the Aetna Casualty & Surety Company v. Texas Workers' Compensation Insurance Facility

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-97-00285-CV

The Aetna Casualty & Surety Company, Appellant

v.

Texas Workers' Compensation Insurance Facility, Appellee

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT

NO. 95-04437, HONORABLE PETE LOWRY, JUDGE PRESIDING

The Aetna Casualty and Surety Company appeals from a declaratory judgment favoring

the Texas Workers' Compensation Insurance Facility. The Facility sought the judgment after Aetna

requested indemnification from the Facility for sums Aetna paid to defend and to settle Jane Craft's claims

that Aetna mishandled her workers' compensation claim. The judgment declares the indemnification

provision in the servicing agreement between Aetna and the Facility "unenforceable as to bad faith, gross

negligence, punitive damages, and other matters asserted in the underlying lawsuit" by Craft. Aetna

contends by three points of error the trial court should have declared the provision valid, enforceable, and

applicable. We will affirm the judgment.

BACKGROUND

The relationship of Aetna and the Facility

The Facility is a private association created by the State to provide workers' compensation

insurance to those otherwise unable to obtain that insurance. It is the successor to the Texas Workers'

Compensation Assigned Risk Pool. All providers of workers' compensation insurance were required to

join the Pool and the Facility. See former Tex. Ins. Code Ann. art. 5.76-2, § 2.01. (1) The member

insurance companies reinsure policies the Facility issues. Their liability is determined by their share of the

workers' compensation market. Id. at § 4.02(b).

Though Aetna is a Facility member by statutory requirement, it is a servicing company by

contract. The Pool and Facility contracted with companies, including member insurers, to service the

policies sold. See id. at § 4.08. The servicing-company agreement and the Pool bylaws in effect when

Aetna became a servicing company call for the servicing companies to receive a share of premiums in

exchange for issuing policies in their names and processing claims. The agreement classifies Aetna as an

independent contractor that "retains the right to control the means, manner and details of fulfilling its

obligations under this Agreement." It obligates Aetna to bear all costs and expenses incident to servicing

the policies except "authorized legal expenses." The agreement calls for Aetna to be indemnified as set

forth in the following Pool bylaws:

Any person or insurer made or threatened to be made a party to any action, suit, or

proceeding, because such person or insurer was a member, or a servicing carrier . . . shall

be indemnified against all judgments, fines, amounts paid in settlement, reasonable costs

and expenses including attorney's fees and any other liabilities that may be incurred as a

result of such action, suit or proceeding . . . except in relation to matters as to which he or

it shall be adjudged in such action, suit or proceeding to be liable by reason of willful

misconduct in the performance of his or its duties or obligations to the Agency . . . . If any

such action, suit or proceeding is compromised, it must be with the approval of the

Governing Committee of the Agency.

. . .

In each instance in which a question of indemnification arises, entitlement thereto, pursuant

to the conditions set forth herein, shall be determined by the Governing committee which

shall also determine the time and manner of payment of such indemnification; provided,

however, that a person or insurer who or which has been wholly successful, on the merits

or otherwise, in the defense of a civil or criminal action, suit or proceeding of the character

herein above described, shall be entitled to indemnification as authorized herein.

Despite the bylaw requiring governing committee approval of settlements, in practice, servicing companies

handled litigation as they saw fit, including payments pursuant to settlement agreements. If they applied for

reimbursement, the Facility assessed the merits of the claim. The Facility reimbursed some servicing

carriers for defending and settling bad-faith claims the Facility deemed lacking in merit.

Trial-court action

This case was tried on stipulated facts. Craft was hurt in April 1989, in the course and

scope of her employment at Hidden Oaks, when a desk collapsed and seriously injured her foot. Hidden

Oaks had a workers' compensation policy through the Facility. Aetna was the servicing company for her

claim.

Aetna's decision not to settle the claim early was costly. Though Aetna initially made

weekly compensation and medical-benefits payments to Craft, it stopped and refused to resume. Aetna

rejected Craft's offer to settle for $15,000 and two years of medical benefits. The Industrial Accident

Board awarded Craft compensation for her injuries and lifetime medical benefits. Aetna appealed. A jury

found Craft totally and permanently disabled and awarded her 401 weeks of compensation and lifetime

medical benefits for treatment of her injuries. Craft then sued Aetna, alleging deceptive trade practices,

failure to process the claim in good faith, and similar misdeeds. Although Aetna claims it had a tenable

defense, it settled with Craft for $1.5 million because it feared further legal expenses. Pursuant to a

standard practice, Aetna settled the case without consulting the Facility's governing committee .

