Auto Liability Limits

Tarrant County insurance lawyers need to understand how the limits in an auto liability policy work.
A good case that explains how auto liability limits work is American States Insurance Company of Texas v. Arnold. This is a 1996 Dallas Court of Appeals case. The facts are a little confusing but here goes:
Eoline Smith Arnold was involved in a two-car collision while driving an automobile owned by Bessie M. Mayes and in which Mayes was a passenger. Mayes’s vehicle struck another vehicle driven by Michael Rhodes and in which Michael Cassady was a passenger. Both Cassady and Rhodes were injured. Mayes was killed in the accident.
American States insured Mayes’s vehicle. The policy provided a $50,000 bodily injury policy limit per person, per occurrence, and included coverage for permissive drivers of Mayes’s vehicle. Arnold was an additional insured or “covered person” under the American States policy because she was a permissive driver of Mayes’s vehicle. American States’s policy provided: “If there is other applicable liability insurance we will pay only our share of the loss. Our share is the proportion that our limit of liability bears to the total of all applicable limits.” At the time of the accident, Arnold was also insured under her own automobile insurance policy issued by American Fire. That policy provided a $20,000 policy limit per person, per occurrence.
Cassady presented to American States his claims for property damage against both Arnold and Mayes’s estate and a personal injury claim solely against Mayes’s estate, all based on Mayes’s negligent entrustment of the vehicle to Arnold. Cassady demanded American States’s policy limits of $50,000 to settle the personal injury claims against Mayes’s estate. Cassady did not present to American States his personal injury claim against Arnold. Instead, Cassady presented that claim to Arnold’s insurer, American Fire. Cassady demanded American Fire’s policy limits of $20,000 to settle the personal injury claim against Arnold.
Mayes’s estate also asserted a wrongful death claim against Arnold. The estate initially presented the claim to American Fire, who referred it to American States. American States and the estate agreed to compromise the estate’s claim against Arnold for $5,500, and American States agreed to pay its policy limits of $50,000 to secure the estate’s release from Cassady’s personal injury claim against Mayes’s estate. American States also paid Cassady’s property damage claim in the amount of $10,139.55, securing a release on behalf of both Mayes’s estate and Arnold.
American Fire refused to settle Cassady’s claim against Arnold. After American States settled his claim against Mayes’s estate, Cassady sued Arnold. American Fire and Arnold demanded that American States defend Arnold in the lawsuit. Because American States had already exhausted its policy limits settling Cassady’s claim against Mayes’s estate, it refused to defend and indemnify Arnold. American States based its refusal to defend on specific language in its policy, which provided that American States’s “duty to defend ends when [its] limit of liability for this coverage has been exhausted.” American Fire defended Arnold in the Cassady lawsuit.
Despite its refusal to defend or indemnify Arnold, American States paid $20,000, an amount equal to American Fire’s policy limits, to protect and release Arnold from Cassady’s lawsuit. American States still refused, however, to pay any costs of defending Arnold in the Cassady lawsuit, asserting that the earlier exhaustion of its policy limits excused performance.
The Judge granted summary judgment against American States and they appealed.
In its’ analysis, the court examined the policy language and relevant law and reversed the trial court decision stating, “The parties do not dispute that American States paid $50,000 to settle all Cassady’s personal injury claims presented to it. As part of that settlement, American States secured a release on behalf of its named insured, Mayes. The $50,000 payment exhausted American States’s policy limits. We conclude that, under the unambiguous policy language and circumstances of this particular case, American States’s settlement of Cassady’s personal injury claim against Mayes’s estate for its bodily injury policy limits terminated any obligation to defend Arnold, as an additional insured, in the Cassady lawsuit. Because American States had no duty to defend Arnold, the trial court erred in granting summary judgment in favor of American Fire and in denying American States’s motion for summary judgment.”