Michael W. Huddleston 2012-12-26 02:16:18
The insurance landscape in Texas was dominated in 2012 by Fifth Circuit and federal district court decisions involving a broad range of issues. This article will focus mostly on a series of decisions concluding that Texas has adopted a position that “independent” or Cumis counsel1 is only available where the underlying liability issues to be submitted to the jury and the coverage issues precisely overlap. Thus, independent counsel is unavailable where there is only a potential or factual conflict based on the development of overlapping coverage and liability facts or potential strategic considerations in the underlying suit. Independent Counsel In Downhole Navigator, L.L.C., v. Nautilus Ins. Co., 686 F.3d 325 (5th Cir. 2012)(Prado, J.)(Texas law), decided June 29, 2012, the carrier sought to defend subject to a reservations of rights, claiming possible policy defenses under (1) the intended/expected exclusion; (2) the “property damage” exclusion; and (3) the “testing or consulting” exclusion in a general liability policy. Id. at 326. The insured rejected this conditional defense, asserting that the conflict of interest created by the coverage defenses reserved required the use of “independent” or Cumis counsel, selected by the insured at the carrier’s expense, to defend the underlying suit for the negligence of Downhole in executing a well deviation plan. Id. The Fifth Circuit disagreed, holding that a conflict justifying independent counsel exists only where the facts to be adjudicated in the underlying suit are the same facts upon which coverage depends. Id. at 330-31. The Downhole court relied on a background discussion from Northern County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex. 2004), which addressed whether a carrier breached its duty to defend by conditioning its offer to defend the insured on whether the insured agreed to withdraw a motion to transfer the liability suit against it to the same county where the insured had its own personal injury suit again the same party pending. Id. at 689- 90. The suit did not present the clean and direct issue of when independent counsel must be provided by a carrier based upon a reservation of rights. The court in Downhole quoted a section from Davalos, taken from an insurance law textbook, giving general background discussion on conflicts of interest and how they might affect the relationship of the carrier and the insured: Ordinarily, the existence or scope of coverage is the basis for a disqualifying conflict. In the typical coverage dispute, an insurer will issue a reservation of rights letter, which creates a potential conflict of interest. See 1 ALLAN D. WINDT, INSURANCE CLAIMS AND DISPUTES § 4.20 at 369 (4th ed. 2001). And when the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends, the conflict of interest will prevent the insurer from conducting the defense. See id. at 370-71. On the other hand, when the disagreement concerns coverage but “the insurer defends unconditionally, there is, because of the application of estoppel principles, no potential for a conflict of interest between the insured and the insurer.” Davalos, supra, at 369 (emphasis added). The court in Downhole treated this general discussion as a controlling holding of the Texas Supreme Court relating to when independent counsel was available in a typical coverage conflict case. Downhole, 686 F.3d at 328 (citing and discussing Partain v. Mid-Continent Specialty Ins. Services Inc., 838 F. Supp.2d 547, 568 (S.D. Tex., Jan 20, 2012)). The court in Downhole noted that the Supreme Court of Texas has not clarified the meaning of “facts to be adjudicated” in the liability suit, as used in Davalos. Downhole, supra, at 328 n.2. The court then looked to Black’s Law Dictionary, which defines “adjudicate” to mean “to rule upon judicially.” Id. The court in Downhole clearly held that the material liability issues to be decided in the underlying suit must be “equivalent” to the issues to be determined relating to coverage in the coverage litigation. Id. at 329. The court held that whether Downhole performed its work negligently was the only issue to be decided in the liability case. The court concluded that questions of whether the harm should have been expected or intended by Downhole, whether the acts or omissions involved professional services, and/or whether the work involve testing or data processing, all of which was excluded from coverage, were irrelevant to the liability issue of negligence. Id. The court in Downhole downplayed the importance of observations of the Supreme Court in Unauthorized Practice of Law Committee v. American Home Assur. Co., 261 S.W.3d 24, 39 (Tex. 2008), which involved the issue of whether a carrier’s use of “captive” counsel involved an unauthorized practice of law by a corporation.2 In that case, the Texas Supreme Court recognized that some “coverage issues may . . . depend on facts developed in the litigation.” Id. at 40 (emphasis added). Despite this holding in Unauthorized Practice, the court in Downhole rejected the insured’s position that a conflict allowing independent counsel exists where “facts developed in the underlying litigation are the same facts upon which coverage depends.” Downhole, supra, at 329. Thus, according to the Fifth Circuit, facts adjudicated do not include facts developed in the course of an adjudication. Many Texas practitioners believe that Unauthorized Practice is consistent with Davalos, and that it recognizes that a conflict requiring independent counsel exists whenever the facts involved with the adjudication and developed in that litigation overlap between liability and coverage issues. The Fifth Circuit described the insured’s arguments as presenting a strained reading of Unauthorized Practice. The court added the following peculiar observation: “The mere observation that coverage issues may turn on facts developed in the litigation does not necessarily entail that a conflict of interest will arise if the