Opinion
Civil Action No. 3:02-CV-1616-L.
June 10, 2004
FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS OF THE UNITED STATES MAGISTRATE JUDGE
Pursuant to the provisions of 28 U.S.C. § 636(b) and an Order of Referral, the Court has considered the parties' amended cross-motions for summary judgment, together with memoranda, appendixes, objections, responses and a notice of recent authority. The findings, conclusions, and recommendation of the Magistrate Judge follow:
FINDINGS AND CONCLUSIONS Background
Plaintiff, The Kirby Company ("Kirby"), is an additional insured on a policy issued by Hartford Casualty Insurance Company ("Hartford"), to Robertson Sales and Service, Inc. ("Robertson"), a distributor of Kirby vacuum cleaners. On September 11, 2000, a rollover accident occurred in Gaines County, Texas. An injured passenger and the estates of two deceased passengers sued the driver, Robertson, and Kirby for damages in state court. Kirby commenced this action against Hartford on July 31, 2002, seeking a declaratory judgment that Hartford owed Kirby a duty to defend it in the state court action and seeking indemnity for damages. Kirby also claimed that Hartford (1) breached the insurance contract by failing to defend Kirby in the underlying lawsuit, (2) violated Article 21.21 of the Texas Insurance Code, and (3) breached the duty of good faith and fair dealing. Hartford filed an answer and counterclaim. During the course of these proceedings, Hartford agreed to defend Kirby in the state court action, subject to a full reservation of rights. Due to a conflict of interest, Kirby took control of its defense. In June 2003, Hartford conceded that it would pay Kirby's defense costs in the underlying lawsuit if it determined that they were reasonable and necessary.
The District Court granted Kirby's motion to dismiss the claim for indemnity after summary judgment was granted in Kirby's favor in the underlying action.
Kirby voluntarily dismissed the claim for breach of the duty of good faith and fair dealing.
Summary Judgment Standard
Summary judgment shall be rendered when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 323-25 (1986); Ragas v. Tennessee Gas Pipeline Company, 136 F.3d 455, 458 (5th Cir. 1998). A dispute regarding a material fact is "genuine" if the evidence is such that a reasonable jury could return a verdict in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). When ruling on a motion for summary judgment, the court is required to view all inferences drawn from the factual record in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co v. Zenith Radio, 475 U.S. 574, 587 (1986); Ragas, 136 F.3d at 458.
Once the moving party has made an initial showing that there is no evidence to support the nonmoving party's case, the party opposing the motion must come forward with competent summary judgment evidence of the existence of a genuine fact issue. Matsushita, 475 U.S. at 586. Mere conclusory allegations are not competent summary judgment evidence, and thus are insufficient to defeat a motion for summary judgment. Eason v. Thaler, 73 F.3d 1322, 1325 (5th Cir. 1996). The party opposing summary judgment is required to identify specific evidence in the record and to articulate the precise manner in which that evidence supports his claim. Ragas, 136 F.3d at 458. The terms of Rule 56 do not impose a duty on the courts to "sift through the record in search of evidence" to support Plaintiff's opposition to Defendants' motion. Id.; Skotak v. Tenneco Resins, Inc., 953 F.2d 909, 915-16 n. 7 (5th Cir. 1992). "Only disputes over facts that might affect the outcome of the suit under the governing laws will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248. Disputed fact issues which are "irrelevant and unnecessary" will not be considered by a court in ruling on a summary judgment motion. Id. If the nonmoving party fails to make a showing sufficient to establish the existence of an element essential to its case and on which it will bear the burden of proof at trial, summary judgment must be granted. Celotex, 477 U.S. at 322-23.
Hartford's Objections to Kirby's Evidence Offered in Support of Its Amended Motion for Summary Judgment
Hartford makes a number of objections to Kirby's summary judgment evidence. The Court has not relied on the disputed evidence in its analysis of the pending motions, with the exception of various letters included in Tabs 9, 10, and 11 of The Kirby Company's Amended Appendix of Summary Judgment Evidence. ("Kir. App.") Hartford objects to the letters as hearsay. Tab 9 is Kirby's November 7, 2001 tender of its defense to Hartford. Tab 10 contains a December 20, 2001 letter to Hartford from Kirby requesting a response to the November 7, 2001 letter and follow-up letters asserting Kirby's entitlement to a defense. Tab 11 contains an April 1, 2003 letter in which Kirby retained Michael Powell to represent it in the underlying lawsuit. However, the Court has not considered the letters for the truth of the matters asserted therein. Rather, the letters show the course of conduct between the parties from November 7, 2001, when Kirby tendered Hartford its defense, and April 1, 2003, when Kirby engaged Powell to represent it in the underlying lawsuit. For these reasons, Hartford's objections are overruled.
Kirby's Amended Motion for Summary Judgment
Kirby contends that (1) Hartford breached its duty to defend Kirby in the underlying lawsuit; (2) Kirby is entitled to counsel of its own choosing at Hartford's expense; (3) Hartford must pay Kirby for all reasonable defense costs in the underlying lawsuit; (4) Hartford knowingly violated the Texas Insurance Code, for which Kirby should be granted treble damages; and (5) Hartford is liable for Kirby's attorney fees in this action. Kirby also asserts that the Court should dismiss Hartford's counterclaim and deny Hartford's claim for attorney fees.
