How To Defend Yourself In A Lawsuit Against A Liability Insurance Company

Transcription

1 INDEPENDENT COUNSEL ISSUES UNDER TEXAS INSURANCE LAW Presenters ROBERT D. ALLEN, Dallas Meckler Bulger Tilson Marick & Pearson, LLP PAUL K. STAFFORD, Dallas The Stafford Law Firm Author ROBERT D. ALLEN Meckler Bulger Tilson Marick & Pearson, LLP 10,000 North Central Expressway, Suite 1450 Dallas, Texas State Bar of Texas 9 th ANNUAL ADVANCED INSURANCE LAW COURSE April 12-13, 2012 Dallas CHAPTER 15

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3 ROBERT D. ALLEN MECKLER BULGER TILSON MARICK & PEARSON, LLP 10,000 North Central Expressway Suite 1450 Dallas, Texas Phone: Bob Allen is the Partner-in-Charge of the Dallas, Texas office of Meckler Bulger Tilson Marick & Pearson, LLP. Prior to transferring his practice to Meckler Bulger Tilson Marick & Pearson on September 1, 2007, he served as the Chair of the Insurance and Reinsurance Disputes Section of Baker & McKenzie s North American Litigation Practice Group. Mr. Allen s practice is primarily focused in representing parties in the trial court and appellate proceedings in insurance and commercial litigation in Texas and other regions of the United States. Starting in 2002, Mr. Allen has been named to London-based Euromoney Legal Media Group s Bi-annual Guide to the World s Leading Insurance and Reinsurance Lawyers. He has been acknowledged by Texas Monthly as a Super Lawyer for Insurance Defense Commercial, from its inception. From 2005 on, he has been listed as one of The Best Lawyers in America for Commercial Litigation. Mr. Allen enjoys an AV Pre-eminent rating from Martindale-Hubbell.

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5 PAUL K. STAFFORD Paul K. Stafford earned a Bachelor of Science in Political Science from Texas A&M University in Mr. Stafford earned a Juris Doctorate from Texas Tech University School of Law in Mr. Stafford is licensed by the State of Texas and in the Federal District Court, Northern, Eastern, and Western Districts of Texas. Between 1994 and 1998, Mr. Stafford served first as an Assistant District Attorney in Denton County, Texas, followed by service as an Assistant District Attorney in Dallas County, Texas. While in Dallas, Mr. Stafford served as a felony prosecutor in the Organized Crime Division. Mr. Stafford has been practicing general civil litigation since Currently, he is the proprietor of The Stafford Law Firm in downtown Dallas a litigation firm focusing on the areas of commercial, business, and insurance litigation. Previously, he practiced at Amis & Bell in Arlington, Texas before joining Werstein, Smith & Wilson in January, Mr. Stafford then became Senior Trial Attorney in the Dallas office of Hughes & Luce LLP (now Kirkpatrick & Lockhart Preston Gates Ellis LLP) practicing in the areas of Business Litigation, Commercial Litigation, and Insurance Law, as well as White Collar Crime Defense. Mr. Stafford was named a Rising Star by Texas Monthly magazine for three consecutive years (2005; 2006; 2007), and a Super Lawyer in In 2008, Stafford was named one of the Eight Top Lawyers in Dallas by Eclipse magazine. Mr. Stafford is an active member of the Dallas Bar Association ( DBA ), serving as the Chair of the DBA s Board of Directors in 2008, and currently serving as the DBA s Second Vice President. In 2004, Mr. Stafford served as co-chair of the DBA s Minority Participation Committee, which received the 2004 Jo Anna Moreland Outstanding Committee Award. In 2005, Mr. Stafford served as co-chair of the DBA s Admissions & Membership Committee. In 2006, Mr. Stafford served as co-chair of the Equal Access to Justice Campaign (raising approximately $540,000 for pro bono legal services in Dallas County) and was named Dallas Bar Association Outstanding Minority Attorney. In 2007, Mr. Stafford served as Chair of the Equal Access to Justice Campaign (raising approximately $575,000 for pro bono legal services in Dallas County). In 2008, Mr. Stafford served as co-chair of the DBA s Judiciary Committee, co-chair of the DBA s Bench Bar Committee, and chair of the DBA s A Bar For All bar-assessment committee. This year, Mr. Stafford is co-chair of the DBA s Mentoring Committee, and serves on the Law Jam II Committee. Mr. Stafford has served on the Board of Trustees of the Dallas Bar Foundation since 2005, and is a member of the Dallas Association of Young Lawyers Foundation. In addition, Mr. Stafford served as 2002 President of J. L. Turner Legal Association. Mr. Stafford is an Adjunct Professor at Texas Tech University School of Law, having taught Insurance Law (2002; 2005; 2008; 2009), Trial Advocacy (2004), and