Aetna requested the Facility to indemnify Aetna for the $1.5 million settlement plus

$1,062,117.73 in attorney's fees incurred in defending the suit. The Facility denied the request on grounds

that Aetna violated its duty of good faith and fair dealing and committed gross negligence in handling Craft's

claim.

The Facility filed the present suit for declaratory judgment that Aetna is not entitled to

indemnity on five grounds. Without citing a particular ground, the trial court held the indemnity provision

"is unenforceable as to bad faith, gross negligence, punitive damages, and the other matters asserted" in

Craft's suit.

DISCUSSION

By three points of error, Aetna contends the trial court erred in rendering judgment for the

Facility. Aetna contends the court erred by holding the indemnity clause unenforceable and argues the

Facility's suit for declaratory judgment was at least partly barred by res judicata or collateral estoppel.

Aetna's first two points of error are opposite sides of the same issue: whether the trial court

should have required the Facility to indemnify Aetna for the payment and attorney's fees incurred in

defending and settling Craft's claims of bad faith, gross negligence, and violations of the Deceptive Trade

Practices Act and Insurance Code. Because the trial court did not specify the basis of its judgment, we

must affirm the judgment if any of the grounds the Facility asserted supports the judgment. See Rogers v.

Ricane Enterprises , 772 S.W.2d 76, 79 (Tex. 1989). We will consider the first basis, that "[t]he Facility's

indemnification provision is unenforceable because it does not meet the express negligence rule, nor by

extension the express bad faith, express gross negligence, and express punitive damages rules for construing

indemnification provisions." The validity of this basis turns on the interpretation of the indemnification clause

and the nature of the servicing companies' relationship with the Facility.

Courts have required indemnity clauses to state expressly that they cover indemnitees for

their own misdeeds. First in this line of cases was the supreme court's holding that an indemnity clause

must expressly state it covers an indemnitee for the indemnitee's negligence. Ethyl Corp. v. Daniel

Constr. Co. , 725 S.W.2d 705 (Tex. 1987). That contract required Daniel, a contractor, to indemnify

Ethyl, a property owner, from suits for Daniel's negligence, but did not address situations in which Ethyl

was also negligent. Id. at 707 . The supreme court held Daniel was not required to indemnify Ethyl for

damages arising from Ethyl's negligence because the contract did not provide expressly for such

indemnification. Id. at 708 . The supreme court also has held no obligation arises to indemnify the

indemnitee for attorney's fees accrued in defending a suit alleging the indemnitee's negligence --even when

an indemnitee is not found to be negligent--absent a clause expressly requiring indemnification for suits

alleging the indemnitee's negligence. Fisk Elec. Co. v. Constructors & Assoc. , 888 S.W.2d 813, 815-16

(Tex. 1994). Constructor, the indemnitee, conceded that the contract did not meet the express-negligence

test , even though it required Fisk to indemnify Constructor from "all claims, damages losses, and expenses,

including but not limited to attorney's fees." Id. at 815 .

Courts also have applied the requirement of an express-indemnification clause to strict-liability and gross-negligence cases. Houston Lighting & Power Co. v. Atchison, Topeka & Santa Fe

Ry. Co. , 890 S.W.2d 455, 459 (Tex. 1994) (indemnity clause expressly including negligence does not

include strict liability; clause must expressly state it indemnifies for strict liability); Crown Central

Petroleum Corp. v. Jennings , 727 S.W.2d 739, 742 (Tex. App.--Houston [1st Dist.] 1987, no writ)

(indemnity clause expressly excluding negligence also implicitly excludes gross negligence; to indemnify for

gross negligence, indemnity clause must expressly include it). In HL&P , the supreme court found a

general-indemnity clause insufficient to provide indemnity for gross negligence. By requiring express

indemnification for gross negligence, the court sought to avoid shifting huge liabilities onto indemnitors

unaware of such potential liability, to discourage drafting of vague indemnity clauses, and to encourage

responsible behavior by clearly delineating responsibilities. HL&P , 890 S.W.2d at 458-59 .

