National Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. CNA Ins. Companies

United States Court of Appeals,

Fifth Circuit.

No. 93-5344.

NATIONAL UNION FIRE INSURANCE CO. OF PITTSBURGH, PENNSYLVANIA,
Plaintiff-Appellant,

v.

CNA INSURANCE COMPANIES and Columbia Casualty Company,
Defendants-Appellees.

Aug. 10, 1994.

Appeal from the United States District Court for the Eastern
District of Texas.

Before GARWOOD and EMILIO M. GARZA, Circuit Judges, and HEAD,*
District Judge.

EMILIO M. GARZA, Circuit Judge:

National Union Fire Insurance Company ("National Union"), an

upper-level excess insurance carrier, brought an action against a

lower-level excess insurance carrier, Columbia Casualty Company

("Columbia"), claiming that Columbia had breached either a direct

or indirect duty to National Union to settle litigation brought

against the mutual insured, Ariens Company ("Ariens"). On appeal,

we must determine whether the district court erred in granting

summary judgment in favor of Columbia. Finding no error, we

affirm.

I

The underlying facts are undisputed. Ariens manufactured and

sold motorized lawn and garden equipment, such as lawn mowers, snow

*
District Judge of the Southern District of Texas, sitting
by designation.

1
blowers, and stump grinders. A four-year-old boy was attempting to

operate one of Ariens's riding rotary lawn mowers. The rotary

blade got caught on a root. The boy got off the mower without

killing the engine or disengaging the mower blade, and placed both

his hands and arms under the mower in an attempt to free the blade.

When the blade was freed, it amputated the boy's hands and one arm

almost to the elbow.

The victim's parents (the "Hines plaintiffs") brought a

products liability suit in state court against Ariens, claiming

that the lawn mower's defective design caused the injuries

described above. Apparently, later models of the insured's mowers

were equipped with switches which killed the engine if the rider

left the mower seat while the blade was engaged. The mower

involved in this case did not have such a feature. Ariens defended

liability on the ground that a riding lawn mower could not be made

safe for use by a four-year old. Ariens also sued the Hines

plaintiffs for indemnity, claiming that they were negligent in

allowing the boy to operate the mower.

Ariens was self-insured up to $100,000 per occurrence, and

$750,000 in the aggregate of all claims made in any one policy

period. Beyond this self-insurance layer, Columbia provided the

first and second levels of excess coverage, providing $1 million,

less the insured's self-retained limits, and $5 million,

respectively. National Union provided the outermost layer of $15

million of coverage, in excess of Columbia's second layer of

2
coverage.1 The excess liability policy between Ariens and Columbia

gave Columbia the "right to associate itself with the insured in

the control, negotiation, investigation, defense or appeal of any

claim." Special Endorsement 6 of the policy also deleted

Columbia's "right to settle [any] claim or suit for an amount

within the Insured's Retained Limit," without the consent of the

insured. Ariens retained its own counsel. After a large verdict

in favor of the Hines plaintiffs, Ariens settled the case for $7.5

million. The settlement exhausted Ariens's self-insured limits and

the first two layers of excess coverage provided by Columbia,

causing National Union to contribute approximately $2 million to

the settlement.

National Union subsequently sued Columbia, claiming that

Columbia breached either a direct or indirect duty to National

Union by not negotiating a settlement with the Hines plaintiffs for

an amount within the first two layers of excess coverage. As

damages, National Union sought to recover the amount it had to

contribute to the settlement of the underlying action. Columbia

moved for summary judgment on the ground that it owed no legal duty

1
"Excess liability insurers contract to provide inexpensive
insurance with high policy limits by requiring the insured to
contract for primary insurance with another carrier. The premium
is also held down by the fact that the duty to defend rests
primarily on the primary insurer...." Harville v. Twin City Fire
Ins. Co., 885 F.2d 276, 278-79 (5th Cir.1989) (footnote omitted).
Here, Columbia contends that Ariens was both self-insurer and
primary insurer, to the extent that Ariens contracted to retain
control over defense of the claim, including the handling of
settlement negotiations. Columbia and National Union, by the
express terms of their respective policies with the insured, were
both excess liability insurers.

3
to either Ariens or National Union to engage in settlement

negotiations, since the excess coverage policy between it and the

insured merely allowed, rather than required, that Columbia

"associate itself with the insured in the control, negotiation,

investigation, defense or appeal of any claim." The district court

concluded that the terms of Special Endorsement 6 did not create a

duty on behalf of Columbia toward Ariens to negotiate a settlement.