6 Interviewing & Counseling (2007; 2008). In 2007, Mr. Stafford was named an Outstanding Alumnus by the Black Law Student Association at Texas Tech University School of Law. Mr. Stafford is active in the North Texas community, serving on a variety of boards and commissions in the area. Mr. Stafford serves on the Board of Directors of Camp John Marc: Special Camps for Special Kids, as well as being a volunteer with Big Brothers Big Sisters. Mr. Stafford is a proud Aggie, serving as an active member of the Texas A&M Association of Former Students (Board of Directors, present), The Black Former Student Network ( Chair), the Dallas A&M Club, the Texas A&M Liberal Arts Development Council, and as a founding member of the Department of Political Science Former Student Advisory Board. Mr. Stafford is also an active member of the Texas Tech Alumni Association and the Black Law Students Alumni Association. Mr. Stafford is a 2003 German Marshall Fund, American Marshall Memorial Fellow, and currently serves on the Board of Trustees of the German Marshall Fund of the United States (based in Washington, D.C.). During his Fellowship in 2003, Mr. Stafford traveled to Brussels, Belgium, where he met with officials from the European Union and NATO to discuss a variety of transatlantic issues. Mr. Stafford also traveled to The Netherlands, where he discussed various legal issues with officials from The Hague, The United Nations Criminal Tribunal for Yugoslavia, and the World Court. Mr. Stafford also met with political, professional, and civic leaders in Italy, Slovakia, and France. In 2005, Mr. Stafford traveled to Rome, Italy to attend the Marshall Seminar on Southern European Affairs (February, 2005); he also moderated a panel on Multilateral/Multinational Organizations at the Marshall Forum on Transatlantic Affairs, Schloss Elmau, Germany (April, 2005). Paul also attended the Marshall Forum in Tremezzo, Italy (March, 2006) and in Schloss Elmau, Germany (June, 2007). In July of 2007, Mr. Stafford was a guest lecturer on The State of Transatlantic Relations at HTW University of Applied Sciences Saarbrucken, Saarland, Germany. Throughout the years, Paul Stafford has been a speaker and lecturer on a variety of political, social and legal issues of local, national and international significance. These issues and topics have included community affairs, social commentary, terrorism and homeland security, commercial litigation, insurance law, criminal law, trial advocacy and strategy, as well as interacting with the media regarding specific clients, cases, issues, or topics. Mr. Stafford is married to Telea Johnson Stafford and has three daughters.

7 Independent Counsel Issues Under Texas Insurance Law Chapter 15 TABLE OF CONTENTS I. WHEN DOES THE INSURED POSSESS THE RIGHT TO INDEPENDENT COUNSEL?... 1 A. Downhole Navigator v. Nautilus... 1 B. Partain v. Mid-Continent Specialty... 2 II. INTERPLAY OF DUTY TO DEFEND AND THE INSURED S PROSECUTION OF CLAIMS FOR AFFIRMATIVE RELIEF A. Standard for Segregating Attorneys Fees... 3