Hartford claims that it did not breach the terms of the policy because (1) its actions were reasonable under the circumstances; (2) Kirby incurred no damages as a result of any breach; (3) it has agreed with Kirby's choice of counsel; and (4) it has also agreed to pay for the reasonable and necessary post-tender costs of defense. Hartford asserts that it is not liable for pre-tender defense costs. Hartford contends that Kirby is not entitled to summary judgment with respect to its claims under Article 21.21 of the Texas Insurance Code because (1) Article 21.21 is not applicable in this case; (2) Hartford did not violate Article 21.21; (3) Kirby suffered no actual damages; and (4) Hartford did not commit a "knowing violation" of the Insurance Code. Hartford claims Kirby is not entitled to an award of attorney fee's in this action. Finally, Hartford asserts that ". . . the evidence included in Hartford's Appendix to [its] Response raise[s] factual issues which preclude the Court from granting summary judgment in favor of Kirby."
However, Hartford has not identified any genuine issues of material fact that would preclude summary judgment. The Court is not required to sift through evidentiary materials in search of material disputed facts. See Ragas, 136 F.3d at 458.
Hartford's Amended Motion for Summary Judgment
Hartford claims that it is entitled to summary judgment on Kirby's breach of contract and declaratory judgment claims because it never rejected Kirby's request for a defense. Hartford asserts that it has accepted the qualified duty to defend Kirby under a reservation of rights and that it has paid most of Kirby's post-tender defense costs. Hartford contends that it is not liable for Kirby's pre-tender defense costs and that Kirby has not been damaged. Hartford requests summary judgment on Kirby's claims pursuant to Article 21.21 of the Insurance Code on the grounds that (1) Article 21.21 is not applicable; (2) Hartford has not violated Article 21.21; (3) Kirby has incurred no actual damages that resulted from Hartford's alleged Article 21.21 violation; and (4) if Hartford violated Article 21.21, it did not do so knowingly.In opposition to Hartford's amended summary judgment motion, Kirby contends (1) Hartford's motion is not supported, and is, in fact, negated by admissible evidence; and (2) its arguments and authorities do not justify summary judgment on Kirby's breach of contract and declaratory judgment claims or on Kirby's claims of insurance code violations.
Undisputed Material Facts
1. Kirby manufactures a line of vacuum cleaner systems, which it sells to independent distributors, including Robertson. (Kir. App. 1 ¶ 3; Kir. App. 5-12.)
2. Under the terms of the Distributorship Agreement, Robertson is obligated to indemnify Kirby and hold Kirby harmless "from any and all liability, damage or expense incurred by it in connection with any claim, demand or suit based on [Robertson's] acts or omissions, including alleged negligence." (Kir. App. 10 § 10(b).)
3. Hartford issued to Robertson an insurance policy, Hartford Spectrum Business Insurance Policy No. 35 SBW KJ 4629 DV ("the Policy"), with a policy period from April 18, 2000 to April 18, 2001. (Kir. App. 56-251.) Kirby is expressly identified as an "additional insured" in the Policy. (Kir. APP. 266-267.) The policy includes an endorsement for "hired/Non-Owned Auto Liability" (Form SS 06 66), with a liability limit of $2,000,000. (Kir. App. 272-275.) The Policy provides that its exclusion for bodily injury assumed pursuant to a contract is not applicable to "liability for damages . . . [a]ssumed in a contract or agreement that is an 'insured contract.'" (Kir. App. 255.)
4. On September 11, 2000, a rollover accident occurred in Gaines County, Texas. (Kir. App. 1-2.) Samantha Sanchez, Robertson's employee, was the driver. ( Id.) Two of her passengers, Chella French Gonzales and Sonny Munoz Silvas, were killed in the accident and another passenger, Perry Jeffery, was injured. ( Id.) Jeffery and the estates of Gonzales and Silvas sued Sanchez and Robertson and added Kirby as a defendant in an amended petition on May 22, 2001. (Kir. App. 26-32.) The case is styled Perry Jeffery, et al., v. Robertson Sales Service, Inc.; the Scott Fetzer Company D/B/A/ The Kirby Company; Samantha Sanchez Ramos; and Ford Motor Company, No. 01-05-14228 (106th Dist. Court, Gaines County, Tex.) ("the underlying lawsuit"). The plaintiff and intervenors allege that Sanchez was an employee of Robertson and that Robertson and Kirby were liable for her negligence because she was acting within the course and scope of employment or representation for Robertson and Kirby at the time of the accident. (Kir. App. 48.)
5. Kirby denied that it had any liability in the underlying lawsuit, and retained defense counsel to represent it. (Kir. App. 2 ¶ 6.) In October 2001, during discovery in the underlying lawsuit, Kirby obtained a copy of the Policy and learned for the first time that it named Kirby as an additional insured. ( Id. ¶¶ 7-8.) Kirby tendered its defense to Hartford in a letter dated November 7, 2001. ( Id. ¶ 8; Kir. App. 278.) On several more occasions, Kirby requested that Hartford provide a defense, reimburse Kirby for defense costs, or at least state its position concerning its coverage under the Policy. (Kir. App. 2 ¶ 9; 279-288.)
6. Hartford's Claims Specialist, David Clement, received Kirby's tender letter dated November 7, 2001, and a follow-up letter dated December 20, 2001. (Kir. App. 278-81, 630.) He reviewed the Policy, and realized that Kirby was named as an additional insured. (Kir. App. 630, 615.) On December 27, 2001, Clement acknowledged receipt of Kirby's previous letters and requested a copy of Kirby's insurance policy issued by Zurich-American Insurance Company ("Zurich") so that he could "finalize [Hartford's] coverage analysis." (Kir. App. 615, 625, 631.) Hartford received a copy of the Zurich policy on January 15, 2002. (Kir. App. 614.)
