Opinion
No. 07-05-00188-CV
April 30, 2007.
Appeal from the 84TH District Court of Hutchinson County; No. 33,355; HONORABLE JOHN LAGRONE, JUDGE.
OPINION
Appellants, Yorkshire Insurance Co., Ltd., and Ocean Marine Insurance Co., Ltd., appeal a judgment entered against them awarding $26,732,876.71 in actual damages, $10,041,307.94 in pre-judgment interest, post-judgment interest at the rate of five percent per annum from the January 3, 2005 date of judgment, and costs, to appellees, Roy Seger and Shirley Faye Hoskins, individually and as administrator of the estate of Randall Jay Seger (collectively, "the Segers"). We affirm in part and reverse and remand for further proceedings.
Because of the complexity of the issues presented on appeal, we will outline the facts and circumstances leading to this appeal and identify other pertinent facts in our discussion of the specific issues presented.
Background
This is an appeal of a Stowers action. The underlying incident giving rise to this action was the death of Randall Jay Seger. Randall did drilling work for two related companies, Diatom Drilling Co., L.P. (Diatom), and Employer's Contractor Services, Inc. (ECS). ECS was a corporation established by Diatom's general partner, Cynthia Gillman, to provide oil field services to Diatom and other drilling contractors. On July 13, 1992, while employed by ECS but providing services to Diatom, Randall was killed when a Diatom rig he was working on collapsed. Diatom, who was insured by a Lloyd's of London-type comprehensive general liability (CGL) insurance policy at the time of the accident, notified the subscribing insurers (collectively, "the CGL insurers") of the accident. Yorkshire and Ocean Marine (collectively, "Insurers") were members of this group.
See generally G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544, 548 (Tex.Comm'nApp. 1929, holding approved).
In June of 1993, Randall's parents, the Segers, filed suit against Diatom, its partners, and ECS alleging negligence and gross negligence. The CGL insurers were not specifically notified of the suit at the time that it was filed. The suit sat virtually dormant until 1998. In 1998, Diatom demanded that the CGL insurers provide a defense to the Segers' suit. The CGL insurers refused to provide a defense, contending that Randall's death was not a covered occurrence and that Diatom failed to provide timely notice of suit.
After the CGL insurers refused to provide Diatom a defense, the Segers offered to settle their suit against Diatom for $500,000, the policy limits of the CGL policy. Diatom made demand on the CGL insurers to settle the claim based on this offer. The CGL insurers notified Diatom that two of the insurers had become insolvent and, therefore, the demand exceeded the available policy limits of the CGL policy. Based on this additional information, the Segers offered to settle the suit for $368,190, the policy limits available from the solvent CGL insurers. The Segers subsequently lowered their settlement offer to $250,000. The CGL insurers refused each of these settlement demands.
Prior to trial in the underlying lawsuit, the Segers non-suited Gillman, and Diatom's counsel withdrew from representation. On March 27, 2001, the underlying suit was tried. Gillman was subpoenaed to attend and did attend as a witness. Gillman testified that she was appearing as the pro se representative of Diatom. However, the record reflects that Gillman's participation in the proceeding was consistent with that of a witness rather than a party. Gillman's limited "representation" of Diatom is evidenced by the fact that Diatom was not represented by counsel, presented no opening or closing argument, called no witnesses and presented no evidence. Gillman testified and, at the conclusion of her testimony, was dismissed. As a result of this trial, the trial court entered judgment against Diatom and awarded the Segers $15,000,000, plus pre-and post-judgment interest.
Following the entry of judgment in the underlying suit, Gillman contacted Diatom's CGL insurers to inquire what they intended to do about the judgment. When Gillman received no response to her inquiry, she assigned Diatom's rights against the CGL insurers to the Segers. The assignment reserved Diatom's right to recover its attorney's fees incurred in defense of the underlying suit, but otherwise assigned all of Diatom's rights against the CGL insurers to the Segers. Following the assignment, the Segers filed suit against the CGL insurers seeking damages based on the insurers' wrongful refusal to defend Diatom and negligent failure to settle the Segers' claim when demand was made within policy limits.
Prior to trial on the Stowers action, the Segers settled their assigned claims against all of the remaining solvent CGL insurers, except Yorkshire and Ocean Marine, and the settling insurers were dismissed from the suit. As the Stowers litigation against Insurers moved toward trial, both the Segers and Insurers filed multiple motions for summary judgment. The trial court heard these motions, denied all of Insurers' motions, and granted the Segers' motion for partial summary judgment on the issues of "coverage, demand within limits, fully adversarial relationship, and trial." Because each of these issues were resolved prior to trial, the only issues at the Stowers trial were the determination of Insurers' negligence, causation, and damages. During the trial, the trial court directed the verdict as to damages based on the judgment the Segers obtained against Diatom in the underlying suit. The issues of negligence and causation were submitted to a jury. The jury returned a verdict in favor of the Segers.
Insurers appeal the trial court's rulings on certain procedural issues, the competing motions for summary judgment, the denial of Insurers' motion for directed verdict, and the granting of the Segers' motion for directed verdict on damages. Insurers present six issues on appeal. Identifying these issues in the order that they will be addressed, Insurers contend that (1) the trial court erred in striking Insurers' defenses for violations of the Insurance Code, (2) Randy's death was not covered by the CGL policy because of the "leased-in worker" exclusion contained in the policy, (3) the Segers failed to make a settlement demand within Insurers' several policy limits, (4) the Segers failed to conclusively establish their damages, (5) evidence of collusion between Diatom and the Segers was improperly concealed, and (6) the trial court judge should have recused himself and the Segers' trial counsel should have been disqualified.
Summary Judgment Issues
Three of Insurers' issues relate to matters that were decided by the trial court by summary judgment. These issues are the statutory preclusion of Insurers' contract defenses, coverage, and demand within limits. Each of these rulings will be reviewed using the same standard of review.
We note that the trial court also entered summary judgment regarding issues related to damages, but, as the damages issue was ultimately decided by directed verdict, we will address it separately.
A. Standard of Review
When both parties to a suit move for summary judgment, each party bears the burden of establishing that it is entitled to judgment as a matter of law. City of Garland v. Dallas Morning News, 22 S.W.3d 351, 356 (Tex. 2000). When the trial court grants one party summary judgment and denies the other, we review both parties' summary judgment evidence, determine all questions presented, and render the judgment the trial judge should have rendered. FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 872 (Tex. 2000). When the trial court does not specify the basis on which it granted summary judgment, the judgment will be affirmed on any meritorious ground expressly presented in the motion and which is preserved for appellate review. State Farm Fire Cas. Co. v. S.S., 858 S.W.2d 374, 380 (Tex. 1993).
