Opinion ID: 150548
Heading Depth: 2
Heading Rank: 1

Heading: Contractual Subrogation and Mid-Continent

Text: The first issue that we must address is one of first impression for this court: whether Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., 236 S.W.3d 765, 776 (Tex.2007), precludes contractual subrogation simply because the insured has been fully indemnified. We hold that it does not. In Texas, parties create contractual-subrogation rights by agreement or contract, granting the right to pursue reimbursement from a third party in exchange for payment of a loss. See id. at 774. When the insurer seeks to recover through contractual subrogation, it stands in the shoes of the insured, obtaining only those rights held by the insured against a third party, subject to any defenses held by the third party against the insured. Id. The Texas Supreme Court, in Mid-Continent, elaborated on the contractual-subrogation doctrine when this court presented the following certified question: Two insurers, providing the same insured applicable primary insurance liability coverage under policies with $1 million limits and standard provisions (one insurer also providing the insured coverage under a $10 million excess policy), cooperatively assume defense of the suit against their common insured, admitting coverage. The insurer also issuing the excess policy procures an offer to settle for the reasonable amount of $1.5 million and demands that the other insurer contribute its proportionate part of that settlement, but the other insurer, unreasonably valuing the case at no more than $300,000, contributes only $150,000, although it could contribute as much as $700,000 without exceeding its remaining available policy limits. As a result, the case settles (without an actual trial) for $1.5 million funded $1.35 million by the insurer which also issued the excess policy and $150,000 by the other insurer. In that situation is any actionable duty owed (directly or by subrogation to the insured's rights) to the insurer paying the $1.35 million by the underpaying insurer to reimburse the former respecting its payment of more than its proportionate part of the settlement? Id. at 768. Both policies included pro rata clauses, limiting each insurer's exposure to the lesser of (1) the limit of the policy that it issued and (2) its proportion of the settlement. Id. at 772. The Texas Supreme Court held that, in the context presented, ... a fully indemnified insured has no right to recover an additional pro rata portion of settlement from an insurer regardless of that insurer's contribution to the settlement. Having fully recovered its loss, an insured has no contractual rights that a co-insurer may assert against another co-insurer in subrogation. Id. at 772, 775-76. From this, the court concluded that, after being fully indemnified, [the insured does not have] any contractual rights remaining against Mid-Continent. Because [the insured] has no rights to which Liberty Mutual may be subrogated, Liberty Mutual has no right of reimbursement through subrogation. Id. at 777. District courts in this circuit have differed on the impact that Mid-Continent has had on contractual subrogation. Two courts, including the district court here, have broadly construed Mid-Continent to preclude contractual subrogation whenever the insured is fully indemnified or defended: Because the men fully recovered their losses in the settlement, they no longer have contractual rights against either co-insurereven where not all of them contributed to the men's recovery. Without a claim against an insurer, Amerisure has no contractual right to be subrogated. Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765, 776 (Tex.2007). Amerisure Ins. Co. v. Navigators Ins. Co., 04:06-CV-2069, op. at 3 (S.D.Tex. Jan. 7, 2009); see also Trinity Univ. Ins. Co. v. Employers Mut. Cas. Co., 586 F.Supp.2d 718, 731 (S.D.Tex.2008) (Applying Mid-Continent, Plaintiffs stand in no better position than Lacy Masonry, who, having been fully defended by Plaintiffs in the underlying suit, has no basis to recover damages against EMC for its failure to defend.), aff'd on other grounds and rev'd on other grounds, 592 F.3d 687 (5th Cir. 2010). [1] On appeal, this court did not reach the subrogation question under Mid-Continent after finding that the appellants could recover through a contribution claim. See Trinity Univ. Ins. Co. v. Employers Mut. Cas. Co., 592 F.3d at 695-96. The majority of courts, however, have cabined Mid-Continent to its facts. See Arrowood Indem. Co. v. Gulf Underwriters Ins. Co., No. EP-08-CV-285-DB, 2008 WL 5686082, at  (W.D.Tex. Dec. 19, 2008) (noting that Mid-Continent was heavily dependant on the existence of pro rata clauses and that it should not be stretched beyond the facts which underlie that case); Duininck Bros., Inc. v. Howe Precast, Inc., No. 4:06-CV-441, 2008 WL 4372709, at  (E.D.Tex. Sept. 19, 2008) ( Mid-Continent is a narrow case ....); Lexington Ins. Co. v. Chi. Ins. Co., No. H-06-1741, 2008 WL 3538700, at , 21-22 (S.D.Tex. Aug. 8, 2008) (emphasizing that Mid-Continent does not address whether an insurer that contributes to a settlement fund but denies coverage for the underlying lawsuit, and that reserves the right to dispute coverage and seek reimbursement for the entire amount it paid, may recover that amount from the other insurer ...); American Home Assur. Co. v. Liberty Mut. Ins. Co., No. 02-3842, 2008 WL 440303, at  n. 4 (E.D.La. Feb. 12, 2008) (acknowledging that Mid-Continent is confined to the factual circumstances). Most recently, Judge Lee Rosenthal, in a well-reasoned opinion, rejected the argument that Mid-Continent automatically precludes subrogation claims whenever the insured is fully indemnified. See Employers Insurance Co. of Wausau v. Penn-America Insurance Co., ___ F.Supp.2d ___, ___ - ___, 2010 WL 1404111, at -13 (S.D.Tex.2010). There, the court emphasized that Mid-Continent is limited to situations where the insurers (1) were co-primary insurers, (2) did not dispute that both covered the loss, and (3) were subject to pro rata clauses. See id. at ___, 2010 WL 1404111, . The court further reasoned that such a broad reading of Mid-Continent would make statutory or contractual indemnification in Texas unavailable to the insurer of a seller