Case: 11-10649 Document: 00512152395 Page: 1 Date Filed: 02/22/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
February 22, 2013
No. 11-10649 Lyle W. Cayce
Clerk
MID-CONTINENT CASUALTY COMPANY,
Plaintiff-Appellee
v.
ELAND ENERGY, INC.; SUNDOWN ENERGY LP,
Defendants-Appellants
_______________________________________________________________________
ELAND ENERGY, INC.; SUNDOWN ENERGY, L.P.,
Plaintiffs - Appellants
v.
MID-CONTINENT CASUALTY COMPANY
Defendant - Appellee
Appeal from the United States District Court
for the Northern District of Texas
Case: 11-10649 Document: 00512152395 Page: 2 Date Filed: 02/22/2013
No. 11-10649
Before JOLLY, JONES, and GRAVES, Circuit Judges.
EDITH H. JONES, Circuit Judge:
The principal issue raised in this appeal is whether an insurer breaches
a duty to its insured in Texas by surreptitiously attempting to settle a covered
third-party claim and truncating its duty to defend, despite paying the full limits
of its coverage. According to appellant Sundown1, Mid-Continent Casualty
Company (“Mid-Continent”) prematurely tendered the limits of Sundown’s
primary and umbrella policies ($6 million total) while undercutting Sundown’s
ability to defend a class action suit for environmental damage following
Hurricanes Katrina and Rita. After extensive litigation, the district court
overturned a jury verdict for Sundown and awarded Mid-Continent judgment as
a matter of law. For the following reasons, we AFFIRM.
BACKGROUND
Sundown’s oil and gas production facilities in Louisiana were destroyed
and tanks containing crude oil spilled their contents after Hurricane Katrina hit
Port Sulphur. Less than a month later, the storm surge from Hurricane Rita
caused that oil to escape a containment boom constructed during Hurricane
Katrina cleanup operations. Sundown held a commercial general liability policy
(“Primary Policy”) and an Umbrella Policy through Mid-Continent Casualty
Company. The Primary Policy had coverage limits of $1 million per occurrence
and $2 million total, and included a duty to defend. The Umbrella Policy had a
total limit of $5 million and included a right to associate with an underlying
insurer and the insured to defend.2
1
Eland Energy, Inc. and Sundown Energy LP are sister companies and are referred to
here collectively as “Sundown.”
2
The policies granted Mid-Continent broad discretion to settle.
2
Case: 11-10649 Document: 00512152395 Page: 3 Date Filed: 02/22/2013
No. 11-10649
Five lawsuits were filed against Sundown by neighboring property owners
and commercial fishermen affected by the spillage of oil.3 Mid-Continent agreed
to provide a defense to the class action lawsuits subject to a reservation of rights.
Sundown asserted that the reservation of rights created a conflict that entitled
it to independent counsel. Mid-Continent eventually agreed that Sundown could
be represented by Jones, Walker, Waechter, Poitevent, Carrère & Denègre,
L.L.P. (“Jones Walker”). Mid-Continent tendered the Primary Policy and
Umbrella Policy limits to Sundown for cleanup costs on March 22, 2006 and
August 18, 2006, respectively. Sundown refused to deposit the checks because
it planned to pursue reimbursement for government-mandated cleanup costs
from a statutory fund and because of concern that, if Mid-Continent paid for
Sundown’s cleanup costs, Mid-Continent would have no duty to defend Sundown
in the class action lawsuits.
Mid-Continent filed suit for a declaratory judgment that it had no further
duty to defend, and Sundown filed a cross-claim for breach of the duty of good
faith and fair dealing, among other cross-claims. In three opinions, the district
court granted Mid-Continent the declaratory relief it sought and judgment on
several of Sundown’s claims.4 The district court granted summary judgment to
Mid-Continent on Sundown’s claim in the alternative that Louisiana law
provided a remedy for its bad faith claims in Mid-Continent I, a decision
Sundown appeals. Sundown’s counterclaims remaining after Mid-Continent I,
3
Only one of those cases, Blanchard, a class action lawsuit, is at issue here.
4
The district court ruled in Mid-Continent I that Mid-Continent exhausted the limits
of the Primary Policy when it tendered the $1 million check to Sundown. Mid-Continent Cas.
Co. v. Eland Energy, Inc., Nos. 3:06cv1576, 3:06cv1578, 2009 WL 3074618, at *11–12 (N.D.
Tex. Mar. 30, 2009). The district court ruled in Mid-Continent II and III that Mid-Continent
exhausted the limits of the Umbrella Policy when it tendered the $5 million check to Sundown.