Both parties moved for summary judgment on traditional and no-evidence grounds. See Tex. R. Civ. P. 166a. We review a summary judgment de novo to determine whether the prevailing party has established its right to summary judgment as a matter of law. See Dallas Cent. Appraisal Dist. v. Cunningham, 161 S.W.3d 293, 295 (Tex.App.-Dallas 2005, no pet.). In reviewing a summary judgment, we must examine the entire record in the light most favorable to the nonmovant, indulging every reasonable inference and resolving any doubts against the motion. See City of Keller v. Wilson, 168 S.W.3d 802, 824-25 (Tex. 2005).
B. Global Preclusion of Insurers' Contract-Based Defenses
In 1992, Insurance Code article 1.14-1, section 8, provided, "Except for lawfully procured surplus lines insurance . . . any contract of insurance effective in this state and entered into by an unauthorized insurer is unenforceable by such insurer." See Act of Apr. 27, 1967, 60th Leg., R.S., ch. 185, § 1, 1967 Tex. Gen. Laws 400, 401,amended by, Act of May 27, 1993, 73rd Leg., R.S., ch. 999, § 3, 1993 Tex. Gen. Laws 4373, 4374, repealed by, Act of Apr. 30, 1999, 76th Leg., R.S., ch. 101, § 5, 1999 Tex. Gen. Laws 486, 538 (current version at Tex. Ins. Code Ann. § 101.201 (Vernon Supp. 2006)). In 1993, this section was amended and the language of the exception was changed from "lawfully procured surplus lines insurance" to "insurance procured by a licensed surplus lines agent from an eligible surplus lines insurer." However, under both the former and amended versions of article 1.14-1, section 8, whether the exception applied to a particular transaction was determined by reference to the requirements for "Surplus Lines Insurance," contained in article 1.14-2. See Act of Apr. 27, 1967, 60th Leg., R.S., ch. 185, § 1, 1967 Tex. Gen. Laws 400, 408-14,amended by, Act of May 27, 1993, 1993, 73rd Leg., R.S., ch. 999, § 16, 1993 Tex. Gen. Laws 4373, 4376-81, repealed by, Act of May 22, 2003, 78th Leg., R.S., ch. 1274, § 26, 2003 Tex. Gen. Laws 3611, 4138 (current version at § 981.001-.222).
Further reference to current provisions of the Insurance Code will be by reference to "section ___" or "§ ___."
Further citation to the pre-amendment version of article 1.14-1 will be by reference to "former article 1.14-1, § ___." Further citation to the post-amendment version of article 1.14-1 will be by reference to "amended article 1.14-1, § ___."
Further citation to the pre-amendment version of article 1.14-2 will be by reference to "former article 1.14-2, § ___." Further citation to the post-amendment version of article 1.14-2 will be by reference to "amended article 1.14-2, § ___."
The Segers contend that Insurers cannot enforce any defenses derived from the CGL policy, as a matter of law, because Insurers were unauthorized insurers when the policy was issued. Insurers contend that, even though they were unauthorized insurers, the statute generally does not preclude an unauthorized insurer's reliance on contract-based defenses in suits initiated by the insured or, if the statute does preclude an unauthorized insurer from asserting its contract-based defenses, the statute is inapplicable to Insurers because they met the surplus lines insurance exception.
Recently, the Texas Supreme Court clarified that the effect of the post-amendment provisions applicable to this case is to preclude unauthorized insurers from enforcing its policies. See Lexington Ins. Co. v. Strayhorn, 209 S.W.3d 83, 89 (Tex. 2006). Thus, we conclude that the Texas Supreme Court has specifically rejected Insurers' contention that the applicable provisions do no more than preclude an unauthorized insurer from bringing suit.
Initially, because the surplus lines exception changed with the 1993 amendments, we must determine the law applicable to the current case. The Segers contend that, because the policy at issue was entered into in 1992, the laws existing at the time the contract was made became part of the contract and govern the transaction. Insurers contend that the 1993 amendments were procedural or remedial in nature and, therefore, are properly applied retroactively. Courts generally presume that an amendment to a statute is to be applied prospectively and not retroactively. Subaru of Am., Inc. v. David McDavid Nissan, Inc., 84 S.W.3d 212, 219 (Tex. 2002). However, this general rule does not apply when the amendment is procedural or remedial, unless the retroactive application of the amendment would affect a party's vested rights.Id. at 219-20.
The 1993 amendments to articles 1.14-1 and 1.14-2 were intended to provide "reasonable and practical safeguards" to protect Texas consumers. Amended article 1.14-2, § 1. An unauthorized insurer who issues a policy to a Texas consumer is penalized by, among other things, being precluded from enforcing any defenses contained within the unauthorized policy. See amended article 1.14-1, § 9; Lexington Ins. Co., 209 S.W.3d at 89. However, because surplus lines insurance is sometimes necessary to insure risks for which coverage cannot be obtained from a licensed, resident insurer, see amended article 1.14-2, § 1; Mid-Am. Indem. Ins. Co. v. King, 22 S.W.3d 321, 322 (Tex. 1995), unauthorized insurers may become "eligible" to issue surplus lines policies to Texas consumers, provided that the insurer complies with strict capitalization and registration requirements. See amended article 1.14-1, § 8; amended article 1.14-2, § 3; Mid-Am. Indem. Ins. Co., 22 S.W.3d at 323. As these surplus lines insurers remain unauthorized insurers, they are subject to the remedial penalties imposed on an unauthorized insurer conducting the business of insurance in the state, including the loss of their contract-based defenses, unless they strictly comply with the eligibility requirements of amended article 1.14-2. See Lexington Ins. Co., 209 S.W.3d at 89. Because the 1993 amendment to article 1.14-1, section 8, affects only the remedies available to an insured when article 1.14-2 is violated by the insurer, we hold that the amended versions of these articles apply to the present case.
Other Texas courts have likewise applied post-amendment unauthorized and surplus lines insurance provisions retroactively, even when the policies were issued prior to 1993. See Lexington Ins. Co., 209 S.W.3d at 85, 89-90 (applying post-amendment article 1.14-1, § 11, to case involving insurance tax dispute covering taxes accruing from 1992 through 1995); Mid-Am. Indem. Ins. Co., 22 S.W.3d at 325 (requiring eligibility under post-amendment article 1.14-2 as prerequisite to bond exemption, even though the exemption specifically required eligibility at the time coverage issued, which was prior to 1993 amendments); Wheelways Ins. Co. v. Hodges, 872 S.W.2d 776, 779, 784 n. 10 (Tex.App.-Texarkana 1994, no writ) (applying amended article 1.14-1, § 8, to case involving accident occurring in 1989 with suit against insurer filed in 1991).
