Dangerous Ways Insurance Companies Can Settle

Dallas and Fort Worth insurance lawyers need to be able to explain to clients the different responsibilities insurance company’s have regarding settling cases. A 1999, U.S. 5th Circuit case is worth reading. The style of the case is, Travelers v. Citgo Petroleum. Here is what it says.
Travelers issued three polices to Wright Petroleum: a business auto policy, an umbrella policy, and a general liability policy. Citgo had a franchise agreement with Wright. Citgo was made an “additional insured” to each policy. The business auto policy provided that the carrier could investigate and settle any claim and its duty to defend or settle ended when the limits of coverage had been exhausted by payments of judgments or settlements.
In October 1992, one of Wright’s tanker trucks and an automobile collided. The tanker allegedly ran a red light at an intersection. Both drivers were killed. The tanker was carrying petroleum products for Citgo, as well as several other oil companies.
The auto driver’s survivors sued Wright, but not Citgo at that time. Travelers provided a defense under the business auto and umbrella policies. On August 30, 1993, the plaintiffs presented a settlement demand. One day before the expiration of the offer, a $1.5 million settlement was reached. A release was executed releasing Wright, the estate of the truck driver, and all others who were then named in the lawsuit in exchange for Travelers tendering full policy limits of $1.5 million. Citgo was not, at that time. a named defendant and was never a named defendant in the lawsuit. Citgo was not included in the release.
The plaintiffs then sued Citgo and other oil companies charging them with negligence in dealing with Wright when they knew or should have known of its inadequate safety standards. Citgo demanded a defense and indemnity from Travelers. Travelers refused citing the exhaustion of the policy limits.
Travelers brought a declaratory judgment action seeking a determination that it had no duty to Citgo. Travelers moved for summary judgment, which was granted.
This Court upheld the ruling.
Texas courts have held that an insurer is free to favor a claim by one claimant over a claim by another claimant in pursuit of its duty to accept settlement offers within policy limits rather than unreasonably risk an adverse judgment over the policy limits. An insurer must be free to settle suits against one of its insureds without being hindered by a potential liability to co-insured parties who have not yet been sued. In the case of claims by multiple plaintiffs, an insurer is allowed to fulfill its Stowers duty to its insured by settling with one claimant, even though the result is to leave the insured exposed to another claim. Therefore, Travelers was entitled to the initial claim.
Citgo argued that Travelers did not act reasonably in the face of the settlement demand. Citgo claimed that there is an independent contractual duty to act reasonably in performance of the contract. Citgo complained that Travelers acted unreasonably by ignoring the notice provisions of the contract, not investigating plaintiffs’ intentions regarding Citgo, and representing Wright in a separate action that Citgo filed against Wright. However, Travelers had a right to settle when it was presented with a demand within the policy limits and apparently had a duty to do so. At the time of the settlement, the duty to defend had risen as to Wright but not Citgo which had not then been sued. Once the Wright settlement had exhausted the policy limits, the provisions of the policy terminated Travelers’ duties under the contract including its duties to Citgo as a co-insured. The decision to settle on behalf of Wright constituted reasonable performance of the contract.