In 2007, the Texas Supreme Court in Mid-Continent Insurance v. Liberty Mutual Insurance Co. — when answering questions certified by the 5th U.S. Circuit Court of Appeals — dramatically changed how insurance adjusters and attorneys treat insurers who underfund settlements.
Insurers’ prevailing attitude before the decision had been that, to prevent an insured from facing an adverse judgment, the insurer might overpay on a settlement but then could seek to recoup the difference through a claim of contribution or subrogation from an underpaying insurer. The Texas Supreme Court changed all that by holding that such recoupment was not possible, but the opinion arguably did not preclude the possibility of contractual subrogation. Now, there is little incentive for an insurer to settle for more than its share of a claim. However, even after the Texas Supreme Court decision, an insurer still may be able to make a claim for contractual subrogation.
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