While the parties and the foregoing analysis cite the former and amended articles 1.14-1 and 1.14-2, these articles were repealed and recodified by the 76th and 78th Legislatures. See Act of Apr. 30, 1999, 76th Leg., R.S., ch. 101, § 5, 1999 Tex. Gen. Laws 486, 538; Act of May 22, 2003, 78th Leg., R.S., ch. 1274, § 26, 2003 Tex. Gen. Laws 3611, 4138. However, the Legislature expressly indicated that no substantive change in the law was intended by either Act. See Act of Apr. 30, 1999, 76th Leg., R.S., ch. 101, § 6, 1999 Tex. Gen. Laws 486, 538 ("This Act is intended as a recodification only, and no substantive change in law is intended by this Act."); Act of May 22, 2003, 78th Leg., R.S., ch. 1274, § 27, 2003 Tex. Gen. Laws 3611, 4139 (same). As a result and based on our determination that the 1993 amendments should be applied retroactively, we will analyze this appeal by reference to the current codification of the law.
It is undisputed that Insurers were unauthorized insurers at all times relevant to the present case. Section 101.201(a) provides that, "An insurance contract effective in this state and entered into by an unauthorized insurer is unenforceable by the insurer." However, section 101.201(b) provides that, "This section does not apply to insurance procured by a licensed surplus lines agent from an eligible surplus lines insurer as defined by Chapter 981. . . ." The Segers contend that Insurers could produce no evidence that they met the surplus lines exception or, alternatively, the Segers conclusively established that Insurers did not meet the surplus lines exception and, therefore, Insurers are precluded from asserting their contract-based defenses under section 101.201(a). Insurers contend that they were entitled to rely on their contract-based defenses because they established that they met the surplus lines exception of section 101.201(b) as a matter of law.
Because surplus lines insurance is excepted from the general statutory restriction on unauthorized insurers, the burden of proving every fact essential to the invocation of the exception rests on Insurers.See Cramer v. Sheppard, 140 Tex. 271, 167 S.W.2d 147, 155 (1942);Risk Managers Int'l, Inc. v. State, 858 S.W.2d 567, 570 (Tex.App.-Austin 1993, writ denied). Proof that the exception applies requires proof that Insurers were eligible surplus lines insurers and that the CGL policy was procured through a licensed surplus lines agent. See § 101.201(b). Even if Insurers established they met the surplus lines exception, Insurers must further prove that the CGL policy was not issued in "material and intentional" violation of chapter 981 of the Insurance Code. See § 981.005: Lexington Ins. Co., 209 S.W.3d at 89.
We will initially review the evidence regarding whether Insurers were eligible surplus lines insurers. An "eligible surplus lines insurer" must comply with the requirements of sections 981.051-.065 of the Insurance Code. See § 981.002(1). The Segers contend that Insurers produced no evidence that they were eligible surplus lines insurers or, alternatively, that summary judgment evidence conclusively established that Insurers were not eligible surplus lines insurers.
The record includes a certification from Kathy A. Wilcox, Registration Officer of the Texas Department of Insurance, that indicates, at all times pertinent to the present case, both Yorkshire and Ocean Marine were unlicensed insurers which were eligible to provide surplus lines insurance under each iteration of the statute and at all times pertinent to the present case. We conclude that these certifications are more than a scintilla of evidence that Insurers were eligible surplus lines insurers. Further, we conclude that, because these certifications were uncontroverted, the evidence conclusively established that Insurers were eligible surplus lines insurers.
Specifically, the certification provides that Yorkshire was "an unlicensed insurer which is an eligible insurer for providing surplus lines insurance under article 1.14-2, Texas Insurance Code from September 1, 1989 thru November 12, 2001 and from July 1, 2002 thru the present."
Specifically, the certification provides that Ocean Marine was "an unlicensed insurer which is an eligible insurer for providing surplus lines insurance under article 1.14-2, Texas Insurance Code from November 1, 1989 thru the present."
Further, we note that the Segers do not contest Insurers' general eligibility to provide surplus lines insurance.
In their motion for summary judgment, the Segers contended that "not all of the original underwriters on the coverage were eligible surplus lines insurers" and, therefore, the CGL policy was not issued by eligible surplus lines insurers. We agree with the Segers' contention that eligibility for a Lloyd's of London-style group policy is dependent upon the eligibility of each insurer participating in the insuring group. See § 981.004(a)(3).
The record contains evidence that the Surplus Lines Stamping Office of the State Board of Insurance, the statutory organization required to evaluate and advise the Commissioner of Insurance regarding compliance with the statutory surplus lines insurance requirements, see § 981.154(b)(2), approved each member of the group of CGL insurers as eligible after the allocation of coverage was amended to replace one ineligible surplus lines insurer. This certification from the Stamping Office that all insurers participating in the CGL policy were eligible to provide surplus lines insurance in Texas is more than a scintilla of evidence that the CGL policy was obtained from an eligible group of insurers and is sufficient, in the absence of evidence to the contrary, to establish that the CGL policy was issued by eligible surplus lines insurers as a matter of law.
However, more is required to meet the exception of section 101.201(b). In addition to the insurer being eligible to provide surplus lines insurance, the insurance must be procured through a licensed surplus lines agent. § 101.201(b). The Segers contend that Insurers could produce no evidence that the CGL policy was placed through a licensed surplus lines agent and that the evidence conclusively established that the policy was not procured by a licensed surplus lines agent. Insurers contend that the evidence conclusively established that the CGL policy was procured by a licensed surplus lines agent.
The record includes a statement from Matt Ray, Deputy Commissioner of the Licensing Division of the Texas Department of Insurance, indicating that London American Risk Specialists, Inc. (LARSI), held a surplus lines agency license that was issued on February 14, 1984 and was due to expire October 25, 2005, if not timely renewed. Notably, the cover note for the CGL policy specifically indicates that the insurance was placed through LARSI. We conclude that this evidence is more than a scintilla of evidence that the CGL policy was procured through a licensed surplus lines agent.
However, the Segers correctly point out that this evidence indicates that LARSI was and is licensed as a managing general agency. Section 981.220(b) restricts a surplus lines agent whose license is granted to it as a managing general agent, that is not also licensed under Article 21.14 of the Insurance Code, to business that originates through a licensed general property and casualty agent. In other words, a surplus lines agent that is not also a licensed local recording agent may not transact business directly with applicants for surplus lines insurance.See § 981.220(b). However, the direct transaction restriction is inapplicable if the managing general surplus lines agent is also a licensed local recording agent. See Id. The statement from Ray, referenced above, makes no indication regarding whether LARSI held a license under Article 21.14. Thus, for LARSI's surplus lines agent license to meet the exception found in section 101.201(b), the transaction must have been directed through an agent that was a licensed general property and casualty agent. § 981.220(b).
Relating to local recording agent licenses.