The court further concluded that because Columbia owed no duty to

Ariens, Columbia also owed no duty to National Union under the

doctrine of equitable subrogation.2 Based on these conclusions,

the court granted summary judgment in favor of Columbia, from which

National Union timely appealed.

II

We review the district court's grant of a summary judgment

motion de novo. Davis v. Illinois Cent. R.R., 921 F.2d 616, 617-18

(5th Cir.1991). Summary judgment is appropriate if the record

discloses "that there is no genuine issue of material fact and that

the moving party is entitled to a judgment as a matter of law."

Fed.R.Civ.P. 56(c). A party seeking summary judgment bears the

initial burden of identifying those portions of the pleadings and

discovery on file, together with any affidavits, which it believes

2
Equitable subrogation is the legal fiction through which a
person who pays the debt for which another is primarily
responsible is substituted, or subrogated, to all rights and
remedies of the other. Black's Law Dictionary 539 (6th ed.
1990). In Texas, an excess insurer may bring an equitable
subrogation action against a primary insurer—i.e., an action that
the insured may have against the primary insurer for mishandling
a claim. See American Centennial Ins. Co. v. Canal Ins. Co., 843
S.W.2d 480, 482-83 (Tex.1992).

4
demonstrate the absence of a genuine issue of material fact.

Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554,

91 L.Ed.2d 265 (1986). Once the movant carries its burden, the

burden shifts to the non-movant to show that summary judgment

should not be granted. Id. at 324-25, 106 S.Ct. at 2553-54. While

we must "review the facts drawing all inferences most favorable to

the party opposing the motion," Reid v. State Farm Mut. Auto. Ins.

Co., 784 F.2d 577, 578 (5th Cir.1986), that party may not rest upon

mere allegations or denials in its pleadings, but must set forth

specific facts showing the existence of a genuine issue for trial.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256-57, 106 S.Ct.

2505, 2514, 91 L.Ed.2d 202 (1986).

National Union first contends that the district court erred

in construing the terms of the excess insurance policy between

Columbia and Ariens as not requiring that Columbia negotiate a

settlement within the first two layers of excess liability

coverage. "In construing a written contract [such as an insurance

policy], the primary concern of the court 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).3 When the terms of an

insurance policy are plain, definite, and unambiguous, a court may

3
Because the laws of the various states involved in this
diversity suit do not conflict on any material issue, we apply
Texas substantive law. See W.R. Grace & Co. v. Continental
Casualty Co., 896 F.2d 865, 874 (5th Cir.1990) ("If the laws of
the states do not conflict, then no choice-of-law analysis is
necessary."). Even if some material conflict did exist, our
application of Texas law renders moot National Union's argument
that Texas law should apply.

5
not vary those terms. Royal Indemnity Co. v. Marshall, 388 S.W.2d

176, 181 (Tex.1965); see also Barnett v. Aetna Life Ins. Co., 723

S.W.2d 663, 665 (Tex.1987) (stating that "if the insurance contract

is expressed in plain and unambiguous language, a court cannot

resort to the various rules of construction [favoring the

insured]"). An insurance policy is ambiguous only when it is

"reasonably susceptible to more than one meaning ... but if only

one reasonable meaning clearly emerges[,] it is not ambiguous."

Universal C.I.T. Credit Corp. v. Daniel, 150 Tex. 513, 243 S.W.2d

154, 157 (1951). When no ambiguity exists, a court must give the

words used their plain meaning. Puckett v. United States Fire Ins.

Co., 678 S.W.2d 936, 938 (Tex.1984).

Special Endorsement 6 of the excess insurance policy provides

in pertinent part:

The [insurance] company, at its own expense, shall have [the]
right to associate itself with the insured in the control,
negotiation, investigation, defense or appeal of any claim or
proceeding which, in the opinion of the company is or may be
covered by this policy. The insured shall fully cooperate in
all matters pertaining to such claim or proceeding....

The rejection of a negotiated settlement for a definite amount
by the insured with respect to a claim shall limit the
company's liability to the total amount of the settlement
negotiated and defense costs and excess defense costs incurred
to the date of such negotiated settlement agreement for such
claim less the self-insured retention.