asserting that its acts or omissions did not cause the underlying plaintiff's injury if the seller's insurer assumed the insured's defense and paid to settle the claim. This reading is not supported by the Texas Supreme Court's statements after Mid-Continent. See Frymire Eng'g Co. v. Jomar Int'l, Ltd., 259 S.W.3d 140, 145 (Tex. 2008) ([The allegedly responsible party's] argument that [the settling party] cannot assert equitable subrogation because its indemnity payment was under a voluntary contract would, if accepted and applied to other contracts, be a radical departure from long-settled Texas subrogation law. For instance, insurance policies are contracts, too, and if the hotel's property insurer had paid the hotel for the cost of repairs pursuant to a policy agreement, it would certainly be able to assert an equitable subrogation claim against [the allegedly responsible party].). Id. at ___, 2010 WL 1404111, . We agree with the majority of courts that have examined this issue and we reject the overly broad view of Mid-Continent 's subrogation exclusion. That view would effectively end contractual subrogation in Texas. This cannot be so, particularly in light of the Texas Supreme Court's most recent contractual-subrogation decision in Texas Health Insurance Risk Pool v. Sigmundik, 315 S.W.3d 12, 2010 WL 2136625 (Tex.2010). Although Sigmundik does not specifically address the reach of Mid-Continent, it is nonetheless instructive. There, the insurer had fully indemnified the insured for his medical expenses ($336,874.71) arising out of injuries sustained in an oil-field explosion. See id. at 13-14, 2010 WL 2136625, . After the death of the insured, his wife filed a negligence action on behalf of herself, her two minor sons, and the insured's estate. Id. The insurer intervened, arguing that it was subrogated to the rights of [the insured] and his estate based on an express subrogation provision in the policy: We will be subrogated to all rights of recovery which any person may have against another party for all benefits paid by the Pool which were incurred by the Insured Person as a result of the negligence or misconduct of another party. Our right to repayment shall be a lien against any recovery by the Insured Person whether it be by judgment, settlement, or otherwise. Id. The negligence action settled for $800,000, and the court explained that, through contractual subrogation, the insurer stepped into the shoes of the insured (the estate) and has a valid claim to recover the $336,874.71 from the settlement. See id. at 14-16, 2010 WL 2136625, -3. The court could not have reached this result if the broad view of Mid-Continent was in fact the law of Texas. Since Mid-Continent, the Texas Supreme Court has not specified the precise boundaries of its holding as it applies to contractual subrogation when the insured is fully indemnified. Nor do we attempt to do so here. Instead, our decision here is an Erie guess, and in making an Erie guess, we must determine how the Texas Supreme Court would resolve the issue under the specific circumstances presented. See Chaney v. Dreyfus Serv. Corp., 595 F.3d 219, 229 (5th Cir.2010) (citation omitted). Accordingly, in light of Sigmundik, we hold that Mid-Continent does not bar contractual subrogation simply because the insured is fully indemnified. [2] Our inquiry does not end here, however, as we still must determine whether Mid-Continent precludes contractual subrogation in this case. It does not. In Mid-Continent, the insured was fully protected because both insurers acknowledged their duties to defend and indemnify. See 236 S.W.3d at 769. Limiting Mid-Continent to such circumstances is faithful to the longstanding view of the Texas Supreme Court, as articulated over half a century ago by Justice Jack Pope, that dueling coinsurers must place the interests of their insureds before their own. See Hardware Dealers Mut. Fire Ins. Co. v. Farmers Ins. Exch., 444 S.W.2d 583, 588-89 (Tex.1969) (emphasizing that the settled principles of Texas insurance law require insurers to give dominant consideration to the rights of the insured). That is the missing element here: Amerisure insisted that its policy did not apply, and Navigators refused to indemnify until Amerisure paid its $1 million policy limit. In other words, the insureds would not have been fully protected, and applying the Mid-Continent exclusion in this situation would have further deviated from settled principles of Texas insurance law by discouraging insurers from first defending and indemnifying and then seeking reimbursement for the costs that a coinsurer should have paid. See Keck, Mahin & Cate v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 20 S.W.3d 692, 703 (Tex.2000) (rejecting a view of subrogation as bad public policy because it would discourage insurance companies from paying or settling disputed claims and thereby force insureds more often into litigation with their insurers); see also Hardware Dealers, 444 S.W.2d at 588-89. Therefore, we hold that Mid-Continent does not bar contractual subrogation when an insurer has denied coverage. The district court provided an additional basis for dismissing Amerisure's contractual-subrogation claim. It held that, [a]lthough Amerisure purchased the right to pursue the mens' claims against third parties, Navigators has been released from liability as a party to the settlement. Amerisure Ins. Co. v. Navigators Ins. Co., 04:06-CV-2069, op. at 3 (S.D.Tex. Jan. 7, 2009). This overlooks how contractual subrogation places Amerisure in the shoes of its insureds, Texas Crewboats and Sylvester. See Mid-Continent, 236 S.W.3d at 774. Neither released Navigators. Furthermore, in its settlement agreement with Clanton and Satterfield, Amerisure reserved its right to recoup its contribution through subrogation from Navigators. In sum, Amerisure has a right to contractual subrogation. Accordingly, we do not reach the equitable-subrogation claim. See Bay Rock Operating Co. v. St. Paul Surplus Lines Ins. Co., 298 S.W.3d 216, 225 (Tex. App.San Antonio 2009, pet. denied) (Here, there is no dispute that St. Paul had a contractual subrogation right pursuant to its insurance policy with Hollimon; therefore, the express agreement of the parties controls, and equitable principles do not come into play.).