DUTY TO DEFEND ATTACKED BUT NOT DEMOLISHED: LOGIC REJECTED AND REASON IGNORED
PART ONE OF THREE
Michael Sean Quinn*
Quinn & Carmona
Insurance arrangements of various sorts have been around for thousands of years. Not so with respect to liability insurance. Bearing anything like that name, it seems to have been invented and sold in the late Nineteenth or early Twentieth Century in connection with motor vehicle policies. If it was railroads that were selling passenger injury policies, then some of it may have been a form of liability insurance.
Liability insurance now a very important component of virtually all developed economies and for obvious reasons. It exists for both individual persons and for larger organizations, e.g., business entities of various sorts. Just list for yourself all the different sorts of liability insurance coverages of which you have heard and then confidentially conjecture that there are many more.
One very important part of virtually all liability policies is the insurer’s duty to defend its insured under many relevant types of situations. For many insureds, coverage for defending the insured is at least as important as having duty-to-pay coverage. Lawsuits are expensive, and insureds need help conducting defenses and having them paid for.
The duty to defend
s is a broader coverage than the duty to pay for the loss for which the insured is liable. What is being insured against is not the liability for causing a loss. What is being insured against is the peril of being sued ostensible for a type of loss, whether the insured is liable or not.
In order to make sure that the coverage for a defense is broad enough, most states have a variant on the rule that if a lawsuit is making an allegation within general area of the policy’s stated sketched areas of what’s insured, as the general area of the policy’s language, the insured will receive a defense. Almost, the insurer is to look only at the live pleading and the insurance policy, then, on that basis, provide a defense if there is possible liability for the insured based on the type of peril the insurance policy covers likely covers. The components, dimensions, and variations on this rule varies from state to state. However, it is usually understood that in most policies, except sof the most technical, complex, and sophisticated in specialist ways, the insurer is to look on the language of both the policy and the petition in ways more-or-less favorable to the insured.
The Texas variant of this rule is strict and favors the insured under almost all circumstances. For this reason, it is called the “Eight Corners Rule” (“8CR”) This means that almost always in deciding whether it has a duty to defend, the insurer looks at the live pleading, the insurance policy (aka contract of insurance) and decides reasonably and favoring the plight of the insured. The insurer may not gather and consider “extrinsic” evidence. When one thinks about what is being covered by the duty to defend, this is a natural rule. Defense coverage is for protecting the insured from the risk of having to pay to defend itself.
If there is any way the insured might be liable for a covered peril, given the way the live pleading is formulated (irrespective of whether is clear or otherwise) the insurer must defend, even if it knows that the insured is not liable or that the suit is phony. Well, almost always. 8CR has been the law in Texas and elsewhere for quite a while. It is reasonably-well understood as legal practice rules go and part of insurance coverage practice has been organized around it for quite some time.
Now, however, as legal fees, court costs, expert witness fees, high-tech costs, and highly regulated insurance premium prices escalate, some insurers and some commercial insureds want to reduce the scope of the duty to defend. This project is not to be easily accomplished.
A new approach has been devised, however, and that is to claim that insurance contracts must be interpreted is an old-looking but actually a new way. The old way is to say that contracts of insurance are subject to the same rules of interpretation as any other contract, a proposition that is–and has long been–asserted. What’s new is (1) ignoring the fact that insurers and their insureds have a “special relationship,” which is something like a quasi-fiduciary relationship, (2) ignoring the fact that insurers draft the lengthy, complicated, usually non-negotiable contracts, (3) ignoring public policy favoring coverage, (4) ignoring state law and administrative atmospherics that favor coverage, and (5) ignoring some basics of logic and language interpretations.
Two recent federal district court cases in Texas illustrate this point. The earlier of these two cases was reversed for reasons irrelevant here. The latter of these two cases went to the Fifth Circuit; it sent the case on to the Texas Supreme Court; and it sent the case back to the Fifth Circuit, essentially reversing the district court’s decision. Interestingly, the Texas Supreme Court does not consider the fundamental issues that will be discussed here, but its opinion is decisive, well-reasoned, sensitive to history and public policy, and perhaps even brilliant.