If the evidence established that the agent through which this transaction was directed was a licensed general property and casualty agent, LARSI would qualify as a licensed surplus lines agent under the section 101.201(b) exception. The evidence indicates that the agent that originated the placement of the CGL policy was Dan Pavillard. An affidavit of Pavillard indicates that he was, at the time the CGL policy was procured, a licensed local recording agent. The record also includes a document titled Individual Licensee Information Inquiry that does indicate that Pavillard was a "General Lines Agent" and was qualified in "Property and Casualty." However, this document, which is not authenticated by Pavillard's affidavit nor by an affidavit of the person or organization providing the document, indicates that Pavillard's General Lines Agency License with a qualification in Property and Casualty became effective on March 13, 1996, four full years after the CGL policy was placed.
Under amended article 1.14-2, § 2(a)(3), an agent holding a managing general agency license was limited to accepting business originating through a regularly licensed recording agent. However, under section 981.220(b), a licensed managing general agent is limited to the acceptance of business originating through a licensed general property and casualty agent. Thus, whether Pavillard held a local recording agent's license at the time the CGL policy was issued is not material to whether Insurers met the section 101.201(b) exception.
Pavillard's affidavit states that he held a local recording agent's license at the time the CGL policy was issued and indicates that this fact "may be verified with reference to the Individual Licensee Information on file with the Texas Department of Insurance" (emphasis added). However, Pavillard does not authenticate the Individual Licensee Information Inquiry that appears to have been attached to his affidavit.
Section 981.220(b)'s "licensed general property and casualty agent" exception changed amended article 1.14-2, section 2(a)(3)'s "regularly licensed recording agent" language. Since this amendment was expressly intended by the legislature to be a recodification of the law and was not to effect any substantive change in the law, see Act of Apr. 30, 1999, 76th Leg., R.S., ch. 101, § 6, 1999 Tex. Gen. Laws 486, 538; Act of May 22, 2003, 78th Leg., R.S., ch. 1274, § 27, 2003 Tex. Gen. Laws 3611, 4139, we conclude that the exception may be satisfied by proof that the agent through which the surplus lines insurance was placed was a regularly licensed recording agent up to the effective date of the recodification if that same agent became a licensed general property and casualty agent from the effective date of the recodification forward. Reviewing the record, Pavillard's affidavit provides some evidence that he met the "regularly licensed recording agent" exception under both the former and amended article 1.14-2 up to the 2003 recodification. Further, the Individual Licensee Information Inquiry provides some evidence that Pavillard held a general property and casualty agent's license at the time that section 981.220(b) became effective. Viewing this evidence in the light most favorable to Insurers and indulging every reasonable inference that may be derived from this evidence in their favor, we conclude that this evidence is sufficient to allow reasonable and fair-minded people to differ in their conclusions regarding whether LARSI met the section 101.201(b) exception.See Merrell Dow Pharm, Inc. v. Havner, 953 S.W.2d 706, 711 (Tex. 1997). Consequently, we conclude that the trial court erred in granting the Segers summary judgment precluding Insurers from asserting their contract-based defenses.
However, we further conclude that, viewing the evidence discussed above in the light most favorable to the Segers and indulging every reasonable inference in their favor, Insurers have failed to prove, as a matter of law, that LARSI was a licensed surplus lines agent statutorily authorized to procure the CGL insurance for Diatom. The evidence fails to conclusively establish that the CGL insurance was procured through an authorized licensed surplus lines agent. Id. Pavillard's affidavit indicates that he held a local recording agent's license "[a]t the time this coverage [the CGL policy] was placed." There is, however, no record evidence establishing that Pavillard maintained his status as a regularly licensed recording agent from the time coverage was placed until the effective date of the statutory recodification. Further, while the Individual Licensee Information Inquiry's indication that Pavillard held a general lines agency license with a qualification in property and casualty is some evidence that Pavillard complied with the exception contained in section 981.220(b), we conclude that the document's lack of authentication and its failure to conclusively establish that a general lines agency license with a qualification in property and casualty is the same as a licensed general property and casualty agent fails to establish LARSI's qualification under the exception as a matter of law. It was Insurers' burden to prove every fact essential to the invocation of the exception. See Cramer, 167 S.W.2d at 155; Risk Managers Int'l, Inc., 858 S.W.2d at 570.
Concluding that the record evidence raises genuine issues of material fact regarding whether the CGL policy in this case was procured by a licensed surplus lines agent from an eligible surplus lines insurer, we conclude that summary judgment precluding Insurers from asserting their contract-based defenses under section 101.201 was in error. However, we affirm the trial court's denial of Insurers' motion for summary judgment on this issue.
When the trial court does not specify the basis on which it granted summary judgment, the judgment will be affirmed on any meritorious ground expressly presented in the motion and preserved for appellate review. S.S., 858 S.W.2d at 380. The Segers would be entitled to summary judgment precluding Insurers from asserting their contract-based defenses, even if Insurers met the surplus lines exception, if the Segers were to establish that any violation of the surplus lines requirements were material and intentional. See § 981.005;Lexington Ins. Co., 209 S.W.3d at 89. However, the Segers failed to expressly present this ground in their motion. The Segers did contend, in their motion for summary judgment, that the evidence established that the insurance was issued in violation of article 1.14-2, §§ 5, 6(a), 6A(a), 6(c), 6(d), 6(e), 7(a), 7(b), and 8(a). However, because the Segers premised their summary judgment motion on alleged violations of former articles 1.14-1 and 1.14-2, they have not even alleged that any of Insurers' violations of article 1.14-2 were material and intentional violations. Therefore, we conclude that the Segers did not expressly present the summary judgment ground that any violation of the surplus lines insurance requirements by Insurers were material and intentional and, because we have previously concluded that the Segers were not otherwise entitled to summary judgment on this issue, the Segers were not entitled to summary judgment on the basis of their avoidance of Insurers' contract-based defenses under section 981.005.
We are unable to ascertain the violation that the Segers allege by their reference to article 1.14-2, § 6A(a), as this provision simply authorized the establishment of the Surplus Lines Stamping Office.See amended article 1.14-2, § 6A(a).
We presume that, because the Segers' appellate position is premised on application of pre-1993 amendment law, all references to articles 1.14-1 and 1.14-2 in the Segers' brief are references to the former provisions.
There was no distinction for "material and intentional" violations under the former articles 1.14-1 and 1.14-2.
As genuine issues of material fact remain regarding whether Insurers are precluded from asserting their contract-based defenses under section 101.201, to the extent that summary judgment was premised on Insurers being globally precluded from asserting their contract-based defenses, the trial court erred. See Tex. R. Civ. P. 166a(c); McConnell v. Southside Indep. Sch. Dist., 858 S.W.2d 337, 339 (Tex. 1993).
