Opinion
No. SA-04-CA-0389-RF.
May 12, 2005
ORDER DENYING DEFENDANT'S MOTION FOR RECONSIDERATION AND DENYING PLAINTIFF'S MOTION FOR ATTORNEY'S FEES
BEFORE THE COURT is Defendant's Motion for Reconsideration (Docket No. 36), filed on March 2, 2005, along with Plaintiff's Response. Also before the Court is Plaintiff's Motion for Attorney's Fees (Docket No. 39), filed on March 15, 2005, and Defendant's Response and objections. The Court granted Defendant's request for argument and held a hearing on March 31, 2005. On April 11, the Court granted Plaintiff's request for leave to submit additional briefing and Plaintiff's supplemental brief was entered on April 12, 2005. (Docket No. 44). After careful consideration of these arguments, the briefing, and the applicable law, the Court is of the opinion that Defendant's Motion for Reconsideration (Docket No. 36) must be DENIED and Plaintiff's Motion for Attorney's Fees (Docket No. 39) must be DENIED.
FACTUAL AND PROCEDURAL BACKGROUND
The instant case involves an insurance dispute over an earlier personal injury action against a nursing home filed in state court by a resident who was injured by a nursing home employee. The resident — and Plaintiff here — sued the nursing home's owner and the employee, obtaining a default judgment of $1,000,000 against the employee, who failed to defend the suit.
On April 5, 2004, Plaintiff Beatrice Crocker filed the instant suit against National Union as judgment creditor and third-party beneficiary of a liability policy written by Defendant National Union and covering the nursing home's corporate owner ("Emeritus") and the employee Morris. Plaintiff contended that Morris was entitled to coverage under the National Union policy and that Defendant breached its policy by failing to defend its insured, Morris, against Crocker's claims in the underlying suit. Since Defendant breached this duty, Plaintiff argued, Defendant is liable to Plaintiff in the amount of the state court default judgment: $1,000,000.
Defendant and Plaintiff filed cross motions for summary judgment, agreeing that there were no genuine issues of material fact to preclude judgment as a matter of law. On February 15, 2005, the Court granted Plaintiff's motion for summary judgment and granted in part and denied in part Defendant's cross motion for summary judgment (Docket No. 34), awarding Plaintiff final judgment here in the amount of $1,000,000.
On March 2, 2005, Defendant filed the instant motion for reconsideration, arguing that the Court's resolution of the issues before it on summary judgment was erroneous and contrary to law. Defendant also sought oral argument on the motion to reconsider. Plaintiff responded to Defendant's motion on March 14 and filed its own motion for attorney's fees on March 15, 2005. The Court addresses both of these motions here.
DISCUSSION
I. Motion for ReconsiderationAt the outset, the Court notes that the Federal Rules "do not recognize a motion for reconsideration in haec verba." Courts in the Fifth Circuit treat so-called motions to reconsider either as motions to alter or amend under Rule 59 or as motions for relief from judgment under Rule 60. Here, Defendant's motion invokes Rule 59(e), which provides that a party may move the court to amend its judgment within ten days of entry. Defendant timely filed its motion to reconsider on March 2, 2005.
Lavespere v. Niagara Mach. Tool Works, Inc., 910 F.2d 167, 173 (5th Cir. 1990).
Id.
A. Application of the Prejudice Rule
Defendant argues that the Court's previous ruling was erroneous because the Court misapplied Texas insurance law. Specifically, Defendant asserts that the Court's application of Texas Board of Insurance Order 23080 was in error, arguing that the Board Order does not apply because the policy at issue here was not issued in Texas. Instead, Defendant argues that the policy was issued and delivered to Emeritus in the State of Florida. Further, Defendant argues that Emeritus is incorporated in Washington and has its headquarters there. Defendant argues that the policy in question was not "issued or delivered" in the State of Texas and, thus, that Board Order 23080 does not apply to the policy here.
The Amendatory Endorsement created by Order 23080 applies to "all General Liability policies issued or delivered in Texas" and requires that an insurer show prejudice to avoid liability.