One might begin with Guideone Elite Insurance Company f/k/a Preferred Abstainers Insurance Company v. Fielder Road Baptist Church,197 S.W.3d 305 (2006). It might be thought of as the most recent Texas Supreme Court case really shaping duty-to-defend law in Texas in a really influential way. Since the issues to be discussed here are quite abstract, there is no need to discuss facts of these cases.
That case was a sexual abuse of a teenage girl by a “quasi-parson” case. The Texas Supreme Court and the intermediate court of appeals before it based its holding on the following language of the policy to explicate and apply the 8CR: “We [the insurer] shall have the right and duty. . . to defend any suit brought against you seeking damages, even if the allegations of the suit are groundless, false, and fraudulent[.]” For the purposes of discussion the two recent federal district court decisions, it’s the “even if” clause that matters.
One might turn to B. Hall Contracting Inc. v. Evanston Ins. Co., 447 F.Supp.2d 634 (N.D.Tex. 2006), rv’d on other grounds, 273 Fed. Appx. 310 (5th Cir 2008), since it is the earlier of the two cases. Another way to do this, however, is to discuss the case decided later first, the one which is actually appealed and ended up in the Texas Supreme Court. It shall be done here in the second–later-first–way, followed by a brief jump backward to the B. Hall Contracting case.
The later of the two cases is State Farm Lloyds v. Richards, 2018 WL 2225084. (Remember: this is the case which went to the Fifth Circuit and then on the Texas Supreme Court, where it was, in effect, reversed.)
Richards declarative judgment duty-to-defend coverage case arising out of a death of a child case in which the mother of the child sues her parents.
As set forth by the court, the relevant policy language is this: “[I]f a claim is made or a suit is brought against an insured for damages because of bodily injury. . . to which this insurance applies caused by an occurrence, [plaintiff] will  pay up to its policy limits of liability for the damages for which the insured is legally liable. . . . And plaintiff will “provide a defense at [its] expense by counsel of [its] choice.”
So much for policy language. The court went on to say, “Thus, for an obligation on the part of plaintiff [remember: this is the insurer], there must be a claim made or suit brought because of bodily injury caused by an occurrence as defined in the policy. [Paragraph] In this respect, the policy at issue here is unlike those typically at issue in Texas case where the duty-to-defend is defined more broadly than the duty-to-indemnity. Those cases in which an insurance policy provides that the insurer must defend any suit brought against its insured ‘even if the allegations of the suit are groundless, false or fraudulent[.]” The court is arguing that 8CR applies only if the “even if” clause (or its equivalent, presumably) is found in the policy. “In this case,” the court said, “the policy does not require plaintiff [the insurer] to defend all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent. Rather, the duty to defend arises only if suit is brought to which the coverage applies.”
Because various exclusions eliminated any duty to indemnity, the court held that there was no duty to indemnity.
There are three serious mistakes built into the court’s view. And a fourth one which is an apparently unanticipated consequence of the view.
First, and foremost, the court interprets the “even if” clauses in more standard Texas policies as necessary conditions (as opposed to sufficient conditions) for the triggering of the duty to defend. This is plainly the wrong way to read an “even if” clause. It is designed to do nothing more than make sure that the point and extent of the main clause is understood. The phrase “X if Y” is far different, logically speaking, than “X only if Y.”
Second, and independent of the first point, is the meaning of the term “applies.” Is ambiguous. The court thinks that an insurance policy applies to a state of affairs only if it actually covers it. This proposition is not true. A policy may “apply” to bodily injuries, say, caused by occurrences but not cover them because of an exclusion.
Third, the court’s view of how the language of the SFL policy effectively destroys the idea that the duty to defend is broader than the duty to defend at all. Thus, it destroys one of the most important parts of the liability policy, namely, a coverage for the expenses which will be incurred if there is not duty to defend. A court must be careful in interpreting the brief phraseology of a part of the language of a complex contract. Insurance policies, just like other contracts, must be understood as a whole and interpreted in context.
