Opinion
No. SA-04-CA-0389-RF.
February 15, 2005
ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
BEFORE THE COURT are cross motions for summary judgment (Docket Nos. 16 and 25), filed by Plaintiff and Defendant, along with the various responses and replies. Although the Court attempted to schedule oral arguments on the motions, Defendant's counsel was unable to participate because of health issues. Given the extensive submissions before it, the Court believes oral argument is not necessary. After careful consideration of the briefing, the record, and the applicable law, the Court is of the opinion that Plaintiff's motion for summary judgment (Docket No. 16) must be GRANTED and Defendant's (Docket No. 25) must be GRANTED IN PART and DENIED IN PART.
FACTUAL AND PROCEDURAL BACKGROUND
The instant case involves an insurance dispute over an prior personal injury action against a nursing home filed in state court by a resident who was injured by a nursing home employee. The resident sued the nursing home's owner and the employee, obtaining a default judgment of $1,000,000 against the employee, who neither answered the Petition nor defended the suit in any way. The following factual account is taken from the parties' statements of undisputed facts, along with affidavit testimony and other summary judgment evidence submitted to the Court with the parties' cross motions for summary judgment.
In 2001, Plaintiff Beatrice Crocker ("Crocker") was injured at the Redwood Springs Nursing Home ("Redwood Springs") by Richard Morris ("Morris"), a Redwood Springs employee. Morris opened a swinging kitchen door which struck Crocker, an elderly resident of the nursing home, knocking her down. As a result, Crocker suffered extensive injuries, incurred greater than $300,000 in medical expenses, and became confined to a wheelchair. Morris's employment with Redwood Springs was terminated shortly thereafter.
On May 3, 2002, Crocker brought suit in Bexar County, Texas against Morris and Redwood Spring's owner, Emeritus Corporation ("Emeritus") as co-defendants, for damages resulting from her injuries. Emeritus tendered its defense to its liability insurer, Defendant National Union Fire Insurance Company of Pittsburgh, PA ("National Union"), which represented Emeritus in the suit. National Union's liability policy for Emeritus also covered employees of Emeritus, including Morris, entitling him to a legal defense and indemnification of any claims arising out of the injury.
Def.'s Mot. Summ. Jmt. at 3; Plf.'s Orig. Pet., Ex. 3.
Plf.'s Mot. Summ. Jmt. at 3; Ex. B. "Endorsement 12."
The policy required that Morris as an additional insured notify National Union of any claim or suit and send the insurer copies of all demands, suit papers, or other legal documents received by Morris, "before coverage will apply." The policy also required Morris, as the insured, to cooperate with National Union in the defense.
Def.'s Mot. at 10-11; Ex. 1, p. 7. Plaintiff alleges, and Defendant does not contest, that Morris was unaware of this liability coverage or the requirements of the policy.
Morris initially refused to be served with process but was eventually served on September 7, 2002. Before he was served, however, Morris permitted plaintiff's counsel to take his recorded statement over the telephone. However, Morris did not respond to calls and other attempts at contact by defense counsel Jonathon C. LaMendola ("LaMendola") who was retained by National Union to defend Emeritus. Morris also did not respond to attempts made by ProClaim America, Inc. ("ProClaim"), an entity National Union retained to assist in its investigation of the claim. Regarding his failure to respond, there is evidence before the Court that Morris believed that Emeritus and LaMendola would not be defending him in the suit, since he had been fired by Redwood Springs following the accident and he was not aware that Emeritus owned Redwood Springs. In addition to failing to reply to calls and letters from defense counsel, Morris failed to tender his defense and did not forward the suit papers to National Union.
Plf.'s Mot. at 4; Ex. C.
Def.'s Mot. at 3; Ex. 5 "Deposition of Richard Morris" at p. 47, 1. 13-25.
See Def.'s Mot. at 3; Affidavit of Brad Reager, Ex. 1, 2.
See Morris Depo. at pp. 52-55.
Def.'s Mot. at 4 (citing numerous evidentiary references accounting for contacts to Morris).
On August 1, 2003, Crocker filed her First Amended Petition, which was served upon Morris via certified mail. Morris similarly refused service of this filing, along with the Motion for Entry of Default Judgment against him, filed by Crocker on September 3, 2003.
Def.'s Mot. at 5; Ex. 10.
Def.'s Mot. at 5; Ex. 11, 12.