7. Mr. Clement discussed Kirby's request for a defense with Robert Stratton of March USA, Kirby's insurance broker. In particular, they discussed whether Hartford's Policy was "concurrent, primary, or excess" to the Zurich policy. (Kir. App. 631, 635.) On March 22, 2002, Mr. Stratton wrote Mr. Clement that under March's interpretation of the Policy, Hartford owed a primary duty to defend Kirby and requested Hartford's position on this issue by April 1, 2002. (Kir. App. 631, 284-285.) Mr. Clement affirmed in an affidavit that he had conveyed to Mr. Stratton Hartford's position that both Hartford and Zurich likely owed a duty to defend Kirby. (Kir. App. 632.) Based upon the assumption that Kirby would not accept Hartford's position that Hartford's and Zurich's duty was concurrent, Hartford took no further steps to respond to Kirby's claim for a defense in the underlying lawsuit. (Kir. App. 631.) On March 22, 2002, Hartford "anticipated litigation." (Kir. App. 635.)
8. Kirby initiated this proceeding on July 31, 2002, seeking, inter alia, (1) a declaratory judgment that Hartford owes Kirby a duty to defend and indemnify it in the underlying lawsuit; (2) damages for breach of contract; and (3) damages for violations of the Texas Insurance Code. (Original Complaint.) Hartford answered, denying any obligation to defend Kirby in the underlying lawsuit. (Answ. ¶ C.18.) Hartford admitted that Kirby is an additional insured under the Policy "in some limited circumstances." ( Id. ¶ C.17.) Hartford maintained the same position in its First Amended Answer and Counterclaim and in its interrogatory answers served November 12, 2002, Hartford asserted that it had no duty to defend Kirby because its coverage was "excess." (Kir. App. 577-578.)
9. On February 19, 2003, Hartford, in a reservation of rights letter, acknowledged its obligation to provide Kirby a "qualified defense" based upon the factual allegations of the petitions in the underlying lawsuit. (Kir. App. 581.) It identified several policy provisions that it claimed might justify a denial of coverage, and suggested it might seek to recoup a portion of the defense fees from Zurich. (Kir. App. 582.) Hartford assigned to Kirby the same defense counsel who was representing Robertson. ( Id.)
10. Kirby objected to defense counsel's joint representation, claiming a conflict of interest with Robertson in the underlying lawsuit. (Kir. App. 587-589.) Kirby requested that Hartford retain Michael Powell, of Locke Liddel Sapp, LLP, as its independent counsel. (Kir. App. 588.) Hartford maintained its joint-representation position in a March 14, 2003 letter. (Kir. App. 590-592.) On March 19, 2003, Kirby informed Hartford it intended to retain new counsel and that it expected Hartford to pay its counsel's fees. (Kir. App. 593-596.) On March 26, 2003, Hartford notified Kirby it was retaining separate counsel for it and unilaterally hired a Lubbock attorney at a lower hourly rate than Mr. Powell, whom Kirby retained on April 1, 2003. (Kir. App. 3 ¶ 10, 289-291, 597-598.)
11. During the week of March 27, 2003, the trial court in the underlying lawsuit set the case for a jury trial on July 14, 2003. (Kir. App. 3 ¶ 10.) Kirby confirmed its decision to retain Mr. Powell to represent it in the underlying lawsuit and informed Hartford of this decision. (Kir. App. 289-291, 599-600.) Hartford agreed to pay a portion of Mr. Powell's fees with respect to some of the issues. (Kir. App. 601-602.) Kirby rejected the offer on the grounds it was an attempt to control Kirby's defense. (Kir. App. 2-3.)
12. One month later, Mr. Powell filed a motion for summary judgment in favor of Kirby in the underlying lawsuit; the trial court granted Kirby summary judgment on July 31, 2003. (Kir. App. 3, 292-293.)
13. In June 2003 and October 2003 Hartford paid a portion of what it considered to be reasonable post-tender attorney fees for Kirby's defense in the underlying action. Hartford has stated it will pay the remainder of Kirby's reasonable post-tender attorney fees after it examines the attorney's invoices for reasonableness.
Analysis Breach of the Terms of the Policy
Under Texas Law, the duty to defend and the duty to indemnify are distinct and separate duties, creating distinct and separate causes of action. The duty to defend is broader than the duty to indemnify. Colony Ins. Co. v. H.R.K., Inc., 728 S.W.2d 848, 850 (Tex.App.-Dallas 1987, no writ). The duty to defend is not affected by facts ascertained before suit, developed in the process of the litigation, or by the ultimate outcome of the suit. American Alliance Ins. Co. v. Frito-Lay, Inc., 788 S.W.2d 152, 153-54 (Tex.App.-Dallas 1990, writ dism'd).An insurer's duty to defend "is determined by the allegations of the petition when considered in light of the policy provisions without reference to the truth or falsity of such allegations." Argonaut Southwest Ins. Co. v. Maupin, 500 S.W.2d 633, 635 (Tex. 1973). "The duty arises when a third party sues the insured on allegations that, if taken as true, potentially state a cause of action within the terms of the policy." Continental Sav. Ass'n v. United States Fidelity Guar. Co., 762 F.2d 1239, 1243 (5th Cir.) (emphasis in original), opinion amended on other grounds, 768 F.2d 89 (5th Cir. 1985).
Each of several insurers on currently triggered policies has a legal obligation to provide a full defense to the insured. Texas Prop. Cas. Ins. Guar. Ass'n v. Southwest Aggregates, Inc. 982 S.W.2d 600, 605 (Tex.App.-Austin 1998, no pet.); see also Keene Corp. v. INA, 667 F.2d 1034, 1047-48 (D.C. Cir. 1981). When multiple policies apply to a loss, the "other insurance" provisions in insurance contracts determine how liability is to be apportioned between insurers, but this provision does not affect the relationship between the insurer and the insured. Texas Prop. Cas., 982 S.W.2d at 606. The insurer has a duty to defend its insured, not a duty to provide a pro rata defense. Id. See Utica Nat. Ins. Co. of Texas v. Texas Property Cas. Ins. Guar. Ass'n, 110 S.W.3d 450, 457 (Tex.App.-Austin, 2001) (rev'd in part on other grounds).
