Citing a policy provision giving a liability insurer the right to settle a
claim against its policyholder without the policyholder's consent, the
Dallas Court of Appeals recently enforced a Rule 11 settlement agreement signed
by the policyholder's attorney (retained by the insurer) despite the
policyholder's objection.
The opinion in McCain v. Promise House, Inc., No. 05–16–00714–CV,
2018 WL 2042009, 2018 Tex. App. LEXIS 3092 (Tex. App.—Dallas May 2, 2018),
provides a roadmap for enforcing settlement agreements under Rule 11 of the
Texas Rule of Civil Procedure. Of more interest to insurance professionals and
coverage counsel, the opinion raises troubling issues about the relationships
among an insured client, its insurer-retained attorney, and the insurer. Most
problematic is the court's holding that an appointed counsel is the
"sub-agent" of the insured client and is, therefore, authorized to
sign a settlement agreement on behalf of the client, as directed by the
insurer, without the client's consent.
Facts of the McCain Case
McCain sued Promise House, alleging his son had been physically and sexually
abused while a resident there. Promise House had a liability policy with Arch
Insurance that included a "sexual or physical abuse" endorsement.
That endorsement provided that Arch would have the "right and duty to
defend" Promise House against any suit making such allegations. Promise
House tendered the McCain claim to Arch, and Arch retained counsel to defend
the lawsuit.
As is common in duty-to-defend policies, Promise House's policy
authorized Arch to, "at [its] discretion, investigate any act of
'sexual or physical abuse' and settle any claim or 'suit' that
may result." Within a month after answering the lawsuit, Promise
House's appointed attorney signed a Rule 11 settlement agreement with
McCain, securing a full and final release in exchange for a payment of
$400,000. About 2 months later, however, Promise House objected to the
"proposed settlement" and took the position that its
attorney—appointed by Arch—did not have the authority to enter into the
settlement agreement on its behalf. That's where things got
interesting.
Upon learning of Promise House's position, McCain filed the Rule 11
agreement with the court and amended his petition to assert breach-of-contract
claims against both Promise House and Arch. McCain argued, among other things,
that the signature of Promise House's attorney alone made the agreement
enforceable and that Arch had both a right and a duty to accept the settlement.
Promise House argued that its attorney was not authorized to execute the
settlement agreement because he did so without Promise House's knowledge,
consent, authorization, or approval. Arch agreed that the policy gave it the
right to settle and that it had approved the settlement but denied it was a
party to any contract with McCain. The parties filed cross-motions for summary
judgment, and the trial court entered a take-nothing judgment against
McCain.
The Appellate Decision
On appeal, McCain argued that Promise House's policy gave Arch the
absolute right to settle all claims, and "Arch, through its assigned
defense counsel, authorized and approved the settlement" that bound Arch
to pay the $400,000 on behalf of Promise House. The court of appeals agreed,
and reversed and rendered judgment against both Promise House and Arch.
The court's analysis has two key components: enforcement of Rule 11
agreements and the relationships among the insurer, insured, and defense
counsel. The court confirmed that "a written settlement agreement may be
enforced even though one party withdraws consent before judgment is rendered on
the agreement." To enforce the agreement in that circumstance, the
offended party must, as McCain did here, pursue a separate breach-of-contract
claim and establish the elements of such a claim. Although the agreement, in
this case, contemplated that the settlement would be "memorialized in a
final settlement agreement," the court held that it contained all of the
essential terms and was enforceable—provided the defendant's lawyer's
signature was binding.
Acting as the client's agent, an attorney may bind the client by
executing a Rule 11 agreement. See Green v. Midland Mortgage Co., 342
S.W.3d 686, 691 (Tex. App.—Houston [14th Dist.] 2011, no pet.). Indeed, there
is a longstanding presumption that "an attorney retained for litigation
[has] authority to enter into a settlement on behalf of a client." See
City of Roanoke v. Town of Westlake, 111 S.W.3d 617, 629 (Tex. App.—Fort
Worth 2003, pet. denied) (citing Williams v. Nolan, 58 Tex. 708
(1883)). That presumption can be rebutted by evidence that at the time the
attorney acted, he or she did so without the client's knowledge or consent.
See Karle v. Innovative Direct Media, Ltd., 309 S.W.3d 762, 765 (Tex.
App.—Dallas 2010, no pet.). The case law suggests that rebutting the
presumption is often a question of fact. It does not appear from the opinion or
the party's briefing that McCain had any reason to question the authority
of Promise House's attorney of record at the time that the settlement was
negotiated.
