of the

insurer’s liability if an injury occurs only in part during a

policy period. As we interpret the policies, they cover [the

insured’s] entire liability once they are triggered.” Id.

(emphasis added); accord CNA Lloyds, 902 S.W.2d at 661. Moreover,

“[f]or an insurer to be only partially liable for an injury that

occurred, in part, during its policy period would deprive [the

insured] of insurance coverage for which it paid.” Keene, 667 F.2d

at 1049.

In predicting how the Texas Supreme Court would decide this

question, this court holds that it would attempt to follow and

apply known principles of Texas insurance law and thereby promote

predictability and certainty rather than potentially undermine

settled contractual expectations. These established principles

recognize that the correlative responsibilities of insurers on the

same risk are typically governed by contract——e.g., “other

insurance” clauses——rather than by common law doctrines. See Sw.

Aggregates, 982 S.W.2d at 605 (“[O]nce coverage under an insurance

policy is triggered, an insurer is liable up to its policy limits,

subject to ‘other insurance’ clauses.”) (quoting Keene, 667 F.2d at

 

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1047-48); see also Garcia, 876 S.W.2d at 855 (“Once the applicable

limit is identified, all insurers whose policies are triggered must

allocate funding of the indemnity limit among themselves according

to their subrogation rights.”). Therefore, the court predicts that

the Texas Supreme Court would not adopt a common law pro-rata

allocation rule that, even if found to be desirable, should be

addressed by contract. Because this court is not convinced that

the Texas Supreme Court would decide the question otherwise, it

follows the guidance of the Texas intermediate courts of appeals

that have rejected a pro-rata rule.

G

In the instant case, even if the 27-day overlap period was

inadvertent and temporally brief in relation to the duration of the

claim occurrence, BMW by contract had $2 million in primary

coverage during the 27-day period because both $1 million primary

policies were in effect. PIIC and USF each contracted to insure

BMW for up to $1 million from October 1, 1999 to October 28, 1999,

yielding a total of $2 million in primary coverage. It is

irrelevant that the injury occurred only in part during the period

when there was $2 million in coverage. Nothing in either primary

policy provides for a reduction of an insurer’s liability if an

injury occurs only in part during a policy period. Cf. CNA Lloyds,

902 S.W.2d at 661 (“[T]he insurance policies . . . do not provide

for a reduction of the insurer’s liability limits if an injury only

 

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partially occurs during a policy period. Instead, both policies

contract to pay the sums the insured becomes legally obligated to

pay, not merely a pro rata portion of that amount.”). PIIC and USF

are liable for BMW’s claim up to their primary policies’ limits,

subject to their policies’ “other insurance” clauses. 

Allocating the $2 million in liability between two triggered

primary policies is straightforward in this case. The court need

not analyze the policies’ “other insurance” clauses because both

primary policy limits must be exhausted in light of the amount of

the Tutt settlement.

H

PIIC and USF argue that requiring them each to contribute $1

million toward the settlement would result in inequitable results

or a windfall for BMW (or for RLI as its subrogee). Keene rejected

a similar argument, and the court predicts that the Texas Supreme

Court would as well. 

In Keene an insurer posited that rejecting the pro-rata

approach would allow the insured “to enjoy the benefits of

insurance coverage which it has never paid for.” Keene, 667 F.2d at

1049 (internal quotation marks omitted). Keene rejected this

premise, explaining that “The contrary point . . . is more

accurate: For an insurer to be only partially liable for an injury

that occurred, in part, during its policy period would deprive [the

insured] of insurance coverage for which it paid.” Id.

 

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Moreover, PIIC and USF should not be surprised that they must

each indemnify BMW for $1 million. Each insurer agreed to accept

a premium in exchange for the risk of exposure up to $1 million;

this is the very nature of CGL coverage. Under Keene, had the

entire claim occurred within one insurer’s policy limits, that

single insurer would have been liable for the full $1 million. Had

BMW not added Westridge to its USF Policy at all, PIIC would have

been liable for $1 million in coverage, notwithstanding that PIIC’s

Primary Policy was in effect for only part of the injury period.