Four options are available to an insurer that is uncertain with respect to whether to defend or to refuse to defend a proffered claim; the insurer may (1) completely decline to assume the insured's defense; (2) seek a declaratory judgment as to its obligations and rights; (3) defend under a reservation of rights or a non-waiver agreement; or (4) assume the insured's unqualified defense. Katerndahl v. State Farm Fire and Cas. Co. 961 S.W.2d 518, 521 (Tex.App.-San Antonio, 1997, no pet.); Farmers Texas County Mut. Ins. Co. v. Wilkinson, 601 S.W.2d 520, 522 (Tex.App.-Austin 1980, writ ref'd n.r.e.). These options must be exercised within a reasonable time. Comsys Info. Tech. Serv., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 190 (Tex.App.-Houston [14 Dist.] 2003, no pet.h.). "An insurer may undertake an insured's defense and later deny coverage by reserving its rights, so long as the insured is advised that the insurer may use a policy defense to later void its duty to defend." Providence Washington Ins. Co. v. A A Coating, Inc. 30 S.W.3d 554, 556 (Tex.App. — Texarkana, 2000, pet. denied) (citing Am. Eagle Ins. Co. v. Nettleton, 932 S.W.2d 169, 174 (Tex.App.-El Paso 1996, writ denied)). To properly reserve its rights, the insurer must have a good-faith belief that the complaint alleges conduct that may not be covered by the policy. Id.
Breach of the Policy
Hartford contends that because Kirby's "breach of the Policy" theories were not pled, the Court should not consider them. However, this Court has determined that Kirby's allegations are sufficient to satisfy the notice pleading requirements of FED. R. CIV. P. 8. Accordingly, Hartford's objection on this ground is overruled.Unreasonable Delay
Hartford determined on January 4, 2001, before the underlying lawsuit was even filed that it would defend Robertson if suit were filed. When Robertson tendered its defense in the underlying lawsuit on May 24, 2001, Hartford defended it. Robertson is the named insured on the Policy. Kirby is named as an additional insured. (Kir. App. 60.) On November 7, 2001, Kirby tendered its defense in the underlying suit to Hartford. Hartford became aware Kirby was an additional insured on the Policy on November 8, 2001, when it produced the Policy in response to discovery requests in the underlying lawsuit. (Kir. App. 630 ¶ 5.) On December 27, 2001, Hartford requested a copy of Kirby's insurance policy with Zurich to review Zurich's coverage of Kirby. Hartford's position on March 22, 2002, was that its coverage was concurrent with Zurich. (Kir. App. 631.) Although Hartford argues that its delay until February 19, 2003, was reasonable because Kirby had set forth an erroneous coverage theory, the record reflects that after March 22, 2002, Hartford did nothing except "anticipate litigation." (Kir. App. 635.) Hartford makes the conclusory statement that it "continued to investigate;" however, the record does not reflect any such investigation. Moreover, it does not reflect that further investigation was necessary once Hartford received and reviewed the Zurich policy. At that time, Hartford's duty to defend became reasonably clear.
When this lawsuit was filed, Hartford denied any obligation to defend Kirby in the underlying lawsuit. (Anser ¶ C. 18) It admitted Kirby was an additional insured under the Policy "in some limited circumstance." ( Id. ¶ C. 7.) Hartford did not change its position in its First Amended Answer and Original Counterclaim. (Am. Answer ¶¶ 7, 18.) It asserted in its interrogatory answers on November 12, 2002, that it had no duty to defend Kirby because its coverage was "excess." (Kir. App. 577-578.)
Hartford contends that because its duty to defend had not been "conclusively determined" at the time that it reviewed the Zurich policy, it could not have breached that duty. However, the law does not require that Hartford "conclusively determine" its duty to defend. Hartford breached the policy by delaying after its duty to defend became reasonably certain. See Minnesota Life Insurance Company v. Vasquez, No. 13-02-554-CV, 2004 WL 690835 *7 (Tex.App.-Corpus Christi-Edinburg, 2004) (holding that an insurance company may not delay its own research of a claim indefinitely without violating the Texas Insurance Code). Hartford cites the majority rule that "[w]here the insured maintains both primary and excess policies, . . . the excess liability insurer is not obligated to participate in the defense until the primary policy limits are exhausted." Texas Employers Ins. Ass'n v. Underwriting Members of Lloyds, 836 F. Supp. 398, 404 (S.D. Tex. 1993) (quoting 14 COUCH ON INSURANCE 2ND § 51:36, at 446 and citing numerous cases). This rule, however, is not applicable to the facts of this case. Hartford's Claims Service Consultant, Mr. Clement, told Kirby's agent, Mr. Stratton, during their conversations between December 2001 and March 22, 2002, that Hartford's duty to Kirby was excess, but that Kirby's primary carrier also has an excess provision that may be triggered, giving both carriers a duty to defend as concurrent carriers. (Kir. App. 632 ¶¶ 8-10.) Early in 2002, Hartford could have issued the same reservation of rights letter it ultimately issued, rendering this litigation unnecessary. In the alternative, it should have exercised one of its other options within a reasonable time. See Katerndahl, 961 S.W.2d at 521; Farmers Texas County Mut. Ins. Co., 601 S.W.2d at 522. See also Comsys Information Technology Services, Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 190 (Tex.App.-Houston [14th Dist.] 2003, no pet. h.). Instead, Hartford waited until the month before a trial date was set in the underlying lawsuit and then issued a reservation of rights letter.