On October 2, 2003, Morris's deposition was taken in the front yard of his mobile home. Privately, Morris conferred with plaintiff counsel William Schmidt ("Schmidt"), who informed defense counsel LaMendola that Morris was waiting for a return call from an attorney with whom Morris had apparently conferred. Morris subsequently declined to speak to LaMendola, who assumed that Morris had decided to retain his own attorney to handle his defense. However, Morris had mistakenly assumed that LaMendola was there in a capacity other than as counsel for his defense and clearly did not understand that LaMendola was available to represent him in the suit in addition to Emeritus.
Def.'s Mot. at 5; Affidavit of Jonathan LaMendola at para. 5.
On October 27, 2003, the case was called to trial, but Morris did not enter an appearance, attend the trial, or send counsel on his behalf. Prior to submission of the charge to the jury, the district court severed the claims against Morris into a separate suit. On October 30, 20003, the jury rendered a take-nothing verdict against Crocker, specifically finding that Emeritus, acting through its agents (including Morris) was not negligent. On November 4, 2003, the trial court granted Crocker's Motion for Default Judgment against Morris, entering judgment in the amount of $1,000,000. The court subsequently entered a final judgment in favor of Emeritus.
Def.'s Mot. at 6; Ex. 13.
Ex. 14.
Ex. 15.
On April 5, 2004, Crocker filed the instant suit against National Union as a judgment creditor, and third-party beneficiary, of National Union's liability policy covering Emeritus and Morris. She contends that Morris was entitled to coverage under the National Union policy and that National Union breached its policy by failing to defend Morris against Crocker's claims in the underlying suit. Crocker also brings direct breach of contract and Texas Insurance Code Art. 21.55 claims against National Union, contending that she was entitled to medical expense coverage of $5,000 under the professional liability coverage provided by the National Union policy.
In connection with this suit, Morris's deposition was taken on July 15, 2004, with counsel for Crocker and National Union present. During the deposition, counsel asked about the events of the underlying suit and Morris's understanding of those proceedings. In the deposition, Morris acknowledged that he had been sued by Crocker, served with the complaint, and that he was required to file an answer or be subjected to a default judgment. However, he stated that he had been unaware of the National Union Policy and did not understand that it required National Union to defend him in the personal injury suit.
Def.'s Mot. at 4; Morris Depo. at pp. 52,1. 14 — 55,1. 19; p. 73, 1. 9-24.
Morris Depo. at pp. 57-73.
National Union moves for summary judgment, arguing that National Union's duty to defend Morris was never triggered because he failed to forward pleadings served upon him to the insurer and request a defense. In the alternative, National Union argues that Morris breached the policy's cooperation clause by failing to tender his defense to National Union and failing to defend himself against Crocker. National Union argues that even if the Court finds that National Union breached a duty to defend Morris, it is not bound by the default judgment entered against Morris because Morris failed to mitigate his damages. Finally, National Union argues that Crocker's claim for reimbursement of $5,000 fails as a matter of law because the policy precludes such coverage for injuries to facility patients.
Crocker also moves for summary judgment, arguing that National Union received actual notice of the pending suit against Morris, knew he had been served, and failed to tender a defense on his behalf, in violation of its liability policy. Further, she argues that National Union is required to show prejudice in order to avoid liability and that it has not done so through its pleadings and the summary judgment evidence offered in support thereof. Finally, she argues that, since National Union has not shown prejudice from Morris's failure to forward the suit papers or request a defense, the insurer is liable to Crocker for the full amount of the default judgment entered against Morris in the earlier action.
Both parties allege that there is no genuine issue of material fact and each argues that it is entitled to summary judgment in this matter.
DISCUSSION
I. Summary Judgment StandardSummary judgment is appropriate if, after adequate time for discovery, there is no genuine issue of material fact and a party is entitled to judgment as a matter of law. 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 non-moving party. The party seeking summary judgment carries the burden of initially demonstrating the absence of a genuine issue of material fact. This burden does not require the moving party to produce evidence showing the absence of a genuine issue for trial; instead, the moving party can satisfy its burden simply by pointing out to the district court that there is no evidence to support the non-moving party's case.
FED. R. CIV. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Stahl v. Novartis Pharmaceuticals Corp., 283 F.3d 254, 263 (5th Cir. 2002).
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
Celotex, 477 U.S. at 325.