See id. at 1048-49. And had the Westridge facility been uninsured

before the USF Policy went into effect on October 1, 1999, USF

would nevertheless have been liable up to its full $1 million

limit. See id. Each insurer understood that it could be liable up

to $1 million.

Additionally, PIIC and USF could in various ways have

prevented the coverage overlap that occurred in this case. The

most obvious starting point is PIIC, who could have provided BMW

timely notice of non-renewal. USF could have made it a contractual

condition of coverage that Westridge not be insured by any other

primary CGL policy. Either insurer could have dealt with this

situation in its policy’s “other insurance” clause. See CNA

Lloyds, 902 S.W.2d at 661 (“[I]nsurer is liable up to its policy

limits, subject to ‘other insurance’ clauses.”) (emphasis added)

(quoting Keene, 667 F.2d at 1048). For example, either insurer

 

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could have included an “escape” clause, which provides that the

insurer is not liable if the insured has other insurance. See

Hardware Dealers Mut. Fire Ins. Co. v. Farmers Ins. Exch., 444

S.W.2d 583, 586 (Tex. 1969). PIIC and USF’s failure to draft their

policies’ “other insurance” clauses to address this situation does

not render this result inequitable.

I

Finally, PIIC and USF’s argument that RLI’s excess coverage

was triggered at $1 million in liability is misplaced. PIIC and

USF point to the fact that BMW scheduled only $1 million in

underlying insurance on the RLI Policy, contending that BMW

bargained for RLI’s Policy to trigger at $1 million rather than $2

million. But the RLI Policy specifically provides coverage only

“for the ultimate net loss in excess of . . . the applicable limits

of scheduled underlying insurance . . . plus the limits of any

unscheduled underlying insurance.” USF Aug. 1, 2005 App. 205

(emphasis added). The majority rule, which Texas follows, is

that where an umbrella policy provides

coverage for a loss in excess of the

underlying policies listed in its schedule and

in excess of the applicable limits of any

other underlying insurance collectible by the

insured, all such other collectible insurance

must be exhausted before liability attaches

under the umbrella policy.

Carrabba v. Employers Cas. Co., 742 S.W.2d 709, 715 (Tex. App.

1987, no writ); see also St. Paul Mercury Ins. Co. v. Lexington

Ins. Co., 78 F.3d 202, 209 (5th Cir. 1996) (“Texas law dictates

 

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9

RLI also contends that, even if the PIIC Primary Policy and

the USF Policy had not been overlapping, its excess liability would

not have been triggered until both primary policy limits were

exhausted, i.e., until the primary insurers contributed a total of

$2 million. PIIC and USF respond, inter alia, that RLI’s position

is inconsistent with Commercial Underwriters, 345 F.Supp.2d 652,

while RLI maintains that Commercial Underwriters is inapposite.

Although the parties have presented substantial briefing on this

question, the court need not address it because it agrees with

RLI’s principal contention that the primary policy limits in this

case are $2 million.

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that primary policies’ limits must be exhausted before excess

insurers become liable.”). Regardless of the scheduled insurance,

RLI’s Policy was not triggered in this case until the limits of

both the PIIC Primary Policy and the USF Policy were exhausted.9

IV

The court now turns to RLI’s alternative argument that PIIC

has not paid the full amount required under the PIIC Excess Policy.

In its August 3, 2005 brief in support of its motion for

summary judgment, RLI explains that it seeks recovery for

underpayment on the PIIC Excess Policy “[i]n the alternative, and

only in the unlikely event that the Court should conclude that

[PIIC] and USF are correct concerning their obligations under the

Primary Policies.” RLI Aug. 3, 2005 Br. 16. In light of the

court’s conclusion that PIIC and USF must contribute the full

limits of their primary policies, RLI explicitly disclaims recovery

under this theory, and the court holds that the claim has been

relinquished.

 

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V

The court now considers whether PIIC and USF are entitled to

summary judgment dismissing RLI’s claims for contribution and

negligence.