Similar concerns guide us to conclude that a contract provision for indemnity must expressly

require indemnity for damages, attorney's fees, and settlement payments a servicing company incurs in

defending suits based upon allegations of Deceptive-Trade-Practices-Act and Insurance-Code violations,

gross negligence, and breach of the covenant of good faith and fair dealing. Because the supreme court

has decided that companies cannot be indemnified for defending allegations of their own negligence, absent

an express provision to that effect, we cannot permit implicit indemnification of actions allegedly committed

under the more culpable mental states required for the actions raised here.

Requiring express indemnification will provide more certainty among Facility members and

servicing companies. Aetna argues that the express-indemnity cases do not apply because they seek to

protect indemnitors who negotiated at arms' length from unexpected liability, whereas Aetna participated

on both sides as a member of the Facility and as a servicing company. The very existence of this appeal,

however, negates the idea that Aetna's dual role ensured accord and avoided unexpected liability. The

uncertainty exists in part because the bad-faith cause of action did not arise until Aranda v. Insurance Co.

of N. Am. , 748 S.W.2d 210 (Tex. 1988); thus, the Facility did not contemplate indemnification for defense

of that action when amending its bylaws in 1976 or entering the servicing agreement with Aetna in 1979.

Though the Facility has indemnified some servicing companies for defending bad-faith suits, there is no

evidence the Facility believes it is required to indemnify all servicing companies who defend bad-faith

claims. Aetna contends the Facility has shown no discernible pattern in its decisions on applications for

indemnification in defending against bad-faith claims. Requiring that any indemnification be express will

avoid confusion and encourage consistent, responsible conduct by both servicing companies and the

Facility.

Aetna contends, however, that it cannot be liable for a bad-faith claim because it is the

Facility's agent, relying on a non-liability statut e and principal-agent case law. We note initially that Aetna's

liability is not at issue in this declaratory judgment action; Aetna settled, and the only issue is whether the

trial court correctly declared the indemnity clause unenforceable regarding indemnity for defending and

settling claims like Craft's.

We conclude that neither the statute nor the case law supports Aetna's position. The

statute on which Aetna relies states that neither the Facility nor its agents are liable for claims "arising out

of or in connection with any judgment or decision made in connection with the performance" of their

statutory powers and duties. See former Tex. Ins. Code Ann. art. 5.76-2, § 2.12 . This apparently shared

nonliability does not resolve whether the Facility must indemnify its agent for defense and settlement of

Craft's claims. Similarly, general principal-agent concepts do not determine whether the disputed

indemnity clause is enforceable as to these causes of action.

Aetna further contends our finding of a vested right to indemnity in a previous case involving

Aetna and the Facility either precludes our reconsideration of this issue or controls the outcome of this case.

In Texas Workers' Compensation Facility v. State Bd of Ins. , we relied on the strong presumption

against retroactivity of statutes and held servicing companies did not lose their contractual right to

indemnification by the Facility upon the 1991 enactment of a statute forbidding the Facility from

indemnifying servicing companies. 894 S.W.2d 49 , judgm't withdrawn by agr. , 910 S.W.2d 176 (Tex.

App.--Austin 1995, no writ) (Aetna was an appellee; opinion not withdrawn despite settlement,

withdrawal of judgment, and dismissal of appeal) . Aetna urges the decision prohibits our reconsideration

of whether indemnity applies in this case. Aetna alternatively contends the vested right to indemnity found

in Facility survives the subsequent evolution of the express-indemnity doctrine and bad-faith cause of

action.

The supreme court summarized the preclusive effects of previous judicial decisions in Barr

v. Resolution Trust Corp. , 837 S.W.2d 627, 630 (Tex. 1992).

Res judicata, or claims preclusion, prevents the relitigation of a claim or cause of action that

has been finally adjudicated, as well as related matters that, with the use of diligence,

should have been litigated in the prior suit. Issue preclusion, or collateral estoppel,

prevents relitigation of particular issues already resolved in a prior suit.

Id. (citations omitted). In Facility , Standard Financial Indemnity Corporation sued the servicing companies

after the Pool denied SFIC's application to be a servicing company. Id. at 51. Until January 1, 1992, the

Facility indemnified the servicing companies for attorney's fees they incurred defending the SFIC suit. It

stopped after the statute was amended to provide that "[t]he Facility may not indemnify the servicing

companies." Former Tex. Ins. Code Ann. art. 5.76-2, § 2.05(i). (2) O n appeal, the Facility raised these

issues: (1) whether the servicing companies have a vested right to indemnification under the servicing-company agreement; and (2) whether the legislature intended section 2.05(i) to apply retroactively to

diminish any such right. Id. at 53. Relying on a strong presumption against retroactivity of statutes, this

Court held the 1991 amendment did not revoke vested contractual rights to indemnification created by the

existing servicing agreements. Id. at 55.