Once the moving party has met its burden, the non-movant must "set forth specific facts showing that there is a genuine issue for trial." The non-moving party must also describe the precise manner in which the evidence he sets forth supports his claims. If the non-moving party fails to set forth specific facts to support an essential element of his claim and one on which that party will bear the burden of proof, then summary judgment is appropriate. Even if the non-movant brings forth evidence in support of his claim, summary judgment is nonetheless appropriate "unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted.
See Forsyth v. Barr, 19 F.3d 1527, 1537 (5th Cir. 1996).
Celotex, 477 U.S. at 323.
Liberty Lobby, 477 U.S. at 249-50.
This case is brought by diverse parties and involves an amount in controversy of more than $75,000. As a result, the Court has jurisdiction over the action under 28 U.S.C. § 1332(a)(1). Because this diversity action concerns the interpretation and application of an insurance contract, this Court will apply Texas substantive law.
See Def.'s Notice of Removal at p. 1, paras. 1-4.
Erie R.R. v. Tompkins, 304 U.S. 64 (1938).
II. Third-Party Beneficiary Claims
A judgment creditor, Plaintiff Crocker seeks to collect the $1,000,000 default judgment entered in the underlying case against Morris, arguing that she is entitled to recover under the National Union policy issued to Emeritus as a third-party beneficiary of the policy.
A party injured by the insured is a third-party beneficiary of a liability insurance policy. A third-party beneficiary "steps into the shoes" of the insured and is bound by the same conditions precedent in the policy that bind those directly insured. Thus, the thirdparty beneficiary cannot acquire a better standing to enforce the contract than that occupied by the insured itself. Further, the third-party beneficiary cannot enforce the policy directly against the insurer unless it has been established, by judgment or agreement, that the insured has a legal obligation to pay damages to the injured party. Finally, in a suit brought by a third-party beneficiary, an insurer has the same defenses against the plaintiff as it would have if the suit were brought by the insured.
State Farm County Mut. Ins. Co. v. Ollis, 768 S.W.2d 722, 723 (Tex. 1989) (per curiam) (citing Great American Ins. Co. v. Murray, 437 S.W.2d 264 (Tex. 1969)).
See State Farm Lloyds v. Madonado, 963 S.W.2d 38, 40 (Tex. 1998); State Farm Mut. County Ins. Co. v. Ollis, 768 S.W.2d 722, 723 (Tex. 1989).
See Maldonado, 963 S.W.2d at 41.
Ollis, 768 S.W.2d at 723; Murray, 437 S.W.2d at 265.
Traders General Ins. Co. v. Davis, 142 S.W.2d 826, 832-33 (Tex.App.-Texarkana 1940, writ dism'd).
III. Insurance Company's Duty to Defend
National Union argues that it is entitled to summary judgment against Plaintiff's third-party beneficiary claim, contending that its duty to defend Morris was never triggered in this case. National Union argues that Texas law holds that an insurer's duty to defend is only triggered by the actual service of process on its insured and the insured's subsequent forwarding of any pleadings with which he has been served to the insurer. Since Morris never forwarded pleadings in the underlying suit to the insurance company, National Union claims that it was never obligated to defend Morris and, as a result, is not liable to Crocker as a third-party beneficiary.
A. Duty to Defend Defined by Contract
The insurer's duty to defend is a contractual duty defined by the terms of the insurance policy. The duty extends to all named insureds and additional insureds, usually including employees of insureds by specific provision. Whether an insurer has a duty to defend one of its insureds is a question of law. The insured generally must take certain required actions in order to trigger the insurer's duty to defend, referred to as "tender" of the lawsuit to the insurer. These requirements are conditions precedent to the insured's recovery of benefits under the insurance policy.
Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81 (Tex. 1997); Houston Petrol. v. Highlands Ins., 830 S.W.2d 153, 155 (Tex.App.-Houston [1st Dist.] 1990, writ den.). See also, generally, Ellen S. Pryor, Mapping the Changing Boundaries of the Duty to Defend in Texas, 31 TEX. TECH L.REV. 869 (2000).
See Texas Med. Liab. Trust v. Zurich Ins. Co., 945 S.W.2d 839, 843 (Tex.App.-Austin 1997, writ denied).
Southstar Corp. v. St. Paul Surplus Lines, 42 S.W.2d 187, 190 (Tex.App.-Corpus Christi 2001, no pet.).
