There is no doubt that, when it comes to important courts for insurance coverage, the Texas Supreme Court is near, or even at, the top.  [In a years-ago issue of CO I undertook a detailed study of why I believe this to be the case.]  So, when the Texas Supreme Court handed down its decision in In re Farmers Texas County Mut. Ins. Co. I of course took close note.  Now, throw in that the case involves one of the most challenging coverage issues of them all – an insurer facing an opportunity to settle, but has a coverage defense -- and it was like a hot knife through butter to choose it for inclusion here.  For more about this issue, and its challenges, see the discussion of Owners Ins. Co. v. Dockstader below. 

At issue in Farmers Texas was an insurer with an opportunity to settle a claim within limits -- but it had a coverage defense that made it less inclined to do so.  To be clear, while the solution provided by the Texas high court may have fit the facts at issue, it is one that is not likely to work in many situations.  However, coming from Austin, and with any guidance on the issue valuable, it was deserving to be include here.  

Farmers Texas involves coverage for an automobile accident.  Cassandra Longoria rear-ended a vehicle being driven by Gary Gibson.  Gibson sued Longoria.  She was insured under a policy issued by Farmers Texas County Mutual Insurance Company, which undertook her defense.

Gibson sought damages of $1 million. Longoria’s policy had a $500,000 limit.  As trial approached, Gibson agreed to settle for $350,000.  Farmers refused to contribute more than $250,000.  As Farmers saw it, there was a coverage defense – Longoria had acted grossly negligent -- which justified it paying less than the full demand.  Longoria, concerned about her personal exposure, offered to pay the additional $100,000, but without waiving her right to seek recovery of that payment from Farmers. Gibson accepted and gave Longoria a release in exchange for Farmers’ and Longoria’s payments.

Longoria sued Farmers, alleging all manner of claims, and sought recovery of her $100,000 payment.  The Texas Supreme Court concluded that Longorio had a right to recovery.  She still needed to do more to win, but the right existed.  [The court also addressed, and rejected, that a cause of action existed for negligent failure to settle, i.e., Stowers, as there was no liability in excess of policy limits.]

In reaching its decision, the court cited to its well-known decisions in Frank’s Casing and Matagorda, which hold that “[i]f a liability insurer disputes whether some claims asserted against its insured are covered, it may comply with its policy obligations by defending under a reservation of rights, and it may settle the entire suit and—with the insured’s consent—reserve for separate litigation the question whether the insured should reimburse it for part of the settlement.”

The Texas Supreme Court concluded that the matter at hand was reverse Frank’s Casing and Matagorda: “This approach also works the other way: if an insurer agrees to settle some claims but refuses to cover others, the insured may join with it to settle the entire suit and reserve for separate litigation the question whether the insurer should reimburse it for the remainder of the settlement.” 

As the court saw it, Farmers Texas’s right to settle, as it considers appropriate, was separate from Longoria’s ability to assert a claim that Farmers breached a separate promise to pay damages for which the settlement made her legally responsible.

In essence, under the rule announced in Farmers Texas, the insured can take action to protect itself against an excess verdict and personal liability and save for afterwards to prove that the insurer failed to provide coverage.  While the solution worked here, because Longoria was able to make a $100,000 contribution to the settlement, it will surely not be the cases in many other instances.

The court, seemingly recognizing that other cases will involve insureds that settled with no insurer participation, provided guidance for such scenario.  Even if it is determined that coverage is owed, “[a]n insurer also will not be obligated to indemnify its insured for a settlement that is collusive or unreasonable in amount.”