Recent Texas Supreme Court Decision Allows Insurers to Intervene and Take Over Insured’s Appeal to Pursue Coverage Defenses

By Alan Daughtry

In recent years, the Texas Supreme Court has dealt with various disputes over an insurer’s control of its insured’s defense. On one hand, the Court has held that the insurer has no right to control an insured’s defense when coverage is implicated, thereby triggering a potential conflict of interest. See Northern County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004). On the other, the court recently sparked controversy in its 2005 opinion in Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, 2005 WL 1252321 (Tex. May 27, 2005), in which the court held that an insurer may settle claims and seek recoupment for uncovered claims from its insured. Amidst great outcry, the Texas Supreme Court has agreed to rehear the Frank’s Casing appeal, but a case decided last week may signal the current lay of the land.

On February 3, 2006, the Texas Supreme Court decided In re Lumbermens Mutual Casualty Company, 2006 WL 249979 (Tex. Feb. 3, 2006), which permitted an insurer to intervene in an appeal and file a separate brief raising an argument that had been abandoned by its insured. The Lumbermens decision stemmed from Cudd’s agreement to indemnify, and to secure coverage for, Sonat in connection with well-servicing operations. When Cudd employees sued Sonat for personal injury, Cudd refused to indemnify Sonat, and Cudd’s insurer, Lumbermens, refused to provide coverage. Given this breach, Sonat settled with the injured employees and pursued indemnity against Cudd. It also filed a separate breach of contract action against Lumbermens and Cudd.

Sonat prevailed on its indemnity claim, causing Lumbermens to put up a $29 million supersedeas bond for Cudd for an appeal. Meanwhile, in the other breach of contract action, Sonat was pressing on certain claims for which Cudd would not have coverage. Thus, they worked a deal. Sonat would dismiss certain uncovered claims in the breach of contract suit, and Cudd would agree not to pursue the choice-of-law issue on appeal in the indemnity action. This was a pivotal decision, for under Louisiana law, the indemnity claim would be unenforceable, yet it would be valid under Texas law.

Once Cudd filed a brief of appellant that did not attack choice-of-law, Lumbermens sought leave to intervene on appeal. (The ten-week delay in seeking leave was not found by the court to be material in this case.) The court of appeals denied leave to intervene, and Lumbermens filed a petition for writ of mandamus with the Texas Supreme Court. The case was taken, and a writ of mandamus was conditionally granted.

The Texas Supreme Court held that the insurer was entitled to intervene and file a brief separately attacking the choice-of-law issue—the court of appeals had abused its discretion. While the court cautioned that intervention was required “under the unique facts presented,” the reality is that the Lumbermens decision may frequently provide a basis for intervention in suits where potential coverage issues are bound up with the facts—and not just on appeal. The court found that contractual defenses for non-cooperation or a potential declaratory judgment action regarding coverage were not sufficient legal remedies to avoid mandamus relief. Thus, while Tex. R. Civ. P. 38(c) and Tex. R. Civ. P. 51(b) generally prevent the joinder of an insurer, the practicalities of the situation—coupled with the Lumbermens decision—may prompt even more involvement and control for the insurer.

Given the uncertainty caused by the Frank’s Casing opinion (and its upcoming rehearing), there are already enough pitfalls for the insured: A Stowers demand may now have the unintended consequence of prompting the insurer to settle and seek reimbursement for uncovered claims; the right to settle may allow the insurer to allocate proceeds based on coverage; and the insurer may leverage an insured to contribute at mediation. Clearly, the insured always had to keep a watchful eye on the litigation of facts that could potentially implicate coverage, but now the Lumbermens decision signals that insurers may have more control over the development of those facts than ever before.

In addition to its proud history of extensive trial expertise, Jackson Walker has abundant appellate experience. If you have any questions concerning this e-alert, please feel free to contact Alan Daughtry at adaughtry@jw.com or 713-752-4513.  Alan is a partner in the Litigation Section in Houston and practices appellate law. He is Board Certified in Civil Appellate Law by the Texas Board of Legal Specialization.

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