See Lee H. Shidlofsky, Duty to Defend: An Analysis of the Eight Corners Rule, 9th Annual Ultimate Insurance Seminar (State Bar of Texas), March 30-31, 2000.
See, e.g., Harwell v. State Farm Mut. Auto. Ins. Co., 896 S.W.2d 170, 174 (Tex. 1995).
In addition, third-party judgment creditors are also bound by the insured's duties and obligations under the policy terms and conditions. Thus, the insured or third-party beneficiary has the burden to plead and prove that all conditions precedent to the policy have been performed. Conditions precedent can include provision of notice of a claim and forwarding of suit papers to the insurer.
State Farm Lloyds Ins. Co. v. Maldonado, 963 S.W.2d 38, 40-41 (Tex. 1998).
Filley v. Ohio Cas. Ins. Co., 805 S.W.2d 844, 847 (Tex.App.-Corpus Christi 1991, writ den.).
See 21 WILLIAM V. DORSANEO III, TEXAS LITIGATION GUIDE § 341.05 (Nov. 1999).
For example, most liability insurance policies require the insured to forward every demand, notice, or summons or other legal process to the insurer. If the policy has such a requirement, the insurer's obligation to defend the insured does not arise until the insured is served and sends the suit papers to the insurer. This requirement (1) gives the insurer the opportunity to defend the insured and control the litigation, and (2) keeps the insurer advised when the insured has been served with process and expects the insurer to file an answer. When the insured breached the duty to forward suit papers, the insurer does not have a duty to determine whether suit has been filed against the insured or whether the insured has been served. This duty is not satisfied by notice of a claim, which is not the same as notice of service in the actual suit.
See Allstate Ins. Co. v. Pare, 688 S.W.2d 680, 681 (Tex.App.-Beaumont 1985, ref. n.r.e.).
Harwell, 896 S.W.2d at 174.
Weaver v. Hartford Acc. Indem. Co., 570 S.W.2d 367, 369 (Tex. 1978).
Harwell, 896 S.W.2d at 174.
Id.; Liberty Mut. Ins. Co. v. Cruz, 883 S.W.2d 164, 165 n. 2 (Tex. 1993).
B. Policy Defenses to Liability
In order to avoid liability, liability insurers often make the argument that they are not subject to liability because of the insured's failure to comply with the policy conditions. This type of defense is referred to as a "policy defense." Further, the defense is often successful; Texas courts for many years held that, as a general rule, the failure of the insured to comply with policy conditions requiring notice or forwarding of suit papers will relieve the company of liability to an injured third party.
See, e.g., Ratcliff v. Nat'l County Mut. Fire Ins. Co., 735 S.W.2d 955, 956 (Tex.App.-Dallas 1987, writ dism'd).
See id. at 956-59.
See, e.g. Members Mut. Ins. Co. v. Cutaia, 476 S.W.2d 278, 279 (Tex. 1972) (citing Womack v. Allstate Ins. Co., 296 S.W.2d 233 (Tex. 1956)).
However, the question of whether allowing insurers to assert policy defenses and avoid liability has also been the subject of litigation. In Members Mut. Ins. Co. v. Cutaia, the Texas Supreme Court struggled with the question of whether notice conditions in insurance policies should be enforced if no harm or prejudice is shown from the insured's failure to provide notice. In so doing, the Texas Supreme Court cited to a treatise on insurance law discussing prejudice to insurers as a prerequisite to an insurer's taking advantage of notice provisions like the one at issue here.
Id. at 279-81.
Id. (citing ROBERT KEETON, INSURANCE LAW, BASIC TEXT § 7.1(b), at p. 441 (1971)).
The Cutaia court discussed efforts of other states to deal with the issue through legislation, eventually determining that "on balance, it is better policy for the contracts of insurance to the changed by the public body charged with their supervision, the State Board of Insurance, or by the Legislature," rather than for a court to insert a provision that violations of conditions precedent will be excused if no harm results from their violation. The Texas Supreme Court in 1972 thus declined to impose a prejudice requirement upon the operation of policy defenses asserted by insurers when they did not appear in the policy itself.
Id. at 280.
