Opinion
Civil Action No: SA-04-CV-251-XR.
October 4, 2004
ORDER
On this date, the Court considered the following: Defendant's Motion to Dismiss (docket no. 6), Defendant's Motion for Summary Judgment (docket no. 13), Plaintiff's Motion for Partial Summary Judgment (docket no. 20), and Defendant's Supplemental Motion to Dismiss (docket no. 23). After considering the evidence and applicable law, the Court DENIES Defendant's Motion to Dismiss (docket no. 6) and DENIES Defendant's Supplemental Motion to Dismiss (docket no. 23). Travelers' motion for summary judgment (docket no. 13) is GRANTED regarding the equitable subrogation claim, but DENIED regarding the article 21.21 claim. Service Casualty's motion for partial summary judgment (docket no. 20) is DENIED.
I. Facts and Procedural Background
Christina Shakoor was employed by Gillespie Motor from 1994 until she was terminated or "constructively discharged" on March 31, 2001. She brought suit in Bexar County, Texas alleging she was discharged in violation of Texas Labor Code section 451.001, et seq. (prohibiting discrimination or retaliation against employees who file a claim for worker's compensation benefits).
Gillespie Motor was insured by Service Casualty Insurance Company ("Service Casualty") under a Commercial General Liability "occurrence basis" policy from February 1, 1999 through March 15, 2001. Travelers Insurance Company (Travelers) issued a "claims made" Employment Practices Liability Plus Policy to Gillespie Motor effective March 15, 2001 through March 15, 2002.
Once the Shakoor suit was filed, the petition was forwarded to Travelers and Service Casualty. Travelers retained counsel to defend Gillespie Motor and defended the claim for approximately two years. On the eve of trial, Gillespie Motor demanded that one or both of the insurance carriers settle the Shakoor suit. The Shakoor suit was settled for $125,000 by Service Casualty.
Service Casualty now brings suit alleging that it is entitled to recover the $125,000 settlement monies paid under the theory of equitable subrogation. In addition, Service Casualty alleges that Travelers violated Texas Insurance Code 21.21, sections 4(11) and 16. Finally, Service Casualty seeks declaratory relief and requests that this court declare the rights and obligations of both parties in the above matter.
II. Defendant's 12(b)(6) Motion to Dismiss Plaintiff's Tex. Ins. Code article 21.21 Claims
On a motion to dismiss, this Court must construe the factual allegations in a complaint, and all reasonable inferences therefrom, in the light most favorable to the plaintiff. A motion to dismiss must be denied unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. Kapps v. Torch Offshore, Inc., 379 F.3d 207, 210 (5th Cir. 2004).
Defendant argues that article 21.21 claims may not be brought by one insurance company against another insurance company, but rather standing to bring such claims are limited to insureds. Thus, even assuming the allegations of the Complaint to be true, Defendant contends that Plaintiff fails to state a claim upon which relief can be granted under Texas law.
In its Supplemental Motion (docket no. 23), Defendant inarticulately argued that article 21.21 claims may not be assigned. Plaintiff responds that there was no assignment by Gillespie Motor to Service Casualty, but rather that Service Casualty brings its article 21.21 claim directly against Travelers for representations made by Travelers' agents to Service Casualty. The Court need not further address this point. The true issue, as raised in Defendant's original motion to dismiss (docket no. 6), is may an insurance company, who is not the insured or policyholder, but nevertheless relies on a statement, pursue an article 21.21 claim against another insurance company.
Plaintiff argues that article 21.21 is to be liberally construed and standing is not limited to insureds or consumers. Plaintiff asserts that an article 21.21, section 4(11) claim and section 16 claim may be brought by any party injured by a violation. Plaintiff argues that it was injured by Travelers direct misrepresentations made to Service Casualty employees. In support of its position, Plaintiff refers this Court to Webb v. Int'l Trucking Co., 909 S.W. 2d 220 (Tex.App.-San Antonio 1995, no writ) and Hermann Hospital v. Nat'l Standards Ins., 776 S.W. 2d 249 (Tex.App. — Houston [1st Dist.] 1989, writ denied).
Sec. 4. The following are hereby defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance:
(11) Misrepresentation of Insurance Policy. Misrepresenting an insurance policy by:
(a) making an untrue statement of material fact;
(b) failing to state a material fact that is necessary to make other statements made not misleading, considering the circumstances under which the statements were made;
(c) making a statement in such manner as to mislead a reasonably prudent person to a false conclusion of a material fact;
(d) making a material misstatement of law; or
(e) failing to disclose any matter required by law to be disclosed, including a failure to make disclosure in accordance with another provision of this code.
