Opinion
No. 3:03-CV-1752-BF.
November 26, 2004
MEMORANDUM OPINION AND ORDER
This case came on for hearing on the parties' cross motions for summary judgment. The parties agree that (1) no genuine issues of material fact exist that would require a trial in this case, and (2) the case should be decided as a matter of law. Clarendon National Insurance Company ("Clarendon") claims it is entitled to recover the amount of $220,000 that it paid in excess coverage under the Business Auto Liability Policy ("the Policy") issued to Frozen Food Express Industries, Inc. on behalf of the named insured FFE Transportation Services, Inc. ("collectively FFE"). Clarendon claims that (1) FFE breached the notice provisions of the Policy, and (2) Clarendon's defense was prejudiced. FFE denies that Clarendon was prejudiced and seeks a declaratory judgment that Clarendon is not entitled to any relief.
Threshold Matter
The Court will first consider FFE's objections to Clarendon's Motion for Summary Judgment. FFE contends that Clarendon's request for summary judgment includes new allegations which are unsupported by any pleadings. First, FFE contends that because the Complaint does not mention the MCS-90 endorsement, Clarendon should not be allowed to rely upon that provision of the Contract for reimbursement. The Court finds that FFE had notice that Clarendon was seeking reimbursement under the Policy and that mention of a specific endorsement was not required. Accordingly, the objection is overruled. Secondly, FFE objects that Clarendon newly asserts it was prejudiced "as a matter of law" and " per se" by the late notice. Under Texas law, an insurer must prove prejudice. Harwell v. State Farm Mut. Auto Ins. Co., 896 S.W.2d 170, 174 (Tex. 1995). Additionally, the terms of the Policy provide that Clarendon must prove prejudice. (Pl.'s App. at 90.) Therefore, these objections are overruled as moot.
FFE also objects to the Affidavit of Brian T. McCulley in support of Clarendon's Motion for Summary Judgment. The Court has reviewed the competent summary judgment evidence and finds that the Court need not consider the McCulley affidavit. Accordingly, this objection is overruled as moot.
Undisputed Material Facts
FFE Transportation Services is a named insured under the Policy that Clarendon issued to Frozen Foods. (Pl.'s App. at 30.) The Policy provides $2,000,000 in insurance coverage subject to a Self-Insured Retention ("SIR") of $1,000,000. (Pl.'s App. at 99.) A SIR is similar to a deductible. (Pl.'s App. at 71.) Endorsement #4 of the Policy states that "the word `deductible' is replaced with the words `self insured retention' in all references in the endorsement including the endorsement title." ( Id.) FFE is responsible for the first $1,000,000 in damages arising from an accident. (Pl.'s App. at 99.) Clarendon provides $1,000,000 in excess coverage above that limit. ( Id.) Endorsement #9 of the Policy, entitled Claims Reporting Endorsement (Excess), requires FFE to provide "immediate notice" to Clarendon when there is "[a]ny claim in which the requested damage exceeds the self retained amount" of $1,000,000. (Pl.'s App. at 80.) The notice provision also requires FFE to provide notice to Clarendon of an occurrence of any injury, death, or disease paid or reserved for 25% or more of the amounts stated in the schedule of underlying insurance. ( Id.) It further provides that "if [Clarendon] show[s] that [FFE's] failure to provide notice under the policy prejudices [Clarendon's] defense, there is no liability coverage under the policy." (Pl.'s App. at 90.) Endorsement #5 of the policy (referred to as the MCS-90 endorsement) provides in pertinent part that "the insured agrees to reimburse the company for any payment made by the company on account of any accident, claim, or suit involving a breach of the terms of the policy, and for any payment that the company would not have been obligated to make under the provisions of the policy except for the agreement contained in this endorsement." (Pl.'s App. at 72.) Additionally, the Policy provides, at Form TE 00 12 Section II. A., that [Clarendon] may "investigate and settle any claim or suit as [Clarendon] considers appropriate." (Pl.'s App. at 18.)
