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HARD CHOICES--A POLICYHOLDER'S PERSPECTIVE ON POST-VERDICT OPTIONS

MICHAEL W. HUDDLESTON Shannon, Gracey, Ratliff & Miller, L.L.P.

500 North Akard, Suite 2575 Dallas, Texas 75201

(214) 245-3090 (214) 245-3097 (Fax)

e-mail address: [email protected]

State Bar of Texas 2ND ANNUAL ADVANCED

INSURANCE LAW COURSE March 31-April 1, 2005

Dallas

CHAPTER 19

©Michael W. Huddleston The analysis, conclusions, and opinions expressed in these materials do not necessarily reflect the position

of the law firm of Shannon, Gracey, Ratliff & Miller L.L.P. or its clients.

Michael W. Huddleston Shannon, Gracey, Ratliff & Miller, L.L.P.

Shareholder 500 North Akard, Suite 2500,

Dallas, Texas 75201 214/245-3075

[email protected] EDUCATIONAL BACKGROUND

• Southern Methodist University J.D. - 1983; Texas A&M University 1980 (G.P.A. - 4.0) B.A. - Summa Cum Laude

PROFESSIONAL ACTIVITIES

• Insurance Section of the State Bar of Texas A Founding Officer and Past-Chair

• Dallas Bar Association Tort & Insurance Practice Section Council Member (2004-2005)

• Dallas Bar Association Appellate Section Founding Officer and Past-Chair

• Master, Mack Taylor Inn of Court • Member of the State Bar College • Texas Monthly Magazine – Texas Super Lawyer • Chambers & Partners, Chambers USA, “America’s Leading Lawyers

for Business, Leading Individuals in the field of Insurance Law,” (2004-2005)

LAW RELATED PUBLICATIONS AND SEMINARS

• American Bar Association, Insurance Coverage Litigation Committee CLE/Seminar, "Dancing After the Party is Over: How to Keep the Judgment Debtor Policyholder Out of Bankruptcy While Litigating Coverage," (Tucson, Ariz., March 3-5, 2005)

• Dallas Bar Association, Noon at the Belo Mansion, CLE on "Insurance Coverage for Punitive Damages," (January 27, 2005)

• South Texas College of Law, Texas Insurance Law Symposium, Punitive Damages Coverage, (January 28, 2005)

• University of Texas School of Law, 9th Annual Insurance Law Institute, AKeeping the Cover: A Policyholder's Perspective on Dealing with Liability Claims," (November 10-12, 2004)

• "Fairness and Fairfield--Is Insuring for Punitive Damages Against Public Policy," TEXAS LAWYER (Feb. 28, 2005)

• "Insurability of Punitive Damages," TEX. INS. J. (Oct. 2000) • "Busse Arrives in Texas Via Matagorda: The Right of Reimbursement," ABA

COVERAGE (1998) SIGNIFICANT APPELLATE DECISIONS

• State Farm v. Gandy (Tex. 1996)(eliminating "sweetheart" liability insurance deals)

• Christophersen v. Allied-Signal (5th Cir. 1990)(en banc)(adopting test for expert testimony pre-Daubert)

• Rose v. Doctors Hospital (Tex. 1990)(holding statutory caps constitutional)

• St. Paul Fire v. Convalescent Services (5th Cir. 1999)(no duty to settle based on uncovered claims)

• State Farm v. Williams (Tex. App.--Dallas 1990, writ denied)(proof of prejudice to establish waiver and estoppel)

• Pennsylvania Nat. v. Kitty Hawk Airways (5th Cir. 1992)(same). HOBBIES

• Father and T-Ball Coach • Book-collector • Jazz/Rock saxophonist • Journeyman Golfer

Hard Choices--A Policyholder's Perspective on Post-Verdict Options Chapter 19

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TABLE OF CONTENTS

I. INTRODUCTION................................................................................................................................................... 1

II. STRATEGIC CONSIDERATIONS ....................................................................................................................... 1 A. Perspectives of the Players .............................................................................................................................. 1 B. Policyholder Considerations............................................................................................................................ 1

1. Hire Independent Insurance Counsel....................................................................................................... 1 2. Push the Carrier for a Decision................................................................................................................ 1 3. Appellate Process and Selection of Counsel ........................................................................................... 1

C. What Are the Options for Protection and/or Resolution ................................................................................. 4 D. Special Carrier Considerations ........................................................................................................................ 7

1. Reservation of Rights .............................................................................................................................. 7 2. Hiring Special Counsel ............................................................................................................................ 7 3. Declaratory Actions................................................................................................................................. 8

a. Justiciability Barriers to Early Indemnity Declaratory Actions....................................................... 8 b. Gandy Opening—Seeking A Solution............................................................................................. 8 c. Griffin Exception—Not Open-Ended.............................................................................................. 8 d. Restrictive Treatment By Lower Courts .......................................................................................... 9 e. Matagorda—New Momentum......................................................................................................... 9 f. Utica—Some Additional Explanation? ......................................................................................... 10

