Foreclosure of Claims Against Brokers or Agents
A policyholder’s claim against its carrier can, and frequently is, joined with its claim against its procuring agent or broker. These causes of action take on various names from jurisdiction to jurisdiction, depending on the governing laws at issue. The majority of these claims involve a broker’s failure to obtain the coverage requested by the policyholder. Under certain circumstances, these claims can also involve requests for recovery due to a broker’s failure to properly advise a policyholder as to the available, and necessary, coverage for its operations. In either scenario, when a policyholder successfully negotiates the settlement of its claim against the carrier, that settlement is presumably based on the strength of the policyholder’s claim that coverage existed under the policy. Thus, the parties’ subsequent documentation of the basis for settlement can affect the validity of the policyholder’s claims against its broker, as these claims are based on the failure to obtain adequate coverage or any coverage whatsoever. Careful consideration of all of a policyholder’s claims in the litigation before undertaking settlement negotiations, and throughout the documentation of any partial settlement agreements, is therefore crucial to ensure the continued viability of the policyholder’s claims against all remaining parties going forward.
Source of Potentially Preclusive Effect
The “election of remedies” doctrine is an equitable doctrine that exists, in one form or another, in every jurisdiction.[3] The doctrine acts as a bar on recovery premised on two or more inconsistent sets of factual allegations. It may constitute a bar to relief where “(1) one successfully exercises an informed choice (2) between two or more remedies, rights, or states of facts (3) which are so inconsistent as to (4) constitute manifest injustice.”[4] In the context of this article, the election doctrine could conceivably prevent a policyholder from first recovering from a carrier in a settlement, based on a claim that coverage exists, and then recovering from a broker, based on claims for failure to procure coverage.[5] The Texas Supreme Court’s per curiam opinion in Lomas & Nettleton Co. v. Huckabee[6] provides an example of the election of remedies doctrine being applied in this manner.
In Huckabee, the plaintiff homeowners brought a coverage suit against their carrier to obtain coverage for losses sustained in a fire. They later added the mortgage account management firm for failure to place the policy into effect.[7] The plaintiffs settled with the insurer, obtaining full payments for real property loss and 80 percent recovery for personal property. After the settlement was finalized, the trial court granted summary judgment dismissing the claim against the agent for failure to place the policy, which the appellate court reversed.
The Texas Supreme Court reinstated the summary judgment on the basis of the election of remedies doctrine finding inconsistencies between the factual positions taken in the claims against the insurer and the agent. The court agreed with the trial court:
Plaintiffs’ cause of action against the insurance companies was on the policies of insurance and on the premise such policies were in effect. Plaintiffs’ cause of action against [the agent] was on the premise the [carrier’s] policy was not in effect due to wrongful action of [the agent]. The remedies in the two causes of action are repugnant and inconsistent.[8]
The court then held that, due to these inconsistent factual positions and the fact that the plaintiffs had “received the settlement benefits from their suit against” the insurer, recovery was barred as to the agent under the election of remedies doctrine.[9] Other courts have applied the election of remedies doctrine to the settlement context in a similar way.[10] The cases discussed below, divergent in their application of the election of remedies doctrine, provide guidance on how a well-drafted settlement agreement can avoid prejudicing the policyholder’s claims against its agents or brokers while preserving the policyholder’s victory against the insurer.