"Any person who has sustained actual damages caused by another's engaging in an act or practice declared in Section 4 of this Article to be unfair methods of competition or unfair or deceptive acts or practices in the business of insurance or in any practice specifically enumerated in a subdivision of Section 17.46(b), Business Commerce Code, as an unlawful deceptive trade practice may maintain an action against the person or persons engaging in such acts or practices. . . ."
In Webb, a truck owned by International Trucking was involved in a wreck. Evelyn Page, an adjuster for the defendant ECC insurance company called International Trucking's president, identified herself as being with ECC, and said ECC would pay for the damages to the truck. She was not agreeable, however, to having the truck towed to Laredo for repairs (Laredo being home to International Trucking). Instead, she directed International Trucking to have the truck repaired in Victoria. This was done, and the truck was repaired there. However, by this time, another ECC employee, John Veale, had decided that their insured was not at fault and therefore the insurance company was no longer willing to pay the bill. International Trucking later filed suit against ECC for DTPA and article 21.21 claims. After reviewing the Texas Supreme Court decisions in Transport Ins. Co. v. Faircloth, 898 S.W.2d 269 (Tex. 1995) and Allstate Ins. Co. v. Watson, 876 S.W.2d 145 (Tex. 1994), the San Antonio court of appeals concluded:
that all statutory causes of actions by third-parties are not barred, albeit they are significantly narrowed. The Supreme Court [in Faircloth or Watson] never says in these two opinions, or any other opinion, that all statutory third-party actions are barred against insurance companies. If the Court had meant to say that it no doubt would have done so with a simple declarative sentence. It did not do so. We conclude there are still limited instances in which a third party plaintiff can recover against an insurance company under the joint authority of Article 21.21 of the Insurance Code and Section 17.46 of the DTPA.Webb, 909 S.W. 2d at 224. The San Antonio court concluded that various DTPA allegations could not stand because International Trucking was not a consumer for purposes of the DTPA claims made against it. However, the San Antonio court found that a DTPA section 17.46 claim could survive because an ECC employee told International Trucking it would pay for the repairs, directed where they were to be done, and then reneged on their agreement. Id. at 227. The San Antonio court further held that a third-party claimant may bring a claim under Insurance Code article 21.21, section 16.
(12) representing that an agreement confers or involves rights, remedies or obligations which it does not have or involve, or which are prohibited by law.
In Hermann Hospital, Jose Carreon was stabbed by a fellow worker while working for his employer. Carreon was ultimately transferred to Hermann Hospital, and the hospital accepted him after verifying insurance coverage with National Standard. Later National Standard denied that there was coverage for Carreon's injury and refused to pay the hospital's bills. Hermann Hospital sued for the damages it suffered by relying on the representations of coverage allegedly made by National Standard. The Texas Supreme Court noted that
it has held that misrepresentations as to coverage and benefits are precisely the sort of conduct that give rise to a cause of action under [article 21.21]. We find that as a practical matter, the relationship between insurance companies and providers of health care is a direct one, with the health care provider acting in reliance on the representations of coverage made by the carriers. Hospitals and other health care providers must, and do, rely upon the insurance carriers representations of coverage in making their decisions regarding admission of potential patients. If insurance coverage and benefits can be verified, the hospital will usually accept an assignment of benefits to insure it is paid for any services rendered. If insurance coverage and benefits cannot be verified, or if no coverage exists, the medical provider can then make alternative financial arrangements. To insulate the insurance carriers from liability leaves the medical care provider without recourse against the party causing its damage, if it acts in reliance on the representation of coverage. Had the insurance carrier not falsely or negligently provided information, appellant could have sought alternative means to ensure that it received payment for services before rendering them.Hermann Hospital, 776 S.W. 2d at 252.
The Fifth Circuit has also addressed who may bring suit under article 21.21 in Palma v. Verex Assurance, Inc., 79 F. 3d 1453 (5th Cir. 1996). Palma purchased a condominium and the mortgage company required her to obtain mortgage insurance. The mortgage insurance was purchased by the mortgage company, City Federal, from Verex. Palma paid for the premiums. She later defaulted on her mortgage note, and Verex paid City Federal pursuant to the mortgage insurance policy. Verex then sued Palma demanding that she pay the deficiency balance. Palma sued claiming DTPA and article 21.21 violations.