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9 Independent Counsel Issues Under Texas Insurance Law Chapter 15 INDEPENDENT COUNSEL ISSUES UNDER TEXAS INSURANCE LAW This paper will address two of the developing issues in Texas Insurance Law regarding independent counsel issues. First, the paper will analyze the development of the latest progeny of Northern County Mut. Ins. Co. v. Davalos, 140, S.W.3d 685, 690 (Tex. 2004) on when a disqualifying conflict occurs that will allow an insured to select counsel of its own choosing to defend it. Also, the paper will discuss how courts handle the allocation of fees between an insured s prosecution of claims for affirmative relief and defending covered claims. I. WHEN DOES THE INSURED POSSESS THE RIGHT TO INDEPENDENT COUNSEL? An ongoing and developing issue in Texas insurance jurisprudence concerns whether a liability insurer s act of agreeing to defend its insured under a reservation of rights creates a material conflict of interest that enables the insured to select counsel of its own choosing. Indeed, this issue was recently answered in the negative by a Houston Federal Magistrate in Downhole Navigator, L.L.C. v. Nautilus Ins. Co., 2011 WL (S.D. Tex. 2011) and by a Houston Federal Judge in Partain v. Mid-Continent Specialty Ins. Services, 2012 WL (S.D. Tex. 2012). Texas, like many jurisdictions, utilizes an eight corner analysis in determining whether a liability insurer owes its insured a duty to defend. See, e.g., National Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997). If the underlying Petition or Complaint alleges a cause of action within the policy s coverage, then the insurer owes a defense to its insured. See, e.g., Canutillo Independent School Dist. v. Nat l. Union Fire Ins. Co. of Pittsburgh, Pa., 99 F.3d 695, 701 (5th Cir. 1996). Typically, the policy allows the insurer to select the attorney to defend the insured. When an insurer issues a reservation of rights letter, a question often arises over whether the insurer can insist on controlling the defense through counsel of its own choosing. In this regard, the Texas Supreme Court has held that every disagreement about how the defense should be conducted cannot amount to a conflict of interest, or the insured could control the defense by merely disagreeing with the insurer s proposed actions. If an insured rejects[s] the insurer s defense without a sufficient conflict, [it loses its] right to recover the costs of that defense... [and the insurer does] not breach its duty to defend. Northern County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 690 (Tex. 2004). Under Texas law, when the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends, a reservation of rights creates a conflict of interest [that] will prevent the insurer from conducting the defense. Id. In other words, a conflict of interest does not arise unless the outcome of the coverage issue can be controlled by counsel retained by the insurer for the defense of the underlying claim. Rx.com Inc. v. Hartford Fire Ins. Co., 426 F. Supp. 2d 546 (S.D. Tex. 2006) (citing Davalos, 140 S.W.3d at 689). A. Downhole Navigator v. Nautilus Downhole Navigator v. Nautilus involves a dispute between an insured and its insurer over whether Nautilus reservation of rights deprived it from insisting that counsel of its choosing defend Downhole. On the one hand, Downhole contended that Nautilus decision to act under a reservation of rights... created a material conflict with respect to the selection of counsel. On the other hand, Nautilus stated that it only reserved [its] rights while investigating this matter, and that [u]ntil or unless a coverage issue develops, Downhole is not entitled to separate counsel. In the underlying suit, Downhole, an oil and gas service provider, was sued for allegedly damaging a well. Nautilus offered to defend Downhole pursuant to a CGL policy. However, Nautilus reserved its right to deny coverage based on three exclusions; to wit: a Testing or Consulting E&O exclusion; a Professional Liability exclusion; and a Data Processing Exclusion. In ruling that Nautilus reservation of rights did not deprive it of controlling the defense, the Houston Federal Magistrate opined: The question for this court, then, is whether the facts to be adjudicated in the Sedona suit are the same facts upon which coverage depends.... Comparing the allegations in the Sedona complaint to [Nautilus ] reservation of rights letter, the facts to be adjudicated in the Sedona suit are not the same facts upon which coverage depends. At issue in the Sedona suit is whether Downhole performed its work negligently. But Nautilus did not reserve its right to disclaim coverage based on whether Plaintiff s work was negligent.... Downhole has not shown that an insurerhired lawyer in the Sedona suit could control the outcome of the coverage issue before this court.... [H]ere,... [Nautilus ] 1

