State Farm Mutual Automobile Insurance Company, Petitioner

Ronald H. Traver, executor of the Estate of Mary E. Davidson, Respondent

Chief Justice Phillips delivered the opinion of the Court, in which Justice Hecht, Justice Enoch, Justice Spector, Justice Owen, Justice Baker, and Justice Hankinson join.

Justice Gonzalez filed a concurring and dissenting opinion, in which Justice Abbott joins.

We withdraw our opinion of August 25, 1998, and substitute the following in its place. We overrule the motions for rehearing of State Farm and Ronald Traver.

Ronald Traver, an estate executor, argues that the attorney provided by decedent Mary Davidson's liability insurer, State Farm, committed malpractice in defending a personal injury claim against Davidson, resulting in a judgment in excess of policy limits. Traver sued State Farm for negligence, breach of its duty to defend, breach of the Stowers duty, breach of the duty of good faith and fair dealing, and violations of the Deceptive Trade Practices Act and Insurance Code. The trial court granted summary judgment for State Farm on all causes of action. The court of appeals, holding that an insurer is responsible for the conduct of the attorney it provides to defend an insured, reversed and remanded the malpractice claim, along with the DTPA and Insurance Code claims relating to the malpractice, for trial. 930 S.W.2d 862. The court of appeals further held, however, that Traver could not recover for breach of the Stowers duty, for breach of the duty of good faith and fair dealing, or for any claim under the DTPA or Insurance Code relating to those duties. Because we hold that an insurer is not vicariously liable for the malpractice of an independent attorney it selects to defend an insured, we reverse the judgment of the court of appeals and render judgment for State Farm on all claims based on vicarious liability. Further, because Traver has not separately applied for writ of error, the court of appeals' judgment on the Stowers claim and good faith claim (and related statutory claims) is final. We remand the cause to the trial court to allow Traver to pursue any remaining claims that he pled or might plead against State Farm.

In January 1989, Mary Davidson collided with Calvin Klause in an automobile accident. Mary Jordan, a passenger in Klause's car, was severely injured. By coincidence, both Davidson and Klause were insured by State Farm Mutual Automobile Insurance Company. Each had an automobile liability policy with a per-person liability limit of $25,000.

Jordan sued both drivers in one action. State Farm retained separate attorneys to represent Davidson and Klause. After settlement attempts failed, the case went to trial. The jury found Davidson 100 percent responsible for the accident. The trial court rendered judgment on the verdict, awarding Jordan $375,000, plus about $100,000 in prejudgment interest, against Davidson. The record does not disclose whether this judgment was appealed or satisfied.

Davidson died shortly after trial. Her executor, Ronald Traver, brought this present action against State Farm. Traver alleged that State Farm was negligent, breached its duty to defend Davidson in the Jordan lawsuit, breached its Stowers duty, breached a duty of good faith and fair dealing, and violated the Deceptive Trade Practices Act and article 21.21 of the Insurance Code. Traver specifically alleged that Charles Bradshaw, the attorney retained by State Farm to represent Davidson in the Jordan lawsuit, committed malpractice by failing to attend several key depositions and by failing to offer a meaningful defense at trial. Traver further alleged that State Farm deliberately orchestrated this malpractice to avoid potential Stowers liability to Klause arising from the settlement negotiations. Thus, Traver alleges, State Farm acted in its own self-interest by shifting responsibility from Klause to Davidson. Traver also sued Bradshaw, but the attorney filed Chapter 7 bankruptcy proceedings shortly thereafter, and the trial court severed the claims against him.

The trial court rendered summary judgment for State Farm on all claims. The court of appeals reversed in part. It held that, under the language of Ranger County Mutual Insurance Co. v. Guin , 723 S.W.2d 656, 659 (Tex. 1987), State Farm was responsible for any injury caused by the malpractice of the attorney it retained for Davidson. 930 S.W.2d at 871. Because State Farm had not negated the existence of such malpractice, the court of appeals remanded Traver's negligence claim for trial, along with any claims under the DTPA or Insurance Code relating to this negligence. Id . at 871-72. The court of appeals further held, however, that State Farm had conclusively negated Traver's Stowers claim, id . at 868, and that an insurer owes no duty of good faith to its insured in the context of a third-party liability claim. Id . at 870. See Maryland Ins. Co. v. Head Indus. Coatings & Servs ., 938 S.W.2d 27, 28 (Tex. 1996).

Davidson's policy with State Farm required State Farm either to defend or settle covered third-party liability claims. The policy also required Davidson to "[c]ooperate with [State Farm] in the investigation, settlement or defense of any claim or suit." Under this contractual obligation to defend, State Farm selected Bradshaw, an independent attorney who was not a State Farm employee, to represent Davidson against Jordan's claims, and State Farm paid Bradshaw's bills. Traver argues that, under these circumstances, State Farm is vicariously responsible for the attorney's conduct. We disagree.