Mid-Continent Cas. Co. v. Eland Energy, Inc., Nos. 3:06cv1576, 3:06cv1578, slip op. at 25 (N.D.
Tex. Oct. 22, 2009); Mid-Continent Cas. Co. v. Eland Energy, Inc., Nos. 3:06cv1576,
3:06cv1578, 2010 WL 610713, at *1 (N.D. Tex. Feb. 22, 2010).
3
Case: 11-10649 Document: 00512152395 Page: 4 Date Filed: 02/22/2013
No. 11-10649
II, and III were tried to a jury, which returned a verdict partially in favor of
Sundown and awarded Sundown a total of $8.45 million in compensatory,
penalty, and punitive damages. Mid-Continent sought judgment as a matter of
law. The district court granted Mid-Continent’s motion, overturning the jury
verdict. Mid-Continent Cas. Co. v. Eland Energy, Inc., 795 F. Supp. 2d 493 (N.D.
Tex. 2011) (Mid-Continent IV). Sundown appealed.
Sundown’s appeal turns on actions taken by Mid-Continent, including a
secret offer of settlement made to Chris Leopold, which it says prejudiced its
ability to settle the Blanchard class action. Leopold owned the largest piece of
property near Sundown’s facility. Leopold also owned a store and a boat storage
shed on that property. Leopold contended that oil stains on trees on his property
and the remains of his buildings were caused by oil spilled from Sundown’s
facility.
On September 23, 2005, within weeks of the hurricanes’ destruction,
Sundown notified Mid-Continent that it had been served in the Blanchard
litigation.5 Property owners near Sundown’s facilities alleged that their
properties had been contaminated with crude oil from Sundown’s facilities. The
class action named Sundown as the sole defendant.6 Mid-Continent hired
attorneys Tony Clayton and Paul Preston to defend Sundown. Representatives
of Sundown, representatives of Mid-Continent, lawyers from Jones Walker,
Clayton, and Preston met on October 7. The parties agreed that any visit to the
Sundown facility or surrounding properties would be coordinated through Jones
Walker. The parties also agreed to coordinate legal issues through Jones
Walker.
5
Leopold was not a member of the putative Blanchard class at that time.
6
Around this time Sundown also notified Mid-Continent that it had been named as a
defendant in two other lawsuits.
4
Case: 11-10649 Document: 00512152395 Page: 5 Date Filed: 02/22/2013
No. 11-10649
What followed next in the claims handling Sundown succinctly
characterizes as “the extreme acts of Mid-Continent with respect to Leopold—the
secret visit, secret investigation, secret sampling and secret offer” that
consciously undermined Sundown’s defense of the Blanchard case.
Preston emailed a Jones Walker attorney, Carl Rosenblum, on October 11,
2005, about arranging a site visit. Rosenblum replied the next day that he
would not be available until the first week of November. Later, Rosenblum
informed Preston that they could visit the site on October 27, but he reversed
course on October 24, telling Preston that a visit by Preston would be
“unnecessary and inappropriate” because Sundown insisted on choosing its own
counsel in response to Mid-Continent’s reservation of rights.
Unknown to Rosenblum, Preston had already arranged a meeting with
Leopold for October 24. Leopold showed Preston and other Mid-Continent
representatives the remnants of oil on his property, but they did not talk about
money or engage in settlement negotiations. While touring Leopold’s property,
another nearby property owner, Ben Slater, approached Preston and briefly
spoke to him. Preston did not visit the Sundown facility. Sundown first learned
of Preston’s visit on November 11, during a conversation between a Jones
Walker attorney and Slater.
On November 29, Luther Holloway visited Leopold’s property on Mid-
Continent’s behalf. Holloway took pictures and made a video of the property.
Mid-Continent concluded, based on Holloway’s report, that Leopold’s property
had been stained by oil spilled from Sundown’s facility. Dana Futrell was hired
to replace Holloway, and he inspected Leopold’s property on December 19.
Futrell was also convinced that oil was present, and he hired an engineering
firm to take soil samples. Two of the twenty-five samples showed petroleum
5
Case: 11-10649 Document: 00512152395 Page: 6 Date Filed: 02/22/2013
No. 11-10649
contamination, but they were from diesel, not crude oil.7 Sundown does not
produce or store diesel.
Leopold responded to the results by indicating that he just wanted Mid-
Continent to remove the parts of the building and debris that were covered in oil.