Analyzing article 21.21(16), the Fifth Circuit stated that "[a]lthough "any person" would appear to be sufficiently broad to permit Palma to have standing, it appears to have been narrowly construed." Id. at 1456. Reviewing Watson, the Fifth Circuit concluded that "standing under article 21.21 is satisfied by not only those who can establish privity of contract or reliance on a representation of the insurer, but also by those who can establish that they were an intended third-party beneficiary of the insurance contract." Id. at 1457. The Fifth Circuit found that the mortgage insurance contract was made, in part, for the benefit of Palma. Id. at 1458. Accordingly, the Court found that she was an intended third-party beneficiary.
In this case there is no privity of contract between Service Casualty and Travelers. Further, no argument is made that Service Casualty is a third-party beneficiary of any contract between Gillespie Motor and Travelers. The only issue is whether Service Casualty has standing to bring an article 21.21(16) claim because it relied upon a representation made by Travelers.
Article 21.21(16), in part, states:
Any person who has sustained actual damages caused by another's engaging in an act or practice declared in Section 4 of this Article to be unfair methods of competition or unfair or deceptive acts or practices in the business of insurance or in any practice specifically enumerated in a subdivision of Section 17.46(b), Business Commerce Code, as an unlawful deceptive trade practice may maintain an action against the person or persons engaging in such acts or practices . . .
Service Casualty is a "person" pursuant to article 21.21(2)(a). It alleges it has sustained actual damages by relying upon Travelers statement that it would defend and indemnify Gillespie Motor. That statement could be construed as a misrepresentation as defined in article 21.21, section 4(11). Service Casualty has standing to bring suit under article 21.21(16). Hermann Hospital, supra. Travelers motion to dismiss (docket no. 6) and Travelers supplemental motion to dismiss (docket no. 23) are DENIED.
"Person" shall mean any individual, corporation, association, partnership, reciprocal exchange, inter-insurer, Lloyds insurer, fraternal benefit society, and any other legal entity engaged in the business of insurance, including agents, brokers, adjusters and life insurance counselors.
The following are hereby defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance:
(11) Misrepresentation of Insurance Policy. Misrepresenting an insurance policy by:
(a) making an untrue statement of material fact;
(b) failing to state a material fact that is necessary to make other statements made not misleading, considering the circumstances under which the statements were made;
(c) making a statement in such manner as to mislead a reasonably prudent person to a false conclusion of a material fact;
(d) making a material misstatement of law; or
(e) failing to disclose any matter required by law to be disclosed, including a failure to make disclosure in accordance with another provision of this code.
III. Travelers' motion for summary judgment regarding equitable subrogation
Travelers argues that its policy with Gillespie Motor excludes coverage for Shakoor's claims. Accordingly, it argues that Service Casualty cannot recover any monies under any theory of equitable subrogation. A.S.W. Allstate Painting Const. Co., Inc. v. Lexington Ins. Co., 94 F. Supp.2d 782, 786 (W.D. Tex. 2000) ("Subrogation is the substitution of one person in the place of another, whether as creditor or as possessor of some lawful claim, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim. . . . If the subrogor has no rights, then the subrogee can have none. Thus, because an insurer's right of subrogation is derived from the rights of the insured and is limited to those rights, there can be no subrogation where the insured has no cause of action against the defendant.") (citations omitted).
Travelers relies upon Exclusion IIIC in its policy with Gillespie Motor. That paragraph states:
This insurance shall not apply to, and the Company shall have no duty to defend or pay Defense Expenses for any Claim:
* * *
For or arising out of facts, transactions or events which are or reasonably would be regarded as Wrongful Employment Practices, about which any Responsible Person had knowledge prior to the inception of coverage under the Policy. . . .
It is uncontested that the policy became effective March 15, 2001, and that Jeff Bonugli, Gillespie Motor's General Sales Manager, was a Responsible Person under the policy. It is further uncontested that retaliation and discrimination against an employee, because that employee previously filed a worker's compensation claim is a Wrongful Employment Practice.
The central question is whether prior to March 15, 2001, Bonugli was aware of "facts, transactions or events which are or reasonably would be regarded as Wrongful Employment Practices."
