Answering a certified question from the U.S. Fifth Circuit Court of Appeals, the Texas Supreme Court has held that when one insurer pays more than its limits to settle claims because another insurer would not pay enough to fund the settlement, there is no contribution or subrogation against the underpaying insurer where both insurers have pro rata "other insurance" clauses. Mid-Continent Ins. Co. v. Liberty Mutual Ins. Co., 236 S.W.3d 765 (Tex. 2007) (answering the first of three certified questions in the negative, therefore not reaching the second and third questions).
The insured, a highway construction contractor, had two CGL policies, both of which provided $1 million in coverage for an underlying suit arising from an automobile collision at a construction site. The policies contained identical "other insurance" clauses that provided for equal or pro rata method of sharing up to the co-insurers' respective policy limits if the loss were covered by other primary insurance. Neither insurer disputed that each owed some portion of the insured's defense and indemnification, but they disagreed on the settlement value of the case. After repeated refusals by one insurer to increase its contribution to a settlement, the other insurer agreed to settle the claims against the insured for an amount greater than its policy limits. The "overpaying" insurer thereafter demanded that the recalcitrant insurer pay half of the settlement, but it again refused, agreeing to pay only a significantly smaller amount, which left the overpaying insurer having to pay more than its limits. The overpaying insurer reserved the right to seek recovery from, and filed suit against, the "underpaying" insurer for its pro rata share of the settlement. The district court held that the overpaying insurer was entitled, through subrogation, to recover from the underpaying insurer up to that insurer's remaining policy limits (it had already paid on another claim). That insurer appealed, and the Fifth Circuit certified questions to the Texas Supreme Court.
The Texas Supreme Court noted the general rules governing contribution, i.e., that if insurers bind themselves to pay an entire loss, and one insurer pays the whole loss, that insurer has a right of action against a co-insurer for a ratable portion of the amount paid because it has paid a debt which is equally and concurrently due by the other insurer. However, where each insurer's policy contains a pro rata "other insurance" clause, a direct claim is precluded because such clauses make the contracts several and independent of each other. The Supreme Court further stated, however, that when an insured is covered by multiple policies containing pro rata "other insurance" clauses, but has not been fully indemnified, then it has a contractual right to recover the insurers' shares of the covered loss so long as the shares are within the respective insurer's policy limits, and a co-insurer seeking reimbursement could be subrogated to this right.
The Supreme Court held that because the two policies contained pro rata "other insurance" clauses, there was no contractual right of contribution between the insurers. The Supreme Court also concluded that because the insured had been fully indemnified, it had no contractual rights against any insurer, and consequently, the overpaying insurer had no right of reimbursement against the other through subrogation. The Supreme Court stated that there was no common law duty of an insurer, outside of the Stowers duty, to act reasonably in the negotiation and participation in settlement. Because the settlement offer was not within the underpaying insurer's policy limits, the Supreme Court found the Stowers duty was not breached. The Supreme Court declined to modify Stowers to create additional rights for the insured in this situation, thus precluding any right to recover via subrogation.