In sum, Hartford's claim that its delay was justified because it was investigating whether it owed Kirby a defense in the underlying action is without merit. Mr. Clement recognized that Hartford's duty to defend was not extinguished or lessened by the existence of the Zurich policy. Moreover, Hartford's excuse does not justify its failure to exercise one of its options within a reasonable time. Hartford's qualified acceptance of the duty to defend came fourteen months after Kirby tendered its defense to Hartford, almost a year after Hartford reviewed Zurich's policy, more than four months after this lawsuit was filed, and only a month before the trial court set a trial date for the underlying lawsuit. The allegations of the petition in the underlying lawsuit and the plain language of the Policy established Hartford's legal duty to defend Kirby in the underlying lawsuit. Hartford's failure to respond within a reasonable time to Kirby's demands for a defense in the underlying lawsuit constitutes a breach of the Policy.
Hartford reserved the issue of whether the coverage is primary or concurrent in its reservation of rights letter, something it could have done long before Kirby was required to file this lawsuit. Hartford waited until two months after the deadline for joining parties and until after both parties had filed summary judgment motions before making an unsuccessful attempt to join Zurich as a party to this action. As the Court has noted, under Texas law, the existence of other insurance coverage does not extinguish an insurer's duty to defend.
Inadequate Tender
Kirby claims that Hartford's qualified tender of a defense was not only untimely, but was also inadequate. Kirby seeks declarations that (1) it is entitled to counsel of its own choosing at Hartford's expense, and (2) Hartford must pay Kirby for all reasonable defense costs in the underlying lawsuit. Hartford contends that Kirby is not entitled to the declarations because beginning in June 2003, Hartford agreed to pay Kirby's defense costs in the underlying lawsuit if it determined the costs were "reasonable."
In its February 19, 2003, "reservation of rights" letter, Hartford admitted that it based its decision that it did have a duty to defend solely on the factual allegations asserted against Kirby in the context of the coverage afforded by the Policy. (Kir. App. 581.) This was the same determination made by Mr. Clement in March 2002. However, Hartford did not offer to provide a full defense. It only agreed to pay "its share" of "reasonable and necessary" defense costs from the date of tender. ( Id.)
Hartford decided Kirby should have a joint defense with Robertson and stated it would assign Robertson's attorney to defend both Kirby and Robertson and that it would share the expenses of Kirby's defense with Zurich. ( Id.) Kirby notified Hartford that Kirby had a conflict of interest with Robertson in the underlying lawsuit because its defenses were different, and that Kirby and Robertson were in direct conflict on some issues. (Kir. App. 587-589.) Kirby stated that the conflict created by Hartford's reservation of rights mandated independent counsel for Kirby and requested that Hartford retain Michael Powell, of Locke Liddel Sapp, LLP, as independent counsel for Kirby. ( Id.) Hartford responded that it had determined that joint representation was not a problem. (App. 590-592.) Hartford never sought permission from Robertson for joint representation. (App. 613 (Answer No. 4 to 2nd Interrog.))
Mr. Powell had represented Kirby in previous matters and Kirby was familiar with the high quality of his work. (App. 2-3.)
Kirby informed Hartford that it was retaining separate counsel and formalized its agreement with Mr. Powell on April 1, 2003. (Kir. App. 2-3, 289-291.) Hartford finally agreed to provide separate counsel, but unilaterally selected a Lubbock attorney to represent Hartford in the underlying lawsuit. (Kir. App. 3, 597-598.) On March 27, 2003, the trial court in the underlying lawsuit set the case for jury trial on July 14, 2003. (Kir. App. 3.) Kirby confirmed its decision to retain Mr. Powell and informed Hartford of its decision. (Kir. App. 289-291.) Hartford offered to pay only part of Mr. Powell's hourly rate, and attempted to impose restrictions on the defense issues for which it would compensate Mr. Powell. (Kir. App. 601-602.) At about the same time, Hartford filed a motion to postpone indefinitely the mediation the District Court had ordered in this case. (April 21, 2003 motion.)
Mr. Powell sought summary judgment in Kirby's favor in the underlying lawsuit. On July 31, 2003, the trial court in the underlying suit ordered that the plaintiffs "take nothing against defendant Kirby." (Kir. App. 292-293.) Then Kirby sought to voluntarily dismiss its indemnity claim against Hartford in this case. (Aug. 22, 2003 motion.) Hartford opposed the voluntary dismissal of the indemnity claim and brought a motion for partial summary judgment requesting this Court to grant judgment in its favor against Kirby on the indemnity claim. The District Court granted Kirby's motion for voluntary dismissal and denied Hartford's motion for partial summary judgment on the indemnity claim.
When an insurer breaches its duty to defend, the insured has the option to engage its own counsel and either settle or litigate the suit against it. Rhodes v. Chicago Ins. Co., 719 F.2d 116, 120 (5th Cir. 1983); see Steel Erection Co. v. Travelers Indem. Co., 392 S.W.2d 713, 716 (Tex.App. — San Antonio 1965, writ ref'd n.r.e.). An insurer loses its right to control an insured's defense by initially breaching the duty to defend. See Witt v. Universal Auto. Ins. Co., 116 S.W.2d 1094, 1098 (Tex.App.-Waco 1938, writ dism'd.). Additionally, an insurer's reservation of rights letter creates a conflict of interest with the insured when coverage will depend upon the findings of the trier of facts with respect to certain issues in the main case. Rhodes, 719 F.2d at 120-121.