Mid-Continent began putting together a settlement offer by obtaining a cleanup
estimate from Greco Construction (“Greco”).8 Greco’s estimate was $98,560, but
Mid-Continent subtracted the portions of the estimate that did not cover debris
removal that was later performed by the government without charge. This
brought the estimate to $54,536, and Mid-Continent alleges it made a written
settlement offer of that amount to Leopold on June 2, 2006. Leopold testified
that he "never got an offer in writing" and that an oral offer of "somewhere
around a hundred thousand dollars" had been made, but that he rejected the
offer.
Sundown learned about the soil samples at a meeting held on June 16.
Sundown representatives reiterated to the Mid-Continent representatives
present the need to coordinate and for Jones Walker to lead the investigation.
They also discussed the three pending lawsuits and Sundown made a proposal
for settlement with Mid-Continent. Mid-Continent did not inform Sundown of
its settlement offer to Leopold at that time. Mid-Continent sent limited results
from the soil sampling to Sundown later that month.
In July, Mid-Continent informed Sundown that it had extended a
settlement offer to Leopold.9 When asked why Mid-Continent did not tell
7
Errors in the soil samples were later discovered. The errors, however, concerned the
concentration of diesel, not any crude oil. Mid-Continent still believed the staining 8–10 feet
above the ground was caused by crude oil from Sundown’s facility.
8
Leopold recommended Greco.
9
The letter was dated July 10, 2006, but Sundown contends it did not receive the letter
until July 21.
6
Case: 11-10649 Document: 00512152395 Page: 7 Date Filed: 02/22/2013
No. 11-10649
Sundown about the settlement offer at the June 16 meeting, Mid-Continent Vice
President Steve Haltom replied that he “didn’t think it was important.”
Sundown demanded Mid-Continent withdraw the offer. Mid-Continent did so
that day, and Leopold promptly became a member of the Blanchard class action.
Leopold also encouraged several of his neighbors to sue Sundown.
Sundown settled the Blanchard litigation for $2 million and an agreement
to remediate any Sundown oil found on any class member’s property. Sundown
paid for the settlement, as Mid-Continent had already tendered policy limits and
withdrawn from the defense. Sundown believed the settlement would have been
smaller had an offer not been made to Leopold.
STANDARD OF REVIEW
“[T]his court reviews de novo a district court’s denial of a motion
for . . . judgment as a matter of law, applying the same standard as the district
court.” Goodner v. Hyundai Motor Co., Ltd., 650 F.3d 1034, 1039 (5th Cir. 2011).
“We review the jury’s verdict to determine if the facts and reasonable inferences
point so strongly and overwhelmingly in favor of one party that reasonable
minds could not arrive at a different verdict.” ARA Automotive Group v. Cent.
Garage, Inc., 124 F.3d 720, 723 (5th Cir. 1997). “The jury’s verdict can only be
overturned if there is no legally sufficient evidentiary basis for a reasonable jury
to find as the jury did.” Guile v. United States, 422 F.3d 221, 225 (5th Cir. 2005).
The Fifth Circuit “review[s] de novo the district court’s determination of state
law.” Mills v. Davis Oil Co., 11 F.3d 1298, 1301 (5th Cir. 1994).
DISCUSSION
Sundown is understandably upset. The court submitted to the jury
interrogatories pertaining to Mid-Continent’s good faith and fair dealing “by
consciously undermining Sundown’s defense in the [Blanchard suit]” and by
failing “to conduct a reasonable investigation of Sundown’s Hurricane Katrina
claim.” The jury returned a multimillion dollar actual and exemplary damage
7
Case: 11-10649 Document: 00512152395 Page: 8 Date Filed: 02/22/2013
No. 11-10649
verdict for Sundown. And the court ruled after post-trial briefing for Mid-
Continent as a matter of law. On appeal, Sundown contends that the district
court erred when it held that there is no cause of action under Texas common
law for breach of an insurer’s duty of good faith and fair dealing in the context
of third-party claims; that it erred in holding that Texas rather than Louisiana
law governed Sundown’s claim for breach of the duty; and that it erred in
holding against Sundown on its statutory claims for unfair settlement practices.
I. Duty of Good Faith and Fair Dealing
Sundown contends Mid-Continent breached an insurer’s common law duty
of good faith and fair dealing. Sundown argues that the district court erred in
interpreting two Texas decisions and a decision of this court. Northwinds
Abatement, Inc. v. Employers Ins. of Wausau, 258 F.3d 345 (5th Cir. 2001); State
Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625 (Tex. 1998); Republic Ins.
Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995). To prevail, Sundown must show that
Texas law recognizes a cause of action for an insurer’s mishandling of third-
party claims. The Texas Supreme Court is the principal authority on questions
of Texas common law. Paz v. Brush Engineered Materials, Inc., 555 F.3d 383,
392 (5th Cir. 2009). Lacking a decision on point, this court must make an “Erie
guess,” i.e., forecast how the Texas Supreme Court “would rule.” Id. “This
prediction may be based on [Texas] case law, dicta, general rules on the issues,
decisions of other states, and secondary sources.” Id.
“Under Texas law, an insurer owes a duty of good faith in handling its
insured’s own claim of loss.” Med. Care Am., Inc. v. Nat’l Union Fire Ins. Co.,
341 F.3d 415, 425 (5th Cir. 2003). Sundown sought coverage, however, for a
third-party claim covered by its comprehensive general liability policy. See
Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 17 (Tex. 2007) ((“[A]
first party claim is stated when ‘an insured seeks recovery for the insured’s own
loss,’ whereas a third-party claim is stated when ‘an insured seeks coverage for
8
Case: 11-10649 Document: 00512152395 Page: 9 Date Filed: 02/22/2013
No. 11-10649
injuries to a third party.’” (quoting Universal Life Ins. Co. v. Giles, 950 S.W.2d
48, 54 n.2 (Tex. 1997))). There exists no statutory cause of action for breach of
the duty of good faith and fair dealing in the context of an insurer’s handling of
a third-party claim. The only previously recognized common law claim is for
breach of the duty to settle a third-party claim within policy limits. Stowers
Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544 (Tex. 1928); see, e.g., Mid-
Continent Ins. Co. v. Liberty Mut. Ins., 236 S.W.3d 765, 776 (Tex. 2007) (holding
that insurer’s common law duty to act reasonably when handling insured’s
defense is limited to its Stowers duty.)
Sundown argues that the Texas Supreme Court, in Traver and Stoker,
expanded an insurer’s duties in two ways beyond that defined by Stowers. In
Traver, the court hinted that an insurer also might be liable if it “consciously
undermined the insured’s defense.” Traver, 980 S.W.2d at 629. In Stoker, the
court stated that “as a general rule there can be no claim for bad faith when an
insurer has promptly denied a claim that is in fact not covered” but the court did
“not exclude, however, the possibility that in denying the claim, the insurer may
commit some act, so extreme, that would cause injury independent of the policy
claim.” Stoker, 903 S.W.2d at 341 (citations omitted).10
Neither of these passages established Texas law. Traver specifically held
that an insurer is not vicariously liable for the malpractice of an attorney the
insurer provides the insured. Traver, 980 S.W.2d at 629. The Traver court’s
“consciously undermined” language notwithstanding, the insured did not appeal
the lower court’s denial of his breach of duty of good faith and fair dealing claim
and thus the lower court’s decision was final. Id. As the issue was not before it,
10
Note that Stoker is premised on denial of coverage at the outset, whereas here, Mid-
Continent paid Sundown the full policy limit.
9
Case: 11-10649 Document: 00512152395 Page: 10 Date Filed: 02/22/2013
No. 11-10649
the Supreme Court’s musings on the subject were dicta.11 The statement in
Stoker is dicta, as it did “not exclude [a] possibility.” Stoker, 903 S.W.2d at 341.12
Sundown contends that the Stoker and Traver statements constitute “plain
unconditioned statement[s]” and “considered dictum” that this court is obliged
to follow. Thomas v. Hoffman-LaRoche, Inc., 949 F.2d 806, 812 (5th Cir. 1992),
cert. denied, 504 U.S. 956 (1992). But this is neither a new issue that Texas
courts have not yet had the opportunity to address or a novel issue that they are
unlikely to confront. The Stoker language has frequently been discussed, but in
seventeen years since the decision appeared, no Texas court has yet held that
recovery is available for an insurer’s extreme act, causing injury independent of
the policy claim, in the first-party claim context, let alone in the third-party
claim context. Such case history does not a yield a sound foundation for an Erie
guess, nor does the failure of state courts in the past fourteen years to apply or
even discuss the Traver language.
Sundown’s final attempt to support its novel claim rests on the Fifth
Circuit’s application of the Stoker language in Northwinds. 258 F.3d at 352–53.
In Northwinds this court, in affirming a jury verdict on statutory claims for
violations of the Texas Deceptive Trade Practices Act and the Texas Insurance
11
Not only has Traver’s dicta not been relied upon by Texas lower court cases, but in
fact, the “consciously undermined” language has only been mentioned in one decision. See
Southstar Corp. v. St. Paul Surplus Lines Ins. Co., 42 S.W.3d 187, 192 (Tex. App.—Corpus
Christi 2001, no pet.).
