After years of maintaining that the duty to defend and the duty to indemnify were independent duties in a liability policy, the Texas Supreme Court held in 1997 that the same allegations used to determine that no duty to defend exists could also be used to eliminate the duty to indemnify. Courts often understood this to mean that the lack of a duty to defend meant that no duty to indemnify existed. So the question was: What standards decide those two duties?
In two recent decisions, the Texas Supreme Court has clarified this confusion of standards and returned to a recognition that the duties to defend and indemnify are “independent, and the existence of one does not necessarily depend on the existence or proof of the other.”
Texas courts have historically held that an insurer’s duty to defend and duty to indemnify are distinct and separate duties. The reason is simple. The duty to defend is determined solely by the factual allegations in a petition (i.e., suit papers) that are then compared to the terms of the insurance policy. This is often referred to as the “8 Corners” or “Complaint/Allegation” Rule.
In contrast, the duty to indemnify is determined by the actual facts, not what is pled. This means that you could have facts pled that create a duty to defend, but that the facts developed in the suit later show that no indemnity obligation exists. Likewise, there could be times when the plaintiff alleges facts that are not covered, but the actual facts later do fall within coverage. It is this latter scenario that created confusion for the Court in 1997.
Confusion of Standards
In Farmers Tx. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 91, 84 (Tex. 1997), the Texas Supreme Court ignored the different tests for the duty to defend and the duty to indemnify. The Court assumed that if the allegations did not show a duty to defend, there could be no duty to indemnify.
The insurer in Griffin brought a declaratory judgment suit seeking a determination that it did not owe a duty to defend or indemnify its insured driver under an automobile insurance policy against claims brought by the victim of a drive-by shooting. The Griffin court recognized that that “[i]t may sometimes be necessary to defer resolution of indemnity issues until the liability litigation is resolved and that, “[i]n some cases, coverage may turn on facts actually proven in the underlying lawsuit.”
Despite recognizing the established rule, the Court went on to decide that the duty to indemnify could be determined “before the insured’s liability is determined in the liability lawsuit when the insurer has no duty to defend and the same reasons that negate the duty to defend likewise negate any possibility the insurer will ever have a duty to indemnify.” Based solely upon the factual allegations in underlying suit against insured, the Court found that the insurer did not owe a defense or indemnity to its insured.
This departure from longstanding tradition created confusion by failing to recognize the different tests for the two policy obligations. Over the next decade, Texas courts were divided as to whether Griffin had eviscerated the indemnity test in some cases. One court held that, because “[t]he duty to defend is thus broader than the duty to indemnify; if an insurer has no duty to defend, it has no duty to indemnify.” Grimes Constr. Co., Inc. v. Great Am. Lloyds Ins. Co., 188 S.W.3d 805, 818 (Tex.App.— Ft. Worth 2006).
Given the widespread confusion that ensued, it is surprising that it took 12 years for the issue to be revisited by the Court. However, the Texas Supreme Court has now clearly retreated from Griffin. In D.R. Horton-Texas, Ltd. v. Markel Intern. Ins. Co., Ltd., 300 S.W.3d 740, 742 (Tex. 2009), the Texas Supreme Court reversed an appellate court’s determination that the absence of a duty to defend automatically rules out any duty to indemnify and held that a subcontractor’s commercial general liability carrier may have a duty to indemnify a general contractor even if it did not have duty to defend.
The plaintiff was a homebuilder that brought action against the subcontractor’s insurer seeking reimbursement of settlement funds and defense costs incurred in an underlying construction defect action brought by homeowners. The subcontractor’s insurer argued that, under the eight corners rule, it had no duty to defend the homebuilder because the underlying complaint did not allege facts triggering coverage for the construction defect claims.
The homebuilder identified evidence from the underlying case that would have established coverage under the policy. The trial court agreed that the subcontractor’s insurer did not owe the homebuilder a duty to defend or indemnify. The appellate court agreed that if there was no duty to defend, there could be no duty to indemnify.
On appeal, the Texas Supreme Court held that, even if the subcontractor’s insurer had no duty to defend, it may still have a duty to indemnify, which needed to be determined from the facts established in the underlying litigation. The Court held that the decision in “Griffin was fact-specific” and was limited to situations where it is an “impossibility” that the claims could be “transformed by proof of any conceivable set of facts into [claims] covered by the insurance policy.” The Court instead emphasized that the duties to defend and indemnify remain “independent, and the existence of one does not necessarily depend on the existence or proof of the other.”
Recently, in a further effort to clarify this issue, the Texas Supreme Court held that an appellate court erred by not considering evidence outside the pleadings and the policy in determining whether an insurer owed a duty to indemnify. Burlington N. & Santa Fe Ry. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, Case No. 10-0064, — S.W.3d —, 2011 WL 711099 (Tex. Feb. 25, 2011).
The case arose out of several personal injury suits filed against BNSF following a fatal collision involving a BNSF train at a railroad crossing. After the carrier refused to provide a defense, BNSF filed suit and sought a declaration that the insurer owed a duty to defend and to indemnify BNSF in an underlying personal injury suit. The trial court granted summary judgment in favor of the carrier.
On appeal, the appellate court applied the eight corners rule to find that a duty to defend did not exist based upon the policy and the underlying pleadings. Without considering any other evidence, the appellate court held that the carrier “did not have a duty to indemnify because BNSF’s arguments were ‘based entirely on its duty to defend arguments’.”
The Texas Supreme Court reversed the appellate court and rejected the argument that Griffin allowed the appellate court to decide the duty to defend and the duty to indemnify based upon the allegations in the petition. The Court recognized that “[i]n some circumstances the pleadings can negate both the duty to defend and the duty to indemnify.” However, the Court found that the Griffin exception was limited to situations where “under the facts plead by the plaintiffs that it would be impossible for the insured defendant to show that the loss fell under the terms of the policy.”
Unlike the situation in Griffin, the Court found that the pleadings in the underlying personal injury suits did not show that it would be impossible for coverage to be triggered under the policy. Therefore, the appellate court erred in not considering evidence outside the pleadings and the policy in determining the duty to defend.
The distinction between the duty to defend and the duty to indemnify appears to be alive and well with actual facts determining whether a duty to indemnify exists. For the foreseeable future, clear standards are back in place.
Martin is a partner and Golding is a senior attorney in the Insurance Litigation and Coverage Practice of the law firm of Thompson Coe Cousins & Irons LLP.
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