C. Regulatory Prejudice Requirement for Policy Defense
Thereafter, the Texas State Board of Insurance, by an Amendatory Endorsement effective May 1, 1973, required that all Texas general liability policies effective on or after that date include an endorsement requiring insurers to show prejudice in order to avoid the duty to defend obligations with the policy defenses of late notice or failure to forward suit papers. Specifically, the Amendatory Endorsement stated that:
Now, Texas Dep't of Insurance. See TEX. INS. CODE ANN. § 1.01A (Vernon Supp. 1999).
Order No. 23080, Texas State Board of Insurance, approving Revision of Texas Standard Provision For General Liability Policies — Amendatory Endorsement — Notice (March 3, 1973)["Amendatory Endorsement"]; Chiles v. Chubb Lloyds Ins. Co., 858 S.W.2d 633, 635 (Tex.App.-Houston [1st Dist.] 1993, writ denied); Trevino v. Allstate Ins. Co., 651 S.W.2d 8, 11 n. 1 (Tex.App.-Dallas 1983, writ ref'd n.r.e.)
Unless the company is prejudiced by the insured's failure to comply with the requirement, any provision of this policy requiring the insured to give notice of action, occurrence or loss, or requiring the insured to forward demands, notices, summons or other legal process, shall not bar liability under this policy.
Chiles, 858 S.W.2d at 635 (quoting Amendatory Endorsement) (emphasis added).
Thus, liability policies in Texas must provide that the insured's failure to notify the insurer of a claim or to forward suit papers does not relieve the insurer of liability under the policy unless the insurer is prejudiced by the failure. Thus, insurers invoking policy defenses must show prejudice from the insured's failure to comply with policy conditions in order to avoid liability. Further, Texas state insurance law places the burden of showing prejudice squarely on the shoulder of the insurer.
DORSANEO, supra, § 341.05[1][b][iii].
Struna v. Concord Ins. Servs. Inc., 11 S.W.3d 355, 359 n. 6 (Tex.App.-Houston[1st Dist.] 2000, no pet.); Chiles, 858 S.W.2d at 635.
TEX. INS. CODE ANN. § 21.58 (Vernon Supp. 2000).
Since the policy before the Court here is a general liability policy, it includes the endorsement requiring the insurer, Defendant National Union, to prove that any failure of the insured to comply with the policy requirements results in prejudice to the insurer in order to avoid liability. Since Crocker "steps into the shoes" of National Union's insured through this third-party beneficiary action, National Union must prove that Morris's failure to forward suit papers to National Union resulted in prejudice to the insurer in order to avoid liability.
See Ex. B.
D. Judicial Application of Prejudice Requirement
From the endorsement became effective in 1973, neither the State Board of Insurance nor the Texas Legislature have adopted any enactment articulating the precise contours of the required prejudice. Although little authority exists to explain what constitutes sufficient prejudice to relieve an insurer of liability under Texas law, courts that have addressed the issue have held that prejudice occurs under the following circumstances:
(1) when the insurer, without notice or actual knowledge of suit, receives notice after entry of default judgment against the insured; (2) when the insurer receives notice of the suit and the trial date is fast approaching, thereby depriving it of an opportunity to investigate the claims or mount an adequate defense; (3) when the insurer receives notice of a lawsuit after the case has proceeded to trial and judgment has been entered against the insured; and (4) when the insurer receives notice of a default judgment against its insured after the judgment has become final and nonappealable.
Bransum, 803 S.W.2d at 467.
See Filley v. Ohio Cas. Ins. Co., 805 S.W.2d 844, 847 (Tex.App.-Corpus Christi 1991, no writ); Kimble v. Aetna Cas. Sur. Co., 767 S.W.2d 846, 849 (Tex.App.-Amarillo 1989, writ denied).
See St. Paul Guardian Ins. Co. v. Centrum G.S. Ltd., 2003 WL 22038321, at *9 (citing Harwell, 896 S.W.2d 170; Cruz, 883 S.W.2d 164; Weaver, 570 S.W.2d 367; Ohio Cas. Group v. Risinger, 960 S.W.2d 708 (Tex.App.-Tyler 1997, writ denied); P.G. Bell Co. v. U.S. Fid. Guar. Co., 853 S.W.2d 187 (Tex.App.-Corpus Christi 1993, no writ); Filley, 805 S.W.2d at 844; Branscum, 803 S.W.2d 462; Kimble, 767 S.W.2d 846; Ratcliff, 735 S.W.2d 955; Wheeler v. Allstate Ins. Co., 592 S.W.2d 2 (Tex.Civ.App.-Beaumont 1979, no writ). Compare Pare, 688 S.W.2d 680 (failure to notify did not prejudice insurer because insurer had actual knowledge of suit)).