C. Coverage
However, because the trial court did not specify the grounds upon which it granted summary judgment, we must affirm the judgment if it is supported by any meritorious ground expressly presented in the motion and preserved for appellate review. S.S., 858 S.W.2d at 380. In their motion for summary judgment, the Segers alternatively contended that Insurers could produce no evidence or insufficient evidence to support any of the contract-based defenses they alleged. Because the Segers presented both no evidence and traditional summary judgment challenges to each of Insurers' contract-based defenses, a determination that Insurers failed to present more than a scintilla of evidence of any defense or that the Segers conclusively negated each of Insurers' defenses would require affirmation of the trial court's summary judgment on the issue of coverage.
After reviewing the defenses asserted by Insurers, we conclude that a genuine issue of material fact exists regarding the leased-in worker and employee exclusions. The CGL policy included, in its cover note, an exclusion of "Leased-In Employees/Workers." This phrase is not defined by the policy. Insurers contend that a standard "leased worker" exclusion was not established until 1993. The policy does include a standard employee exclusion. Insurers contend that either Randall was actually an employee of Diatom and, therefore, the Segers' claim is excluded by the standard employee exclusion or Randall was "leased in" by Diatom from ECS and coverage is excluded based on the leased-in worker exclusion contained on the CGL cover note.
It is undisputed that the Segers' claim is the kind of claim generally covered by the CGL policy. However, the parties hotly contest the application of the leased-in worker and employee exclusions to the Segers' claim. Once general coverage is established, the burden of proving the existence and applicability of a policy exclusion rests with Insurers. Tex. R. Civ. P. 94; Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 193 (Tex.App.-Houston [14th Dist.] 2003, pet. denied); Venture Encoding Serv., Inc. v. Atl. Mut. Ins. Co., 107 S.W.3d 729, 733 (Tex.App.-Fort Worth 2003, pet. denied).
The interpretation of insurance policies is governed by the same rules of construction applicable to other written contracts. State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 433 (Tex. 1995). In construing a written contract, the court's primary concern is to ascertain the true intentions of the parties as expressed in the instrument. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). Terms in an insurance contract will be given their ordinary meaning unless the policy shows that the words were meant in a technical or different sense. Sec. Mut. Cas. Co. v. Johnson, 584 S.W.2d 703, 704 (Tex. 1979). If terms in the contract can be given a definite or certain legal meaning, they are not ambiguous and the court will construe the contract as a matter of law.Coker, 650 S.W.2d at 393. When a contract contains an ambiguity, the granting of a motion for summary judgment is improper because the interpretation of the contract becomes a fact issue. Id. at 394.
The record includes evidence which raises a genuine issue of material fact regarding the applicability of the leased-in worker exclusion to the Segers' claim. Among the evidence construing the leased-in worker language to exclude coverage for the Segers' claim are the affidavits of Keith Redwood, one of the underwriters binding the CGL policy coverage on behalf of Yorkshire, Alan John Jones, a claims adjuster for the successor to Yorkshire, and Karl Emery, the LARSI employee who helped broker the CGL policy for Diatom. We conclude that this evidence is persuasive and raises a genuine issue of material fact regarding whether the leased-in worker exclusion in the CGL policy excluded the Segers' claim.
For purposes of the present analysis, we will assume that Randall was not an employee of Diatom through alter ego principles.
The Segers contend that the leased-in worker exclusion is ambiguous because the exclusion could reasonably be construed to exclude leased-in workers from being "insureds" under the policy, claims made by leased-in workers, or all claims, including wrongful death claims asserted by survivors of the leased-in worker, arising from the leased-in worker relationship. However, the Segers' position that the exclusion is ambiguous precludes summary judgment on traditional grounds because an ambiguity in a contract gives rise to a fact question regarding the proper interpretation of the contract. Id. at 394. Because the Segers contend that the exclusion is ambiguous, the trial court erred in granting summary judgment on coverage in favor of the Segers.
Insurers contend that the trial court erred in denying their motion for summary judgment that contended that coverage for the Segers' claim was excluded, as a matter of law, by the leased-in worker and employee exclusions. Even were this court to conclude that the leased-in worker and employee exclusions exclude coverage of the Segers' claim, a determination which we need not and do not make, Insurers would not be entitled to summary judgment because, as discussed above, a genuine issue of material fact would remain regarding whether Insurers could rely on these contract-based defenses under section 101.201(b). As Insurers' right to rely on any of the policy's defenses remains a material fact issue, we conclude that construction of the policy's exclusions is premature and is best left to the trial court, if Insurers establish their entitlement to rely on these exclusions. See Tex. R. App. P. 47.1.
Having concluded that the trial court erred in granting summary judgment on the issue of coverage, we will reverse the summary judgment and remand to the trial court for a determination of whether the CGL policy covered the claims asserted by the Segers. We affirm the trial court's denial of Insurer's motion for summary judgment on this issue.
D. Demand Within Limits
To prove an insurer's negligent failure to settle a claim, i.e., aStowers claim, the insured must establish that (1) the claim is within the scope of coverage, (2) a demand was made that was within policy limits, and (3) the demand was such that an ordinary prudent insurer would have accepted it, considering the likelihood and degree of the insured's potential exposure to an excess judgment. Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994). A demand that exceeds the policy limits, even though reasonable, does not trigger the insurer's duty to settle. Id. Insurers contend that, since the policy provided that each insurer was severally liable, the Segers' collective settlement offers were ineffective to trigger Insurers'Stowers liability because the Segers failed to make settlement demands within the several limits of Yorkshire and Ocean Marine. The Segers contend that their collective settlement demands were within the solvent policy limits available under the CGL policy and were sufficient to meet the second Stowers element. Further, the Segers rely on the CGL insurers' admission that the Segers made a demand that was within the available policy limits.
The terms of the CGL policy provided that, in exchange for premium payments totaling $10,850, the CGL insurers would provide coverage for the period of January 23, 1992 through January 23, 1993, with policy limits of $500,000 per accident/occurrence. The cover note, which was incorporated into the policy, indicated that Yorkshire insured 16.472 percent of the policy and that Ocean Marine insured 10 percent of the policy. It is undisputed that the Segers did not make demands upon Yorkshire and Ocean Marine separately that would fall within their proportionate share of the policy's limits. However, it is also undisputed that the Segers did make demand for the stated policy limits, $500,000, and subsequently made demands for $368,190 and $250,000. In fact, at Insurers' request, the trial court took judicial notice that the Segers offered to settle the underlying case for $250,000. Thus, the facts related to this issue are not in dispute. Rather, the question presented is whether the Segers' collective settlement demand for $250,000 was sufficient to meet the "demand within policy limits" element of a Stowers action or were the Segers required to make separate demands upon each of the CGL insurers within each insurer's proportionate share of the policy's limits.
