One of the hallmarks of Texas insurance law is that Texas, unlike Louisiana and a handful of other states, is not a “direct-action” state. This simply means that a third-party claimant/plaintiff cannot bring a lawsuit against the insurance company of the defendant/insured until it has a settlement or judgment that allows it to step into the shoes of the insured as a third-party beneficiary to the insurance policy.
Louisiana, on the other hand, allows third-party claimants to sue a defendant’s insurance company directly (not in the shoes of the insured, so to speak) in the same action against the insured/defendant. This direct-action approach creates significant concerns for carriers and greatly influences how litigation proceeds. At a minimum, it raises the potential for prejudice and raises coverage issues that otherwise may never arise if the defendant/insured wins the suit. Texas’ non-direct-action status is one of its most attractive aspects to carriers when thinking about Texas as a forum for either defense or coverage litigation.
Change in direction?
Richardson v. State Farm Lloyds Ins., 2007 WL 1018651 (Tex. App. — Fort Worth, April 5, 2007).
In that case, State Farm issued a condominium policy to Robert F. Kays. The Richardsons alleged that Kays killed their son by rolling over him with Kays’ vehicle and that Kays was guilty of negligence for harassing their son and his roommate, trespassing on Richardson’s property and disassembling their security equipment. State Farm denied coverage to Kays under the condominium policy relying primarily on the use of a vehicle exclusion. The Richardsons sued State Farm, alleging the company wrongfully denied coverage under Kays’ policy, and sought a declaratory judgment that State Farm had a duty to defend and indemnify Kays for their claims against him. State Farm filed a plea arguing that the plaintiffs could not litigate whether State Farm had a duty to indemnify or defend its insured because no contractual relationship existed between State Farm and the Richardsons under Kays’ policy, State Farm’s potential duty to indemnify was not ripe for adjudication, and the Richardsons had suffered no injury by its decision not to defend Kays.
The Court, before finding that coverage was excluded on the merits, ruled that the Richardsons had standing to sue State Farm directly. The court’s short and discursive analysis of the direct-action issue examines the Texas Supreme Court opinion in Farmers Texas Cty. Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 1997), which held that, while the insurer’s duty to defend is separate and distinct from the insurer’s duty to indemnify, the duty to indemnify may be justiciable before the underlying liability suit is resolved when an insurer has no duty to defend, and the same reasons that negate the duty to defend likewise negate any possibility the insurer would have a duty to indemnify.
So far, so good. No one disputes that carriers and insureds may litigate these issues before resolution of the underlying claim. The Fort Worth Court also reviewed Texas Rule of Civil Procedure 51(b) regarding joinder which, in part, states: “This rule shall not be applied in tort cases so as to permit the joinder of a liability or indemnity insurance company, unless such company is by statute or contract directly liable to the person injured or damaged.” This is true and not in dispute. But what has that got to do with the right of a third-party claim-ant to sue the de-fendant’s carrier?
While the tort action against Kays was severed from the Richard-sons’ declaratory judgment action against State Farm, that is, it was to be tried separately to avoid prejudice to the carrier, the court still held that a direct action against an insurer by a third-party claimant is permissible, in declaratory judgment form, to seek to have the insurance company defend or indemnify for the conduct of the defendant/insured. The court said, in essence, that if carriers and insureds can sue each other on coverage, there’s no reason that tort claimants cannot as well.
Richardson court claimed to examine the Griffin decision carefully in reaching its conclusion. It did not. It would be more accurate to say that the court cites and discusses the Griffin decision but did not examine, much less understand the point of Griffin, or the cases regarding who can bring coverage actions.
For instance, Richardson points out that the Griffin decision allowed a declaratory judgment action by a carrier against its own insured while the underlying suit was still proceeding. True, but beside the point. The carrier has a contract with the insured so that each has privity, and hence standing, to contest the contract terms. That’s not the case here.
As to the issue of ripeness of declaratory judgment actions between carriers and insureds, that issue was decided in State Farm v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996). Indeed, the Texas Supreme Court in Gandy actually required carriers to bring certain coverage actions against their insureds to determine coverage as quickly as possible so as to prevent “set up” trials created by sweetheart deals between tort claimants and insureds where the insured assigns its coverage and allows a big judgment while in turn receiving a covenant not to execute from the plaintiff. It focused on the timing of declaratory actions, as well as on who can bring them and under what circumstances.
The Richardson court just does not get the point. Instead, it sees only the timing issue in Griffin and ignores that only the contracting parties can properly bring a declaratory judgment action prior to a settlement or judgment. The Richardsons had no legal right to sue State Farm because they had no contract, no assignment and no judgment.
The Fort Worth Court of Appeals has apparently opened up any case in which an insurance carrier denies a duty to defend or indemnify to litigation by the underlying claimant — and has arguably permitted the claimant to sue the defendant’s insurer on coverage even without a formal denial. This decision, if followed and unreversed, is a significant change in Texas law and may substantially affect the volume of litigation insurers are subject to in this state. State Farm has filed a motion for rehearing. Let’s hope the court reconsiders this confusing ruling.
Brian S. Martin is a partner in the Insurance and Coverage section of the Houston office of Thompson, Coe, Cousins & Irons L.L.P.