This court has previously determined that Hartford breached the Policy by its unreasonable delay in accepting its duty to defend Kirby. Even after its issuance of a reservation of rights letter and in the face of a trial setting in the underlying case, Hartford's offers to defend were less than Kirby was due. The conflict based upon the relationships between the driver of the car, Robertson, and Kirby were apparent. Hartford insisted on a joint defense for over a month and never sought Robertson's permission for a joint defense. Then Hartford offered to pay only a part of Mr. Powell's hourly rate and attempted to dictate what issues it would pay him to defend. Hartford also stated it would pay only half of the defense costs because it believed Zurich was liable for the other half. Hartford's breach of its duty to defend, its reservation of rights, its inadequate tender, and its continuing maintenance of positions adverse to Kirby entitled Kirby to select and control independent counsel.
Hartford's assertions that Kirby and Robertson have subsequently presented primarily a unified defense to the underlying action are not proof that the initial conflict did not exist.
Despite Hartford's purported concern with Zurich's obligations, it did not seek to add Zurich as a party until after the deadline for adding parties in this case had passed.
Damages
Hartford contends that Kirby did not suffer damages because Hartford has pre-paid part of Kirby's attorney fees in the underlying lawsuit during the pendency of this lawsuit. Hartford's position is without merit. Kirby's damages are the defense costs in the underlying lawsuit. Maryland Insurance Company v. Head Industrial Coatings and Services, Inc., 938 S.W.2d 27, 29 (Tex. 1996). Recovery of the claim depends upon its validity when presented and is not precluded by a defendant's payment of the claim shortly before judgment is rendered. In re Southland Corp., 19 F.3d 1084, 1088 (5th Cir. 1994).
Attorney Fees
Kirby is entitled to its reasonable attorney fees for bringing this action for Hartford's breach of the Policy. TEX. CIV. PRAC. REM. CODE. § 38.001; see also Texas Property and Cas. Ins. Guar. Association/Southwest Aggregates, Inc. v. Southwest Aggregates, Inc. 982 S.W.2d 600, 615 (Tex.App.-Austin 1998, no pet.). The award of reasonable attorney's fees to a plaintiff recovering on a valid claim founded on a written or oral contract preceded by proper presentment of the claim is mandatory. Kimbrough v. Fox, 631 S.W.2d 606 (Tex.App.-Fort Worth 1982, no writ); Karol v. Presidio Enterprises, Inc., 622 S.W.2d 638 (Tex.App.-Austin 1981, no writ). Proper presentment is the assertion of a claim and a request for payment made thirty days before the initiation of a suit. Id.
When an insured proves that his insurer refused to provide a full defense, the trial court's failure to award attorney fees under this statute is error. Texas Property and Cas. Ins. Guar., 982 S.W.2d at 615. A party who establishes coverage under an insurance policy and has fulfilled the statutory requirements for tender of the claim is entitled to attorney fees pursuant to TEX. CIV. PRAC. REM. CODE § 38.001(8) (Vernon 2004). See Broadhead v. Hartford, 773 F. Supp. 882, 907 (S.D. Miss. 1991).
Hartford breached its duty under the Policy to defend Kirby by its unreasonable delay, and the defense Hartford tendered in the underlying lawsuit was inadequate. Furthermore, Kirby made a timely presentment of its claim for the post-tender defense costs and has fulfilled the other requirements of Section 38.002. See TEX. CIV. PRAC. REM. CODE § 38.002(8). Accordingly, the Court finds that Kirby is entitled to attorney fees pursuant to its breach of contract claims.
In the joint status report filed January 6, 2004, the parties agreed that the Court may determine the amount of fees and expenses, if any are due, following the disposition of the substantive liability issues. Kirby contends in its summary judgment motion that a subsequent proceeding to determine attorney fees is not necessary because the Court can determine the fees based upon the materials it has submitted. This Court finds that the better procedure will be to determine the attorney fees after a hearing.
Pre-tender Defense Costs
Kirby contends that Hartford is liable for its pre-tender defense costs. Hartford responds that Kirby may not recover defense costs incurred before November 7, 2002, the date Kirby tendered its defense in the underlying lawsuit to Hartford. An insurer's duty to defend an insured is only triggered by the actual service of process upon its insured and its relay to the insurer. Travelers Indem. Co. v. Citgo Petroleum Corp., 166 F.3d 761, 768 (5th Cir. 1999) (citing Members Ins. Co. v. Branscum, 803 S.W.2d 462, 466-67 (Tex.App.-Dallas 1991, no writ.)); LaFarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389, 399-400 (5th Cir. 1995), disapproved in part on other grounds, Federated Mut. Ins. Co. v. Grapevine Excavation, Inc., 241 F.3d 396, 400 (5th Cir. 2001); Rodriguez v. Tex. Farmers Ins. Co., 903 S.W.2d 499, 507 (Tex.App.-Amarillo 1995, writ denied). A notice of suit provision notifies the insurer that the insured has been served with process and that the insurer is expected to defend. Harwell v. State Farm Mut. Auto. Ins. Co., 896 S.W.2d 170, 173 (Tex. 1995). "Compliance with the notice of suit provision is a 'condition precedent' to the insurer's liability on the policy.'" Harwell, 896 S.W.2d at 173-174. The insured has the duty to notify the insurer of the suit against it; the insurer does not have a duty to determine when or if the insured was served. Harwell, 896 S.W.2d at 174.Kirby claims that its pre-tender fees do not fall under the voluntary payment provision and were involuntary because Kirby did not know about the Policy. Kirby claims this lack of knowledge excuses its failing to give notice earlier, particularly since Hartford was defending Robertson in the underlying lawsuit. However, Texas law does not support this proposition. It is the insured's action in giving notice to the insurer that triggers the insurer's obligation to defend. Members Ins. Co., 803 S.W.2d at 467. Kirby could have investigated its insurance coverage when it was served in the underlying lawsuit. The cases Kirby relies on are not applicable under the undisputed facts. As a matter of law, Hartford does not owe Kirby a duty to reimburse Kirby for expenses it incurred in violation of the voluntary payments clause before it tendered its defense to Hartford. LaFarge Corp., 61 F.3d at 399-400; E L Chipping Co. v. Hanover Ins. Co., 962 S.W.2d 272, 278 (Tex.App.-Beaumont 1998, no pet.).
