United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
For the Fifth Circuit February 6, 2006
Charles R. Fulbruge III
Clerk
No. 05-20139
MOTIVA ENTERPRISES, LLC,
Plaintiff–Appellant
VERSUS
ST. PAUL FIRE AND MARINE INSURANCE COMPANY,
Defendant,
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH,
PENNSYLVANIA,
Defendant-Appellee.
Appeal from the United States District Court for the
Southern District of Texas
Before REAVLEY, DAVIS and WIENER, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
Plaintiff-Appellant Motiva Enterprises, L.L.C. (“Motiva”)
compromised an action brought against it for damages without notice
to its insurer, Appellee-National Union. Motiva sued to recover
the amount it paid in settlement, contending that it had no
1
obligation to comply with the condition in the policy to obtain its
insurer’s consent to settle because National Union refused to
tender an unqualified defense to Motiva. We agree with the
district court that Motiva breached the policy, but we vacate the
district court’s take nothing judgment and remand the case to the
district court to determine whether Motiva’s breach prejudiced
National Union.
I.
In July 2001, a sulfuric acid storage tank exploded at
Motiva’s Delaware refinery, killing one employee and injuring
several others. A number of civil suits ensued, including a
lawsuit by John and Pamela Beaver for injuries John sustained in
the explosion (the “Beaver” suit).
Motiva had approximately $250 million in liability insurance
which Motiva contended covered its liability for injuries and
litigation costs related to the explosion. The coverage was
divided into two “towers,” referred to as the Continental Tower and
the St. Paul Tower, and consisted of seven insurance policies in
all. National Union supplied $25 million of umbrella coverage,
providing for both the duty to defend and the duty to indemnify
once the underlying insurance was exhausted. The policy contained
standard “consent to settle” and “cooperation” clauses. The
consent to settle clause required National Union’s advance consent
2
to any settlements that it would be funding,1 and the cooperation
clause required Motiva to cooperate with National Union in the
investigation, settlement, and defense of claims.2
In July 2002, Motiva notified National Union of the first two
lawsuits that had been filed against it, including the Beaver suit,
and requested a defense. In February 2003, National Union
conditionally disclaimed coverage on the ground that the underlying
insurance policies had not yet been exhausted. National Union
reserved the right to supplement or amend its disclaimer in the
future. When National Union did not withdraw its denial of
coverage at Motiva’s request, Motiva filed suit seeking a
declaratory judgment of its coverage.
In May 2003, National Union sent Motiva a “reservation of
rights” letter that withdrew its disclaimer of coverage, but
reserved the right to withhold or limit coverage under the terms
and conditions of the policy. On July 28, 2003, Motiva informed
National Union that the St. Paul policy had been exhausted and that
National Union would be responsible for the defense costs related
to the remaining five suits. The next day, Motiva asked National
Union to send a representative with full settlement authority to a
1
The consent to settle clause specifically states: “No
Insureds will, except at their own cost, voluntarily make a
payment, assume any obligation, or incur any expense, other than
for first aid, without our consent.”
2
The cooperation clause specifically states: “You and any
other involved Insured must: ... cooperate with us in the
investigation, settlement or defense of the claim or suit.”
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mediation in the Beaver case that was scheduled for August 8, 2003.
National Union immediately requested all documents related to
Beaver, but on August 1, Motiva rejected the request, claiming that
National Union had “never acknowledged coverage” for the Beaver
claim. Despite that refusal, Motiva still demanded that National
Union attend the mediation.
On August 6, National Union tendered its offer to defend the
Beaver case and the other pending lawsuits, subject to a
reservation of its right to deny coverage under the terms of the
policy. National Union asked Motiva to cooperate fully with its
defense – a requirement of the policy – and said that it expected
to participate fully in the Beaver mediation. Despite the tender,
Motiva refused to furnish the Beaver documents to National Union.
On August 8, National Union sent a representative to the
mediation. During National Union’s presence at the mediation, the
only settlement demand it received was for $40 million. Before the
mediation ended however, National Union was asked to leave. The
mediation continued without National Union’s presence and
ultimately resulted in a voluntary settlement agreement in which
Motiva agreed to pay $16,500,000 to resolve the claim.
After the mediation, Motiva asked National Union to fund the
settlement, but National Union refused to do so on the grounds that
its consent had not been obtained as required by the consent to
settle clause. Motiva paid the settlement out of its own funds and
4
after National Union again declined Motiva’s request for
reimbursement, Motiva filed this suit to recover sums it paid to
settle the Beaver claim.
In December 2003, the parties submitted a Stipulated
Chronology and Facts per the district court’s order. National
Union and Motiva filed cross-motions for summary judgment, and on
August 26, 2004, the district court granted partial judgment for
National Union, holding that Motiva should take nothing in the
lawsuit because it had breached the consent to settle and
cooperation clauses.
Following the district court’s partial judgment in favor of
National Union, Motiva filed a Motion for Reconsideration and to
Amend Judgment and attached several affidavits contradicting the
facts in the summary judgment record as interpreted by the district
court. National Union filed a response in opposition and a motion
to strike the affidavits as offering newly alleged facts. The
district court denied Motiva’s Motion for Reconsideration and to
Amend Judgment and stated that Motiva could not supplement the
record with new facts.
Reviewing the district court’s grant of summary judgment de
novo, we consider each of Motiva’s arguments below.
II.
A.
Motiva argues first that the district court erred in allowing
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National Union to deny policy benefits to its insured based on
breaches of consent to settle and cooperation clauses when National
Union had not tendered an unqualified defense to Motiva. In other
words, Motiva argues that when National Union’s tender of a defense
was subject to its reservation of rights to later deny coverage,
Motiva was entitled to settle the Beaver claim without consulting
National Union.