On January 9, 1997, one of FFE's vehicles was involved in an accident, and several people, including Ray Stewart, brought claims against FFE. (Def.'s App. at 5-6.) Stewart's claim did not settle, but FFE settled the other claims for $219,861.99. (Def.'s App. at 62.) Stewart brought a tort action against FFE in a state court in Missouri. (Def.'s App. at 5-6.) Before trial, Stewart's settlement demand was $1,000,000, and FFE's counsel recommended that FFE offer to settle with Stewart for up to $500,000. ( Id.) As of August 11, 1998, FFE had set reserves for the Stewart claim in excess of $370,000. (Pl.'s App. 175-87.) This is in addition to the $219,861.99 paid to settle the other claims. (Def.'s App. at 62.) Therefore the total amount reserved and paid was in excess of $590,000.
A jury awarded Stewart the sum of $1.1 million in damages on April 5, 2001. (Pl.'s App. at 129.) FFE first notified Clarendon of the occurrence on July 18, 2001, more than three months after the judgment had been entered. (Pl.'s App. at 134.) Clarendon acknowledged the claim in a July 26, 2001 letter, and reserved its right under the policy to disclaim coverage because of the late notice. (Pl.'s App. at 136-38.)
Clarendon participated in post judgment settlement efforts, and the claims against FFE in the Stewart action were eventually settled for $1,000,000. (Pl.'s App. at 151.) FFE met the SIR by paying $780,000 toward the settlement of the Stewart action and $219,861.99 to settle the other claims. (Def.'s App. at 62.) Clarendon contributed $220,000 toward the post judgment settlement of the Stewart action, but in a letter acknowledged by FFE, stated that the payment did not jeopardize Clarendon's rights under the Policy or waive its right to seek reimbursement from FFE. (Pl.'s App. at 141-48.) Clarendon requested repayment of the $220,000 because (1) FFE breached the notice provisions of the policy, (2) FFE was prejudiced, and (3) therefore, it had no liability under the Policy. (Pl.'s App. at 155-56.) FFE refused the demand, and Clarendon filed this lawsuit.
Summary Judgment Standard
Summary judgment is appropriate when the pleadings and record evidence show that no genuine issue of material fact exists and that the movant is entitled to judgment as a matter of law. Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994). Only disputes about material facts will preclude the court's granting summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The burden is on the movant to prove that no genuine issue of material fact exists. Latimer v. Smithkline French Labs., 919 F.2d 301, 303 (5th Cir. 1990). If the non-movant bears the burden of proof at trial, the summary judgment movant need not support his motion with evidence negating the non-movant's case. Rather, the movant may satisfy his burden by pointing to the absence of evidence to support the non-movant's case. Little, 37 F.3d at 1075. Once the movant meets his burden, the non-movant must show that summary judgement is not appropriate. Little, 37 F.3d at 1075 (citing Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)). "[A properly supported summary judgment motion] requires the nonmoving party to go beyond the pleadings and by [his] own affidavits, or by the `depositions, answers to interrogatories, and admissions on file,' designate `specific facts showing that there is a genuine issue for trial.'" Celotex, 477 U.S. at 324. See FED. R. Civ. P. 56(e). To determine whether a genuine issue exists for trial, the court must view all of the evidence in the light most favorable to the non-movant, and the evidence must be sufficient such that a reasonable jury could return a verdict for the non-movant. Munoz v. Orr, 200 F.3d 291, 302 (5th Cir. 2000); Anderson, 477 U.S. at 248.
Breach of the Policy's Terms
The parties agree that this case is governed by Texas law. The general rules of contract construction govern insurance policy interpretation. State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 433 (Tex. 1995); Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994). "Whether a contract is ambiguous is a question of law that must be decided by examining the contract as a whole in light of the circumstances present when the contract was entered." Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex. 1996); Nat'l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995). A contract is unambiguous as a matter of law if it can be given a definite or certain legal meaning. Columbia Gas, 940 S.W.2d at 589; CBI, 907 S.W.2d at 520. Conversely, if an insurance contract is subject to more than one reasonable interpretation, the contract is ambiguous, and the interpretation that most favors coverage for the insured will be adopted. Grain Dealers Mut. Ins. Co. V. McKee, 943 S.W.2d 455, 458 (Tex. 1997).
A court must "read all parts of each policy together and exercise caution not to isolate particular sections or provisions from the contract as a whole." Provident Life Accident Ins. Co. v. Knott, 128 S.W.3d 211, 216 (Tex. 2003). The court's objective is to give effect to the written expression of the parties' intent. Id. "The meaning of a particular contractual provision is to be determined by reference to the context." Greyhound Corp. v. Excess Ins. Co. of Am., 233 F.2d 630, 634 (5th Cir. 1956).