Liability Pursuant to Art. 21.21 of the Insurance Code
Kirby also claims that Hartford is liable to it under the Texas Insurance Code. It contends that Hartford engaged in the unfair acts or practices defined in Section 4 of Article 21.21 and that it may recover its actual damages for the violations under Section 16. The terms of Section 4 include:
(10) Unfair Settlement Practices.
(a) Engaging in any of the following unfair settlement practices with respect to a claim by an insured or beneficiary:
. . .
(v) failing within a reasonable time to:
(A) affirm or deny coverage of a claim to a policyholder; or
(B) submit a reservation of rights to a policyholder . . .
TEX. INS. CODE art. 21.21, § 4(10)(a)(v)(A) and (B). The statute requires an insurer to either affirm or deny coverage of a claim or submit a reservation of rights to the insured within a reasonable time. Comsys Information Technology Services, 130 S.W.3d at 190. In a general liability policy, the insurer's duty to defend arises with the insured's notice to the insurer that it has been sued, and this duty to defend is determined by comparing the allegations in the pleadings with the language of the insurance policy. Id. Accordingly, when the insurer has a duty to defend, it must decide the issue of coverage within a reasonable time after the filing of a suit. Id.
Hartford maintains that Article 21.55 of the Texas Insurance Code and the sections of 21.21 upon which Kirby relies apply only to requests for first party claims, and do not apply to requests for defense and indemnity. Hartford relies upon TIG Insurance Company v. Dallas Basketball, Ltd., 129 S.W.3d 232, 242 (Tex.App.-Dallas 2004, no pet.h.), a case which holds that Article 21.55 does not apply in the context of requests for a defense. In TIG, the state appellate court relied on the language and purpose of Article 21.55 in reaching its conclusion. Article 21.55 is entitled "Prompt Payment of Claims." TEX. INS. CODE art. 21.55. This article sets forth deadlines by which an insurance company must respond to a claim. Id. A "claim" is defined in the statute as "a first party claim made by insured or a policyholder under an insurance policy or contract or by a beneficiary named in the policy or contract that must be paid by the insurer directly to the insured or beneficiary." Id. § 1(3). If an insurance company does not comply with the requirements of the article, it is liable to pay "in addition to the amount of the claim, eighteen percent per annum of the amount of the claim as damages, together with reasonable attorney fees." Id. § 6.
The applicability of Article 21.55 of the Texas Insurance Code is not before the Court. Moreover, the Court notes that Article 21.21, which sets out the unfair settlement practices for which an insurer will be liable to an insured or beneficiary, does not contain the restrictive language or definitions set out in Article 21.55. The Texas Supreme Court has not addressed the applicability of Article 21.21 to an insurer's duty to defend a third party action against its insured. However, the United States District Court for the Northern District of Texas has examined this issue. See Travelers Indem. Co. of Connecticut v. Presbyterian Healthcare Resources, No. 3:02-CV-1881-P, 2004 WL 803787 *3 (N.D. Tex. March 30, 2004). The Court held that breach of the duty to defend can give rise to a claim under Article 21.21 of the Texas Insurance Code. This Court agrees with the reasoning in Travelers. The purpose of Article 21.21 is to protect insurance consumers by prohibiting unfair or deceptive practices in the business of insurance. Kirby was a named insured under the Policy. The distinction Hartford attempts to draw between first party claims and third party claims is unwarranted in the context of Article 21.21 and the circumstances of this case. Therefore, the Court finds that Kirby states a claim pursuant to Article 21.21.
However, Hartford claims that even if Article 21.21 applies, it is not liable for unfair claims practices because it did its best to "sort out the complex coverage analysis in light of Kirby's incorrect analysis under the policy." Hartford's apparent attempt to blame Kirby for its own delay is not persuasive. Hartford had already determined that it had a concurrent duty with Zurich because neither policy provided primary coverage. Its determination of coverage should have been based solely upon the allegations of the petition in the underlying lawsuit, considered in light of the policy provisions. The Court has previously found that Hartford's delay in issuing a reservation of rights letter was unreasonable. The Court need not recite again the facts that led to that conclusion. Hartford engaged in unfair claims practices under TEX. INS. CODE art. 21.21, § 4(10)(a)(v)(A) and (B) by its failure within a reasonable time to affirm or deny coverage or to submit a reservation of rights to Kirby. Hartford also contends that it is not liable under Article 21.21 because Kirby suffered no actual damages. This defense is premised upon Hartford's assertion that, at some point in this litigation, Hartford agreed to pay Kirby's post-tender reasonable and necessary defense costs. As this Court has found in connection with Kirby's damages for breach of contract, Kirby's actual damages are the defense costs in the underlying lawsuit. Maryland Insurance Company, 938 S.W.2d at 29. Further, recovery of the claim depends upon its validity when presented, and is not precluded by a defendant's payment of the claim shortly before judgment is rendered. In re Southland Corp., 19 F.3d at 1088.
In fact, Hartford's reservation of rights letter states that this is the analysis it employed.