No issue has been raised regarding the timely payment of these premiums.
In a typical Stowers action, an insured brings suit against his insurer for the insurer's negligent failure to settle a covered claim asserted against the insured for an amount within the applicable policy limits when the covered claim results in a judgment in excess of the policy limits. However, before an insured can prevail in aStowers action, the claimant in the underlying proceeding must have made a settlement demand that was within the applicable policy limits.Id. Thus, it is the claimant in the underlying suit that determines whether the second element of a Stowers claim can be met by the insured. As a result, we believe that a claimant should be entitled to rely on the specific provisions of an insurance policy in making a settlement demand that is within the coverage of the policy. That it is the policy that dictates whether a settlement demand was within policy limits is bolstered by the Texas Supreme Court's indication that a settlement demand that proposes to release the insured for "the policy limits," in lieu of a demand for a sum certain, is sufficient to satisfy the "demand within limits" element of a Stowers action. See Id. at 848-49. Further, when a claimant makes such a demand and it is rejected by the insurer, we believe that proof that a settlement demand that was within the limits stated in the policy and that was rejected by the insurer is all that is necessary to satisfy the "demand within limits" element of aStowers claim. Thus, in the present case, we conclude that the Segers' collective settlement demand of $250,000, which falls within the $500,000 limit stated in the policy, was sufficient to satisfy the second element of a Stowers action against Insurers. As the undisputed facts establish that the Segers made a settlement demand that was within the CGL policy limits as a matter of law, we affirm the trial court's grant of summary judgment in favor of the Segers on this issue.
We express no opinion regarding what, if any, effect the insolvency of certain severally liable insurers would have on whether a demand within stated policy limits, but exceeding the solvent insurers' proportionate share of coverage, would have on the establishment of a "demand within limits" in the context of a subsequent Stowers action. In the present case, it is undisputed that when the Segers made their $250,000 demand, the demand was within the available policy limits of the solvent CGL insurers.
However, we agree with Insurers' position that each underwriter in a Lloyd's policy has only several liability and that the liability of each is limited to the percentage of the coverage that each insurer agreed to undertake. See Houston Cas. Co. v. Certain Underwriters at Lloyd's London, 51 F.Supp.2d 789, 791-92 (S.D. Tex. 1999) (explaining the nature of an insurer's liability in a Lloyd's policy). Thus, if the CGL insurers are determined to have been negligent in failing to settle the Segers' claims for the $250,000 settlement offer, Yorkshire's and Ocean Marine's liability for this negligence shall be limited to their proportionate share of the total coverage provided by the CGL policy.
By example, if Insurers are found liable on remand and if the damages caused by the CGL insurers' negligent failure to settle the Segers' claims is determined to be $10,000,000, Yorkshire's liability under the judgment would be $1,647,200 ($10,000,000 times Yorkshire's 16.472 percent portion of the CGL policy). Under the same hypothetical, Ocean Marine's liability under the judgment would be $1,000,000 ($10,000,000 times Ocean Marine's 10 percent portion of the CGL policy).
Damages
Insurers contend that the Segers presented no evidence to establish that Diatom suffered injury as a result of any negligence on the part of Insurers and, therefore, the trial court's grant of directed verdict as to damages was in error. Insurers contend that (1) Diatom was judgment proof and, therefore, was not injured by Insurers' negligence, (2) directed verdict was an improper method to determine damages, and (3) because the underlying judgment was not the result of a fully adversarial trial, it constituted no evidence of damages. The Segers contend that Diatom's financial condition is immaterial to Insurers'Stowers liability and that, because the damages awarded in the underlying judgment were the result of a fully adversarial trial, the damages awarded in that judgment are conclusive of the damages Diatom suffered as a result of Insurers' negligence. We will address each of Insurers' subpoints regarding this issue in the order in which they were presented.
In reviewing the granting of a no-evidence summary judgment, we must decide whether any probative evidence was presented that would raise a genuine issue of material fact regarding the issue upon which the summary judgment was granted. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 241-42 (Tex. 2001) (per curiam). This is the same standard utilized in reviewing a directed verdict. See King Ranch, Inc. v. Chapman, 118 S.W.3d 742, 750-51 (Tex. 2003). In determining if the evidence raises a genuine issue of material fact, we review the evidence in the light most favorable to the party against whom the verdict is rendered. Morgan v. Anthony, 27 S.W.3d 928, 929 (Tex. 2000).
Insurers contend that, because Diatom was unable to pay any damages awarded by the judgment, the Segers cannot prove that Diatom suffered any harm as a result of Insurers' negligent refusal to settle the Segers' claims when demand was made within policy limits. The record does establish that Diatom is and was judgment proof. Diatom ceased doing business in 1993, sold all of its assets to make payments to creditors, and was involuntarily dissolved. As a result, Diatom possessed no assets from which it could pay any damages awarded to the Segers.
Insurers' contention is analogous to the argument made by the insurer in YMCA of Metro. Fort Worth v. Commercial Standard Ins. Co., 552 S.W.2d 497 (Tex.Civ.App.-Fort Worth 1977, writ ref'd n.r.e.). InYMCA, the insurer argued that, because its insured had entered into a covenant with the plaintiffs not to execute the judgment against the insured, the insured had no obligation to pay the judgment and, consequently, was not harmed by the insurer's negligent refusal to settle. Id. at 501. The court analyzed the language in the policy at issue and concluded that the policy was a liability policy rather than an indemnity policy. Id. at 504. Notably, the court cited the policy's provision that, "The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages. . . ." After discussing the differences between a liability policy and an indemnity policy, the court concluded that the policy was a liability policy and that the covenant not to execute did not release the insurer from liability, even though the insured was under no legal obligation to pay the damages awarded. See id.
An insurer in a liability policy agrees to defend the insured and protect it from liability. If the insurer is unsuccessful in protecting insured from liability and must settle or, if a judgment is rendered against the insured, the insured is not required to pay the obligation before the insurer is required to pay. If a judgment is rendered against the insured, the insurer's liability to pay attaches at that time. This obligation to pay continues until the judgment is satisfied.
Conversely, an indemnity policy provides that the insurer's liability does not attach unless the judgment against the insured has actually been paid.
See id. at 504.
The CGL insurance policy involved in the present case includes the exact language cited above in the YMCA policy. From this and other provisions of the policy, we conclude that the CGL policy is a liability policy rather than an indemnity policy. Therefore, we conclude that Diatom's inability to pay the damages awarded in the underlying judgment does not affect Diatom's liability under the judgment. See id. at 504. Thus, the fact that Diatom was judgment proof does not establish Insurers' right to directed verdict on damages.