"Under Texas law, cases involving an insured's notice of occurrence, notice of claim, or notice of suit are governed by the fundamental principle of contract law that a material breach by one contracting party excuses performance by the other party and that an immaterial breach does not." Hanson Prod. Co. v. Americas Ins. Co., 108 F.3d 627, 631 (5th Cir. 1997). However, an insured's failure to notify an insurer of a suit against the insured does not relieve the insurer from liability for an underlying judgment unless the lack of notice prejudices the insurer. Harwell, 896 S.W.2d at 174. A self-insured owes no common law duty to his excess carrier to attempt to settle a lawsuit at a point below the threshold of the excess insurance. International Ins. Co. v. Dresser Indus., Inc., 841 S.W.2d 437, 446 (Tex.App.-Dallas 1992, writ denied). Texas courts have found that an insurer was prejudiced from lack of notice by its insured (1) when the insurer, without notice or actual knowledge of the suit, received notice after the entry of a default judgment against the insured; (2) when the insurer received notice of the suit, but the trial date was fast approaching, thereby depriving it of an opportunity to investigate the claims or mount an adequate defense; (3) when the insurer received notice of a lawsuit after the case had proceeded to trial and judgment has been entered against the insured; and (4) when the insurer received notice of a default judgment against its insured after the judgment had become final and could not be appealed. See Harwell v. State Farm Mut. Auto. Ins. Co., 896 S.W.2d 170, 175 (Tex. 1995); Liberty Mut. Ins. Co. v. Cruz, 883 S.W.2d 164, 166 (Tex. 1993); Filley v. Ohio Cas. Ins. Co., 805 S.W.2d 844, 847 (Tex.App.-Corpus Christi 1991, no writ); Members Ins. Co. v. Branscum, 803 S.W.2d 462, 467 (Tex.App.-Dallas 1991, no writ); Kimble v. Aetna Cas. Sur. Co., 767 S.W.2d 846, 851 (Tex.App.-Amarillo 1989, writ denied); Ratcliff v. Nat'l County Mut. Fire Ins. Co., 735 S.W.2d 955, 959 (Tex.App.-Dallas 1987, writ dism'd w.o.j); Wheeler v. Allstate Ins. Co., 592 S.W.2d 2, 3 (Tex.Civ.App.-Beaumont 1979, no writ). Compare Allstate Ins. Co. v. Pare, 688 S.W.2d 680, 683-84 (Tex.App.-Beaumont 1985, writ ref'd n.r.e.) (failure to notify did not prejudice insurer because insurer had actual knowledge of suit).
Analysis
Neither party disputes that under the terms of the Policy, FFE operates as a self-insurer up to the limit of the SIR, $1,000,000, and Clarendon is an excess insurer for any amounts FFE is obligated to pay above the SIR, up to an additional $1,000,000 for any occurrence. FFE argues that Clarendon was entitled to notice only after FFE exhausted its SIR. FFE relies on the language in endorsement #3:
As respect to any `accident' where the total damages payable under the LIABILITY COVERAGE do not exceed the liability deductible shown in the Schedule, you agree to be financially responsible for all costs and expenses resulting from the investigation, defense, negotiation, settlement, and interest applicable thereto, of any claim or suit resulting from such `accident.'
(Pl.'s App. at 31.) FFE's argument fails because the Court must read the Policy as a whole. See Knott, 128 S.W.3d at 216. Endorsement #3 must be read with all other terms of the Policy. First, the Policy provides that FFE shall give Clarendon prompt notice of any accident or loss and clearly explains the consequences of failure to provide notice, i.e., if Clarendon shows that FFE's "failure to provide notice prejudices [Clarendon's] defense, there is no liability coverage under the policy." (Pl.'s App. at 22.) The Policy, Form TE 00 12 Section II. A., provides: "[Clarendon] may investigate and settle any claim or suit as [it] consider[s] appropriate." (Pl.'s App. at 18.) Additionally, Endorsement #9 requires FFE to provide immediate notice: to Clarendon where there is any claim in which the requested damage exceeds the self retained amount of $1,000,000. Endorsements #3 and #4 provide that "to settle any suit," Clarendon may pay all or any part of the [SIR] and all or any part of the costs and expense of investigation, defense, negotiation, settlement and interest which are FFE's responsibility under the SIR, and FFE must reimburse Clarendon for the costs and expenses that Clarendon pays which are FFE's responsibilities under the SIR. Additionally, Endorsement #5 provides that "the insured agrees to reimburse the company for any payment made by the company on account of any accident, claim, or suit involving a breach of the terms of the policy, and for any payment that the company would not have been obligated to make under the provisions of the policy except for the agreement contained in this endorsement."