The Court notes that this "agreement" does not indicate that this lawsuit was not necessary or that Kirby has acted unreasonably, as Hartford appears to imply. This "agreement" is based upon the premise that Hartford will determine what defense costs are reasonable and necessary. Hartford has litigated this case aggressively, as evidenced by its counterclaim that merely restates its defenses and its demand for attorney fees. Additionally, Hartford opposed Kirby's voluntary dismissal of its claim for indemnity and brought a second motion for partial summary judgment. The Court additionally notes Hartford's numerous motions and its vigorous defense of motions filed by Kirby.
Kirby claims it is entitled to treble damages because Hartford knowingly violated the terms of the Insurance Code. Hartford contends that even if Kirby has shown an Insurance Code violation and damages, Kirby has not shown a "knowing violation." Hartford contends that Kirby initiated this lawsuit at a time when Hartford was "still investigating" Kirby's claim, a contention that this Court has found to be without merit. Hartford also claims Kirby has not proved a "knowing violation" because it offered to defend Kirby under a reservation of rights, to appoint separate counsel in the geographic area of the underlying lawsuit, and to contribute the rate that its assigned counsel agreed to charge towards the rate that Kirby's counsel charged. It also states that the violation was not knowing because it has paid in excess of $105,000 of Kirby's defense costs.
Article 21.21 is to be liberally construed and applied to effect its underlying purposes. TEX. INS. CODE art. 21.21 § 1(b). The treble damage provision of Article 21.21 § 16 is "punitive in nature and designed to deter knowing violations of the Insurance Code." Steward Title Guar. Co. v. Sterling, 822 S.W.2d 1, 9 (Tex. 1991). The Insurance Code defines "knowingly" to mean "actual awareness of the falsity, unfairness, or deception of the act or practice made the basis for a claim for damages under . . . this Article. TEX. INS. CODE art. 21.21 § 2(c). "'Actual awareness' may be inferred where objective manifestations indicate that a person acted with actual awareness." Id; see also St. Paul Surplus Lines Ins. Co. v. Dal-Worth Tank Co., 974 S.W.2d 51, 53-54 (Tex. 1998). The fact that Hartford prepaid most of Kirby's damages before Kirby obtained a judgment requiring it to do so does not mean that Hartford did not knowingly violate Article 21.21. Hartford's conduct from the time Kirby tendered its defense to the time Hartford issued its reservation of rights letter is the relevant period for determining whether its delay in issuing a reservation of rights letter was a knowing violation. As the Court has previously stated, the only objective manifestations of Hartford's conduct in the record show that it did not communicate with Kirby after March 2002, that it did nothing to investigate the claim after that time and that instead, it prepared for litigation. Hartford's forcing Kirby to file a lawsuit rather than communicating with it because Hartford "assumed" Kirby would not accept its position with respect to coverage is indicative of a knowing violation. Hartford's choice to "anticipate litigation" rather than to timely respond to Kirby's tender of its defense in the underlying lawsuit is an unfair claims practice. After suit was filed in July 2002, Hartford waited until February of 2003 to issue a reservation of rights letter. The Court can only imply from Hartford's conduct that it knowingly violated the Insurance Code.
If the Court finds that an insurer knowingly committed the acts complained of, the Court may award not more than three times the amount of actual damages; or any other relief which the court deems proper. Hartford has mitigated its violation by agreeing (albeit belatedly) to pay the full reasonable and necessary costs of defense of the underlying lawsuit and has in fact, paid a large portion of the damages. The Court finds that, under these circumstances, an award of $50,000 in addition to the full post-tender defense costs in the underlying lawsuit, plus attorney fees and costs, is the proper relief for Hartford's knowing violation of the Texas Insurance Code.
Hartford's Counterclaim for Declaratory Judgment and Demand for Attorney Fees
Kirby claims that Hartford's Counterclaim for Declaratory Judgement should be dismissed because it does no more than restate the controversy between the parties. Hartford claims this Court should grant summary judgment with respect to its own claims for declaratory judgment, finding and declaring that Hartford has satisfied its duty to defend by agreeing to defend Kirby in the underlying lawsuit subject to its full reservation of rights and by eventually agreeing to pay the reasonable and necessary defense costs from the date of tender forward.
Under Texas law, the declaratory judgment act is not available to settle disputes already pending before the court. B.M.B. Corp. v. McMahan's Valley Stores, 869 F.2d 865, 869 (5th Cir. 1989). When a party brings a declaratory judgment action by way of a counterclaim, and that counterclaim involves only issues already raised by the original claim, the party is not entitled to an award of attorneys fees. Id. Accordingly, Hartford's counterclaim for declaratory judgment, which does no more than restate the issues already before the Court, should be dismissed with prejudice. Hartford's request for attorney fees should be denied.
RECOMMENDATION
The Court recommends that Kirby's amended motion for summary judgment be granted in part and denied in part as follows: The District Court should grant summary judgment to Kirby on Kirby's claims for breach of contract and violation of TEX. INS. CODE art. 21.21, § 4(10)(a)(v)(A) and (B). Kirby may recover its post-tender defense costs in the underlying lawsuit less any amounts that Hartford has prepaid. Additionally, for a knowing violation of the Insurance Code, the District Court should award Kirby additional damages of $50,000 as punishment. The District Court should also grant Kirby's costs and reasonable and necessary attorney fees in this action pursuant to Section 38.001 of the Texas Civil Practice and Remedies Code and TEX. INS. CODE art. 21.21 § 16.The District Court should deny Kirby's motion for summary judgment on its claim for pre-tender defense costs in the underlying lawsuit. The Court recommends that Hartford's amended motion for summary judgment be granted in so far as Hartford is not liable for Kirby's pre-tender defense costs and denied in all other particulars. The District Court should dismiss Hartford's counterclaim with prejudice and deny Hartford's request for attorney fees.