Duty to Defend v. Duty to Pay for Defense

This insurance case is styled Coreslab Structures (Texas), Inc. v. Scottsdale Insurance Company, Cause No. 14-14-00865-CV (Houston–14th Court of Appeals. Opinion Filed July 28, 2016).  The underlying case–the one which gave rise to the insurance case–involved $38M water damage at a well-known Houston hospital and its building, Memorial Hermann Tower (I-10 at Gessner).

The liability case involving Hospital was settled and played no role in this litigation. This case is solely legal fees and a carrier’s duty to defend.

The Hospital had sued Coreslab and its subcontractor to recover for its property damage. Coreslab sought a defense for the CGL carrier for one of its subs, namely, Scottsdale (“Scott”) claiming it was a named insured. It also sought a defense from (one of) its own carriers, Lexington (“Lex”). Scott fallaciously denied coverage, while Lex paid defense expenses.

Scott was found in error and was ordered to pay.  The costs of defense were substantial $825K+. Eventually, both Lex and Scott paid substantial sums. Scott paying over $409K. In the end, all the legal fees were agreed to be reasonable and necessary, and it was also agreed that Coreslab itself never paid any legal fees.

However, Coreslab sued Scott for breach of its duty to defend, apparently seeking all of the money to which it would have been entitled if Scott had not made its original mistake of denying coverage.  Lex, of course, has corrected that mistake, so far as Coreslab was concerned, by picking up the whole tab. (Curiously, Lex is not a party to this suit, and I say “is” because I suspect that this case–silly as it be–is not over.)  I would have expected Lex to try and get some of its money back somehow.

As any court in its right mind would do, the trial court granted Scott summary judgment, and the court of appeals affirmed. I expect Coreslab to go to the Texas Supreme Court, but I expect that it will refuse to take it.

The basic issue is this. Coreslab says this: “Scott had a duty to defend me. It failed in this contractual duty. Therefore I have a valid breach of contract action against it. In addition by failing to defend me, it violated sections of the Texas Insurance Code which prohibits insurers’ bad faith and calls for damages, attorney fees, and penalties. So I want the enforcement of that statute and the relief it specifies.”

There is just one (or at least one) problem with this line of “reasoning.” Coreslab did not pay any defense costs. Lex paid them. Hence, it suffered no damages.  So, from what does it want relief? For from what injury is it seeking relief.  I’ll come back to this.

Coreslab gave three arguments on its behalf. (1) “[A]n insurer has the duty to provide a full defense to its insured rather than pro-rata defense.” (2) If a petition alleges one cause of action which may be covered and one which obviously is not, the liability carrier has a duty to defend the entire case. (3) It is Texas law “that the insured is in the best position to identify the policy or policies that would maximize coverage[,]” so it gets to pick which one will defend it. Coreslab picked Scott, so it should be compensated for that violation of the law.

All three of these are wretched arguments.  If they were set forth on a law school exam, the student would have to take the course again. This is true for a very simple reason. Coreslab did not suffer any damages; it did not pay any legal bills at all.

Coreslab seems to have thought that it was injured by the fact that the legal fees Scott did not pay but Lex did would somehow drive up the premiums it would owe in the future for similar insurance. Of course, this might happen whoever the down-the-road carrier might be. Maybe it thought that Lex would charge it higher premiums in the future since Lex (as opposed to another insurer) was paying legal bills and that fact would affect Coreslab loss ratio with it and thereby increase its premiums. Significantly, Lex was not a party to this case.

What’s a little nutty about this is that any insurer will look to the entire loss history over a specified, relatively recent period of time in calculating a premium.  It will not restrict its inquiry to the applicant’s loss history with it.  Thus, if Scott had paid the legal fees the way it was supposed to, Lex would still know about the suit, the claim, the settlement, plus the attorney fees, and all those facts would affect its underwriting decision.

So what can we learn here? How’s about this one as a start.

Not every mistake made by an insurer in handling a claim inflicts compensable damages upon a claiming insured.  This is true especially if the insurer’s error hurt somebody, just not the insured.


Here’s another possible lesson. The decision-maker at Coreslab did not think this one through well.  This is why risk management departments and/or capable coverage counsel experienced in litigation are a good idea. This point is evidenced especially vividly if Coreslab has had to foot the bill for all or any part of this lawsuit. (What irony it would be if Coreslab had to pay Scotts’ legal fees.)