Opinion ID: 17516
Heading Depth: 2
Heading Rank: 1

Heading: Statute of Limitations and Exhaustion of the Policy

Text: 9 Northern argues that the statute of limitations bars Western's action. Since Western has dropped its breach of contract action based on the duty to defend, the relevant limitations inquiry is whether the current action was filed within four years of Northern's breach of the duty to indemnify. The duty to indemnify may be justiciable in a declaratory judgment action before a determination of the insured's underlying liability if the complaint does not trigger the duty to defend and no facts can be developed in the underlying suit that could trigger the duty to indemnify. See Farmers Texas County Mutual Insurance Co. v. Griffin, 955 S.W.2d 81, 84 (Tex.1997). It does not follow, however, that every breach of the duty to defend automatically breaches the duty to indemnify and begins the running of the statute of limitations on the latter. A clear breach of the duty to defend might perhaps constitute an anticipatory breach of the duty to indemnify, but here Northern never definitively stated that it would not defend Sparks. Instead, it continually asked for more time to examine the situation and strung both its insured and Western along. There is no indication that either Sparks or Western regarded or treated these delaying tactics as a breach of the duty to indemnify. That duty was breached, if it was breached at all, when Northern declined to tender the full settlement amount to its insured Sparks on March 24, 1992. We find, as did the district court, that since the current action was filed on February 23, 1996, within four years of the breach of the duty to indemnify, the action was not barred by the statute of limitations. 10 Northern also claims that it is entitled to summary judgment on the grounds that, having exhausted the limits of its primary policy in its December 30, 1993, settlement on behalf of the FDIC, it has no further duty to indemnify Sparks. Northern's policies clearly indicated that it had no further obligations under their terms once the relevant policy limits were exhausted. The FDIC settlement exceeded the $1,000,000 limit on the primary policy, and Northern argues that its umbrella policy was excess to Western's policy. Western in substance concedes that Northern's umbrella policy is excess to Western's policy. Thus, we disregard the umbrella policy. We have recently held that under Texas law an insurer may favor one of its insureds (who had been sued) over another insured party (who had not been sued), and thus may exhaust policy limits on behalf of one insured despite the fact that such a settlement leaves its remaining insureds without protection under the policy. See Travelers Indemnity Company v. Citgo Petroleum Corp., 166 F.3d 761, 768 (5th Cir.1999). See also American States Insurance Co. of Texas v. Arnold, 930 S.W.2d 196 (Tex.App.--Dallas 1996, writ denied). 11 However, in Citgo we faced a situation in which an insurer settled on behalf of one of its insureds, who had been sued, before the other insured party had been named in the action. Here, in contrast, we face the reverse problem. Northern, having struck an agreement deferring resolution of its duty to indemnify Sparks before the FDIC was named in the suit, now claims that its subsequent decision to exhaust settlement limits in settling on behalf of the FDIC mooted any liability it might have incurred by not immediately fulfilling its duty to indemnify Sparks. This argument fails. Under Citgo, Northern was entitled to settle on behalf of Sparks and exhaust policy limits on his behalf. It perhaps might have been entitled to settle on behalf of the FDIC and exhaust policy limits had the FDIC been a party to the action at the time of the Sparks settlement. However, at that time Sparks was the only insured party named in the action, and the primary policy limits were not exhausted. If the facts were sufficient to trigger the duty to indemnify, that duty included the immediate payment of a settlement of up to $1,000,000. Northern's decision to subsequently expend the policy limits on behalf of the FDIC cannot alter the fact that it may be liable to Sparks for the full value of a settlement within policy limits. Under the facts of this case, we hold that the exhaustion of Northern's primary policy liability in a subsequent proceeding could not serve to excuse Northern's asserted earlier breach of its duty to indemnify.