Special Endorsement 6 also expressly deleted condition 3(d) from

the insurance policy, which formerly read:

The [insurance] [c]ompany at its sole option and without the
consent of the insured, may settle any claim or suit involving
the limits of liability of this policy or likely to involve
its limits. The [c]ompany expressly reserves the right to
settle such claim or suit for an amount within the Insured's
Retained Limit.

6
 We read this unambiguous language to mean that Columbia had

the right, and not the duty to engage in settlement negotiations.

Indeed, the explicit abrogation of Columbia's unilateral authority

to negotiate a binding settlement supports the interpretation that

the parties intended for Ariens to control its own defense,

including the handling of settlement negotiations. See also Inst.

of London Underwriters v. First Horizon, 972 F.2d 125, 126 (5th

Cir.1992) (interpreting similar language under Louisiana law—"[the

excess carrier] shall have the right and shall be given the

opportunity to associate with the Assured or the Assured's

underlying insurers or both in the defense and control of any

claim...."—as unambiguously excluding a defense obligation on

behalf of an excess carrier). Based on the policy's plain and

unambiguous language, we hold, as the district court did, that

Columbia had no duty to Ariens to settle for an amount within the

first two layers of excess liability coverage.4 Because Columbia

had no duty to Ariens, Columbia also had no duty to National Union

under the doctrine of equitable subrogation. See American

Centennial, 843 S.W.2d 480, 482-83 (Tex.1992) (noting that the

doctrine permits the excess insurer to step into the shoes of the

insured when pursuing a cause of action for mishandling of a

4
We do recognize that the policy did impose the duty upon
Columbia to "cooperate in all matters pertaining [a] claim or
proceeding [in defense of litigation]." Given the undisputed
fact that Columbia never objected to any settlement Ariens wanted
to make, we hold as a matter of law that Columbia did not violate
its duty to cooperate. See Record on Appeal vol. 2, at 781
(deposition of J. Michael Myers, counsel for Ariens) (stating
that prior to the verdict coming in, Columbia had never refused
to consent to an amount for which his client desired to settle).

7
claim).5

National Union also contends that it raised a material issue

of fact regarding whether Columbia actually controlled the defense

of the litigation against Ariens, thereby triggering a duty on

behalf of Columbia to settle and/or defend the claim in a

reasonable and careful manner. This argument fails to persuade for

at least two reasons. First, the terms of the policy unambiguously

reserves control of the defense to Ariens, and not Columbia. Thus,

as a matter of law, Columbia could not have controlled the defense

of the claim. Second, the summary judgment evidence which National

Union cites in its brief demonstrates at most that Columbia's

adjuster participated in settlement negotiations with the Hines

plaintiffs. We have held as a matter of law that where the insured

has retained independent counsel, an insurer's participation in

settlement negotiations does not itself constitute an assumption of

the insured's defense. See Arkwright-Boston Mfrs. Mut. Ins. Co. v.

Aries Marine Corp., 932 F.2d 442, 445-46 (5th Cir.1991). We

5
Although some jurisdictions have recognized a direct duty
running from the primary to the excess insurer, Texas has yet to
recognize such a duty. See American Centennial, 843 S.W.2d at
483 ("[W]e decline at this time to permit a direct action.").
Even if Texas did recognize a duty running from a lower-level
excess insurer to an upper-level excess insurer, to settle a
claim within the lower-level coverage limits, the terms of the
policy gave the Ariens, and not Columbia, the authority to
control the defense of litigation, including settlement
negotiations. Lacking such control, Columbia could not have
possessed a duty to settle within the lower-level coverage
limits. See Certain Underwriters v. Fidelity and Casualty Ins.
Co., 789 F.Supp. 927, 934 (N.D.Ill.1992) ("As a matter of law the
primary insurer cannot have a direct duty to the excess insurer
to do that which the primary insurer has no authority to do."),
rev'd on other grounds, 4 F.3d 541 (7th Cir.1993).

8
therefore reject Columbia's second contention on appeal.6

III

For the foregoing reasons, we AFFIRM the judgment of the

district court.

6
Because we conclude that Columbia violated no duty to
National Union, we further note that the district court correctly
granted summary judgment on National Union's claims under the
Texas Deceptive Trade Practices Act and Insurance Code which were
premised on Columbia's allegedly negligent conduct in failing to
settle the litigation. See Brief for National Union at 35 ("The
same evidence which constitutes negligence on the part of CNA
also constitutes evidence of an unconscionable course of conduct
which would violate both the DTPA and Art. 21.21, Insurance Code
of Texas.").

9