Fourth, and related to the third point, the court’s reading of the SFL policy subjects to the insured
to two pieces of litigation at once, namely, the underlying action (“You injured me, so pay me,”) and the coverage lawsuit regarding duty-to-defend (Maybe you did injure him, maybe you didn’t. I’m not defending until I know which is which.”). (a) This makes duty-to-defend money a kind of indemnity contract: you pay now, and maybe I’ll reimburse you. (b) This is the large against the small, quite often. (c) It will create a new form of law practice and a new contingent loan market, where the companies paying for defense will become assignee and suit liability carriers that deny defenses.
The earlier case, the B. Hall Contracting case is a somewhat similar coverage case. It arose partly out a property-damage-by-fire case where that damage allegedly resulted an alleged negligent construction error and different but related bodily injury case arising out of the same problem. An alleged construction error caused a fire, and two fellows had to jump off a roof and were injured.
Here is the policy language as set forth by the court. “The insuring agreement of the policy of the obligates Evanston to pay “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” In addition, said the court, the policy goes on to say that “[h]owever, we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply.”
The terms “apply” and “applies” appears repeatedly in this policy. Most germane here is its use in an exclusion to be found in the “Roofing Endorsement.” According to the court it states in relevant part as follows: “The coverage under this policy does not apply to bodily injury, property damage, . . or any injury, loss, or damage arising-out of any  operations involving any . . . membrane roofing[.]” Obviously, this is an exclusion. Apparently, the presence of membrane in the roofing was established by affidavits and evidence, though it was not mentioned in any relevant pleading.
There were other exclusions, but they are not relevant here.
The court’s interpretation of the policy language and rejection of a duty to defend works somewhat differently than in the Richards coverage case. In that case, the hinge issue was about the absence of the “even if” clause. Here the issue is much different. Here the contract says bluntly, the insurer will have no duty to defend if the suit seeks damages for a bodily injury (or property damage) to which the policy does not apply. There is no reference to what is to be found in the plaintiff’s pleading in the underlying case.
Consequently, the reason why the duty-to-defend avoidance strategy in this policy is quite different. As we shall see, the Texas Supreme Court recognized this fact. There is another way to look at it however, one having semantics and interpretation.
The term “apply,” and its verbal siblings, which are used in this policy, must be distinguished from the term “cover” and its siblings. This policy is said to be a CGL policy. This means that there is a section of the policy named “Coverage A.” It is also clear that parts of this section can “apply” to a situation’s, injuries, and/or damages which are not covered, e.g., because there is an exclusion taking them out of coverages. That is more or less the case here, except that the policy seems to use the term “apply” in different ways at different places, and it does not ever equate “apply” to “cover.” In fact, the policy explicitly distinguishes between “cover” and “apply.”
This policy is a mess. It has internal inconsistences. The question then, is how should one interpret a contract that is incoherent. Obviously, one cannot do it phrase by phrase. That is precisely where the inconsistencies are to be found. One has to look at the overall nature of the policy, at the purposes of the policy, at expectations of the citizenry, lawyers in the field, a hypothetical-congress of insurance underwriters and intermediaries, public policy, local understanding and custom, established patterns of precedent, the standard form used, and more.
So what happens next? Why were the B. Hall Contracting and the Richards coverage cases taken in the wrong order? The Fifth Circuit’s reversal of B. Hall is about something else entirely and is irrelevant here so it will not be discussed. The fifth Circuit’s treatment of Richards is a different matter and a rather unusual one. Stay tuned. The decision in the Fifth Circuit is discussed next. State Farm Lloyds v. Richards, 18-10721 (5th Cir. 2019)(Certified Order Issued September 9, 2019).
*Quinn’s Resumes–“Short Resume” & “Long Resume” can be found on the internet without difficulty. The theses expressed herein are mine alone and therefor my responsibility alone.
Originally posted on 06/24/2020 @ 11:10 pm