Defendant argues that, if Order 23080 does not apply, then there is no duty on the part of Defendant National Union to defend Morris absent a specific request and forwarding of suit papers by the additional insured. Since it is undisputed that Morris did not forward the suit papers or request a defense from National Union in the underlying suit, Defendant argues that this Court should have entered summary judgment for it instead of for Plaintiff. Defendant moves on these grounds for reconsideration of the February 15, 2005 Order granting summary judgment to Plaintiff in this cause.
Defendant National Union argues in the alternative that it is entitled to reconsideration of the February 15 order granting summary judgment for Plaintiff because National Union was not bound by the default judgment because Morris failed to defend himself and this failure precluded a fully adversarial trial below. Defendant states that a judgment for a plaintiff against a defendant, rendered without a fully adversarial trial, is never binding on the defendant's insurer, citing the Texas Supreme Court decision in Gandy. Since a judgment is not binding on the insurer, National Union argues that it is not liable to a judgment creditor like Plaintiff Crocker. Defendant concludes that a fully adversarial trial is a condition precedent to an insurer's liability to a judgment creditor and argues that the Court must reconsider its February 15 order.
State Farm Fire Cas. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996).
Id.
Plaintiff responds, arguing that the "Prejudice Rule" is alive and well in Texas and applied to the National Union insurance policy, as found by this Court in its February 15 order. She states that National Union's arguments as to why its policy is not governed by Order 23080 are erroneous. Specifically, Plaintiff states that the terms "issued or delivered" as set forth in Order 23080 are terms of art and that the order applies to all policies covering property located in Texas. If the property is located in Texas, Plaintiff argues, the insurance policy — and the Texas Insurance Board's amendatory endorsement requiring a showing of prejudice to avoid liability — has been issued and delivered in Texas.
Any insurance company doing business in Texas is subject to Texas laws governing insurance. The Texas Insurance Code, section 101.051, provides that an insurer engages in the business of insurance in Texas when it provides liability insurance for a facility located in Texas. Further, the Fifth Circuit has found that "Texas law governs any insurance policy `payable to any citizen or inhabitant of this State.'" National Union has conceded herein that it is authorized to engage in the insurance business in Texas. Therefore, the Court finds that the National Union policy written to Emeritus and covering the nursing home in the underlying dispute is governed by Texas law, including Board Order 23080.
TEX. INS. CODE ANN. § 21.42 (West 1981) ("Any contract of insurance payable to any citizen or inhabitant of this State by any insurance company or corporation doing business within this State shall be held to be a contract made and entered into under and by virtue of the laws of this State relating to insurance, and governed thereby, notwithstanding such policy or contract of insurance may provide that the contract was executed and the premiums and policy (in case it becomes a demand) should be payable without this State, or at the home office of the company or corporation issuing the same.")
Hanson Production Co. v. Americas Ins. Co., 108 F.3d 627, 629 (5th Cir. 1997).
See Defendant's Response to Request for Admission No. 2 (Ex. H); Defendant's First Amended Answer to Plaintiff's Original Petition for Damages (Ex. I).
Further, even if the Court found that Defendant's argument that its policy was not affected by Order 23080 because the policy was not "issued or delivered" in Texas was meritorious, the Court would find nonetheless that the policy at issue was subject to the prejudice rule and that National Union would have to show prejudice to avoid the judgment entered below against Morris. The Court's role, sitting as an Erie court, is to rule the way it believes the Texas Supreme Court would rule. The Fifth Circuit, acting in this same role in similar cases, has held that "all policies issued to Texas residents are subject to Texas law and the rules of construction followed by the Texas Courts."
Browning Seed, Inc. v. Bayles, 812 F.2d 999, 1002 (5th Cir. 1987).
Hanson, 108 F.3d at 630.
The Fifth Circuit in Hanson reasoned that the Texas Supreme Court would have followed the overwhelming national trend and required a showing of prejudice even in the close cases. The Fifth Circuit applied the doctrine of "immaterial breach" to the so-called policy defenses — such as the failure to notify, failure forward suit papers, and similar defenses — determining that the insurer would have to prove the breach (such as failure to notify the insurer of suit) was material in order to avoid liability. Further, as laid out by the Texas Supreme Court in Hernandez, the Prejudice Rule is the common law of Texas and precludes an insurer from being able to escape liability from breach by an insured, unless the breach is material.