12
Courts have frequently recognized the relevant language from Stoker as dicta. See,
e.g., Gen. Star Indem. Co. v. Sherry Brooke Revocable Trust, 243 F. Supp. 2d 605, 612 (W.D.
Tex. 2001) (“[The insureds] hang their extra-contractual claims on a single line of dictum in
Stoker”); Potomac Ins. Co. v. Woods, No. 1:95cv469, 1996 WL 450687, at *6 (E.D. Tex. July 22,
1996) (“In dicta the [Stoker] court left open the theoretical possibility that in a case in which
the insurer has no liability under the policy there could be a bad faith claim.”); SnyderGeneral
Corp. v. Century Indem. Co., 907 F. Supp. 991, 1006 (N.D. Tex. 1995) (“[T]he [Stoker] court
also said, albeit in dicta, that there are exceptions [to the general rule]”), aff’d in part and
vacated in part on other grounds, 113 F.3d 536 (5th Cir. 1997); Toledo-Lucas Cnty. Port Auth.
v. Axa Marine & Aviation Ins. Ltd., 220 F. Supp. 2d 868, 874 n.7 (N.D. Ohio 2002) (noting that
the Stoker language is dicta), rev’d on other grounds, 368 F.3d 524 (6th Cir. 2004).
10
Case: 11-10649 Document: 00512152395 Page: 11 Date Filed: 02/22/2013
No. 11-10649
Code, approvingly cited the Stoker language and held that a reasonable jury
could have found the defendant’s “successful efforts to persuade the [insurer] to
sue [its insured] baselessly” were sufficiently extreme and caused Northwinds
to pay significant defense costs. Id. The district court explained at length,
however, and we need only summarize its reasoning, why Northwinds is
inapposite. First, the judgment in Northwinds arose from breaches of statutory
provisions, and the court stated there had been no breach of contract or of good
faith and fair dealing. The court’s citation to Stoker referred only to those
statutory claims, a different proposition than creating an exception to the
general rule that there is no claim for breach of good faith and fair dealing in the
third-party claims-handling process. Second, if Northwinds articulates a
liability standard based on Stoker’s dicta, it is at odds with later Texas court
decisions, including two Texas Supreme Court opinions, that uniformly fail to
apply Stoker’s language as a concrete cause of action.13 This court must, in a
diversity case, “follow subsequent state decisions that are clearly contrary to a
previous decision of [the Fifth Circuit].” Farnham v. Bristow Helicopters, Inc.,
776 F.2d 535, 537 (5th Cir. 1985). If Northwinds approved a “Stoker claim,” this
court’s decision has not withstood the test of subsequent state court decisions.14
13
Progressive Mutual Insurance Co. v. Boyd, 177 S.W.3d 919, 922 (Tex. 2005), and Am
Motorists Insurance Co. v. Fodge, 63 S.W.3d 801, 804 (Tex. 2001), treat the Stoker language
as admitting a mere “possibility” accompanied by no examples (nor any mention of
Northwinds). See also Laas v. State Farm Mut. Auto. Ins. Co., No. 14-99-194cv, 2001 WL
1479228, at *4 (Tex App.—Hous. Nov. 1, 2001, no pet.) (“Indeed, the supreme court in Stoker,
mentioned in dicta the possibility, that in denying a claim, an insurer might commit some act,
so extreme, there could be an injury independent of the policy claim.”); Gates v. State Farm
Cnty. Mut. Ins. Co. of Tex., 53 S.W.3d 826, 831–32 (Tex. App.—Dallas 2001, no pet.); Crocker
v. Am. Nat’l Gen. Ins. Co., 211 S.W.3d 928, 936 (Tex. App.—Dallas 2007, no pet.).
14
This court later held, while discussing Texas law and without citing Northwinds, that
“[A]n insured . . . has no claim for bad faith premised on the insurer’s investigation or defense
of a claim brought against it by a third party. This is because ‘an insured is fully
protected . . . by his contractual and Stowers rights’ . . .” Med. Care Am., Inc. v. Nat’l. Union
Fire Ins. Co. 341 F.3d 415, 425 (5th Cir. 2003) (citations omitted).