Specifically, Endorsement # 9 states:
It is agreed that with respect to claim reporting, the insured, in addition to our terms set forth in this policy, must report an occurrence of any injury, death or disease, paid or reserved, for 25% or more of the amounts stated in the schedule of underlying insurance attaching to and forming a part of this policy and immediate written notice shall be given by or on behalf of the insured to the company, except immediate notice shall be given to the company, where any injury of the following type occurs: * * * (G) any claim in which the requested damage exceeds the Self Retained amount.
(Def.'s. App. at 42.)
FFE relies upon Dresser, 841 S.W.2d at 440, for the argument that (1) FFE did not owe the excess insurer, Clarendon, a duty to settle, and therefore, (2) Clarendon cannot demonstrate prejudice from the lack of notice. However, FFE's reliance on Dresser is misplaced. The Dresser court based its decision that Dresser did not have a contractual duty to settle within primary limits solely on the court's construction of the policy. Id. at 444. Dresser is factually distinguishable because the parties in Dresser agreed to different terms than those contained in the contract between Clarendon and FFE. The Dresser policy gave Dresser, as the insured (and as the insured acting as a self-insurer) the right to investigate and settle. Id. at 442. That policy stated that the excess insurer "shall never make formal demand upon a primary insurer that the latter settle a claim within its policy limit." Id. Therefore, Dresser did not have a contractual duty to settle the case within the primary limits. Id. at 443.
Application of the teachings of Dresser would not provide FFE relief. Even though both cases involve an insured acting as a self-insurer, the Policy in this case assigned the rights differently. The Policy is not ambiguous with respect to the bargained-for rights and responsibilities of FFE and Clarendon. It gives Clarendon, not FFE, the right to investigate and settle any claim or suit as it sees fit. (Pl.'s App. at 18.) FFE's assertions that the Court should hold the parties to the usual self-insured/excess carrier scenario are not persuasive. Under Texas law, a Court cannot rewrite a contract of insurance where the wording is plain and certain, as it is here. Pepper, 339 S.W.2d at 662. This Court must enforce the Policy as written. Id.
FFE claims that the Policy is ambiguous and therefore offers evidence of the usual rights and responsibilities of parties to excess insurance policies and the course of conduct of its own dealings with Clarendon with respect to other claims. Because the Policy unequivocally states the rights and responsibilities of the parties, the use of extrinsic evidence of the parties intent is not permitted. Gen. Am. Indem. Co. v. Pepper, 339 S.W.2d 660, 662 (Tex. 1960). The fact that excess policies in general differ from the Policy in this case is not determinative. It is irrelevant that when, in the past, FFE gave Clarendon notice of other claims, it did not take an active role in those cases. This Court cannot rewrite the Policy to provide that FFE, not Clarendon, had the right to investigate and settle as it saw fit and to provide that notice was not required until the self-insured limits were exhausted. National, 907 S.W.2d 520.
FFE contends that, as a matter of law, "failure to obtain a more favorable settlement does not constitute prejudice," relying upon St. Paul Guardian Ins. Co. v. Centrum G.S. Ltd., No. 3:97-CV-1478-L, 2003 WL 22038321, *7-10 (N.D. Tex. Aug. 29, 2003), an unpublished opinion. Even if St. Paul had precedential value, the facts in St. Paul are decidedly different from those in this case. In St. Paul, the insured notified the insurer more than a year before the case was scheduled to be tried and more than two years before the actual trial. The insurer failed to show that it was prevented from investigating the underlying claims, from developing a defense strategy, from participating in the lawsuit, or from otherwise representing its interests during the pendency of the underlying litigation. Id. In this case, the insurer received notice of the lawsuit after the case had proceeded to trial and more than three months after a $1.1 million judgment had been entered against the insured. In contrast to the insurer in St. Paul, the late notice in this case prevented Clarendon from exercising its rights under the Policy.