Id. at 631 ("Most other jurisdictions presented with this issue have likewise imposed a prejudice requirement, primarily on public policy grounds. See Thompson v. American States Ins. Co., 687 F.Supp. 559, 564 (M.D.Ala. 1988); Shelter Mut. Ins. Co. v. Bough, 310 Ark. 21, 834 S.W.2d 637, 640 (1992); Rafferty v. Progressive American Ins. Co., 558 So.2d 432, 433 (Fla.App. 1990); Marsh v. Prestige Ins. Group, 374 N.E.2d 1268, 1270 (1978); Kapadia v. Preferred Risk Mut. Ins. Co., 418 N.W.2d 848, 852 (Iowa 1988); MacInnis v. Aetna Life Casualty Co., 403 Mass. 220, 526 N.E.2d 1255, 1257-58 (1988); Silvers v. Horace Mann Ins. Co., 324 N.C. 289, 378 S.E.2d 21, 27 (1989); Wheeler v. Nationwide Mut. Ins. Co., 749 F.Supp. 660, 663 (E.D.Penn. 1990)).
Id. ("[A]n insurer who is not prejudiced by [the breach] may not deny coverage. . . .' If anything, we believe that the failure to give notice of a claim poses a smaller risk of prejudice than failure to obtain consent to a settlement. In many instances of untimely notice of a claim, the insurer is not prejudiced at all, and ultimately may not face any coverage obligation.") (citing Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691 (Tex. 1994)).
Hernandez v. Gulf Group Lloyds, 875 S.W.2d at 694.
The Court is also confident in applying the Prejudice Rule and requiring that National Union show prejudice to avoid liability for the default judgment entered against it because both Florida and Washington — the other two jurisdictions in which Emeritus is located and thus the other two jurisdictions where the policy at issue could be considered to be in effect — both apply the Prejudice Rule in situations such as this. Thus, whether the Court determined that National Union was a company operating in the business of insurance in Texas, Washington, or Florida, the Court would appropriately apply the Prejudice Rule and require National Union to show that it was prejudiced by Morris's failure to forward the suit papers and specifically request a defense in the underlying suit to avoid liability here. For this reason, the Court declines to reconsider the application of the Prejudice Rule to Defendant National Union.
Tiedtke v. Fidelity Cas. Co., 222 So.2d 206, 209 (Fla. 1969); Liberty Mutual Ins. Group v. Cifuentes, 760 So.2d 230, 231 (Fla.App. 2000); Oregon Auto Ins. Co. v. Salzberg, 535 P.2d 816, 819 (Wash. 1975) ("For the foregoing reasons, we are convinced that sound public policy requires that an alleged breach of a cooperation clause may be considered substantial and material, and may effect a release of an insurer from its responsibilities Only if the insurer was actually Prejudiced by the insured's actions or conduct. The requirement of a showing of prejudice would pertain irrespective of whether the cooperation clause could be said to be a covenant or an express condition precedent and, in this regard, the burden of proof is upon the insurer."); Kaplan v. Northwestern Mut. Life Ins. Co., 990 P.2d 991, 996 (Wash.App. 2000).
B. Defendant Failed to Show Prejudice
The Court has held, and has upon reconsideration has concluded again, that under Texas insurance law, National Union must show prejudice to avoid liability to Plaintiff. National Union has asserted that, even if the Court requires a showing of prejudice, it can show prejudice from Morris's failure to forward suit papers and request a defense. The main thrust of this argument is that National Union was not aware that Morris had been served. However, counsel for Plaintiff informed the carrier in writing that Morris had been served. Documents uncovered in discovery also indicate that National Union knew that Morris had been served, knew that the insurer was required to defend him, and even provided that the counsel designated to defend Emeritus would represent Morris as well. In light of these facts and other evidence submitted by Plaintiff, the Court concludes that National Union had actual knowledge of the suit against Morris.