Guidance for Settling Safely
In Bocanegra v. Aetna Life Ins. Co.,[11] the Texas Supreme Court was presented with a plaintiff who sought coverage for hospital services she needed because of a “non-occupational disease.” She had previously settled with a workers’ compensation carrier and received benefits, even though the classification of her condition as a “non-occupational disease” was unknown and undetermined as of the time of the settlement. The non-compensation carrier took the position that the election of remedies doctrine barred the plaintiff’s claim for coverage based on the classification of her condition as a “non-occupational disease” in light of the previous settlement with the workers’ compensation carrier. In evaluating this argument, the court reached a different result than in Huckabee.[12]
First, the Bocanegra court criticized the manner in which Huckabee applied the election of remedies doctrine:
One who pleads alternative or inconsistent facts or remedies against two or more parties may settle with one of them on the basis of one remedy or state of facts and still recover a judgment against the others based on the pleaded alternative or inconsistent remedies or facts.[13]
The court then stated that “election should not bar a suit when a previous course of action or a settlement for less than the claim was grounded upon uncertain and undetermined facts,” ultimately finding that the policyholder could not be bound to an election under the facts of the case.[14] In particular, because the settlement agreement between the policyholder and the insured acknowledged that coverage was in dispute, the Bocanegra court determined that the election of remedies doctrine did not apply.[15]
Other Texas appellate courts have allowed a policyholder to pursue claims against its agent, despite having reached a previous resolution of its claims for coverage against its carrier. For example, in Plate & Platter, Inc. v. Wolf,[16] the policyholder sued its carrier and agent after a coverage claim was denied.[17] The policyholder’s petition alleged claims of breach of contract against its carrier for failure to pay an otherwise properly due claim.[18] The petition also pled, in the alternative, a claim of negligence against the policyholder’s agent, alleging that “if the loss was not covered by the policy,” the agent was liable under a negligence theory.[19] Ultimately, the policyholder resolved its claims with the carrier and memorialized their agreement in a written release. Once executed and funded, the agent sought dismissal from the suit by summary judgment premised on the policyholder’s election of remedies against the carrier.[20] The trial court granted the agent’s summary judgment motion. On appeal, the Texas Fifth Circuit Court of Appeal examined “whether [the plaintiff’s] claim [was] barred under the doctrine of election of remedies, because [the plaintiff] reached a settlement agreement with another defendant in the law suit.”[21] Concluding that the policyholder was free to pursue its agent, the court held that the settlement did not bar recovery under the election of remedies doctrine because the settlement agreement expressly stated that “both the [availability of] coverage and the amount of damages” remained in dispute.[22] The written release further established that the carrier’s payment was made solely “in order to avoid further litigation.”[23]
The obvious conclusion is that the recitals of the parties’ settlement agreement have meaning, which can adversely affect a policyholder’s remaining claims if not properly crafted. Another Texas appellate opinion, George Brothers Fabrication, Inc. v. Bryant,[24] illustrates the consequences of a lack of diligence in the crafting of partial settlement releases. In George, the Texas Eleventh Circuit Court of Appeal held that where settlement funds were partially attributable to the resolution of the policyholder’s bad-faith and late payment claims, the election of remedies doctrine barred further recovery against the policyholder’s agent.[25] The court reasoned as follows:
The basis for the payment from [the carrier] was that it should have paid the claim promptly because the insurance policy covered the loss. If the policy covered the loss, then [the agent] could not have negligently failed to provide an insurance policy which covered the loss.[26]
The language used by the George court suggests that if the settlement agreement expressly provided that no part of the payment was allocated to the policyholder’s bad-faith and late payment claims against the carrier, a different result may have been reached.
The lesson extracted from these cases is that where a policyholder has claims pending against its agents or brokers for failure to obtain coverage, any settlement entered into must carefully avoid admissions as to “the existence of coverage.” These admissions can be expressed or implied and still have the same preclusive effect. Thus, a settlement agreement in this context should expressly state that “the existence of coverage is still in dispute” and that the compromise has been reached “solely to avoid uncertainties of litigation,” in order to fully protect the policyholder’s claims against the remaining parties. Similarly, the agreement should specify that no part of the settlement payment is made for the policyholder’s bad-faith or late payment claims against the carrier. Finally, the policyholder’s attorney should be aware of these issues on the front end such that any specific negotiations of the release terms, or conditions for payment of settlement funds, can be resolved during the parties’ substantive negotiation of the claim. Carriers and agents have relationships that carry on beyond the specific claim at issue in any given case. Thus, carriers are much more likely to agree to incorporate the necessary protective language into the agreement when the terms are required as a condition of settlement as opposed to an afterthought that remains un-memorialized until the push and shove of the parties’ final written agreement.
The Dangers of Overbreadth and the “Policy Release”
The so-called policy release is another important drafting consideration to be aware of when memorializing the settlement of a policyholder’s claim in multiparty litigation. Carriers can, and increasingly more often do, insist that a policyholder provide them with “a complete release of the policy” in exchange for a resolution of the policyholder’s claim in cases involving claims valued at or near the policy limits. The effect of such a release is to place the policyholder and carrier back in their initial positions—as if the policy at issue never existed. From the carrier’s standpoint, this is not just a resolution of the policyholder’s specific claim in the litigation but a closure of the “carrier’s book of claims” that have, or could be, maintained against a specific certificate of insurance.
While such a request is not uncommon in the insurance settlement context, it is a request that justifies careful consideration and discussion with the policyholder. Because the release is of the certificate of insurance as opposed to a specific claim by the policyholder, the policyholder and its attorney must carefully evaluate the impact the release will have on the policyholder’s risk of exposure for future, or not yet known, claims that would otherwise be covered under the released certificate. Once the policyholder is satisfied that no such liabilities exist, or that it is sufficiently self-insured as to potential liabilities of this nature, the policyholder’s attorney should, once again, carefully craft the scope of the requested release to ensure there is no adverse effect on the policyholder’s remaining claims in the litigation.