A

Under Texas law, if an excess insurer pays more than its share

to settle a lawsuit against the insured because a primary carrier

did not contribute its obligated amount, the excess insurer can

recover its overpayment from the primary insurer in a subrogation

action. See Am. Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d

480, 483 (Tex. 1993) (“[A]n excess carrier may bring an equitable

subrogation action against the primary carrier.”). RLI paid BMW $1

million that PIIC and USF were obligated to pay, and RLI can

recover this amount as subrogee to BMW’s rights. RLI stands in

BMW’s shoes——i.e., RLI can assert any claim that BMW could have

asserted directly, and it is subject to any defense that could have

been raised against BMW. See Nat’l Union Fire Ins. Co. of

Pittsburgh, Pa. v. John Zink Co., 972 S.W.2d 839, 844 (Tex. App.

1998, pet. denied) (“The subrogees stand in the shoes of the one

whose rights they claim, and the extent of the subrogees’ remedy

and the measure of their rights are controlled by those possessed

by the subrogor.”).

RLI sues for equitable and/or contractual subrogation and

contribution, breach of contract, and negligence for the primary

 

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10Texas does recognize one type of negligence claim brought by

an insured against its insurer. An insured may bring a Stowers

action for the insurer’s negligent failure to settle. But Stowers

is inapplicable to the facts of this case. An insurer’s Stowers

duty is its duty “to exercise ordinary care in the settlement of

claims to protect its insureds against judgments in excess of

policy limits.” Garcia, 876 S.W.2d at 843 n.2. In this case,

there could have been no breach of an insurer’s Stowers duty

because each insurer settled the Tutt Lawsuit. There was no

judgment in excess of policy limits.

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insurers’ failures to pay under their policies. In its complaint,

RLI does not bring its negligence claim directly. Instead, it sues

as BMW’s subrogee. BMW would have been entitled to seek relief

against PIIC and USF, but its claim would have sounded only in

contract for their failures to perform fully under the insurance

contracts, not in negligence.10 The court therefore grants summary

judgment dismissing RLI’s negligence claim, and denies summary

judgment in RLI’s favor on this claim.

B

Although the complaint enumerates one cause of action for

“subrogation and contribution,” Compl. § V, these are in fact two

distinct theories of recovery. Subrogation is not a direct claim;

it is a contractual or equitable conduit through which a party,

standing in the shoes of the subrogor, may assert the subrogor’s

claims. In contrast, contribution is a direct cause of action

whereby a party against whom judgment has been rendered can seek

contribution from other codefendants against whom judgment has also

been rendered. See Tex. Civ. Prac. & Rem. Code Ann. §§ 32.002,

 

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33.015(a) (Vernon 1997). “[A] defendant can settle only his

proportionate share of a common liability and cannot preserve

contribution rights under either the common law or the comparative

negligence statute by attempting to settle the plaintiff's entire

claim.” Beech Aircraft Corp. v. Jinkins, 739 S.W.2d 19, 22 (Tex.

1987).

In this case, no judgment was rendered against any of the Tutt

Lawsuit defendants. Moreover, RLI did not preserve its

contribution rights because it settled the entire Tutt Lawsuit.

The court thus grants PIIC and USF summary judgment on RLI’s

contribution claim and denies RLI summary judgment in its favor on

this claim.

* * *

Accordingly, the court grants in part and denies in part RLI’s

August 1, 2005 motion for summary judgment, and it denies RLI’s

September 15, 2005 motion for leave to file an appendix in support

of its reply brief. The court grants in part and denies in part

PIIC’s August 1, 2005 motion for summary judgment, and it grants in

part and denies in part USF’s August 1, 2005 motion for summary

judgment. USF’s and PIIC’s August 23, 2005 objections are

overruled, and USF’s August 23, 2005 motion to strike is denied, as

moot. The court holds that RLI, as subrogee, is entitled to

judgment against PIIC for $500,000, plus prejudgment interest, for

breach of contract, and to judgment against USF for $500,000, plus

 

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prejudgment interest, for breach of contract. RLI may apply for an

award of attorney’s fees and costs under the procedures specified

in Rule 54(d) and N.D. Tex. Civ. R. 54.1. The court will file

today a judgment that reflects the foregoing decision. All other

relief sought by any party is denied.

SO ORDERED.

March 15, 2006.

_________________________________

SIDNEY A. FITZWATER

UNITED STATES DISTRICT JUDGE

 

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