In determining whether a principal is vicariously responsible for the conduct of an agent, the key question is whether the principal has the right to control the agent with respect to the details of that conduct. See Newspapers, Inc. v. Love , 380 S.W.2d 582, 590 (Tex. 1964). We have recognized that a liability policy may grant the insurer the right to take "complete and exclusive control" of the insured's defense. G.A. Stowers Furniture Co. v. American Indemnity Co. , 15 S.W.2d 544, 547 (Tex. Comm'n App. 1929, holding approved); see also Continental Cas. Co. v. Huizar , 740 S.W.2d 429, 434 (Tex. 1987); Richmond, Walking a Tightrope: The Tripartite Relationship Between Insurer, Insured, and Insurance Defense Counsel , 73 Neb. L. Rev. 265, 269 (1994) ("Because of its financial interest in the effective resolution of a claim, the insurer has a contractual right to control its insured's defense."); Sweeney, Tank v. State Farm: Conducting a Reservation of Rights Defense in Washington , 11 U. Puget Sound L. Rev. 139, 163 (1987) ("When defending unconditionally, the insurer has complete control of the defense."). Here, the standard form Texas Personal Auto Policy provides that the insurer "will settle or defend, as [it] consider[s] appropriate, any [covered] claim or suit . . ." The insurer's control of the insured's defense under this policy thus includes authority to accept or reject settlement offers and, where no conflict of interest exists, to make other decisions that would normally be vested in the client, here the insured. However, even assuming that the insurer possesses a level of control comparable to that of a client, this does not meet the requisite for vicarious liability.

A defense attorney, as an independent contractor, has discretion regarding the day-to-day details of conducting the defense, and is not subject to the client's control regarding those details. See Restatement (Second) of Torts, § 385, cmt. a. While the attorney may not act contrary to the client's wishes, the attorney "is in complete charge of the minutiae of court proceedings and can properly withdraw from the case, subject to the control of the court, if he is not permitted to act as he thinks best." Id . Moreover, because the lawyer owes unqualified loyalty to the insured, see Employers Cas. Co. v. Tilley , 496 S.W.2d 552, 558 (Tex. 1973), the lawyer must at all times protect the interests of the insured if those interests would be compromised by the insurer's instructions. Under these circumstances, the insurer cannot be vicariously responsible for the lawyer's conduct. See Ingersoll-Rand Equip. Corp. v. Transportation Ins. Co. , 963 F. Supp. 452, 454-55 (M.D. Pa. 1997) ("The attorney's ethical obligations to his or her client, the insured, prevent the insurer from exercising the degree of control necessary to justify the imposition of vicarious liability."); Merritt v. Reserve Ins. Co. , 110 Cal. Rptr. 511, 526 (Cal. Ct. App. 1973) ("In our view independent counsel retained to conduct litigation in the courts act in the capacity of independent contractors, responsible for the results of their conduct and not subject to the control and direction of their employer over the details and manner of their performance."); Aetna Cas. & Sur. Co. v. Protective Nat'l Ins. Co. , 631 So.2d 305, 306-07 (Fla. Ct. App. 1993) (adopting Merritt's reasoning); Feliberty v. Damon , 527 N.E.2d 261, 265 (N.Y. 1988) ("The insurer is precluded from interference with counsel's independent professional judgments in the conduct of the litigation on behalf of its client."); Brown v. Lumbermens Mut. Cas. Co. , 369 S.E.2d 367, 372 (N.C. Ct. App. 1988), aff'd , 390 S.E.2d 150 (1990); see also 1 Windt, Insurance Claims and Disputes § 4.40, at 275 (3d ed. 1995) ("There is . . . no theoretical justification for imputing a defense counsel's negligence to the insurer."); Sweeney, supra at 163 ("The client, as principal, should turn to his attorney, as agent, for relief if the attorney acts improperly, since the attorney is supposed to be independent of the insurer's influence and must act as though the policyholder is paying the bills.").

Traver, like the court of appeals, relies on Ranger County Mutual Insurance Company v. Guin , 723 S.W.2d 656 (Tex. 1987), in asserting liability against the insurer. We stated in Ranger that an insurer's duty to its insured "extends to the full range of the agency relationship." Id . at 659. We upheld a jury instruction stating that the

[attorney retained by the insurer] is deemed, under the law, to be the sub-agent of the insurance company. As such, the insurance company is as responsible to the insured for the conduct of the sub-agent with reference to the litigation as the insurance company is for its own conduct. Therefore, the insurance company is liable to the insured for damages caused to the insured, if any, by the negligence, if any, of the sub-agent in conducting the affairs of the insured with reference to the litigation.

