FROST CONCURRENCE in
The Methodist Hospital v. Zurich American Inc. Co.
(Tex. App. - Houston [14th Dist.] Jul. 7, 2009) (Seymore)
(
INSURANCE LITIGATION: insured's suits against worker's compensation carrier alleging wrongful payment
of noncompensable injury claims within the deductible)(
insurer's duty of good faith and fair dealings,
Texas Negligence Law Regarding Insurers Handling Third-Party Claims Against Insureds negligent claims
handling,
express warranty claim, breach of warranty - elements, conclusory affidavit)
AFFIRMED: Opinion by
Justice Seymore     
Before Justices Frost, Seymore and Guzman   
14-07-00663-CV The Methodist Hospital v. Zurich American Insurance Company, Tamera McKinney and
Mary Vu   
Appeal from 280th District Court of Harris County


Affirmed and Majority and Concurring Opinions filed July 7, 2009.

In The

Fourteenth Court of Appeals
_______________

NO. 14-07-00663-CV
_______________

THE METHODIST HOSPITAL, Appellant

V.

ZURICH AMERICAN INSURANCE COMPANY, TAMERA McKINNEY AND MARY VU
, Appellee
                                                                                                                                         
On Appeal from the 280th District Court
Harris County, Texas
Trial Court Cause No. 2006-60720
                                                                                                                                        
C O N C U R R I N G   O P I N I O N

The majority correctly concludes that the insurer does not owe the named insured a negligence duty as a
matter of law.  This conclusion, however, should be grounded on precedents from the Supreme Court of
Texas rather than on section 2053.203 of the Texas Insurance Code and the decision of a sister court of
appeals.

The Contracts

Appellee Zurich American Insurance Company (“Zurich") issued two insurance policies under which Zurich is
the insurer and appellant The Methodist Hospital (“Methodist") is the named insured.  Each of these policies
is entitled “Workers' Compensation and Employers Liability Insurance Policy," and the portions of each
relevant to this case are identical.  In pertinent part, these policies provide as follows:

*        Zurich agrees to promptly pay, when due, the benefits required of Methodist by the workers'
compensation law.

*        Zurich has the duty to defend Methodist at Zurich's expense against any claim, proceeding, or suit for
workers' compensation benefits payable by this insurance.

*        Zurich has the right to investigate and settle these claims, proceedings, or suits.

*        Terms of the workers' compensation insurance that conflict with the workers' compensation law are
changed to conform to that law.

*        Workers' compensation claims for bodily injury are subject to a $1 million deductible for each
accident.  Methodist agrees to reimburse Zurich for claims that Zurich handles and pays within this
deductible.

Zurich and Methodist also entered into a “Deductible Agreement," in which they further detailed the manner
in which Methodist would reimburse Zurich for claims Zurich handled and paid that are within the policies'
deductibles.

Zurich's Arguments Regarding Methodist's Negligence Claim

In its summary-judgment motion and on appeal, Zurich has challenged Methodist's negligence claim by
asserting that Zurich owes Methodist no negligence duty.  Zurich argues that Texas law does not recognize
a negligence duty from an insurer in favor of its insured, other than the Stowers[1] duty, which is not
involved in this case.  In this argument, Zurich relies heavily on our sister court's opinion in Wayne
Duddlesten, Inc. v. Highland Insurance  Company, 110 S.W.3d 85, 97 (Tex. App.- Houston [1 Dist.] 2003,
pet. denied).

Methodist's Arguments Regarding its Negligence Claim

In challenging the trial court's summary judgment as to its negligence claim, Methodist asserts the following
arguments:

*        The workers' compensation claims in question (those filed by Judith Riegert and Ana Fulton-Perez)
were within the $1 million deductible.  As to these claims, Methodist is “a self-insured entity," and Zurich did
not act as Methodist's insurer.  Rather, Zurich acted as Methodist's 'agent for administering workers'
compensation claims."

*        Zurich is Methodist's agent both under the parties' contracts and under section 2053.203 of the Texas
Insurance Code.

*        Under Texas common law, agents owe general negligence duties to their principals.

*        The no-duty rule raised by Zurich does not apply in this case because Zurich acted as Methodist's
“claims servicing agent" rather than its insurer.

*        The Supreme Court of Texas repeatedly has confirmed that Texas law provides a claim for negligent
performance of a contract.  Therefore, Methodist has a claim for Zurich's negligent performance of its
contract.

*        Because Zurich was promptly reimbursed from an escrow account funded by Methodist for all
payments Zurich made on claims within the deductibles, the payments made on the claims in question were
made with Methodist's money, not with Zurich's money.  Because Zurich was spending Methodist's money,
the no-duty rule advocated by Zurich does not apply.