10 Independent Counsel Issues Under Texas Insurance Law Chapter 15 reservation of rights letter invoked the Testing Exclusion, which bars coverage for, among other things, an error, omission, defect or deficiency in... a consultation. Downhole worries that an insurer-hired attorney could direct the facts to indicate Plaintiff s relationship was that of a consultant rather than a vendor hired to perform specific work. But even if the attorney developed such facts, the underlying fact-finder will not decide whether the type of work Downhole performed constitutes testing or consulting, as those terms are used in the Testing Exclusion. If the... fact-finder concludes that Downhole was negligent, Nautilus will still have to convince the factfinder in this forum that Plaintiff s negligent work constituted an error, omission, defect or deficiency in... a consultation that triggers the Testing Exclusion. No finding in the Sedona suit will control the outcome of the coverage issue in this court. Accordingly, the court held that Nautilus reservation of rights did not create a conflict of interest that entitled Downhole to hire independent counsel [and] [f]or that reason, Nautilus is not obligated to reimburse the cost of those attorneys. B. Partain v. Mid-Continent Specialty Earlier this year, Houston Federal Judge Keith P. Ellison analyzed a similar issue of whether an insurer s reservation of rights correspondence allowed the insureds to select counsel of their own choosing in Partain v. Mid-Continental Specialty Ins. Svcs., Inc., 2012 WL (S.D. Tex. 2012). The underlying suit giving rise to the coverage/bad faith action was a claim against insureds for copyright infringement. Since copyright infringement arising out of an insured s advertising activity was potentially covered under its policy, Mid-Continent agreed to provide a defense to the insureds under a reservation of rights. From this, the insureds and Mid-Continent disputed whether this reservation of rights create[d] a conflict of interest that allowed [the insured] to select his own, independent counsel. Id. at *3. The district court made several interesting rulings on Mid-Continent s Motion to Dismiss the insureds statutory bad faith claims, including requiring the insured to meet the pleading requirements of Fed. R. Civ. P. 9(b) in connection with the Insured s misrepresentation claims. After conducting that analysis, the court considered the nature of the alleged conflict of interest that was created by Mid- Continent s reservation of rights. As a threshold matter, the court noted that Mid-Continent never denied [the insureds] claim; it denied only [the insureds] demand to retain [counsel of the insureds choosing] to defend [the insureds]. Id. at 7. Also, the court quoted from Darwin Select Ins. Co. v. Laminack, Pirthe & Martines, LLP, 2011 WL *3 (S.D. Tex. 2011) for the proposition that the insurer possesses the right to appoint defense counsel, to determine reasonable claims expenses, to control settlement and to determine whether the matter is litigated or arbitrated. Regardless, when a disqualifying conflict of interest arises, insureds may select their own, independent counsel, thereby protecting them from an insurer-hired attorney who may be tempted to develop facts or legal strategy that could ultimately support the underlying lawsuit facts within a policy exclusion. Partain 2012 WL at *14 (quoting Rx.com v. Hartford Fire Ins. Co., 426 F. Supp. 2d 564, (S.D. Tex. 2006) and Hous. Auth. of the City of Dallas, Tex. v. Northland Ins. Co., 333 F. Supp. 2d 595, 601 (N.D. Tex. 2004). The court defined a disqualifying conflict of interest as occurring when the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends. Partain 2012 WL at *15 (citing to Davalos, 140 S.W. 3d at 689). After conducting this analysis, the district court held that the underlying case did not present a disqualifying conflict and so, Mid-Continent was permitted to insist that the insured be defended with counsel selected by Mid-Continent. In so doing, the court focused on the proposed jury questions by the party suing the insured for copyright infringement and determined that the answers to those questions would not determine a fact upon which coverage depends. The court opined that even if some of the same facts might be developed and presented in the Underlying Suit is irrelevant as Davalos requires the same facts to be actually adjudicated. Id. at 19. After obtaining this positive ruling, Mid- Continent sought the district court to rule that the insureds alleged breaches of the policy s cooperation s clause and notice provisions excused Mid-Continent from its duty to defend, even with counsel of Mid-Continent s choosing. In a subsequent slip opinion, the district court expounded on its earlier opinion and stated to conclude that [the insureds ] position that a conflict arises any time the facts developed in the underlying lawsuit would raise facts that could be used to exclude coverage is incorrect; rather, it must be apparent that facts upon which coverage depends will be ruled upon judicially in the underlying lawsuit. Next, the district court rejected Mid-Continent s claims that the Insured repudiated the contract and 2