Thus, generally insurers can show prejudice when they are not given notice until just before or after a trial is conducted or after default judgment is entered. However, some Texas courts, like the one in Pare, find that an insured's failure to notify the insurer did not cause prejudice when the insurer had actual knowledge of the suit.
Pare, 688 S.W.2d at 680-84.
IV. Analysis: Third-Party Beneficiary Claim
Both parties move for summary judgment, asserting that the summary judgment evidence shows that there are no issues of material fact and the Court should rule on the motions before it. In reviewing the summary judgment evidence, the Court finds itself in agreement with the parties and has discovered no genuine issue of material fact. For this reason, the Court will rule on the legal issues and enter judgment as a matter of law.
Since she was injured by a covered insured under the National Union policy, Plaintiff Crocker is a third-party beneficiary of the policy and "steps into the shoes" of the insured, Morris. As a result, National Union is liable to Crocker for the $1,000,000 default judgment entered in the underlying case if it was obligated to defend Morris and failed to do so. If National Union was not obligated to defend Morris, then the insurer is not liable to Crocker for the default judgment, since the third-party beneficiary cannot acquire a better position than that occupied by the insured himself.
See Ollis, 768 S.W.2d at 723; Murray, 437 S.W.2d at 264; Maldonado, 963 S.W.2d at 40.
See id.
In its Motion for Summary Judgment, National Union argues that, because Morris failed to comply with the express terms of its liability policy, Crocker is not entitled to recover under the policy as a third-party beneficiary. Specifically, National Union contends that its duty to defend Morris was never triggered because Morris failed to request a defense, citing case law from the Fifth Circuit and Texas appellate courts. National Union thus asserts the policy defense of failure to request a defense in order to avoid liability to Crocker for the default judgment. However, because of the Amendatory Endorsement attached to this policy by operation of Texas insurance regulatory requirement, National Union must show prejudice from Morris's failure to forward the suit papers in order to avoid liability under its policy.
See, e.g., Travelers Indem. Co. v. Citgo Petroleum Corp., 166 F.3d 761, 768 (5th Cir. 1999) (citing Branscum, 803 S.W.2d at 466-67).
Amendatory Endorsement, Order No. 20380.
Chiles, 858 S.W.2d at 635; Trevino, 651 S.W.2d at 11 n. 1.
In its motion, National Union asserts that it has been prejudiced, but fails to cite case law supporting its contention that Morris's failure to forward suit papers prejudiced it as a matter of law. Instead, National Union argues that, since Morris failed to meet his obligation to minimize his legal liability, National Union was therefore prejudiced. However, National Union does not develop this argument and cites no cases decided on similar facts holding that the failure to request a defense and forward suit documents constitutes prejudice. Further, the Court finds no Texas case clearly holding that an insurer could avoid liability when its insured failed to submit pleadings and formally request a defense in a suit falling under its liability policy when the insurer had actual knowledge of the suit.
See Laster v. Am. Nat'l Fire Ins. Co., 775 F. Supp. 985, 995 (N.D. Tex. 1991), aff'd 966 F.2d 676 (5th Cir. 1992).
In her Motion for Summary Judgment, Crocker argues that, even if National Union did not properly receive notification directly from Morris that he had been served, National Union is still liable under the policy because it was not prejudiced by Morris's failure in this regard. In support, Crocker cites Texas authority holding that evidence of actual knowledge of a lawsuit against an insured negates the prejudice suffered by an insurer.
Cruz, 883 S.W.2d at 165; Struna, 11 S.W.3d at 360; Pare, 688 S.W.2d at 682.
Crocker points out that National Union was on notice that Morris had been served as early as September 17, 2002, when the return of service upon Morris was filed with the trial court. This provided National Union with notice that Morris had been served just less than fourteen months prior to the trial. Almost a year later, Crocker filed her motion for default judgment on September 2, 2003, providing National Union with notice that Morris had failed to file an answer or otherwise defend himself in the suit. This was more than one month prior to the entry of default judgment by the trial court.
See Plf.'s Mot. at 4; Ex. C.
Ex. 11.