Texas Negligence Law Regarding Insurers Handling Third-Party Claims Against Insureds

For decades, Texas courts have recognized a negligence duty owed by an insurer to its insured, that being
the duty recognized in Stowers Furniture Company v. American Indemnity Company, 15 S.W.2d 544 (Tex.
Comm'n App.1929, holding approved).  In Ranger County Mutual Insurance Company v. Guin, the Supreme
Court of Texas indicated that insurers owe their insureds a general negligence duty regarding the insurer's
handling of third-party claims against the insured.  See 723 S.W.2d 656, 659-60 (Tex. 1987).  The Ranger
court rejected the insurer's argument that an insured's negligence duty to its insured is limited to the
Stowers duty.  See id.  In doing so, the Ranger court made the following points:

*        If, under the insurance policy, the insurer has a duty to defend the insured against third-party claims
as well as the right to control the defense of these claims, then the insurer is the agent of the insured.

*        In such a case, any negligence on the insurer's part would support a negligence claim by the insured
against the insurer.

*        The insurer's negligence duty is not limited to the Stowers duty; rather, this duty “extends to the full
range of the agency relationship."

See id. at 659-60.  In sum, the Ranger court stated that an insurer having a duty to defend and right to
control the defense of third-party claims owes its insured a general negligence duty based on the agency
relationship the insurer has with its insured.

Though in Ranger the Supreme Court of Texas seemed to expand an insurer's negligence duty beyond the
Stowers duty, the high court later held that this language was dicta and that Ranger did not expand the
negligence duty owed by insurers beyond the duty recognized in Stowers.  See American Physicians Ins.
Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994).  In Garcia the Supreme Court of Texas also concluded
that an insurer's Stowers duty is not activated unless (1) the claim against the insured is within the scope of
coverage; (2) a settlement demand is made that is within the policy limits; and (3) the terms of the demand
are such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the
insured's potential exposure to an excess judgment.  See id.

The Supreme Court of Texas later concluded that, in the context of an insurer that has a duty to defend its
insured against third-party claims, “Texas law recognizes only one tort duty in this context, that being the
duty stated in Stowers . . . ." Maryland Ins. Co. v. Head Indus. Coatings & Serv., Inc., 938 S.W.2d 27, 28
(Tex. 1996) (per curiam); see also Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312, 318 (Tex. 1994)
(Cornyn, J., concurring).  Based on this line of cases, the United States Court of Appeals for the Fifth Circuit
has held that, under Texas law, the only negligence duty owed by insurers in this context is the Stowers
duty.  See Ford v. Cimarron Ins. Co., 230 F.3d 828, 831-32 (5th Cir. 2000).  In sum, the Supreme Court of
Texas has articulated a rule that, in the context of an insurer with a duty to defend its insured against third-
party claims, the insurer owes only one common-law tort duty to its insured, that being the Stowers duty.  
See Maryland Ins. Co., 938 S.W.2d at 28; Garcia, 876 S.W.2d at 849

Failure of Methodist's Arguments under Binding Precedent

Methodist is not alleging in this case that Zurich breached the Stowers duty.  Instead, Methodist alleges
Zurich was negligent in handling and paying workers' compensation claims asserted against Methodist. The
crux of Methodist's main issue is that Zurich is not acting as an insurer for claims within the $1 million
deductible and therefore, the no-duty rule established by the Supreme Court of Texas does not apply.  
However, under the unambiguous language of the insurance policies and the Deductible Agreement, Zurich
is Methodist's insurer and has the duty to promptly pay when due workers' compensation benefits to
Methodist's employees.  In the policies, the parties describe the workers' compensation benefits as “benefits
payable by this insurance."  Methodist promises to reimburse Zurich for claims within the $1 million
deductible, and the parties established a Methodist-funded escrow account by which Zurich is to be
reimbursed weekly for the amounts Methodist owes under this reimbursement obligation.  Though none of
the past precedents in this area have involved this exact arrangement between the insurer and its insured,
Zurich is nonetheless Methodist's insurer, handling and defending third-party claims against Methodist.  In
addition, Methodist has not cited and research has not revealed authority that would support an exception
to the no-duty rule if (1) the insurance policy has a high deductible, (2) the insurer is the insured's claims
servicing agent, (3) the insured reimburses the insurer for payments within the deductible, or (4) the
insured funds an escrow account that promptly reimburses the insurer for payments made on claims within
the deductible.  See Wayne Duddlesten, Inc. v. Highland Ins. Co., 110 S.W.3d 85, 96-97 (Tex. App.-
Houston [1st Dist.] 2003, pet. denied) (applying no-duty rule to workers' compensation insurer even though,
under a premium payment plan, insured would reimburse insurer for claims paid under the insurance).[2]  
Therefore, under binding precedent from the Supreme Court of Texas, Zurich does not owe the negligence
duty alleged by Methodist.[3]  See Maryland Ins. Co., 938 S.W.2d at 28; Garcia, 876 S.W.2d at 849; see
also Ford, 230 F.3d at 831-32.