11
Case: 11-10649 Document: 00512152395 Page: 12 Date Filed: 02/22/2013
No. 11-10649
Finally, Northwinds is in any event factually distinguishable from the present
case. The claim in Northwinds sought recovery of the cost of defending a
baseless lawsuit instigated against Northwinds at the defendant’s behest; the
lawsuit had nothing to do with the defendant’s mishandling of workers’
compensation claims as a servicing agent for Northwinds. Here, Sundown’s
claim is inextricably tied to Mid-Continent’s mishandling of a third-party claim
under the insurance policies and Mid-Continent’s motive to minimize its costs
associated with the policies. Northwinds accords with any extra-contractual
cause of action that the Stoker language might suggest, but in this case the
“extreme” acts are subsumed within the claims-handling process, and they did
not inflict injury independent from the policy claim.15
II. Choice of Law
The district court ruled in Mid-Continent I that Texas law applied and
granted Mid-Continent’s motion for summary judgment on Sundown’s
alternative claims under Louisiana law. 2009 WL 3074618, at *94–95.16
Sundown had asserted an extra-contractual claim for breach of the duty of good
faith and fair dealing under Louisiana law based on Mid-Continent’s “failure to
inform Sundown regarding its contacts and settlement overtures” and its
“unreasonable settlement offer to a single member of the Blanchard putative
class action.” The “most significant relationship” test from § 6 of the
Restatement (Second) Conflict of Laws is used by Texas courts and governs this
diversity case. Spence v. Glock, GmbH, 227 F.3d 308, 311 (5th Cir. 2000).
15
Because the above grounds are sufficient, we do not reach Sundown’s other
arguments on this issue or the district court’s other grounds for holding for Mid-Continent.
16
“This court reviews the district court’s grant of summary judgment de novo, applying
the same standards as the district court. Summary judgment is warranted if ‘the pleadings,
the discovery and disclosure materials on file, and any affidavits show that there is no genuine
issue of material fact and that the movant is entitled to judgment as a matter of law.” DePree
v. Saunders, 588 F.3d 282, 286 (5th Cir. 2009) (internal citations omitted).
12
Case: 11-10649 Document: 00512152395 Page: 13 Date Filed: 02/22/2013
No. 11-10649
Section 6 of the Restatement begins: “(1) A court . . . will follow a statutory
directive of its own state on choice of law.” Mid-Continent argues that Article
21.42 of the Texas Insurance Code mandates the application of Texas law to
disputes over insurance contracts payable to a citizen or inhabitant of Texas.17
Sundown counters, however, that Texas and Louisiana courts treat breaches of
the duty of good faith and fair dealing as tort, not contract claims. We assume
arguendo that Article 21.42 is not facially applicable. Consequently, the factors
listed under § 6(2) must be considered:
(2) When there is no such directive, the factors relevant to the choice of the
applicable rule of law include
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests
of those states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be applied.
Under § 145 of the Restatement (Second) Conflict of Laws, the
(2) Contacts to be taken into account in applying the principles of § 6
to determine the law applicable to an issue include:
(a) the place where the injury occurred,
(b) the place where the conduct causing the injury occurred,
(c) the domicil, residence, nationality, place of incorporation and
place of business of the parties, and
(d) the place where the relationship, if any, between the parties is
centered.
17
The statutory directive in Article 21.42 states:
Any contract of insurance payable to any citizen or inhabitant of this State by
any insurance company or corporation doing business within this State shall be
held to be a contract made and entered into under and by virtue of the laws of
this State relating to insurance, and governed thereby, notwithstanding such
policy or contract of insurance may provide that the contract was executed and
the premiums and policy (in case it becomes a demand) should be payable
without this State, or at the home office of the company or corporation issuing
the same.
13
Case: 11-10649 Document: 00512152395 Page: 14 Date Filed: 02/22/2013
No. 11-10649
Section 145 lists contacts because the “states which are most likely to be
interested are those which have one or more of the contacts with the occurrence
and the parties.” Restatement (Second) Conflict of Laws § 145 cmt. (e). Here,
the conduct causing Sundown’s alleged injury partially occurred in Louisiana.
Nevertheless, the other relevant contacts point toward Texas. Sundown is a
Texas business. Under Article 21.42 of the Texas Insurance Code, the policies
are governed by Texas law, and thus the relationship between the parties is
centered in Texas. Sundown’s insurance agent prepared its notice of claim in
Texas. Mid-Continent sent Sundown payment under the policies to Texas. The
parties’ meetings regarding the handling of the claims were held in Texas.
Not only do the parties’ relevant contacts with Texas predominate, but the
“relevant policies” of Texas and Louisiana militate toward applying the law of
Texas. The basic legal question is whether, or to what extent, the insurer had
a duty to handle third-party claims without disadvantaging its insured
notwithstanding that it reimbursed the insured up to the policies’ full limits.