We conclude Facility does not preclude our reconsideration of this issue. In that case,

the Facility and other parties stipulated that, before adoption of the amendment, the indemnity clause

required indemnity for the servicing-companies' attorney's fees, but questioned whether a subsequent

statute revoked that clause. Id. at 53. The stipulation did not address the main issue in this case. Here,

the central question is whether the clause ever required indemnity for defending these claims. The

distinction takes this case beyond the preclusive effect of the previous Facility decision. There is no

showing that the claim here--that the indemnity clause does not encompass costs Aetna incurred in defense

of a claim--was remotely related to or should have been brought in the suit for costs accrued in defending

the Facility's rejection of an application to become a servicing company. Neither res judicata nor collateral

estoppel applies.

Nor does the reasoning behind our conclusion in Facility , regarding vested rights to

indemnity, require reversal here. Because we refused in Facility to apply retrospectively the 1992 statute

to the 1979 agreement, Aetna contends we now should refuse to apply retrospectively the express-indemnity doctrine (announced in 1987) to find no right to indemnification for defending allegations of bad-faith (a type of claim first recognized by the supreme court in 1988). The supreme court has shown no

compunction about applying the express-indemnity doctrine to contracts executed before the court

announced the doctrine. See Ethyl , 725 S.W.2d at 707 . Perhaps this is because the statutory prohibition

of indemnification was external to the contract, whereas the express-indemnity doctrine concerns the

proper construction of contract terms. See Fisk , 888 S.W.2d at 814 (express-negligence requirement is

a rule of contract interpretation). Regardless of the reasoning, the supreme court has applied the doctrine

retrospectively. The vesting of a contractual right to indemnification does not require that we imply the

indemnity provision encompassed the subsequently developed bad-faith cause of action. Rather, the

express-indemnity doctrine argues against inclusion of bad-faith claims in the indemnification provision. To

the extent a right to indemnification vested upon agreement to the provision, the right vested only as to the

causes of action expressly included and therefore could not have included the then-unrecognized bad-faith

cause of action.

The contract did not expressly require the Facility to indemnify Aetna for costs incurred

in defending causes of action for bad-faith, gross negligence, or violations of the DTPA and Insurance

Code. Under Ethyl and its successors, the Facility does not have to indemnify Aetna for defending and

settling such claims. Under Fisk , the Facility does not have to indemnify Aetna for attorney's fees

expended in defense of those actions; if parties who prevail in their defense of unindemnified claims are not

indemnified for their accrued fees, a party who paid more than a million dollars in attorney's fees before

settling unindemnified claims for $1.5 million surely cannot. The previous Facility case neither bars our

consideration of nor controls our disposition of the present appeal.

We overrule points of error one, two, and three. Having overruled all points of error, we

affirm the judgment of the trial court.

John Powers, Justice

Before Justices Powers, Aboussie and B. A. Smith

Affirmed

Filed: April 2, 1998

Do Not Publish

1. The Facility was created to succeed the Pool by Act of December 11, 1989, 71st Leg., 2d C.S., ch.

1, § 13.11(a), 1989 Tex. Gen. Laws 1 , 90 (codified at Tex. Ins. Code Ann. art. 5.76-2). Amended in the

interim, article 5.76-2 was repealed entirely by Act of June 1, 1997, 75th Leg., R.S., ch. 594, § 3.01(1),

1997 Tex. Gen. Laws 2081 , 2081.

2. Act of August 25, 1991, 72d Leg., 2d C.S., ch. 12, § 18.09, 1991 Tex. Gen. Laws 252 , 344

(effective January 1, 1992) (repealed, see footnote 1).

3. Relying on a strong presumption against retroactivity of statutes, this

Court held the 1991 amendment did not revoke vested contractual rights to indemnification created by the

existing servicing agreements. Id. at 55 .

We conclude Facility does not preclude our reconsideration of this issue. In that case,

the Facility and other parties stipulated that, before adoption of the amendment, the indemnity clause

required indemnity for the servicing-companies' attorney's fees, but questioned whether a subsequent

statute revoked that clause. Id. at 53 . The stipulation did not address the main issue in this case. Here,

the central question is whether the clause