11 Independent Counsel Issues Under Texas Insurance Law Chapter 15 that the Insureds breaches of the cooperation s clause and notice provisions prejudiced Mid-Continent as a matter of law. The parties and the court focused on the language in Davalos that if an insured reject[s] the insurers defense without sufficient conflict, [it loses its] right to recover the costs of that defense. Davalos, 140 S.W.3d at 690. In this regard, the district court held: That portion of Davalos is inapplicable here. The Court reads this statement in Davalos to mean that, if an insured rejects an insurer s defense without sufficient conflict, it loses its right to recover the costs of that defense the one that it elects to use in the underlying suit. Here, for example, if Plaintiffs elect to proceed in the underlying suit using their own counsel to defend them, they will be unable to recover the costs of that defense, as the Court has concluded there was not a sufficient conflict of interest. Davalos did not hold that plaintiffs who reject an insurer s defense with a good faith basis for believing that a sufficient conflict exists lose their right to a defense altogether once it is found that no sufficient conflict exists. The court found that the insureds possessed a good faith belief that they were entitled to select their own counsel and that [t]hough the Court concluded, under Texas law, no sufficient conflict exists, the case was a close one. The court also recognized that [the insureds] had a good faith basis for their position. Accordingly, held that the insured s conduct did not allow Mid-Continent to avoid defending the insureds; albeit with counsel of its own choosing. These opinions and results are noteworthy because: 1) the courts found that the conflicts were not material (i.e., disqualifying), so that the insurers did not lose its right to provide a defense to their insureds with their choice of counsel; and 2) the insurers were not obligated to reimburse the insureds for the costs they incurred in paying the attorneys they retained. The reasoning appears favorable to insurers because it recognizes a material disqualifying conflict in very limited circumstances, i.e., when the jury s answer on a liability issue will directly decide a coverage issue. Examples of this might be the potential for a finding of fraud against the insured when the policy contains a fraud exclusion, the potential for an assault/battery finding against the insured when the policy contains an assault/battery exclusion and whether a putative insured was acting in the course and scope of his/her employment because a negative finding on course and scope would negate coverage for the putative insured under the employer s policy. Finally, it should be noted that Downhole Navigator was not appealed and the word (from a Linked-In discussion) is that Partain will be appealed to the Fifth Circuit. Thus, it will be interesting to see how this issue develops judicially under Texas law. II. INTERPLAY OF DUTY TO DEFEND AND THE INSURED S PROSECUTION OF CLAIMS FOR AFFIRMATIVE RELIEF. Yet another issue that arises in the independent counsel situation occurs when insured is prosecuting an affirmative claim for relief in the same action where the insured is being sued for damages potentially covered by their liability policy. Since an insurer is not responsible for funding the prosecution of claims for affirmative relief, litigation occurs over how to allocate the fees attributable to claims for affirmative relief, from the fees incurred in the defense of potentially covered claims. A. Standard for Segregating Attorneys Fees. Although not an insurance case focusing on the distinction between an insured s defense from the insured s prosecution of claims for affirmative relief, in 2006 the Texas Supreme Court analyzed how parties should allocate fees attributable to causes of action permitting the recovery of attorneys fees (e.g. breach of contract) from the fees attributable to causes of action that do not allow for a prevailing party to recover their fees (e.g. negligence). Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299 (Tex. 2006). In Chapa, the Texas Supreme Court held that when a party incurs attorney s fees relating solely to a claim for which such fees are unrecoverable, a claimant must segregate recoverable from unrecoverable fees. Id. at 313. Intertwined facts do not convert unrecoverable fees to recoverable. Id. at In other words, just because recoverable and unrecoverable claims depend upon the same set of facts or circumstances, that does not mean those claims require the same research, discovery, proof, or legal expertise. Id. at 313. Therefore, the Court overruled the previous rule in Stewart Title Guar. Co. v. Sterling, 822 S.W.2d 1 (Tex. 1991), stating that Sterling went too far in suggesting that a common set of underlying facts necessarily made all claims arising therefrom inseparable and all legal fees recoverable. Id. Here, the Texas Supreme Court held that it is only when discrete legal services advance both a recoverable and unrecoverable claim that they are so intertwined that they need not be segregated. Id. at But when, as here, it cannot be denied that at least some of the attorneys fees are attributable to claims for which fees are not recoverable, segregation 3

12 Independent Counsel Issues Under Texas Insurance Law Chapter 15 of fees ought to be required and the jury ought to decide the rest. Texas caselaw specifically addresses allocating fees between defending claims and prosecuting claims for affirmative relief for purposes of an insurer s duty to defend. For example, in Landmark American Ins. Co. v. Ray, 2006 WL (W.D. Tex.) (decided the day before Chapa), Federal Judge Royal Ferguson analyzed an insurer s obligation to pay the costs attributable to an insured s prosecution of counterclaims for affirmative relief in a suit where the insured was sued, in part, for a covered claim. Here, the insured took the position that her counterclaims were so inextricably related to her defense that Landmark is obligated to also reimburse her for the cost of prosecuting such counterclaims. Judge Ferguson rejected the insured s argument and held a bench trial to determine three categories: 1) the fees attributable solely to the defense of the plaintiff s claims against the insured; 2) the fees attributable solely to prosecuting the insured s claims for affirmative relief; and 3) the fees attributable to both the defense of the insured against the plaintiff s claims and the insured s prosecution of her claims for affirmative relief. In this regard, the court awarded the insured all of her fees attributable to defending the plaintiff s claims against her; none of the fees attributable solely to prosecuting the insured s claims for affirmative relief and 50% of the fees attributable to both defending the plaintiff s claims and prosecuting the insured s claims for affirmative relief. 4