Michael W. Huddleston 2016-12-20 18:02:33
Many anticipated that the opinion in Seger v. Yorkshire Ins. Co., Ltd.,1 would resolve whether a carrier who wrongfully refused to defend an insured was bound by any subsequent judgment against the insured under State Farm Fire & Cas. Co. v. Gandy.2 The Texas Supreme Court limited the scope of Gandy in Evanston Ins. Co. v. Atofina Petro. Inc.3 and Lennar Corp. v. Markel Am. Ins. Co.4 Prior to Gandy, the court held in its initial opinion in APIE v. Garcia (Garcia I)5 that an insured could enter a so-called sweetheart deal, assigning his rights against his liability carrier to the claimant and the claimant may recover the amount of an agreed or other judgment despite the fact the insured is provided a covenant not to execute that protects it from the judgment. The court recognized that public policy favored ignoring that the insured suffered no harm from the judgment despite the covenant, noting this scenario provided a strong incentive for insurers to give due consideration to the interests of its insureds. In its second opinion, the court avoided the issue of the legitimacy of an assignment or covenant and resolved the case on its interpretation of the policy. When Seger came out in June, so-called sweetheart deals were not the issue. Instead, the court, as in APIE, resolved the case on coverage, holding that the underlying claims were excluded under the policy’s “leased-in employees/ workers” exclusion. Equating the “not enforceable” (language in the statute) with “voidable” (not in the statute), the court rejected the insured’s argument that the exclusion was “unenforceable” as required under the specific terms of Texas Insurance Code § 101.201(a). The court concluded that an insured provided a policy by an unauthorized carrier has a Hobson’s choice: (a) seek enforcement of the policy as written or (b) rescind the policy and have no coverage. A motion for rehearing was filed in Seger, receiving significant amicus support. The rehearing urged that the court rewrote the statute to substitute “voidable” for “not enforceable.” The Supreme Court denied the motion for rehearing, leaving an opinion in place that is contrary to what the Segers urge is the purpose of the Texas surplus lines laws, which is to protect admitted domestic carriers and make it more difficult and perilous for non-admitted carriers who engage in unfair competition. Non-admitted carriers have known for years that violations of sections 101.201(a) and 981.005 mean that they cannot enforce their policy exclusions. An insured left with rescission as the only remedy, after a loss has already occurred, in fact has no remedy at all. The court’s interpretation renders the “not enforceable” provision mere surplusage because Texas already recognizes that rescission is available where the contract is unauthorized and in effect illegal. The Gandy debate continues to be the subject of frequent appellate opinions: Great Am. Lloyds Ins. Co. v. Vines-Herrin6 and Mid-Continent Cas. Co. v. JHP Devel., Inc.7 The latest draft of the Restatement of the Law of Liability Insurance dives into this debate, blending the approaches of numerous states. For now, the Texas Supreme Court has avoided the resolution of the continued viability of Gandy. Notes 1) ___ S.W.3d ___ (Tex. June 17, 2016). 2) 925 S.W.2d 696 (Tex. 1996). 3) 256 S.W.3d 660 (Tex. 2008) (carrier refusing to defend not entitled to challenge “reasonableness” of settlement). 4) 413 S.W.3d 750, 751 (Tex. 2013) (carrier refusing to participate in preemptive, pre-suit settlements not entitled to challenge the reasonableness or claim prejudice from breach of the consent to settle condition). 5) 876 S.W.2d 842, 855 (Tex. 1994). 6) 2016 WL 4486656 (Tex. App.—Dallas 2016)(petitions for rev. pending)( where the carrier wrongfully refused to defend, the insured was entitled to protect itself by agreeing to arbitrate and then assigning its rights after the arbitration decision in exchange for agreeing not to appeal; rejecting the insurer’s arguments that agreeing to arbitrate was per se a failure to engage in a “fully adversarial trial”). 7) 557 F.3d 207 (5th Cir. 2009)(“fully adversarial trial requirement of Gandy was not applicable where a default was entered after the carrier wrongfully refused to defend). MICHAEL W. HUDDLESTON is an equity partner in Munsch Hardt Kopf & Harr and chairs the firm’s insurance practice group. He provides counsel and litigates insurance coverage and bad faith cases for policyholders and claimants.
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