With the exception of certain circumstances which are not present here, an unpublished opinion has no precedential value. See 5TH CIR. R. 47.5.4.
In Greyhound, the Fifth Circuit Court of Appeals discussed the controversies inherent in excess insurance where the excess insurer does not undertake to defend the insured. Greyhound, 233 F.2d at 633. It noted that, in such a case, the insurer is not interested in every accident, but only those that may be serious enough to involve the excess insurance. Id. Notice is usually required when the claim appears likely to involve the excess carrier. Id. With notice, the excess carrier can then take the steps it finds are warranted, such as additional investigation and other actions to protect its own interests. Id.
The facts in Greyhound bear some similarity to those in this case. There, the policy issued by the excess insurer required notice upon the occurrence of any accident which "may" involve liability under the policy. Id. The question before the court was whether notice was timely and whether the excess insurer was prejudiced. The excess carrier insured Greyhound for liability over and above that of the primary policy whose limits were $40,000 for any one person injured or killed in the operation of motor vehicles by Greyhound and $100,000 for personal injuries received in any accident. The suit against Greyhound originally claimed damages in the amount of $75,000. The amount requested was later increased to $250,000. The insured's notice to the excess insurer came four years after the accident, ten months after the increase of the demand, and only three weeks before trial. The court held that the notice was inadequate because the policy required that the insured immediately give notice of any accident that might give rise to a claim against the excess insurer. Id. at 636. The notice three weeks before trial prejudiced the insurer because it was wholly inadequate to permit the excess insurer to investigate and to exercise, if it so elected, the rights reserved to it under the policy. Id.
FFE paid almost $220,000 to settle other claims from the accident that involved Stewart. Stewart filed suit against FFE for his damages. Both before and after he filed suit, Stewart claimed FFE owed him damages in excess of the $1,000,000 SIR. Judgment was entered in favor of Stewart against FFE for $1.1 million on April 5, 2001. FFE first notified Clarendon of the accident and claims on July 18, 2001. One provision of the Policy required "prompt notice" and another provision required "immediate notice." Under Texas law, similar provisions have been interpreted to mean that FFE was required to give Clarendon notice within a reasonable time. See McPherson v. St. Paul Fire Marine Ins. Co., 350 F.2d 563, 566 (5th Cir. 1965).
FFE gave Clarendon notice four years after the accident and three months after judgment had been entered against FFE. Under the terms of the Policy and the circumstances of this case, this was not a reasonable time, and therefore, the notice was untimely. Clarendon's defense was prejudiced by FFE's failure to notify it until the case had proceeded to trial and judgment had been entered against the insured for $1.1 million. The case was in a decidedly different posture than it would have been if Clarendon had received the notice that was required under the Policy. Clarendon was deprived of the opportunity to investigate the accident, to contribute to the development of a defense strategy, to participate in the lawsuit, to evaluate the settlement demands, to accept or reject any of the settlement demands, or to otherwise represent its interests during the pendency of the underlying litigation. These rights were guaranteed to Clarendon under the Policy, and they were foreclosed by the lack of notice of the claim. The late notice's foreclosing those rights prejudiced Clarendon.
The fact that FFE had a competent attorney who vigorously defended the Stewart case is irrelevant. The Policy did not give FFE the sole right to gamble upon the outcome by submitting the case to the jury because Stewart's demands exceeded the $1 million SIR, triggering Clarendon's right to notice. FFE's attorney admitted that, during the trial, Stewart offered to settle for $700,000, and FFE countered with an offer of $500,000. (Def.'s App. at 6.) The case did not settle. An insurer has an absolute right to settle third-party claims against an insured in its own discretion without the insured's consent when the insurance policy expressly provides that the insurer can do so when it considers it to be expedient. Dear v. Scottsdale Ins. Co., 947 S.W.2d 908, 915 (Tex.App.-Dallas 1997), overruled in part on other grounds by Apex Towing Co. v. Tolin, 41 S.W.3d 118, 122-23 (Tex. 2001). Clarendon had the absolute right under the terms of the Policy to accept the $700,000 demand for settlement that Stewart offered during the trial, but FFE's failure to notify Clarendon of the claim deprived it of the right to attempt to settle the case for that amount. Clarendon has proved that it was prejudiced by the late notice.
