Opinion ID: 7094
Heading Depth: 2
Heading Rank: 2

Heading: Insurance Aspects

Text: 18 As noted, the district court grounded its opinion in what it perceived to be a recognized principle of insurance law, that [a]n insurance company cannot prefer one of its insureds over another. 26 Armed with this article of faith, the district court concluded that [t]he bankruptcy court erred when it ruled that the Homsys ha[d] no property interest in the proceeds, and reversed the bankruptcy court. We discern several difficulties with the district court's determination. 19 Ignoring for a moment that court's failure to refer us to anything other than a single treatise to support this purported canon of insurance law, we perceive a logical contradiction between the court's legal reasoning and the injunctive relief that it ordered. Reduced to its essence, the foundation of the district court's reversal of the bankruptcy court's decision was the court's preliminary conclusion that the Homsys owned some portion of the policy proceeds (or some fractional or undivided interest in all of the proceeds) and that the Homsys' portion of or interest in the proceeds was not--and could not be--property of the Estate. 27 Nevertheless, the district court went on to order the bankruptcy court to extend the umbrella of [its] injunction ... to shield the Homsys from liability and to protect their interest in the policies adequately. But, if the Homsys' portion of the Proceeds is truly not property of the Estate, then the bankruptcy court has no authority to enjoin suits against the Homsys: The bankruptcy court's injunctive powers exist only to ensure the preservation and fair division of Estate assets. 28 Therein lies the apparent contradiction between the district court's legal reasoning and the injunctive relief that it ordered: If the Homsys own a portion of the Proceeds, that portion cannot be deemed property of the Estate; and perforce there can be no justification for shielding such portion under the bankruptcy court's injunctive orders, the reach of which extends only to property of the Estate. 20 More relevant for our purposes, however, is the failure by either the Homsys or the district court to cite us to any binding authority for the proposition that [a]n insurance company cannot prefer one of its insureds over another. 29 The district court anchored its opinion on this principle, yet provided us with neither statutes nor case law indicating that the laws of the State of Texas embrace such a principle. Neither did the district court explain exactly how the principle applies in this case. For their part, the Homsys referred us to two cases--one from New York and one from an intermediate appellate court in Texas--that purportedly support the principle: Smoral v. Hanover Insurance Co. 30 and Texas Farmers Insurance Co. v. Soriano. 31 But these cases are distinguishable. 21 In Smoral, the New York Supreme Court, Appellate Division, held that an insurance company breached its duty of good faith to an insured driver (one of two coinsureds) when it tendered the full limits of an automobile liability policy to a passenger who was injured in a car accident, in exchange for an agreement to release from liability the insured owner of the car (the other of two coinsureds). 32 Far from standing for a broad principle that an insurer may never prefer one of its insureds over another (and thus may be enjoined from entering a settlement that would do so), however, the Smoral case merely indicates that an insured may seek damages under a breach of good faith cause of action if he believes that an unfair settlement has been effected. 33 22 The intermediate appellate court opinion in Soriano likewise reveals only that, under some circumstances, an insured may challenge a settlement between his insurer and another party by filing an action for breach of the duty of good faith and fair dealing. 34 We note first that Soriano does not involve a settlement between an insurer and one of two or more coinsureds but between the insurer and one of several third-party claimants. Second, there is now considerable doubt whether Soriano still stands for the proposition for which it was cited to us by the Homsys in the first place: After the instant case was briefed and argued to us on appeal, the Supreme Court of Texas reversed the intermediate appellate court and rendered a take-nothing judgment against the Soriano plaintiffs. In so doing, the state supreme court noted that it had never recognized a cause of action for breach of the duty of good faith and fair dealing where the insurer fails to settle third-party claims against the insured, 35 emphasizing that [w]e have never held and do not hold today that either of these two standards [ (1) the insurer has no reasonable basis for denying or delaying payment of the claim, or (2) the insurer knew or should have known that there was no reasonable basis for denying or delaying payment of the claim] applies to insurers in responding to third-party claims. 36 Thus the Homsys' reliance on Soriano is even less efficacious now than it was when cited in their brief to this court. 23 Nowhere in either Smoral or Soriano do we find true support for a general principle of insurance law that forbids an insurer from settling with one of its coinsureds to the disadvantage of another one. Rather, those cases recognize nothing more than the aggrieved insured's right to seek damages from the insurance company for making such a settlement, by initiating a suit for breach of good faith. 37 24 In this case, of course, the Homsys have not initiated such a suit. Relying on nothing more than a general statement in a hornbook, the Homsys--and apparently the district court--would have us convert an insured's right to sue for breach of good faith into a general prohibition that forbids an insurer from entering a settlement by which it tenders the full limits of a liability policy exclusively to or for the benefit of one of several coinsureds. We decline the invitation to expand the holdings of Smoral and Soriano so extensively. 38 III