Travelers argues that Shakoor suffered an occupational injury in December 2000, and that Gillespie Motor delayed for two weeks the filing of a worker's compensation claim. Thereafter from December 2000 through March 2001, Shakoor made numerous requests for accommodations which were denied. Shakoor also alleges that she was retaliated against by having her workload increased and being subjected to insults. Based on Shakoor's allegations, Travelers argues that Bonugli was aware of discriminatory and retaliatory conduct occurring prior to March 15, 2001.
In opposition to Travelers' motion, Bonugli has submitted an affidavit which states that he was not aware of any litigation threat made by Shakoor until "just before she resigned, not weeks earlier." Travelers argues that the exclusion language does not contain the words claim or lawsuit. Travelers argues that coverage is precluded when Gillespie Motor was aware of a "known loss" or "progressive loss" from "facts, transactions or events which are or reasonably would be regarded as Wrongful Employment Practices."
The Dallas court of appeals addressed a similar issue in Scottsdale Ins. Co. v. Travis, 68 S.W.3d 72 (Tex.App.-Dallas 2001, pet. denied). Scottsdale Insurance argued that the underlying petition alleged facts showing that a former president's misappropriation of trade secrets began before the effective date of the policy, thereby alleging facts that excluded coverage. The court of appeals agreed noting that the petition alleged that the former president, along with other co-defendants, planned and began executing their scheme before August 9, 1993, the inception of Scottsdale's coverage. The specific provisions of the petition alleged that "[p]rior to Robinson resigning he already had planned his new company, determined the customers he would take away from [Maintenance Houston], and decided the means and methods of doing so." Id. at 75-76. Specifically, according to the petition, before Robinson resigned, he and his co-conspirators undermined existing contracts Maintenance Houston had with employees and customers. Id. at 76.
In examining the petition and comparing it to the insurance policy, the court addressed exclusions under the "fortuity" doctrine. The Court noted that
[b]ecause the purpose of insurance is to protect insureds against unknown, or fortuitous, risks, fortuity is an inherent requirement of all risk insurance policies. The fortuity doctrine precludes coverage for both a `known loss' or a `loss in progress.' A `known loss' is a loss the insured knew had occurred prior to making the insurance contract. A `loss in progress' occurs when the insured is, or should be, aware of an ongoing progressive loss at the time the policy is purchased. Insurance coverage is precluded where the insured is or should be aware of an ongoing progressive or known loss at the time the policy is purchased.Id. at 75 (citations omitted). Since all of the allegations pertained to Robinson's conduct before the inception of the insurance policy, the Court found that the fortuity doctrine applied. See also Two Pesos, Inc. v. Gulf Ins. Co., 901 S.W.2d 495 (Tex.App.-Houston [14th Dist.] 1995, no pet.); RLI Ins. Co. v. Maxxon Southwest, Inc., 265 F. Supp.2d 727 (N.D. Tex. 2003), aff'd, 2004 WL 1941757 (5th Cir. 2004).
Texas courts that have denied summary judgment in analogous cases have done so because the underlying petition pled alternative theories or alternative causes of action that triggered a duty to defend, even though part of the allegations triggered the fortuity doctrine. See Burlington Ins. Co. v. Texas Krishnas, Inc., 2004 WL 1468985 (Tex.App.-Eastland 2004, no pet. h.). See also Westchester Fire Ins. Co. v. Gulf Coast Rod, Reel Gun Club, 64 S.W.3d 609 (Tex.App.-Houston [1st Dist.] 2001, no pet.) (rejecting insurance carrier's argument that because the petition alleged that the defendants had known about certain soil erosion for at least 20 years the known loss provision applied, due to the fact that the petition also alleged that the defendants failed "to ascertain the consequences of the action of dredging"). In this case, the Shakoor petition did not plead any such alternative theories or alternative causes of action that triggered a duty to defend.
A review of the allegations contained in the Shakoor petition specifically outline "facts, transactions or events which are or reasonably would be regarded as Wrongful Employment Practices" that took place prior to March 15, 2001. The court therefore concludes that coverage for the Shakoor litigation is excluded by paragraph IIIC and the fortuity doctrine. Since Travelers' policy with Gillespie Motor excludes coverage for Shakoor's claims, Service Casualty cannot recover any monies under any theory of equitable subrogation. A.S.W. Allstate Painting Const. Co., Inc. v. Lexington Ins. Co., 94 F. Supp.2d 782, 786 (W.D. Tex. 2000).
