United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
For the Fifth Circuit March 28, 2006
Charles R. Fulbruge III
Clerk
No. 05-20139
MOTIVA ENTERPRISES, LLC,
Plaintiff–Appellant
VERSUS
ST. PAUL FIRE AND MARINE INSURANCE COMPANY, ET AL,
Defendants,
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH,
PENNSYLVANIA,
Defendant-Appellee.
Appeal from the United States District Court for the
Southern District of Texas, Houston Division
Before REAVLEY, DAVIS and WIENER, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
IT IS ORDERED that the Petition for Panel Rehearing is
GRANTED. The opinion of the court issued on February 6, 2006, at
439 F.3d 243, is withdrawn, and the following opinion substituted
in its place.
1
Plaintiff-Appellant Motiva Enterprises, L.L.C. (“Motiva”)
settled an action brought against it for damages without notice to
Appellee National Union, its insurer, and without obtaining
National Union’s consent. Motiva sued National Union to recover
the amount Motiva paid in settlement, contending that it had no
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 National Union’s tender of a defense with a
reservation of rights to later deny coverage does not excuse
Motiva’s breach of the consent-to-settle clause. We also conclude
that National Union suffered prejudice as a matter of law and has
no obligation to reimburse Motiva for the settlement. We therefore
AFFIRM the judgment of the district court.
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
2
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
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
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.”
3
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
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’s representative was asked
4
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
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 summary 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.
5
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 rejecting
Motiva’s claim for policy benefits 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 Insurance.
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
6
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 Insurance. Co. v. Maldonado,
963 S.W.2d 38 (Tex. 1998). In Maldonado, State Farm tendered a
defense 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
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.
7
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
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.
We turn to the principal issue in this case, whether Motiva’s
settlement of the Beaver claim without giving National Union an
opportunity to participate in the final settlement decision and
without obtaining National Union’s consent to the settlement
precludes Motiva’s action against National Union under the policy
for reimbursement of the sum Motiva paid in settlement.
Motiva argues that even if it breached the consent-to-settle
clause, National Union cannot refuse to pay policy benefits unless
8
it shows actual prejudice from the breach. Motiva relies primarily
on Hernandez v. Gulf Group Lloyds, 875 S.W. 2d 691 (Tex. 1994) to
support its argument.
In Hernandez the daughter of the plaintiffs was killed in an
automobile accident involving an underinsured driver who was solely
at fault. The parents and daughter had uninsured motorist coverage
in their policy which also afforded protection for an underinsured
motorist. The plaintiffs settled with the underinsured driver for
the limits of his insurance coverage and sought recovery from their
UM carrier under the underinsured motorist coverage. The parties
stipulated that the underinsured driver had no assets and the UM
carrier’s subrogation rights were not impaired by the settlement.
The UM carrier denied coverage on grounds that the plaintiffs had
failed to obtain the insurer’s consent to the settlement. This
denial was based on a settlement-without-consent clause, excluding
coverage where the insured settles with any person who may be
legally liable for the injury without the insurer’s consent.4
The majority in Hernandez held 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 with the tortfeasor.” Id. at 692. The court reasoned
4
The clause provided that “insurance does not apply . . . to
bodily injury or property damage with respect to which the
insured . . . without written consent of the company, makes any
settlement with any person . . . who may be liable therefore . .
.” Id. at 692, n. 1.
9
that under fundamental contract law “when one party to a contract
commits a material breach of that contract, the other party is
discharged or excused from any obligation to perform.” Id. The
court further reasoned, however, that when the insurer is not
prejudiced by the breach, the breach is not material, the insurer
has not been deprived of the benefit of the bargain, and it should
not be relieved of its obligation to provide coverage. Id. at 693.
In Hanson Production Co. v. Americas Insurance. Co., 108 F.3d
627 (5th Cir. 1997), we applied Hernandez and held that when the
insured fails to provide prompt notice of a claim as required by
the policy, the insurer must show prejudice to avoid its coverage
obligation.
In Ridglea Estate Condominium Ass’n v. Lexington Insurance
Co., 415 F.3d 474 (5th Cir. 2005), a panel of this court recently
applied Hernandez in a suit by an insured seeking recovery on a
fire and windstorm policy. The insurer argued that it had no
obligation under the policy because the insured failed to give
“prompt notice of the loss or damage” to covered property. Id. at
476. In a narrowly written opinion, the panel applying Hernandez
concluded that although notice of damage was not prompt, the
district court erred in holding that the insurer was not required
to show prejudice in order to rely on the prompt notice provision
as a defense. The panel carefully noted, however, that it “[did]
not read Hernandez as necessarily creating a prejudice requirement
10
for all insurance policies issued in Texas.” Id. at 480, n.4.
As suggested by Ridglea, it is not entirely clear under Texas
law whether an insurer must demonstrate prejudice before it can
avoid its obligations under a policy where the insured breaches a
prompt-notice provision or a consent-to-settle provision.5 Assuming
without deciding that an insurer must show prejudice to avoid its
obligations under the policy when the insured breaches the consent-
to-settle provision, based on the summary judgment evidence in this
case, we are satisfied that National Union suffered prejudice as a
matter of law. An insurer’s right to participate in the settlement
process is an essential prerequisite to its obligation to pay a
settlement. When, as in this case, the insurer is not consulted
about the settlement, the settlement is not tendered to it and the
insurer has no opportunity to participate in or consent to the
ultimate settlement decision, we conclude that the insurer is
prejudiced as a matter of law. Under these circumstances the breach
of the consent-to-settle provision in the policy precludes this
action. This disposition makes it unnecessary for us to consider
whether Motiva breached the cooperation clause in the policy and
whether that precludes recovery.
For the reasons stated above we AFFIRM the judgment of the
5
For example, in PAJ Inc. v. Hanover, 170 S.W.3d 258 (Tex.
App.–Dallas 2005)(pet. filed), a Texas court held that a breach
of a notice provision was a “condition precedent” to the
insurer’s liability, not a “covenant,” and thus, the insurer was
not required to show prejudice from the breach.
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district court.
AFFIRMED.
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