The MCS-90 endorsement required that Clarendon pay the third party, Stewart, despite Clarendon's position that there was no coverage under the Policy. In a separate letter agreement, FFE acknowledged that Clarendon's decision to contribute to the post trial settlement did not waive Clarendon's rights to seek reimbursement for monies that would not otherwise been due and payable under the Policy.
Endorsement #5 of the Policy, the MCS-90 endorsement, provides in pertinent part:
The insured agrees to reimburse the company for any payment made by the company on account of any accident, claim, or suit involving a breach of the terms of the policy, and for any payment that the company would not have been obligated to make under the provisions of the policy except for the agreement contained in this endorsement.
(Pl.'s App. at 72.) FFE argues that the MCS-90 endorsement has no application to this case because it is undisputed that the underlying tort action against FFE was covered under the Policy. The Court finds, however, that the underlying tort action was not covered because FFE materially breached the contract and prejudiced Clarendon's defense.
The purpose of endorsements such as MCS-90 is to protect the public. T.H.E. Ins. Co. v. Larsen Intermodal Servs., 242 F.3d 667, 673 (5th Cir. 2001). Nevertheless, once the injured third party has been compensated, a court may look to the portion of the endorsement giving the insurer a right of reimbursement. Id. The Texas statute which requires insurers of motor carriers to pay to policy limits all judgments that may be recovered against motor carriers so as to provide continuous protection to the public does not forbid a provision in the policy that the carrier will reimburse the insurer for any judgment the insurer may have to pay under the provision. Wheeler v. American Fidelity Cas. Co., 164 F.2d 590, 590-91 (5th Cir. 1947); Commercial Standard Ins. Co. v. Ebner, 228 S.W.2d 507, 510 (Tex. 1950). In such cases, the insured is entitled only to the amount of protection, if any, that the policy itself affords him. Wheeler, 164 F.2d at 591. See, e.g., Milwaukee Ins. Co. v. Morrill, 123 A.2d 163, 166 (N.H. 1956) (finding that although an insured's failure to notify the insurance company could not avoid coverage as against the injured parties, the insurer had the right to reimbursement from the insured for payments made because of a state financial responsibility act); Bankers Indem. Ins. Co. v. A.E.A. Co., 108 A.2d 464, 472 (N.J.Super. App. Div. 1954) (affirming a judgment holding an insured liable to his insurer for reimbursement where the insured failed to give timely notice of two accidents to his insurance company and the insurer paid the third party under the financial responsibility endorsement).
Clarendon reserved its rights to challenge coverage under the policy based upon the prejudice it suffered from the extremely late notice. The MCS-90 endorsement was triggered because, even though Clarendon contested coverage, it had to pay $220,000 to Stewart. Endorsement #5 unequivocally states that Clarendon has the right of reimbursement if it has to pay under those circumstances. Accordingly, FFE is liable to Clarendon for the $220,000 that it paid Stewart.
FFE contends that Clarendon is legally estopped to seek reimbursement of the $220,000 that it paid to settle the Stewart case because FFE relied on Clarendon's contribution by foregoing an appeal. (Def.'s Brief at 15.) Clarendon contends it is entitled to seek reimbursement as well as its costs and expenses of its investigation. "A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise." RESTATEMENT (SECOND) OF CONTRACTS § 90 (1981). Under Texas law "promissory estoppel has four elements: (1) a promise; (2) foreseeability of reliance thereon by the promisor; (3) substantial reliance by the promisee to its detriment; and (4) a definite finding that injustice can be avoided only by the enforcement of the promise." Zenor v. El Paso Healthcare Sys., Ltd., 176 F.3d 847, 864 (5th Cir. 1999).
A reservation of rights letter "protects an insurer from a subsequent attack on its coverage position on waiver or estoppel grounds." Tex. Ass'n of Counties County Gov't Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128, 133 (Tex. 2000). A reservation of rights letter also "notifies the insured that the insurer will defend the insured, but that the insurer is not waiving any defenses it may have under the policy." Id. at 133. "When coverage is disputed and the insurer is presented with a reasonable settlement demand within policy limits, the insurer may fund the settlement and seek reimbursement only if it obtains the insured's clear and unequivocal consent to the insurer's right to seek reimbursement." Id. at 135.
