Insurer Has Right to Control Defense

Posted on September 11, 2023 by Barry Zalma

If Insurer Agrees to Defend Insured May Not Expect it to Pay Independent Counsel

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The Insureds sued Mid-Continent for failing to pay their attorneys’ fees in defense of the underlying lawsuit where the Insureds alleged several causes of action against Mid-Continent, including breach of contract, bad faith, and several Insurance Code violations. Mid-Continent filed a motion for summary judgment and the trial court denied the motion for summary judgment.

In Mid-Continent Casualty Company v. Harris County Municipal Utility District No. 400, No. 09-22-00252-CV, Court of Appeals of Texas, Ninth District, Beaumont (August 31, 2023 the Court of Appeal was asked whether Mid-Continent Casualty Company (Mid-Continent) must reimburse its insureds, Harris County Municipal Utility District No. 400 (MUD 400), Anne Marie Wright (Wright), and Cheryl Smith (Smith), for fees and expenses incurred by attorneys chosen by the MUD 400 to defend the Insureds in an election contest lawsuit.

BACKGROUND

This dispute arises from an underlying lawsuit filed by Edgar Clayton (Clayton) in June 2018 (the “Clayton Suit”). In the Clayton Suit, Clayton challenged the result of the May 5, 2018 election of two open at-large director positions on the MUD 400 board of directors.

Mid-Continent’s Insurance Policy Terms and Reservation of Rights

Mid-Continent issued a Directors and Officers Policy insuring MUD 400, and its directors. On July 24, 2018, Mid-Continent offered a defense, subject to a reservation of rights. Mid-Continent notified the Insureds that attorney Britt Harris had been retained by Mid-Continent to defend all Insureds in the Clayton Suit.

The Policy

The terms of the relevant insurance policy include the following language: “Exclusions …. B. The Insurer shall not be liable to pay Loss resulting from any Claim: (4) based upon or attributable to any of the Insureds gaining in fact any profit, remuneration, or advantage to which such Insured was not legally entitled[.]”

It also provided that “The Insureds shall not, except at personal cost, make any payment, admit any liability, settle any Claims, assume any obligation, or incur any expense without the Insurer’s written consent.”

The Clayton Suit was eventually dismissed in favor of all Insureds.

Insureds Demand for Reimbursement

On February 1, 2019, after the Clayton Suit had been dismissed, the insureds wrote to Mid-Continent demanding reimbursement for attorneys’ fees and expenses. The insureds  stated, “Because of the potential conflicts with joint representation as well as the existence of actual conflicts due to your reservation of rights letter, the insureds defended the case with counsel of their choosing[.]”

On January 29, 2019, during the trial, Clayton voluntarily dismissed his suit against the Insureds with prejudice. Mid-Continent denied the claims for reimbursement of the fees incurred by counsel chosen by the Insureds in the defense of the Clayton Suit.

Mid-Continent’s attorney, mailed a check made out to MUD 400 for $4290 to pay the fees generated by the insured’s independent lawyer’s firm between the time that it first provided a copy of Clayton’s petition to Mid-Continent and the time that Mid-Continent offered to assume the defense of the Clayton Suit, under a reservation of rights.

Duty to Defend Under Eight-Corners Rule

Mid-Continent had certain obligations to defend the Insureds. The duty to defend is distinct from, and broader than, the duty to indemnify. In determining a duty to defend Texas follows the eight-corners rule, sometimes called the complaint-allegation rule. The rule directs Texas courts to determine an insurer’s duty to defend its insured based on:

1. the pleadings [filed] against the insured and
2. the terms of the insurance policy.

Under the eight-corners rule, an insurer’s duty to defend its insured from a underlying suit is determined by the pleadings and allegations in the underlying suit (here the Clayton Suit), considered in light of the policy provisions, without regard to the truth or falsity of those allegations.

Right to Control Defense

Liability insurance policies, like the one at issue, typically confer on an insurer the right to control the defense of claims against the insured.

DISCUSSION

“Advantage,” as used in the policy exclusion refers to something like a monetary advantage. In the underlying suit, Clayton’s petition refers to several election irregularities. None of Clayton’s allegations are monetary advantages gained by the Insureds.

After examining the allegations in the Petition and the wording in the policy, the Court of Appeals agreed with Mid-Continent that the facts upon which coverage depends would not be adjudicated in the underlying election contest suit. Nowhere in Clayton’s pleadings does Clayton allege that Wright, Smith, or MUD 400 received a monetary advantage.

Since Clayton’s petition did not allege facts that would necessitate separate counsel. Clayton does not allege anything in his petition that would make the interests of Wright, Smith, or MUD 400 adverse to the interests of each other.

CONCLUSION

For the foregoing reasons, the Court of Appeals concluded that Mid-Continent had no duty to reimburse its Insureds for fees and expenses incurred by attorneys chosen by the Insureds to defend the Insureds in the Clayton Suit. Mid-Continent had no duty to reimburse its Insureds for the costs they incurred in hiring separate counsel to defend each Insured in the Clayton Suit. The trial court erred in ruling that Mid-Continent owed a duty to pay its Insured for fees and expenses incurred by attorneys chosen by the Insureds to defend the Insureds in the Clayton Suit.

ZALMA OPINION

Even with the eight corners rule accepting all allegations in a suit as true there was simply no facts alleged that put coverage at issue. Although if there is coverage and a conflict of interest independent counsel can be compelled at the expense of the insurer. However, when, as in this case, there was no conflict the insureds were not entitled to compel their insurer to pay for the charges of independent counsel.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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