Plf.'s Mot. for Summ. J. at App. 3.
Id. at App. 1, Ex. D-5.
Texas courts also hold that evidence of actual knowledge of a lawsuit against an insured negates the prejudice suffered by an insurer. Even where insureds fail to forward suit papers and specifically request a defense, Texas courts find that this failure does not result in prejudice when the insurers had actual knowledge of the suit. Based on the clear precedent from Texas courts rejecting the prejudice argument when insureds fail to forward suit papers and request a defense and the insurer had actual knowledge of the suit, this Court finds that National Union was not prejudiced by Morris's failure to forward suit papers and specifically request a defense when National Union had actual knowledge that Morris had been served in the underlying suit.
Liberty Mutual Ins. Co. v. Cruz, 883 S.W.2s 164, 165 (Tex. 1993).
Id.; Struna v. Concord Ins. Servs., Inc., 11 S.W.3d 355, 359 (Tex.App.-Houston [1st Dist.] 2000, no pet.); Allstate Ins. Co. v. Pare, 688 S.W.2d 680, 682 (Tex.App. — Beaumont 1985, writ ref'd n.r.e.)
C. National Union Is Bound by Default Judgment
At the March 31, 2005 hearing on this issue, counsel for Defendant National Union focused on the argument that National Union is not bound by the default judgment because it was not reached after a fully adversarial trial. National Union argues specifically that, because the court below did not reach a decision on Plaintiff's damages following a full hearing or trial on the merits, it was not bound by the $1,000,000 default judgment taken against Morris.
Defendant cites a number of Texas cases in support of its claim that it is not bound by the default judgment entered against Morris. Defendant argues that the policy held by Emeritus and covering the nursing home facility owned by it where Plaintiff was injured required that Morris's liability be determined by a trial before it would be obligated to pay on his behalf. The National Union policy, attached to Plaintiff's summary judgment motion, provides that third parties could sue the insurer only after the insured's liability has been determined "by a trial, after which a final judgment has been entered."
Plf.'s Mot. Ex. B.
In State Farm Lloyds Ins. Co. v. Maldonado, the Texas Supreme Court held that to recover on a claim as a third-party beneficiary, the plaintiff must show that the insured complied with the conditions precedent, including the "actual trial" requirement. The Texas Supreme Court stated in Maldonado that
State Farm Lloyds Ins. Co. v. Maldonado, 963 S.W.2d 38, 40 (Tex. 1998).
An "actual trial" contemplates a genuine contest of issues . . . Although Maldonado presented evidence to a judge who later made findings of fact and conclusions of law, this evidence was uncontested. Robert did not appear at trial. His attorney did not cross-examine any witnesses or put on any of his own. [Counsel] made no argument to the court contesting liability or damages and at one point even referred to the trial as a "hearing." In sum, there was no real contest of issues.
Id.
The key for the Texas court in Maldonado then was that there be a genuine contest of the issues in order for a third-party beneficiary claim to be appropriate.
After carefully reviewing the facts before it, the Court finds that the situation confronting the Texas Supreme Court markedly different from that before this Court. Here, there was a full trial on the merits, defended by counsel retained by Defendant on behalf of Emeritus, Jonathan LaMendola. While LaMendola was not representing Morris individually, the case against Morris and Emeritus was tried together and LaMendola, on behalf of Emeritus, had the opportunity to challenge evidence, make objections, and cross-examine witnesses. Here, there was an actual trial, involving a real contest of the issues. Thus, the Court finds the holding in Maldonado inapplicable because there was a genuine contest of the issues and Emeritus failed to comply with its duty to defend Morris.
Defendant also cites the unpublished Fifth Circuit decision in Ace Property Casualty Ins. Co. v. Dorismund, which it argues supports its point that a default judgment does not constitute a fully adversarial trial. In Dorismund, the plaintiff sued now-defunct retailer Service Merchandise in a suit filed two months after the retailer filed for bankruptcy. The retailer notified its liability insurance provider, Ace Property and Casualty Co. ("Ace"), that it did not intend to defend itself in the suit brought by the plaintiff. Neither Ace nor Service Merchandise entered an appearance in the matter and the Texas trial court entered a default judgment for plaintiff Dorismund in the amount of $421,516.39.