The insurance contract is governed by Texas law. Both Texas and Louisiana,
like all other states, have regulatory agencies and specific law devoted to the
business of insurance. Even though an extra-contractual claim may not fall
within the parameters of express Texas regulation, the regulating state is vitally
concerned, because such claims, whether successful or not, bracket its efforts
and may reveal the need for additional or different regulation. Allowing judge-
made torts like breach of good faith, to superimpose another state’s standards
on Texas regulation undermines it, furnishes no predictability for the state’s
insurers, and guarantees inconsistent outcomes for insureds with Texas policies.
Thus, although the “protection of justified expectations”; the “certainty,
predictability and uniformity of result”; and the “ease of determination and
application of the law to be applied” are typically given less weight in tort
actions, id. cmt. (a)-(c), those policies weigh heavily here, where the cause of
14
Case: 11-10649 Document: 00512152395 Page: 15 Date Filed: 02/22/2013
No. 11-10649
action, although resting in tort, could not exist but for the insurance policies.
Accordingly, Texas law applies.18
III. Statutory Claims for Unfair Settlement Practices and
Misrepresentations
The jury found that Mid-Continent committed five separate violations of
the Texas Insurance Code, and it awarded $2 million compensatory damages for
Sundown’s alleged injury in settling the Blanchard case. The district court
granted judgment as a matter of law for Mid-Continent on all of these claims.
On appeal, Sundown defends the verdict only as to two: Mid-Continent’s failure
to give a prompt and reasonable explanation for the Leopold settlement offer,
Tex. Ins. Code § 541.060(a)(3); and Mid-Continent’s four misrepresentations of
material facts, Tex Ins. Code § 541.060.19
The parties dispute whether the trial court correctly overturned the
verdict finding that Mid-Continent delayed too long and then failed reasonably
to explain its settlement offer to Leopold in July, 2006. On the other hand, Mid-
Continent does not challenge the finding of four material misrepresentations
presented to the jury: (1) Mid-Continent misstated the law to Sundown when it
denied that a conflict of interest was created by its reservation of rights letters;
(2) Mid-Continent misrepresented that it did not pay more than $200/hour for
Louisiana attorneys (and hence would not pay more for Sundown’s separate
counsel); (3) Mid-Continent misstated that there was no coverage for Hurricane
Katrina costs at Sundown’s facility unless Sundown obtained a written order
from the Coast Guard; and (4) Mid-Continent misstated the law when it
18
We do not decide whether Louisiana law does in fact recognize a cause of action for
breach of a duty of good faith and fair dealing in these circumstances.
19
Section 541.060 of the Texas Insurance Code states: “(a) It is an unfair method of
competition or an unfair or deceptive act or practice in the business of insurance
to . . . misrepresent[ ] to a claimant a material fact or policy provision relating to coverage at
issue.”
15
Case: 11-10649 Document: 00512152395 Page: 16 Date Filed: 02/22/2013
No. 11-10649
maintained it had an unavoidable duty to investigate the Leopold claim. The
district court held as a matter of law that none of these unfair settlement
practices was a producing cause of Sundown’s injury in the amount of the
Blanchard settlement. We agree. Again, we may summarize the district court’s
more comprehensive explanation.
“A producing cause is an efficient, exciting, or contributing cause, which
in a natural sequence, produced the injuries or damages complained of, if any.”
Gabriel v. Lovewell, 164 S.W.3d 835, 844 (Tex. App.—Texarkana 2005, no pet.)
(citations and internal quotation marks omitted). “[P]roducing cause requires
a lesser burden than proximate cause because it does not require foreseeability.”
Id. There must, however, be a showing of cause in fact, which “requires evidence
that allows the fact finder to reasonably infer that the damages are a result of
the defendant’s conduct.” 2 Fat Guys Inv., Inc. v. Klaver, 928 S.W.2d 268, 272
(Tex. App.—San Antonio 1996, no writ). The “plaintiff must show an unbroken
causal connection between the alleged misrepresentation and injuries suffered
by the complaining party.” Travelers Indem. Co. v. Page & Assocs. Constr. Co.,
No. 07-01-22cv, 2002 WL 1371065, at *9 (Tex. App.—Amarillo June 25, 2002,
pet. denied) (citing Doe v. Boys Club of Greater Dall., Inc., 907 S.W.2d 472, 481
(Tex. 1995)).
The jury found that Mid-Continent violated § 541.060(a)(3) of the Texas
Insurance Code by failing to provide notice of its offer of settlement within ten
days and failing to explain it reasonably. Sundown devoted considerable energy
at trial to attempting to show that it was injured because the Leopold offer was
made,20 the offer was excessive, and it was not communicated to Sundown for
over a month. Moreover, Mid-Continent’s explanation was unreasonable
because the offer was not justifiable based on expert reports concerning
20
Mid-Continent had the right under the policy to settle claims without Sundown’s
consent.