The court in McCain did not rely on the attorney's presumed
authority and did not expressly determine whether Promise House had rebutted
the presumption. Instead, the court found that the attorney was given authority
to settle by the client's insurance policy under which the lawyer was
appointed: "Arch retained counsel to represent Promise House; thus Arch
became Promise House's agent, and the attorney became Promise House's
sub-agent." To support this holding, the court relied on language in
Ranger County Mut. Ins. Co. v. Guin, 723 S.W.2d 656, 659 (Tex. 1987).
In Ranger, the Texas Supreme Court said the defending insurer's
duty to its insured "extends to the full range of the agency
relationship" and approved a jury instruction that an insurer-appointed
attorney is "the sub-agent of the insurer," making the insurer
"as responsible for the [attorney's] conduct as [it] is for its own
conduct." 723 S.W.2d at 658–59.
In later cases, however, the Texas Supreme Court repeatedly characterized
Ranger's expansive language as dicta. See State Farm Mut.
Auto. Ins. Co. v. Traver, 980 S.W.2d 625, 628 (Tex. 1998); American
Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994). In
Traver, the Texas Supreme Court reiterated the longstanding principle
that a lawyer's sole duty is "unqualified loyalty" to the client
even when the lawyer has been appointed and is being paid by an insurer, and
the lawyer "may not act contrary to the client's wishes." 980
S.W.2d at 627-28 (citing Employers Cas. Co. v. Tilley, 496 S.W.2d 552,
558 (Tex. 1973)). The court expressly rejected the argument
that an insurer can be held vicariously liable for the actions of appointed
counsel. See also Taylor v. Allstate Ins. Co., 356 S.W.3d 92, 97 (Tex.
App.—Houston [1st Dist.] 2011, pet. denied) (following Traver).
The insurance contract may give the insurer a right to conduct the defense,
which, absent a conflict of interest, "includes the right to select the
attorney who will defend the claim and to make other decisions that would
normally be vested in the insured as the named party." Northern County
Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex. 2004). This
contractual relationship, however, does not weaken the appointed lawyer's
duty of "unqualified loyalty to the insured" client. Id. at
690 (citing Traver); see also Unauthorized Practice of Law Comm.
v. American Home Assur. Co., 261 S.W.3d 24, 41 (Tex. 2008)
("[D]efense counsel, whether private or on staff, owes the insured
unqualified loyalty.").
Although the court in McCain did not articulate how Arch became a
party to the settlement contract signed only by counsel for Promise House, it
apparently presumed that the same counsel represented both Promise House and
Arch. Some jurisdictions hold an appointed defense counsel effectively has two
clients (the insurer and the insured), although the primary duty is generally
owed to the insured if a conflict arises. Texas, however, is generally
considered a "one-client" state.
Nevertheless, as the court recognized, the policy granted Arch the right to
settle claims in its discretion. (Disputes between Promise House and Arch
remain pending in a separate lawsuit.) But, as demonstrated here, exercising
this right can be complicated without participation by the insured. An insured
may reject the insurer's tendered defense and defend itself but, absent a
disqualifying conflict, risks losing the right to be compensated for the
defense costs. Davalos, 140 S.W.3d at 690. Similarly, interfering with
the insurer's defense or settlement could in some circumstances breach the
insured's duty to cooperate and thus potentially undermine coverage under
the policy. And, because the Stowers settlement duty is owed only to
the insured, the insured's objection to the settlement would negate the
insurer's duty to accept a reasonable settlement offer, though not its
right to do so. A clear line of communication between the insurer and its
policyholder often can address some of these issues before they erupt into
serious conflicts.
Conclusion
Disputes between the insurer and the policyholder client can place appointed
defense counsel in an untenable position with no easy resolution. The
lawyer's duty of "unqualified loyalty" to the client requires, at
a minimum, keeping the client informed of material developments, including
settlement negotiations. The lawyer can recommend the client consult
independent coverage counsel for advice concerning the client's rights and
obligations under the policy. And, while the lawyer may not act contrary to the
client's wishes, the Traver court noted counsel might be allowed
to withdraw from the representation if "he is not permitted to act as he
thinks best." 980 S.W.2d at 627–28. Each of these contingencies should
generally be addressed in the attorney's engagement letter with the
client.
In the end, no one suggests that McCain did not enter into the settlement in
good faith, relying on the presumed authority of the defendant's counsel of
record. And Arch, from which the attorney received instructions, unquestionably
intended to fund the settlement. So, a disinterested observer may conclude that
the court reached the right "common sense" result but plowed up some
thorny issues in its wake. The moral? Communicate early and often.