See Ace Property Casualty Ins. Co. v. Dorismund, 88 Fed.Appx. 695, 2004 WL 256557 (5th Cir.).
Id. at **1.
Upon motion by Ace, the trial court entered a declaratory judgment, finding that Service Merchandise had breached notice provisions in the insurance policy and an implied duty to defend itself and to mitigate its damages and that Ace was not liable as a result. However, the Fifth Circuit, upon reviewing the insurance contract, found that Ace had no duty to defend Service Merchandise and that it had expressly written the duty to defend out of the contract. Concluding its holding, the Fifth Circuit wrote that
Id.
Id.
Service deliberately decided not to take any action, as shown in its August 2, 2002, letter to ACE. Service's inaction provides an egregious example of avoiding "a fully adversarial trial" or even some sort of aggressive settlement negotiation. Such inaction constitutes a breach of Service's duty to its insurer.
Id. at **2.
In the situation before the Court, the facts are different. As set forth in the Court's February 15 order, the summary judgment evidence is clear that Morris did not know that Emeritus's insurance policy covered him as an additional insured and that he was entitled to a defense for claims covered by the policy. In the case below, Morris did not make the same decision that Service Merchandise made in Dorismund: not to defend the suit because the plaintiff had waived any right to a distribution by Service Merchandise. Rather, the former nursing home employee failed to appear at the trial because he could not afford counsel and did not know of National Union's duty to defend him. As a result, the Court finds the Fifth Circuit's holding in Dorismund inapplicable to the determination before it: whether National Union is bound by the default judgment entered against Morris.
Finally, Defendant cites to State Farm Fire Ins. Co. v. Gandy, for the proposition that a judgment rendered without a fully adversarial trial is never binding on the defendant's insurer. However, Gandy involved an assignment of choses in action and stated that the issue before the court was whether an insured could assign his claims against an insurance company for breach of its duty to defend. The Gandy court limited its discussion to situations involving assignments of claims and did not purport to extend its ruling beyond that limited factual scenario. This limits the applicability of the holding in Gandy and precludes it from creating controlling precedent for this Court in deciding whether National Union is bound by the judgment taken against Morris, since there was no assignment of claims here.
State Farm Fire Ins. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996).
Id. at 719.
Further, even taking Defendant's quoted statement from the court in Gandy at face value, the Court has already noted that there was a trial in this case and that the claims against Morris were severed from the suit against Emeritus after the close of evidence. Emeritus and National Union had the chance to rebut all of Plaintiff's evidence in the trial below. Indeed, as a co-defendant, Emeritus had an incentive to challenge all of the evidence submitted by Plaintiff and vigorously defend the claims brought against it. This incentive existed whether or not National Union fulfilled its duty to defend Morris. Thus, the Court finds that there was a fully adversarial trial on the merits below, with competent counsel representing plaintiff and defendant Emeritus. Additionally, there was no assignment of claims and Gandy's holding is inapplicable for this reason.
Other cases decided by Texas courts and cited by Plaintiff uphold default judgments in insurance cases. In Struna, the Texas court of appeals stated that generally, "direct actions by an injured third-party against a tortfeasor's insurance company are prohibited until it has been established by judgment or agreement that the insured has a legal obligation to pay damages to the injured party." Like Defendant National Union, the insurer in Struna focused on the actual trial requirement and argued that there had not been an actual trial establishing the insured's liability to the Struna plaintiff and that there could be no liability on the part of the insurer for the default judgment taken against its insured. In that case, there had not been an actual trial, but the trial court entered judgment after a hearing on the issue of the plaintiff's damages. The Texas court of appeals held that this hearing satisfied the actual trial requirement and reversed the trial court's decision to grant summary judgment to the insurer trying to avoid its liability for the default judgment.