Motiva relies on our decision in Rhodes v. Chicago Ins. Co.,
719 F.2d 116 (5th Cir. 1983) for its argument that under Texas law,
National Union’s reservation of rights released Motiva from the
constraint of the “consent to settle” clause. Motiva correctly
quotes our statement that “[i]f the insurer properly reserved its
rights and the insured elected to pursue its own defense, the
insurer is bound to pay damages which resulted from covered conduct
and which were reasonable and prudent up to the policy limits.”
Id. at 121. Motiva also recites our statement in Rhodes that in
such a situation, “the insured is not constrained by conditions in
the policy which limit the insured’s ability to settle the claim,
and the insurer cannot complain about the insured’s conduct of the
defense.” Id.
Unfortunately for Motiva, our holding in Rhodes was an “Erie
guess” by us and has since been undermined by the Texas Supreme
Court’s decision in State Farm Lloyds Ins. Co. v. Maldonado, 963
S.W.2d 38 (Tex. 1998). In Maldonado, State Farm tendered a defense
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with a reservation of rights to its insured, Robert, who had been
sued for defamation by a former employee, Maldonado. When State
Farm would not pay Maldonado’s settlement demand, Maldonado and
Robert entered into a private agreement in which Maldonado
discharged Robert from further personal liability for Maldonado’s
damages. Robert, no longer having any incentive to contest the
defamation claim at trial, failed to actively defend the claim
through his attorney provided by State Farm. He did not present any
evidence, cross-examine any witnesses, or present opening or
closing arguments.
The trial resulted in a verdict in favor of Maldonado. State
Farm denied coverage and contended that the trial constituted a
breach of the “actual trial” condition of its insurance policy3 and
relieved State Farm of its duty to indemnify. The Texas Supreme
Court agreed, holding that “[b]ecause State Farm agreed to defend
Robert under a reservation of rights and Robert failed to satisfy
a condition precedent of the insurance policy, Robert cannot sue or
recover on the policy.” Id. at 40.
Under Erie, we are, of course, obliged to decide questions of
state law as we believe the state supreme court would decide the
issue. Although a different policy condition was at issue in
Maldonado, we see no principled basis to distinguish it from
3
The “actual trial” condition provided that “[a] person or
organization may sue [State Farm] to recover on ...a final
judgment against an insured obtained after an actual trial.” 963
S.W.2d at 40.
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today’s case. We conclude therefore that under Maldonado, an
insurer which tenders a defense with a reservation of rights is
entitled to enforce a consent to settle clause, and our holding in
Rhodes does not accurately reflect current Texas law. The district
court therefore did not err in holding that Motiva breached its
insurance policy by settling without National Union’s consent, even
though National Union reserved its right to contest coverage and
therefore did not tender to Motiva an unqualified defense.
B.
The district court found that Motiva breached the cooperation
clause by asking National Union to leave the Beaver mediation.
Motiva challenges this conclusion. The only summary judgment
evidence on this point is a letter sent after the mediation from
National Union’s attorney to Motiva’s attorney complaining that
National Union was “brashly asked” to leave the mediation.
Even if this letter of complaint by National Union supports
the inference that Motiva asked the insurer’s counsel to leave the
mediation, we are not persuaded that this isolated fact amounts to
a breach of the cooperation clause. We have no facts or
circumstances surrounding Motiva’s alleged request to National
Union’s counsel to leave the mediation, or what significance the
event had in the eventual outcome of the case and whether it
operated to National Union’s prejudice. We conclude that questions
of fact are presented on whether National Union breached the
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cooperation clause, and if it did breach the clause, whether the
failure to cooperate operated to National Union’s prejudice.
C.
Motiva argues next that even if it breached the consent to
settle or cooperation clauses in the National Union policy,
National Union cannot refuse to pay the benefits unless it shows
actual prejudice from the breach. We agree.
The Texas Supreme Court held in Hernandez v. Gulf Group
Lloyds, 875 S.W. 2d 691, 692 (Tex. 1994), that an insurer may
escape liability on the basis of a settlement-without-consent
exclusion only when the insurer is actually prejudiced by the
insured’s settlement. The court based its holding on general
principles for interpreting contract law and observed that “when
one party to a contract commits a material breach...the other party
is discharged...from any obligation to perform.” Id. at 692. In
determining the materiality of the breach, the court observed that
it must consider inter alia “the extent to which the non-breaching
party will be deprived of the benefit that it could have reasonably
anticipated from full performance.” Id. at 693. In Ridglea Estate
Condo. Ass’n v. Lexington Insurance. Co., 415 F.3d 474 (5th Cir.
2005), a panel of this court recently applied Hernandez and held
that Texas law requires that an insurer show prejudice resulting
from the insured’s breach of a condition in the policy to defeat
the insured’s claim to policy proceeds.
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Although the district court made a brief reference to
prejudice in its opinion, it did not consider the actual, concrete
prejudice an insurer must show to avoid payment. We therefore must
remand this case to the district court for a determination of
whether National Union breached the cooperation clause, and whether
it suffered actual, concrete prejudice4 from Motiva’s breach of any
policy condition.
III.
For the reasons stated above, we vacate the district court’s
judgment ordering that Motiva take nothing and remand for further
proceedings consistent with this opinion.
VACATED and REMANDED.
4
For example, can National Union show that Motiva had no
liability or that it had no coverage or that the breach
prevented it from asserting a valid defense to liabilty or
coverage or that the settlement was unreasonable.
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