In Struna and Pare, the insureds — like Mr. Morris — failed to forward suit papers in accordance with the policy terms. Both courts found that this failure did not result in prejudice to the insurance company however, because the companies had actual knowledge of the suit. In Struna, actual knowledge was found because the plaintiff's attorney notified the defendant insurance company of the underlying lawsuit and communicated with the insurance company at key points throughout the suit, including during the pendency of plaintiff's motion for default judgment. As a result, the insurer failed to meet its duty of showing that it was prejudiced by the insured's failure to forward the suit papers.
See Struna, 11 S.W.3d at 360.
In Pare, another Texas appellate court concluded that, where the defendant insurance company had actual knowledge of the underlying suit and had several conversations with plaintiff's counsel during the action and prior to the default judgment, there was no prejudice shown to the insurance company from the insured's failure to forward suit papers. In that case as well the court relied upon an amendatory endorsement conditioning the insurance company's ability to avoid liability under its policy on a showing of prejudice from the failure to forward papers.
See id.
In Liberty Mutual Ins. Co. v. Cruz, a case cited by both sides, the Supreme Court of Texas held that, absent actual notice, prejudice occurred when an insurer was not notified of suit against its insured until after the default judgment became final. In Cruz, the Supreme Court stated that, if the insurer had known of the suit, it might have chosen to answer for the named insured and litigate the merits of the underlying suit.
Id.
Under Cruz then, not learning about the suit against an insured until after the default judgment has been entered constitutes prejudice. Texas courts have found prejudice in other situations as well. For example, in Kimble v. Aetna Cas. Surety Co., the insured forwarded suit papers after the entry of default judgment but prior to the deadline for new trial motions. Failure to notify until after entry of default judgment created a "change in position" that amounted to prejudice as a matter of law. In Ratcliff v. Nat'l County Mut. Fire Ins. Co., another Texas appellate court held that failure to notify until after the judgment became final constituted prejudice.
Kimble, 767 S.W.2d at 848.
Id. at 851.
Here, National Union knew that Morris, as one of its insureds, had been sued by Crocker in the personal injury action below. In fact, it is undisputed that National Union knew of the suit against Morris as early as May 2002, eighteen months before trial in that case. National Union also knew by September 2002 that Morris had been served, providing them with over a year of notice prior to the trial in the underlying, personal injury suit. Further, National Union provided Attorney Jonathan LaMendola as counsel to represent Emeritus, who was Morris's co-defendant in the personal injury case. By September 2003, National Union knew that Morris, who had been validly served, had failed to file answer or retain counsel to appear on his behalf. Thus, National Union had clear evidence more than one month prior to the entry of the default judgment that its insured Morris had not tendered a defense in the suit against him by Crocker.
Ex. C.
The situation is thus easily distinguishable from the facts in Cruz, Kimble, and Ratcliff, where the insurers did not know of the suits against their respective insureds until after entry of the default judgment. Rather, the facts before the Court are more like those in Struna, where the court found that the insurer could not meet its burden of showing that it was prejudiced by the insured's failure to notify them, in light of the actual notice to the insurer. Morris's failure to forward the suit papers and request a defense from National Union, given the actual notice that the insurer had of the suit and impending default judgment, does not show prejudice to National Union as a matter of law.
See Cruz, 883 S.W.2d at 166; Kimble, 767 S.W.2d at 848; Ratcliff, 735 S.W.2d at 957.
Struna, 11 S.W.3d at 360; Branscum, 803 S.W.2d at 465-66; Pare, 688 S.W.2d at 680.
Struna, 11 S.W.3d at 360; Cruz, 883 S.W.2d at 165.
National Union also argues that it was also prejudiced in the underlying suit because Morris breached the cooperation clause of the policy. As an insured, Morris owed National Union a duty to cooperate with the insurer in its defense of Morris. Here again, it is the insured's duty to prove that there was actual prejudice in order to avoid liability as a result of Morris's breach.
See Quorum Health Resources, L.L.C. v. Maverick County Hospital District, 308 F.3d 451 (5th Cir. 2002) (citing State Farm Cas. Co. v. S.S., 858 S.W.2d 374, 385 (Tex. 1993)).
TEX. INS. CODE ANN. § 21.58(b). See also Philadelphia Indem. Ins. Co. v. Stebbins Five Co., Ltd., 2002 WL 31875596 at *5 n. 3 (citing Frazier v. Glens Falls Indem. Co., 278 S.W.2d 388, 392 (Tex.Civ.App.-Fort Worth 1955, writ ref'd n.r.e.)).