See Struna v. Concord Ins. Services, Inc., 11 S.W.3d 355 (Tex.App.-Houston [1 Dist.] 2000); Ohio Casualty Group v. Risinger, 960 S.W.2d 708 (Tex.Civ.App. Tyler 1997, reh'g overruled); Allstate Ins. Co. v. Pare, 688 S.W.2d 680, 680 (Tex.App.-Beaumont 1985, writ ref'd n.r.e.).
11 S.W.3d at 359 (citing State Farm County Mut. Ins. Co. v. Ollis, 768 S.W.2d 722, 723 (Tex. 1989); Great Am. Ins. Co. v. Murray, 437 S.W.2d 264, 265 (Tex. 1969)).
Id.
Id. at 358-59.
In Risinger, another Texas appellate court addressed a suit against an insurer to collect on a default judgment. The insureds in the underlying case did not notify in the insurer Ohio Casualty that they had been served with citation and the Ohio Casualty argued that the insureds' failure to notify prejudiced it and precluded its liability for the default judgment. The court determined that the holder of the default judgment could overcome the insurer's affirmative defense of prejudice due to lack of notice by the insured by proving that Ohio Casualty had actual knowledge of the suit and was not prejudiced. The Court finds this case analogous and finds on these facts that National Union can and is bound by the default judgment taken against Morris in the underlying suit.
As to the court's statements regarding prejudice to the insurer from the insureds' failure to notify the insurer of the claim, this Court notes that National Union does not rely upon prejudice from lack of notice. Further, National Union concedes that it knew of the lawsuit and knew that Morris was a party to it. National Union argues instead that it was prejudiced by Morris's failure to forward suit papers and specifically request a defense and that it should be able to avoid liability for the underlying default judgment as a result.
In fact, in cases going back for decades, Texas judges have allowed injured third-party beneficiaries to sue on default judgments in Texas state courts. For example, Plaintiff cites to Pioneer v. Jefferson, a third-party beneficiary claim brought against an insurer under an automobile policy. The Pioneer court addressed a situation not unlike that before this Court: an insurer who refuses to defend the personal injury action then seeks to avoid liability for a subsequent default judgment. The defendant insurer in Pioneer also relied upon the actual trial requirement, protesting that the insured did not comply with the notice and cooperation provisions in its policy and that it could not be liable for the default judgment. Finding the insurer's argument disingenuous, the Texas court of appeals held that an insurer who refuses to defend its insured cannot thereafter insist on compliance with the insurance contract. The Texas court of appeals thus allowed the third-party beneficiary to enforce the default judgment against the insurer.
456 S.W.2d 410 (Tex.Civ.App. — 14th Dist. 1970, writ ref'd, n.r.e.).
Id. at 413.
In numerous other cases, Texas courts have allowed third-party beneficiaries to sue insurance companies on default judgments taken against them and rejects the insurer's inevitable argument that they are not bound by these default judgments. On the basis of the cases cited to the Court by counsel for both parties, the Court finds that Texas courts allow third-party beneficiaries to sue insurers on default judgments entered in underlying cases. The Court thus finds that it had more than adequate authority to support its Erie determination that Texas courts would allow the claim Plaintiff asserts against Defendant National Union here. As a result, the Court will deny Defendant's motion to reconsider.
II. Motion for Attorney's Fees
Also before the Court is Plaintiff's motion for attorney's fees (Docket No. 37), filed on March 2, 2005. The Court notes at the outset that Plaintiff's request was filed out of time. Local Rule CV-7(j) requires that a motion for attorney's fees be filed within fourteen days of entry of the judgment. The instant request was filed fifteen days after entry of the judgment, rendering it untimely. Defendant asks that Plaintiff's motion be denied on this basis.
The Court declines to deny Plaintiff's request merely because of a procedural defect. However, considering the nature of the case and the posture in which it was decided, the Court has determined that an award of fees is not appropriate here. As a result, the Court will deny Plaintiff's request for attorney's fees.
CONCLUSION
For the foregoing reasons, it is hereby ORDERED that Defendant's Motion for Reconsideration (Docket No. 36) is DENIED.
It is further ORDERED that Plaintiff's Motion for Attorney's Fees (Docket No. 39) is hereby DENIED.