16
Case: 11-10649 Document: 00512152395 Page: 17 Date Filed: 02/22/2013
No. 11-10649
Leopold’s damage. Critically, Sundown did not adduce evidence that had Mid-
Continent provided notice within ten days and had it furnished all its expert
reports to Sundown, Leopold could have been persuaded not to join the
Blanchard class, not to become a class representative, and not to discuss his
claim with other property owners. Sundown’s brief asserts that the statutory
violation “prevented Sundown from taking measures to mute the effect of the
offer immediately after it was made,” but no evidence supports that earlier
notification to Sundown would have made any difference in the discussions with
Leopold. A producing cause cannot be based on speculation.
Sundown’s proof of producing cause is also lacking for each of Mid-
Continent’s misrepresentations. First, Mid-Continent misstated the law when
it failed to acknowledge a conflict of interest created by its reservation of rights
letters. Sundown does not put forth any explanation for how the lack of
acknowledgment by Mid-Continent of a conflict of interest led to a more costly
settlement of the Blanchard litigation. Instead, Sundown frames the
misstatement as part of Mid-Continent’s general behavior and tactics in its
dealings with Sundown. Even assuming the misstatement was part of a larger
scheme, Sundown draws no direct connection between this misstatement and the
harm it suffered.
Next Mid-Continent misrepresented that it did not pay more than $200
per hour for Louisiana lawyers, But Sundown does not show how Mid-
Continent’s misrepresentation affected its choice of attorneys or their utilization.
Sundown was still able to hire the attorneys of its choice, albeit at reduced rates.
Instead, Sundown paints the misrepresentation as part of Mid-Continent’s
scheme to stymie Sundown and again fails to show any direct connection
between Mid-Continent’s misrepresentation and the amount it paid to settle the
Blanchard case.
17
Case: 11-10649 Document: 00512152395 Page: 18 Date Filed: 02/22/2013
No. 11-10649
The jury also found that Mid-Continent misstated the law when it told
Sundown there was no coverage for Hurricane Katrina cleanup costs at
Sundown’s facility unless Sundown could produce a written order from the Coast
Guard. This led Sundown to seek reimbursement for cleanup costs from a
government fund and use its policy coverage instead for litigation. Sundown
contends Mid-Continent responded with a secret plan to exhaust its policy limits
as quickly as possible to minimize defense costs. Sundown goes beyond mere
conjecture about an overall scheme and offers a theory showing a direct line from
Mid-Continent’s misrepresentation to Sundown’s injury. Sundown did not,
however, adduce sufficient evidence that Mid-Continent’s misrepresentation
caused Sundown to incur the $2 million Blanchard settlement. Before the
attempt to hold its cleanup claims “in abeyance,” Sundown had submitted such
extensive invoices for cleanup costs that Mid-Continent tendered the policy
limits for excess coverage to Sundown in August of 2006. The district court held
in Mid-Continent I that Mid-Continent’s duty to defend suits arising out of
Hurricane Katrina ended on March 22, 2006, when Mid-Continent tendered the
$1 million check on the primary coverage to Sundown. Accordingly, Mid-
Continent’s misstatement could not have been a producing cause of any
increased settlement cost.
Last, the jury found Mid-Continent misstated the law when it maintained
that it had an unavoidable duty to investigate Leopold’s claim. Sundown
contends this misstatement led to Mid-Continent’s secret site visit, which led to
the offer to Leopold, which in turn led to the increased settlement. Sundown
draws a connection between the misstatement and its harm, but that causal
connection fails in its first step. Sundown proved only that it was harmed by
Mid-Continent’s conduct of the investigation, not its misstatement that it had a
duty to investigate.
18
Case: 11-10649 Document: 00512152395 Page: 19 Date Filed: 02/22/2013
No. 11-10649
To defeat the district court’s ruling, Sundown needed to successfully tie
only one misrepresentation by Mid-Continent to the increased settlement
amount and establish that it was a producing cause. It is not enough to merely
show that Mid-Continent was a bad actor. Sundown devotes twelve pages of its
principal brief to this issue without attempting to tie the misrepresentations
found by the jury to the increased settlement. Instead, Sundown argues that
it was injured by the Leopold offer and related actions, none covered by the jury’s
misrepresentation findings, that led to inflated expectations and the inflated
Blanchard settlement. The evidence does not establish that any of Mid-
Continent’s misrepresentations were the producing cause of an increased
settlement for the Blanchard litigation.
The district court’s judgment is AFFIRMED.
19