Though Methodist does not cite the Ranger case in its argument, Methodist's emphasis on a common-law
or statutory agency relationship[4] as the source of Zurich's purported negligence duty is reminiscent of the
language from Ranger that the Supreme Court of Texas later disavowed as dicta.  See Ranger County Mut.
Ins. Co., 723 S.W.2d at 659-60; see also Garcia, 876 S.W.2d at 849.

The insurers in Maryland Insurance Company and Garcia acted as the insureds' claims-handling agent, yet
the Supreme Court of Texas still found the insurers owed no negligence duty other than the Stowers duty.  
See Maryland Ins. Co., 938 S.W.2d at 28; Garcia, 876 S.W.2d at 849.  As an intermediate court of appeals,
we are bound by this no-duty rule, and we must leave any consideration of changing that rule to our high
court.[5]  See In re K.M.S., 91 S.W.3d 331 (Tex. 2002).  

/s/        Kem Thompson Frost

Justice

Panel consists of Justices Frost, Seymore, and Guzman. (Seymore, J., majority).

[1]  See Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544, 546-48 (Tex. Comm'n App. 1929,
holding approved).

[2]  Zurich relies on the Wayne Duddlesten case in its no-duty argument, and Methodist asserts that this
case is distinguishable.  Nonetheless, the majority attaches undue importance to the issue of whether the
Wayne Duddlesten case is on point.  See ante at pp. 8, 16 (phrasing issue in terms of whether the Wayne
Duddlesten case “controls" in this case), p. 13 (concluding that “Texas law negates Methodist's contention
that Zurich owed a duty to perform with care," without discussing applicable authority from the Supreme
Court of Texas).  The facts of the Wayne Duddlesten case are not the same as the facts in this case, and
even if they were, a decision of a sister court of appeals cannot control the outcome in this case.  See
Chrismon v. Brown, 246 S.W.3d 102, 111 n.8 (Tex. App.- Houston [14th Dist.] 2007, no pet.).  On the other
hand, this court must follow a rule established by the Supreme Court of Texas as long as the rule has not
been abandoned by that high court or superseded by statute.  See In re K.M.S., 91 S.W.3d 331 (Tex. 2002).

[3]  The majority correctly concludes that Methodist and Zurich have an insured/insurer relationship
regarding claims within the deductible.  However, the only issue the majority discusses in reaching this
conclusion is whether section 2053.203 of the Texas Insurance Code applies. See ante at pp. 10-13. The
relationship between Methodist and Zurich would be an insured/insurer relationship regardless of whether
section 2053.203 of the Texas Insurance Code applies.  In addition, Methodist cites common-law agency
cases and argues that Zurich owes a negligence duty to Methodist under the common law of agency.  By
limiting its analysis to section 2053.203 of the Texas Insurance Code, the majority does not address this
argument.

[4]  The majority incorrectly indicates that Methodist argues Zurich is an agent based only on the purported
applicability of section 2053.203 of the Texas Insurance Code.  See ante at pp. 10-13.  Instead, Methodist
alleges that Zurich is its agent both under this statute and under the common law based on the parties'
contract.  Even if Zurich were an agent under both the common law and this statute, that would not make
the Supreme Court of Texas's no-duty rule inapplicable.  This court need not and should not address
whether section 2053.203 of the Texas Insurance Code applies to the policies in this case.

[5]  Methodist's assertion that the negligent performance of any contract gives rise to a negligence claim is
not correct.  See Southwestern Bell Tel. Co v. DeLanney, 809 S.W.2d 493, 494-95 (Tex. 1991); Janicek v.
KIKK, Inc., 853 S.W.2d 780, 782 (Tex. App.- Houston [14th Dist.] 1993, writ denied).  The no-duty rule
outlined above is one of the instances in which the Supreme Court of Texas has not recognized a
negligence claim, even though a party alleges negligent performance of the contract by another contracting
party.  See Maryland Ins. Co., 938 S.W.2d at 28; Garcia, 876 S.W.2d at 849.