FEDERAL DISTRICT COURT DISMISSES TEXAS INSURANCE CODE CLAIMS ASSERTED AGAINST A CO-PRIMARY INSURER

September 19, 2012

U.S. District Judge Xavier Rodriguez recently dismissed claims under section 542.003 of the Texas Insurance Code asserted by a co-primary insurer, Great American Assurance Company, against another co- primary insurer, Zurich American Insurance Company, in Great American Assur. Co. v. Wills, C.A. No. SA–10–CV–353–XR, 2012 WL 3962037 (W.D.Tex., Sept. 10, 2012).

 The case involves a dispute between Great American and Zurich over the handling of a claim against their mutual insured.  In 2009, the two insurers had an opportunity to settle a claim against their insured but Zurich refused to tender its pro rata share of the settlement demand because it considered the demand to be excessive at the time. Since Great American’s insurance policy limit was insufficient to meet the settlement demand alone, the case proceeded to trial and a judgment was ultimately entered against the insured that forced both insurers to exhaust their policy limits.

Great American filed a lawsuit against Zurich asserting various claims, including a claim that Zurich’s refusal to pay its pro rata share of the settlement demand violated section 542.003(b)(4) of the Texas Insurance Code because Zurich “failed to attempt in good faith ‘to effect a prompt, fair, and equitable settlement of a claim submitted in which liability has become reasonably clear.’”  Zurich had previously filed a motion to dismiss Great American’s claim under 542.003, but the court denied that motion in part after finding that Great American’s 542.003 claim, although it appeared to be unavailing, could not properly be  dismissed  because  Great  American  was  not  given  sufficient  notice  that  the  claim  was  subject  to dismissal. Zurich subsequently filed another motion to dismiss asking the court to dismiss Great American’s remaining claim under the Texas Insurance Code.

The court explained its concerns with Great American’s claim under the Texas Insurance Code in its previous order. Specifically, the court noted that it was not clear that section 542.003 supports a private cause of action because the language of the Code, its legislative history, and court interpretations of the Code suggest that only the Texas Department of Insurance can bring a claim under section 542.003. Additionally, the court noted that even if a private cause of action were allowed, a cause of action would likely not be available to Great American.  Since Great American brought its claim against Zurich as a third party to Zurich’s contract with the insured, and since Great American cannot assert any of the insured’s rights in subrogation against Zurich, the court reasoned that Great American would not have standing to assert a claim against Zurich for a violation of section 542.003.

Great American offered no arguments to refute the court’s rationale. Nor did Great American offer any statutory law, case law or legal theories in support of its claim. Thus, the court concluded Great American’s claim under the Texas Insurance Code could not plausibly entitle Great American to relief and consequently granted Zurich’s motion to dismiss.