Travelers also argues that Gillespie Motor knew about Shakoor's threatened lawsuit prior to March 15, 2001, because in Service Casualty's Complaint stated: "The Travelers insurance policy was purchased specifically to replace the Service Casualty policy with a more specific policy for Employment Related Claims, because Gillespie Motor feared employment related claims might be filed." Original Complaint at paragraph 10. The Court agrees with Service Casualty that this is not a judicial admission. This vague statement regarding Gillespie Motor's motivation could be interpreted as meaning that because of Gillespie Motor's past employment related lawsuits it was desirous of securing insurance coverage for these specific type of claims.
IV. Cross motions for summary judgment regarding Plaintiff's article 21.21 claims
Service Casualty alleges that Travelers violated Texas Insurance Code 21.21, sections 4(11) and 16, and it has sustained actual damages by relying upon Travelers' statement that it would defend and indemnify Gillespie Motor.
The parties have failed to clearly brief this issue. Travelers claims summary judgment is proper as to these claims because Service Casualty has failed to establish intent. However, Travelers cites no cases in support of its argument. Both parties go on at length regarding coverage issues, however, it is unclear why this is relevant to the issue at hand Service Casualty has not provided any evidence Travelers told Service Casualty that it would solely defend and indemnify Gillespie Motor in the Shakoor lawsuit. Travelers apparently argues in four sentences that because there is no equitable subrogation right, it need not address whether it made any article 21.21 misrepresentations to Service Casualty.
In reviewing the attachments to the various motions and replies the Court has pieced together the following: Shakoor was terminated/constructively discharged on March 31, 2001. Shakoor evidently filed a charge of discrimination with the Equal Employment Opportunity Commission at some point because the law firm of Thompson Coe was retained by Travelers to defend Gillespie Motor in those administrative proceedings. On July 31, 2002, Thompson Coe advised Jay Wallace of the law firm of Gibson, McClure of his appointment by Travelers and requested that Gibson, McClure forward all documents it may have in its possession regarding the Shakoor charge of discrimination.
It is uncertain whether Service Casualty or Gillespie Motor retained Mr. Wallace/Gibson, McClure.
Shakoor filed her worker's compensation retaliation lawsuit in state court on February 20, 2003. On or about January 13, 2004, Julia Miller of Travelers sent an email to Angela Thompson of Service Casualty and opined that the Shakoor lawsuit had a settlement value of $125,000. "That being said, again Travelers takes the position it is excess to your policy and its only exposure is for back pay excluded by your policy to which we are willing to respond. . . . Travelers reserves all rights under the policy and applicable law."
On January 14, 2004, Shakoor's counsel, Jeffrey Goldberg sent a demand letter to Thompson Coe offering to settle the worker's compensation lawsuit for $185,000. Since the case was set for trial on February 2, 2004, Mr. Goldberg placed a deadline of January 21, 2004 to accept his client's settlement offer. On January 19, 2004, David Pruessner, an attorney representing Service Casualty wrote a letter to Ms. Miller stating that Shakoor's termination occurred after the Service Casualty policy expired, and this fact "should end any demand by Travelers that Service Casualty contribute toward the settlement." The letter further addressed other issues. On January 22, 2004, counsel for Gillespie Motor sent a "Stowers Demand" letter to both Service Casualty and Travelers demanding that the Shakoor lawsuit be settled. On that same date, Service Casualty informed Travelers that it was "taking over settlement negotiations pursuant to Gillespie's demands." By a separate email Service Casualty informed Travelers by taking over settlement, it was not making any voluntary payments, and that if a settlement was reached in the Shakoor lawsuit, it would file suit against Travelers to recoup any amounts paid.
A courtesy copy of the settlement demand letter was also sent to Jay Wallace.
The cross motions for summary judgment regarding the article 21.21 claims are DENIED. Docket nos. 13 and 20. Fact issues exist as to what misrepresentations were allegedly made. Should the parties re-file motions on this issue, they should address the Court's concerns described above and provide relevant citations.
Conclusion
The Court DENIES Defendant's Motion to Dismiss (docket no. 6) and DENIES Defendant's Supplemental Motion to Dismiss (docket no. 23). Travelers' motion for summary judgment (docket no. 13) is GRANTED regarding the equitable subrogation claim, but DENIED regarding the article 21.21 claim. Service Casualty's motion for partial summary judgment (docket no. 20) is DENIED.