Ordinarily, a policy release is defined in terms of the specific certificate of insurance at issue such that the particular certificate is rendered void ab initio following the parties’ exchange of settlement funds. Sometimes, however, an insurer will insist on a broader definition. For example, the carrier could request a release for “any and all policies of insurance offering coverage of the type at issue under the certificate at issue” or “any and all policies of insurance offered by a particular syndicate or subsidiary of the insurance company,” among others. Such definitions can wreak havoc in multiple-party litigation for a variety of reasons—among them, an inadvertent release of coverage available to the policyholder from another party’s carrier simply because it is of the “type of coverage” afforded under the policyholder’s released policy, and an unwitting release of coverage available to the policyholder from another party’s insurer based on the policyholder’s prior release of a specific “company or syndicate” subscribing to both policies.
Conclusion
As noted above, this article covers just a few of the many issues that partial settlements in multiparty coverage litigation can present.[27] The bottom line is that resolving the policyholder’s claim against any party is, in most circumstances, a positive development. That triumph, however, can quickly dissipate if the policyholder’s remaining claims are adversely affected by counsel’s inartful documentation of the scope of what is being released in exchange. It is crucial to evaluate the elements of a policyholder’s claims against each and every party to a multiparty coverage action before undertaking serious, substantive settlement discussions with any party. This evaluation is the only way to ensure that any potential resolution reached will remain a source of celebration for the policyholder in its pursuit of recovery from the remaining parties in the litigation. The issues and solutions addressed herein, while not exhaustive, provide an example of the types of issues that can befall policyholder’s counsel during settlement documentation and ways in which to avoid the heartburn that follows non-recognition. As always, preparation is the best policy and careful study of the elements of one’s case the only answer.
Keywords: litigation, insurance coverage, election of remedies, settlement
Jacqueline M. Brettner and Harry M. Barton are with Carver, Darden, Koretzky, Tessier, Finn, Blossman & Areaux, LLC, New Orleans.
[1] Jaqueline M. Brettner is an insurance and commercial litigation attorney with the law firm of Carver, Darden, Koretzky, Tessier, Finn, Blossman & Areaux, LLC. She is also a certified mediator.
[2] Harry M. Barton is a corporate and commercial litigation attorney with the law firm of Carver, Darden, Koretzky, Tessier, Finn, Blossman & Areaux, LLC.
[3] See, generally, 25 Am. Jur. 2d Election of Remedies § 1 et seq.
[4] Bocanegra v. Aetna Life Ins. Co., 605 S.W.2d 848, 851 (Tex. 1980).
[5] See, e.g., Lomas & Nettleton Co. v. Huckabee, 558 S.W.2d 863 (Tex. 1977); Metroflight, Inc. v. Shaffer, 581 S.W.2d 704 (Tex. Civ. App. 1979).
[6] 558 S.W.2d 863 (Tex. 1977).
[7] Huckabee, 558 S.W.2d at 864.
[8] Huckabee, 558 S.W.2d at 864.
[9] Huckabee, 558 S.W.2d at 864.
[10] See, e.g., Metroflight, 581 S.W.2d 704.
[11] 605 S.W.2d 848, 851 (Tex. 1980).
[12] Bocanegra, 605 S.W.2d 848.
[13] Bocanegra, 605 S.W.2d at 851–52.
[14] Bocanegra, 605 S.W.2d at 852.
[15] Bocanegra, 605 S.W.2d at 853 (“The settlement agreement that Mrs. Bocanegra made with her compensation carrier showed that the carrier disputed liability, the period of time lost for the claimed occupational disease, and past and future medical expenses for which the carrier paid nothing.”).
[16] 780 S.W.2d 453 (Tex. App. 1989), writ denied (Mar. 28, 1990).
[17] See Plate & Platter, 780 S.W.2d at 454.
[18] See Plate & Platter, 780 S.W.2d at 454.
[19] See Plate & Platter, 780 S.W.2d at 455.
[20] See Plate & Platter, 780 S.W.2d at 455.
[21] See Plate & Platter, 780 S.W.2d at 454.
[22] See Plate & Platter, 780 S.W.2d at 454.
[23] See Plate & Platter, 780 S.W.2d at 454–55.
[24] 865 S.W.2d 622 (Tex. App. 1993), writ denied (Apr. 28, 1994).
[25] George Brothers Fabrication, 865 S.W.2d at 623.
[26] George Brothers Fabrication, 865 S.W.2d at 623.
[27] Another issue is the policyholder’s potential subrogation liability for claims asserted against it by other named carriers. The complexity and breadth of this issue makes it impossible to address in this article; however, we mention it as an example of the host of additional issues that must be considered when memorializing partial settlement agreements in multiparty litigation.