As support for its contention, Insurers cite Foremost County Mut. Ins. Co. v. Home Indem. Co., 897 F.2d 754, 757 (5th Cir. 1990), as holding that an underlying judgment constitutes no evidence of damages in aStowers action if the judgment is accompanied by a covenant not to execute against the insured. The Foremost court, however, recognized the general rule that "[i]n Texas a covenant not to execute by an insured does not release an insurance carrier from liability."Id. at 758 (citing YMCA, 552 S.W.2d at 504-05). Further, theForemost court specifically indicated that, "under our decision not to extend the YMCA rule the insurer who negligently refuses to settle will be able to use a covenant not to execute only to the disadvantage of another insurer that has breached its duty to the insured . . . and not to the disadvantage of its insured." Id. at 760 (emphasis added). We conclude that the Foremost opinion is not controlling because it is clearly distinguishable from the present case. See Tex. Farmers Ins. Co. v. Soriano, 844 S.W.2d 808, 824-25 (Tex.App.-San Antonio 1992),rev'd on other grounds, 881 S.W.2d 312 (Tex. 1994) (discussing the limited application of the holding in Foremost). We affirm the trial court's denial of Insurers' motion for directed verdict as to damages.
While the Segers entered into a covenant not to execute the judgment against Gillman in the present case, we understand Insurers' argument to analogize a covenant not to execute with a judgment proof insured. However, we conclude that the analysis and the result would be the same if Insurers were contending that the covenant not to execute precluded proof of harm to Diatom.
Next, we must consider whether the trial court erred in giving conclusive effect to the damages found in the underlying judgment. By directing verdict on the issue of damages in accordance with the damages found in the underlying judgment, it is evident that the trial court found that the judgment set Diatom's damages as a matter of law. Insurers' contention that directed verdict was an inappropriate vehicle to establish damages is premised on their position that the evidence that Diatom was judgment proof raised a fact issue regarding whether Diatom was damaged by the excess damages awarded in the underlying judgment. However, for the reasons discussed above, we conclude that Diatom's financial status is immaterial to Diatom's liability and, therefore, fails to raise a fact issue regarding damages in the present suit.
Insurers contend that it was error for the judgment to have been admitted into evidence for the judge's eyes only. However, the judgmentwas admitted into evidence. Because the trial court gave the judgment conclusive effect on the issue of damages and rendered a directed verdict in accordance with that judgment, the fact issue of the amount of damages suffered by Diatom was removed from the jury's consideration. Therefore, whether the trial court erred in the manner in which it admitted the judgment is subsumed within the issue of whether the trial court erred in directing damages in accordance with this judgment and will be addressed below.
A directed verdict is appropriate only when "reasonable minds can draw only one conclusion from the evidence." Collora v. Navarro, 574 S.W.2d 65, 68 (Tex. 1978). Review of a directed verdict requires that the evidence be viewed in the light most favorable to the party against whom judgment was entered and that all reasonable inferences from that evidence be resolved in that party's favor. Morgan, 27 S.W.3d at 929.
The general rule is that, in a Stowers action, damages are fixed as a matter of law in the amount of the excess of the judgment rendered in the underlying suit in favor of the plaintiff over the applicable limits of the policy. See Allstate Ins. Co. v. Kelly, 680 S.W.2d 595, 606 (Tex.App.-Tyler 1984, writ n.r.e.). See also Rocor Int'l, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 77 S.W.3d 253, 271 (Tex. 2002) (Baker, J., dissenting); State Farm Fire Cas. Co. v. Gandy, 925 S.W.2d 696, 713 (Tex. 1996). Thus, absent evidence that the underlying judgment is not reliable evidence of the damages suffered by the insured in the underlying suit, the judgment conclusively establishes the damages suffered by the insured and is sufficient evidence to support a directed verdict.
While the general rule is that a judgment obtained by a plaintiff against an insured is conclusive to establish the amount of damages suffered by the insured in a subsequent Stowers action, see Kelly, 680 S.W.2d at 606, the Texas Supreme Court has created an exception to this general rule when the insured assigns hisStowers action to the plaintiff in the underlying suit, see Gandy, 925 S.W.2d at 714. When such an assignment occurs, the underlying judgment is not only not conclusive, but is inadmissible as evidence of damages, unless rendered as the result of a "fully adversarial trial."Id. Insurers contend that they presented evidence that would raise a fact question as to whether the judgment from the underlying suit was the result of a fully adversarial trial and, therefore, that the trial court erred in directing the verdict on damages in accordance with the underlying judgment.
Prior to trial, the Segers filed a motion for partial summary judgment in which they contended, inter alia, that the evidence established that the parties to the underlying suit were in a "fully adversarial relationship at the time of trial" and that an "actual trial" had occurred. The trial court granted the Segers' motion. However, we conclude that these findings by the trial court do not resolve whether the judgment in the underlying suit was the result of a fully adversarial trial.
In reviewing the Segers' motion relating to these points, we note that the "fully adversarial relationship" issue in no way addressed the events occurring at the underlying trial. While the Court did not define "fully adversarial trial" in Gandy, we believe that a determination of whether a hearing constitutes a "fully adversarial trial" requires a review of the extent to which the parties to the proceeding participated. See Gandy, 925 S.W.2d at 713. When the judgment is an agreed judgment, default judgment, or when the underlying defendant's participation is so minimal as to evidence that the hearing was not adversarial, the judgment resulting from that hearing may not admitted as evidence of damages in the Stowers action. See id. at 713, 714. The determination of whether the hearing was fully adversarial requires review of the underlying proceedings.
At the close of evidence in the Stowers action, the Segers offered the judgment in the underlying suit for the court's review only and moved the trial court for instructed verdict on damages based on the judgment. Insurers objected to admission of the judgment contending that it was not the result of a fully adversarial trial. The trial court overruled Insurers' objection and granted the Segers' motion for instructed verdict on damages.
Directed verdict was proper, in this situation, only if no probative evidence was presented that would raise a genuine issue of material fact regarding the amount of damages suffered by Diatom as a result of Insurers' negligent failure to settle the underlying suit. See Dow Chem. Co., 46 S.W.3d at 242. As the Segers' only evidence of damages in theStowers action was the judgment in the underlying suit, the trial court could only direct the verdict on damages if Insurers failed to raise a genuine issue of material fact regarding the reliability of the judgment as evidence of Diatom's damages.
Insurers raised the question of whether the judgment in the underlying action was the result of a fully adversarial trial. As evidence that it was not, Insurers correctly indicated that Diatom was not represented by counsel at the trial in the underlying suit, made no opening or closing statements, offered no evidence, and conducted no cross-examination of the Segers' witnesses. Further, Insurers cite the trial court's own characterization of this proceeding as a nihil dicit prove up.