Crocker responds, arguing that National Union has not proved non-cooperation under Texas law. Crocker argues that Texas courts consider non-cooperation to be something more than mere failure to forward papers, such as collusion or refusal of counsel. National Union alleges that, among other things, Morris's repeated refusals of service and his failure to return LaMendola's phone calls show that he was not cooperating with National Union in his own defense. However, it is undisputed that Morris did not understand that National Union would defend him as a result of the liability policy.
See Rodriguez v. Texas Farmers Ins. Co., 903 S.W.2d 499, 507 (Tex.App.-Amarillo 1995, writ denied).
It is also uncontroverted that National Union never commenced a defense of Morris, despite knowing that he had been served with process as early as September 2002 and knowing a year later that a default judgment would likely be entered against him. In Rodriguez, the insurer attempted to provide defense counsel for the insureds in the underlying suit; however, they continually refused assistance. Further, they entered into a collusive arrangement with the other side, undermining their counsel's efforts to seek a new trial. As Crocker points out, Morris never refused counsel; rather, he stated that he would have liked representation. Further, his breaches of the policy conditions were unknowing breaches, since he was not even aware of the policy or of National Union's duty to defend him. Under these facts, National Union fails to show that Morris refused to cooperate with his defense, which would preclude liability under the policy language.
Id. at 509.
Id. at 507.
Ex. 5, at pp. 52-69.
Further, even if a court looking at the same evidence were to conclude that Morris did refuse to cooperate — and thus violated the duty to cooperate — National Union fails to show how it was prejudiced by the alleged failure. After conceding that it must demonstrate actual prejudice, National Union cites a string of mitigation of damages cases and asserts in a conclusory fashion that it has shown prejudice as a matter of law. Under controlling Texas case law, the insurer does not meet its burden of showing prejudice as a matter of law.
Def.'s Mot. at 15-17.
See TEX. INS. CODE ANN. Art. 21.58(b). Stebbins, 2002 WL 31875596 at *5 n. 3; Frazier, 278 S.W.2d at 392.
Since it fails to show that it was prejudiced by Morris's failure to forward the suit papers, request representation, or cooperate with the insurer in its defense of him, National Union has failed to meet its burden under Texas statutory and case law requiring an insurer to show prejudice in order to assert a policy defense. Because the insurer has not shown the required prejudice, it had a duty to defend Morris in the personal injury suit.
Since National Union breached its duty to defend by failing to notify Morris that it would provide Morris counsel to defend the claims against him, the insurer is responsible for the default judgment entered against Morris in the suit below. Since National Union's affirmative, policy-oriented defenses fail, Plaintiff Crocker's motion for summary judgment should be granted. As a result, Defendant National Union's motion must be denied, to the extent that it relates to National Union's duty to defend Morris and its liability for the default judgment entered against Morris in the suit below.
V. Crocker's Direct Liability Claim
Crocker also asserts a direct liability claim under the National Union policy, for $5,000 in medical expenses. She also claims in connection with this direct claim that National Union violated Texas Insurance Code Art. 21.55, requiring that all claims be promptly paid or denied, by failing to promptly pay her direct claim.
The National Union policy excluded coverage for medical expenses of anyone injured on Redwood Springs's premises and defined medical expenses as those brought about by bodily injury caused by an accident. Since Crocker's injuries fall into this excluded category, her direct claim for medical expenses fails. Further, since her claim for direct medical expenses liability under the policy fails, her claim under Article 21.55 also fail as a matter of law and National Union is entitled to summary judgment on these claims. As a result, National Union's motion for summary judgment should be granted as to this issue.
See Def.'s Mot. at 20; Ex.1.
Allstate v. Bonner, 51 S.W.3d 289, 291-92 (Tex. 2001).
CONCLUSION
For the foregoing reasons, it is hereby ORDERED that Plaintiff's Motion for Summary Judgment (Docket No. 16) is GRANTED.
It is further ORDERED that Defendant's Motion for Summary Judgment (Docket No. 25) is hereby GRANTED IN PART as it relates to Plaintiff's direct claim for medical expenses under the Defendant's policy.
It is further ORDERED that Defendant's Motion for Summary Judgment (Docket No. 25) is hereby DENIED IN PART as it relates to Defendant's liability for the default judgment entered in the underlying case.