Clarendon bases its argument against estoppel on two reservation of rights letters. First, it claims that it reserved its rights under the Policy by letter dated July 26, 2001. (Pl.'s App. at 136.) FFE argues that Clarendon is estopped from asserting a reimbursement right because endorsement #3 of the Policy expressly states that Clarendon's right to reimbursement is limited to any amount of the $1 million SIR that Clarendon pays. (Pl.'s App. at 70; Def.'s' Brief at 11.) FFE asserts that it exhausted its SIR, therefore Clarendon has no right to reimbursement under the terms of the Policy. (Def.'s Brief at 12.)
FFE's argument fails. In the July 26, 2001 letter Clarendon informs FFE that there is a question of whether FFE's claim was reported in a timely matter in accordance with the terms of the Policy. (Pl.'s App. at 138.) The letter clearly informs FFE that if the claim was not reported in a timely manner and Clarendon proves prejudice, that it then has a right to disclaim coverage and to seek reimbursement. The letter states that Clarendon "reserves all rights under the Policy to disclaim coverage for lack of notice," and that "investigation into this matter does not waive North American Risk Services or Clarendon National Insurance Company's rights to disclaim coverage under this policy." ( Id.) Clarendon's reservation of rights is clear and unequivocal.
Secondly, Clarendon relies upon the October 2, 2001 letter signed by FFE. Clarendon contends it is not estopped from seeking reimbursement because it received FFE's clear and unequivocal consent in that letter. FFE asserts that this letter does not entitle Clarendon to reimbursement because the Policy states that Clarendon's right to reimbursement only extends to payments Clarendon may make that are within FFE's SIR. (Def.'s Brief at 12-13.) FFE argues that the October 2, 2001 letter expands Clarendon's rights under the Policy because it creates a right of reimbursement for any payment it makes, even those outside the SIR. (Def.'s' Brief at 12.)
The October 2, 2001 reservation of rights letter issued by Clarendon is signed by both FFE and its counsel in acknowledgment of their understanding and agreement that Clarendon's rights under the Policy are not jeopardized as a result of its contribution to the Stewart settlement. (Pl.'s App. at 141-48.) Additionally, the letter states that Clarendon did not waive its "right to seek reimbursement directly [from] you for monies that would not have else wise been due and payable under the terms of your insurance policy." ( Id.).
The Policy clearly states that in the event FFE fails to give Clarendon notice and Clarendon proves it is prejudiced by the lack of notice, there is no liability under the Policy. FFE failed to give Clarendon notice until more than three months after a $1.3 million judgment had been entered. Clarendon was prejudiced for the reasons previously stated. Clarendon had no liability, but it was required to pay Stewart $220,000. Clarendon reserved its right to have its liability decided, and Endorsement #5 of the Policy requires reimbursement. Clarendon's payment of the settlement was not a promise not to seek reimbursement, and it was not foreseeable that FFE would rely on it as a promise, given that the October 2, 2001 letter made clear that Clarendon still intended to pursue its rights. Further, in the reservation of rights letters, Clarendon asserts its rights under the Policy, not new rights; therefore, Clarendon is protected from FFE's estoppel claim. See Matagorda, 52 S.W.3d at 133. The Court finds that neither waiver, estoppel, nor the terms of the Policy limit Clarendon's right to recover money that it paid on FFE's behalf, for which it was not liable.
Conclusion
FFE materially breached the Policy by its failure to notify Clarendon of the Stewart Action until three months after a $1.3 million judgment had been entered, and the untimely notice prejudiced its defense for the reasons previously stated. Clarendon clearly and unequivocally reserved its right to challenge coverage on two occasions. No coverage was afforded for the Stewart claims, but Clarendon was required to pay them under the MCS-90 endorsement.
Clarendon's Motion for Summary Judgment, filed March 29, 2004, is GRANTED. FFE's Motion for Summary Judgment, filed March 29, 2004, is DENIED. Judgment shall be entered that (1) there is no coverage under Business Auto Policy No. T 07701905, and (2) Frozen Food Express Industries, Inc., and FFE Transportation Services, Inc., are liable to Clarendon National Insurance Company for the amount of $220,000, plus interest and expenses incurred in connection with the claim.