Id . at 658. If this language were the holding of Ranger , it would support Traver's position. As we noted in American Physicians Insurance Exchange v. Garcia , 876 S.W.2d 842, 849 (Tex. 1994), however, the only negligence claim at issue in Ranger was a Stowers claim for negligent failure to settle. Indeed, the Court expressly recognized in Ranger that there was "no contention that Ranger was negligent in investigation or trial of the [underlying personal injury suit]." Ranger , 723 S.W.2d at 659. We concluded in Garcia that Ranger 's broad language about the scope of the insurer's responsibilities was dicta . See Garcia, 876 S.W.2d at 849. Although reaffirming the Stowers duty, we emphasized that Ranger was a Stowers case only, and that "evidence concerning claims investigation, trial defense, and conduct during settlement negotiations is necessarily subsidiary to the [ Stowers issue]." Id . We thus did not hold in Ranger that an insurer is vicariously responsible for the conduct of the attorney it selects to defend an insured.

In sum, we hold that a liability insurer is not vicariously responsible for the conduct of an independent attorney it selects to defend an insured. Traver thus cannot recover against State Farm on any common law or statutory claim based solely on Bradshaw's conduct.

We disagree, however, with State Farm's contention that the court of appeals limited its remand to claims based on vicarious liability and that Traver's failure to bring a separate application waived any claims based on State Farm's own misconduct. We further reject State Farm's contention that our decision in Maryland Insurance Company v. Head Industrial Coatings & Services, Inc. , 938 S.W.2d 27 (Tex. 1996) necessarily limits Traver's damages to the policy limits and defense costs.

In Head , we said it was unnecessary to recognize a duty of good faith and fair dealing in the context of third-party liability insurance because the duty of reasonable care adopted in Stowers already offered greater protection for the insured. Head , 928 S.W.2d at 28-29; see Texas Farmers Ins. Co. v. Soriano , 881 S.W.2d 312, 319 (Tex. 1994)(Cornyn, J. concurring). We further concluded that rights granted under Stowers together with rights under the contract of insurance fully protected the insured against an insurance company's erroneous refusal to defend a third-party liability claim. Head , 938 S.W.2d at 29. The factual circumstances alleged in the present case are quite different from those in Head , however. Here, the plaintiff's allegations are not that the insurer merely refused a defense, but that the insurer consciously undermined the insured's defense.

We render judgment for State Farm on all claims based on vicarious liability. Because Traver has not challenged the court of appeals' judgment on the Stowers duty, the duty of good faith and fair dealing, or any statutory claim relating to those duties the court of appeals' judgment regarding those claims is final. We remand the cause to the trial court to allow Traver to pursue any remaining claims that he pled or might plead against State Farm.

____________________________

Thomas R. Phillips

Chief Justice

Opinion Delivered: December 31, 1998

See G.A. Stowers Furniture Co. v. American Indem. Co. , 15 S.W.2d 544 (Tex. Comm. App. 1929, holding approved) (recognizing cause of action by policyholder against liability insurer for negligently refusing a settlement offer within policy limits).

Jordan initially made a joint settlement demand to both defendants for their combined policy liability limits ($50,000), plus Klause's underinsured motorist coverage ($20,000). State Farm refused, offering instead Davidson's policy liability limit ($25,000), Klause's underinsured motorist coverage ($20,000), but only $5,000 of Klause's liability coverage. Jordan refused this counteroffer. Although State Farm later increased its offer to include Klause's full liability coverage (thus meeting Jordan's original demand), Jordan also refused this offer.

Although the court of appeals' opinion predated our decision in Head , the court of appeals anticipated this result based on the Court's writings in Texas Farmers Ins. Co. v. Soriano , 881 S.W.2d 312 (Tex. 1994).

But see Boyd Bros. Transp. Co. v. Fireman's Fund Ins. Cos. , 729 F.2d 1407, 1409-10 (11th Cir. 1984); Smoot v. State Farm Mut. Auto. Ins. Co. , 299 F.2d 525, 530 (5th Cir. 1962); Pacific Employers Ins. Co. v. P.B. Hoidale Co. , 789 F. Supp. 1117, 1122-23 (D. Kan. 1992); Continental Ins. Co. v. Bayless & Roberts, Inc. , 608 P.2d 281, 294 (Alaska 1980); Stumpf v. Continental Cas. Co. , 794 P.2d 1228, 1231-32 (Or. Ct. App. 1990).