We conclude that this evidence is sufficient to raise a genuine issue of material fact regarding whether the underlying judgment upon which the trial court directed the verdict on damages was the result of a fully adversarial trial. See Gandy, 925 S.W.2d at 714. As such, we reverse the damages portion of the judgment.
"In no event, however, is a judgment for plaintiff against defendant, rendered without a fully adversarial trial, binding on defendant's insurer or admissible as evidence of damages in an action against defendant's insurer by plaintiff as defendant's assignee" (emphasis added).
We would, however, reiterate our conclusion stated in the "demand within limits" section of this opinion, that the liability of the Insurers, if any, should be proportioned to correspond with their percentage of coverage under the CGL policy.
Evidentiary Exclusions
Insurers contend that they were denied evidence of collusion between the Segers and Diatom in the underlying proceeding because the trial court abused its discretion in sustaining Diatom's assertions of attorney-client privilege and work product privilege. As Insurers' issue challenges the exclusion of those documents that specifically relate to the underlying judgment and subsequent assignment, we will limit our review to those documents. We must determine whether the trial court abused its discretion in upholding Diatom's assertions ofSee May v. Barton's Pump Serv., Inc., 153 S.W.3d 469, 477-78 (Tex.App.-Amarillo 2004, no pet.).
The documents submitted for the trial court's in camera review include documents that were prepared for the purpose of facilitating the rendition of legal services in defense of Insurers' third-party action against Diatom. These documents appear to be privileged under Texas Rule of Evidence 503(b), but, in any event, are not sought by Insurers through this issue.
Some of the evidence sought by Insurers was included in the appellate record in this cause. These documents were made part of the record on December 28, 2004. They were included in the appellate record after Diatom asserted its claims of privilege. Nothing in this court's file evidences any attempt by Diatom to recall these documents as privileged. See Tex. R. Civ. P. 193.3(d). Therefore, for the present litigation, we conclude that Diatom's prior assertion of privilege as to these documents has been waived.
However, the conclusion that Diatom has not attempted to "snap back" these documents is not a determination that it has waived its claim of privilege. Because Diatom is no longer a party to the present action, Insurers' identification of the disclosure of these documents does not necessarily result in Diatom's actual knowledge of the disclosure.
Using these disclosed documents, Insurers contend that other documents relating to the underlying proceeding are discoverable and admissible. After reviewing all of the documents provided to the trial court for in camera inspection, the documents Insurers seek by this issue are duplicates of the documents that were included in the appellate record. As Diatom's prior assertions of privilege regarding these documents have been waived, we overrule Insurers' issue as moot.
Recusal of Judge
Insurers contend that the denial of their motion to recuse Judge LaGrone was an abuse of discretion because, as the judge that presided over the underlying trial, Judge LaGrone was a vital material witness in the Stowers suit and had personal knowledge of disputed material facts. The denial of a motion to recuse is reviewed for abuse of discretion.Brosseau v. Ranzau, 81 S.W.3d 381, 399 (Tex.App.-Beaumont 2002, pet. denied). Insurers contend that the Segers' citation to Judge LaGrone's statement in the underlying trial transcript that "The Court will call for trial in Cause No. 30,110, . . ." made Judge LaGrone a vital material witness in the Stowers action. However, the complete transcript of the underlying proceeding, which includes the statement Insurers complain of, was admitted into evidence in the Stowers action. Further, Judge LaGrone's calling the underlying proceeding for trial did not constitute his participation "as . . . material witness in the matter in controversy." Tex. R. Civ. P. 18b(2)(d). Certainly, as addressed above, Insurers may refute Judge LaGrone's characterization of the underlying proceeding as a "trial," but we do not conclude that the trial court abused its discretion in denying Insurers' motion for recusal on this basis.
Additionally, Insurers contend that Judge LaGrone must have knowledge of disputed evidentiary facts regarding whether the underlying proceeding was, in fact, a fully adversarial trial. However, Insurers fail to identify any specific knowledge of disputed evidentiary facts purportedly held by Judge LaGrone. We will not find recusal appropriate solely on the basis of speculation regarding facts that may or may not be held by the presiding judge.
We overrule Insurers' challenge to the denial of their motion to recuse.
Disqualification of Counsel
Finally, Insurers contend that two attorneys in the Segers' counsel, Brian Heinrich and Joe Hayes, were disqualified from representing the Segers in their Stowers action because each (1) were witnesses in theStowers action, see Tex. Disc. R. Prof. Cond. 3.08, and (2) were to be paid on a contingent basis, see Tex. Disc. R. Prof. Cond. 3.04. The denial of a motion for disqualification is reviewed for abuse of discretion. See Metro. Life Ins. Co. v. Syntek Fin. Corp., 881 S.W.2d 319, 321 (Tex. 1994). As both parties to the present dispute acknowledge, the disqualification of counsel is a severe remedy, which is not to be invoked lightly. See In re Nitla S.A. de C.V., 92 S.W.3d 419, 422 (Tex. 2002). Even if challenged counsel has committed a disqualifying act, the party requesting disqualification must demonstrate that counsel's conduct caused actual prejudice.Id.
Assuming, without deciding, that Heinrich and/or Hayes were lawyer-witnesses such that they would be disqualified from representing the Segers in the Stowers action, Insurers have failed to present any evidence that they were harmed. Insurers cite a deposition of Professor Bob Schuwerk, which is not a part of the record, as concluding that Heinrich and Hayes violated Rules 3.04 and 3.08 of the Texas Disciplinary Rules of Professional Conduct. However, proof that an attorney violated a Rule of Professional Conduct, without a further showing of harm, is insufficient to justify disqualification.Id. Nothing in Insurers' discussion of Schuwerk's deposition identifies how they were harmed by any alleged violation of the Rules by either Heinrich or Hayes.
Insurers contend that the trial court took certain unrelated actions to avoid having to rule that Heinrich and Hayes were disqualified to represent the Segers in the Stowers action, however, this contention is wholly unsupported by evidence and is purely speculative. See Miller v. Hood, 536 S.W.2d 278, 285 (Tex.Civ.App.-Corpus Christi 1976, writ ref'd n.r.e.) (presumption of regularity and validity of trial court rulings unless facially invalid or invalidity shown in the record). Additionally, while Insurers contend that Hayes and Heinrich were disqualified because they were witnesses whose payment was contingent upon the outcome of the case, Insurers fail to identify any evidence establishing that Hayes or Heinrich were being paid on a contingent basis.
We overrule Insurers' issue regarding the denial of their motion to disqualify Hayes and Heinrich.
Conclusion
We affirm the trial court's denial of Insurers' motion to recuse, denial of Insurers' motion to disqualify counsel, and grant of summary judgment on the issue of whether the
Segers made a sufficient settlement demand within the CGL policy limits. In all other respects, we reverse the judgment and remand this cause for new trial consistent with this opinion.