facts that could be developed in the underlying litigation are the same facts upon which coverage depends. Proceeding from the former observation to the latter conclusion requires an illogical leap.” Id. at 330. The “illogical leap” noted by the Downhole court is indeed the majority view in other jurisdictions. Many urge that the “facts” to be developed in the underlying suit should be the touchstone of determining if there is a conflict because the duty to indemnify is determined by the actual facts upon which liability is based. D.R. Horton- Texas Ltd. v. Markel Intern. Ins. Co., Ltd., 300 S.W.3d 740, 742 (Tex. 2009). Understandably, the courts have typically restricted the determination of the duty to indemnify to historic facts developed in the underlying suit, not just to jury issues submitted, which are often insufficient to determine whether the claim is covered. Swicegood v. The Medical Protective Co., 2003 WL 22234928, *11 (N.D. Tex., Sept. 19, 2003)(Fitzwater, J.). In October 2012, the Fifth Circuit again followed its restrictive “equivalency” rule for determining conflicts under Davalos. In Coats, Rose, Yale, Ryman & Lee v. Navigator’s Specialty Ins. Co., No. 12-10055, slip op. (5th Cir., Oct. 15, 2012), the court affirmed the district court summary judgment finding no obligation to provide inependent counsel based on Davalos based on “substantially the same reasons set forth in the district court’s opinion.” The district court reasoned in part that a “potential” conflict of interests was insufficient to trigger the right to independent counsel. Ironically, the case cited by the court, Rx.com, Inc. v. Hartford Fire Ins. Co., 426 F. Supp.2d 546, 559 (S.D. Tex.2006), holds that a conflict exists whenever the “insurer-hired attorney . . . may be tempted to develop facts or legal strategy that could ultimately support the insurer’s position that the underlying lawsuit fits within a policy exclusion.” Strangely, the court also noted that a conflict exists if the insurer’s interests would be furthered by providing a less than vigorous defense to the allegations. Id. (citing Williams v. Am. Country Ins. Co., 359 Ill.App.3d 128, 295 Ill.Dec. 765, 833 N.E.2d 971, 979 (2005) as in agreement with Davalos). Other Important Pending Issues and Decisions The Supreme Court’s opinion in Gilbert Texas Constr., L.P., v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010), the court held that the CGL contractual liability exclusion applied to claims against an insured who contractually undertook an additional liability to pay for damages to a third party’s structures resulting from its malperformance of the contract. The question left open by Gilbert was whether there was an “assumption of liability” sufficient to invoke the contractual liability exclusion where there was no such obligation involving damage to third parties. Moreover, Gilbert continued to be subject to attack because it was contrary to the virtually unanimous position taken in other jurisdictions that the “assumption” of liability excluded was limited to three-party indemnity arrangements, not bilateral contractual agreements. After initially issuing a decision finding the tri-partite contractual obligation in Gilbert was not a critical factor and that its absence did not limit the application of the exclusion,3 the Fifth Circuit certified this important coverage issue to the Texas Supreme Court in Ewing Constr. Co. Inc. v. Amerisure Ins. Co., 2012 WL 3205557 (5th Cir., Aug 08, 2012). The certification presents two questions: (1) is the obligation under a bilateral contract to do work in a good and workmanlike manner an “assumption” of liability sufficient to invoke the contractual liability exclusion, and, if so, (2) does an allegation that the insured general contractor violated its “common law duty to perform the contract in a careful, workmanlike, and non-negligent manner” fall within the exception to the contractual liability exclusion for “liability that would exist in the absence of contract?” Id. at *5. Oral argument was set by the Texas Supreme Court for Feb. 5, 2013. The 2011 decision in Pride Transp. v. Continental Cas. Co., 804 F. Supp.2d 520 (N.D. Tex. 2011), has been appealed to the Fifth Circuit, which will be hearing oral argument before the end of the year. The district court decision in that case addresses a number of issues relating to a liability carrier’s duty to settle or not to settle. The Fifth Circuit heard oral argument in Pride on Dec. 4, 2012. In Texas Mut. Ins. Co. v. Ruttiger, 2012 WL 2361697, 55 Tex. Sup. Ct. J. 912 (Tex., June 22, 2012), the Texas Supreme Court found that amendments to the Workers Compensation Act obviated all extra-contractual duties and claims against a workers compensation carrier except for claims of misrepresentation under section 541.061 of the Texas Insurance Code. Notes 1. This term comes from the California decision in Navy Federal Credit Union v. Cumis Ins. Society Inc., 162 Cal. App. 3d 358 (1984), holding that a liability carrier must pay for independent counsel and not use its own selected counsel where coverage issues are reserved that create a conflict of interest between the carrier and the insured. 2. The Supreme Court there concluded that where there was a conflict of interests, the use of captive counsel might well amount to the unauthorized practice of law by the carrier. 261 S.W.3d at 39. 3. Ewing Const. Co. Inc. v. Amerisure Ins. Co., 684 F.3d 512 (5th Cir., Jun 15, 2012). MICHAEL W. HUDDLESTON is a senior partner with Shannon, Gracey, Ratliff & Miller, and practices primarily in Dallas, Fort Worth, Austin, and Houston. He provides counsel and litigates insurance coverage and bad-faith cases involving all lines of insurance. He also handles appeals in insurance cases and other matters involving catastrophic losses, including a number of landmark appellate decisions. He has also served as an expert witness and a mediator/arbitrator in complex insurance cases.
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