III. RESOLVING COVERAGE ISSUES AFTER AN ACTUAL TRIAL................................................................. 11 A. Facts Versus Allegations ............................................................................................................................... 11 B. Pleaded Facts Do Not Control....................................................................................................................... 11 C. Pleadings Are Still Considered...................................................................................................................... 11 D. Actual As Opposed To Potential Or Hypothetical Facts ............................................................................... 11 E. Causal Nexus – Facts Establishing Liability ................................................................................................. 12 F. Can New Facts Be Developed and Admitted in the Coverage Trial Beyond The “Historical Facts”

Developed in the Underlying Suit? ............................................................................................................... 12 G. Duty To Defend Trumped By Actual Facts Post-Verdict?............................................................................ 14 H. "Actual Facts" – Numerous Scenarios Involve Interplay with Collateral Estoppel and Gandy .................... 14 I. How Far Afield May the Carrier Go –Superimposing Coverage Defenses Beyond the Scope of Relief Sought ............................................................................................................................ 16 J. Related and Interdependent Causes, Concurrent Causation and Allocation— Understanding the Directions Coverage Litigation May Take ..................................................................... 17

IV. THE DUTY TO DEFEND ON APPEAL ............................................................................................................. 18 A. Typical Policy Language............................................................................................................................... 18 B. Limited Texas Law........................................................................................................................................ 18 C. Do "Allegations" Control? ............................................................................................................................ 18 D. Ramifications of Recognizing the Duty ........................................................................................................ 19 E. Other Jurisdictions......................................................................................................................................... 19

V. POLICY PROVISIONS REGARDING SUPERSEDEAS BONDS .................................................................... 20

VI. AN INTRODUCTION TO SUPERSEDEAS BONDS IN TEXAS AFTER HOUSE BILL 4............................. 20 A. The Amount of the Bond............................................................................................................................... 20

1. Establishing and Contesting Net Worth ................................................................................................ 20 2. Is Insurance Included in Net Worth? ..................................................................................................... 20

B. The Time for Filing ....................................................................................................................................... 22 C. Who Can Sign and Provide the Bond............................................................................................................ 22

1. Sufficient sureties .................................................................................................................................. 22 a. Who may serve as sufficient surety ............................................................................................... 22 b. Liability Insurers as Sureties.......................................................................................................... 23 c. Insurance Code Issues—Capital and Surplus ................................................................................ 24 d. Other Insurance-Related Issues ..................................................................................................... 24


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e. Multiple sureties ............................................................................................................................ 24 2. Principals ............................................................................................................................................... 25

VII. MODIFICATION OF THE BOND AMOUNT.................................................................................................... 25 A. Modification Under Rule 24.2(b)—The Texaco v. Pennzoil or 47(b) Standard— “Will Suffer Irreparable Harm”..................................................................................................................... 25 B. House Bill 4—“Likely to Suffer Substantial Economic Harm”.................................................................... 26

VIII. TURNOVER ORDERS ....................................................................................................................................... 26

IX. DEALING WITH THE CLAIMANTS--ASSIGNMENTS AND COVENANTS AND OTHER ISSUES ......... 30 A. Policyholder Concerns About Assignments .................................................................................................. 30 B. Assignability.................................................................................................................................................. 30 C. Covenants Not to Execute ............................................................................................................................. 31 D. Dismissal of the Appeal................................................................................................................................. 31 E. Post-Verdict in a Fully Adversarial Proceeding? .......................................................................................... 32

1. "Fully Adversarial"................................................................................................................................ 32 2. Scenarios................................................................................................................................................ 34

a. Default Judgment........................................................................................................................... 34 b. Arbitration...................................................................................................................................... 35 c. Carrier Wrongfully Refuses to Defend .......................................................................................... 35 d. Agreement to Have a Fully Adversarial Proceeding ..................................................................... 35 e. Judgment Silent As To Amount of Damages--In Rem .................................................................. 35 g. Coverage Trial Does Not Substitute for Fully Adversarial Proceeding-- And Turnover Does Not Allow Avoidance of Gandy ................................................................... 35


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HARD CHOICES--A POLICYHOLDER'S PERSPECTIVE ON POST-VERDICT OPTIONS I. INTRODUCTION

This paper focuses on (a) the hard choices faced by a policyholder after an unfavorable verdict where there is a coverage dispute and/or the judgment exceeds policy limits, and (b) critical legal rules and standards applicable to analysis of coverage issues and the choices presented post-verdict.

It must be kept in mind that the best options vary depending on the type of policyholder involved: (a) the penniless policyholder; (b) the policyholder with substantial assets; (c) the policyholder dependent on ongoing lines of credit to do business; (d) the rich policyholder with ample available assets for execution; (e) the policyholder with a big business deal pending that could be affected by the judgment; (f) the policyholder who hates the claimant and wants to stiff the claimant; and (g) the policyholder in need of available insurance who will not be able to get insurance if the loss is upheld. We will try to highlight critical differences in the perspectives of these types of policyholder as we go.

II. STRATEGIC CONSIDERATIONS A. Perspectives of the Players

The typical liability case presents three key players: the claimant, the insured/defendant and the insurer. The claimant should seek to push all appellate deadlines, particularly the entry of judgment. The closer to the point where a bond must be filed, the closer to possible resolution. The claimant must demonstrate the ability and willingness to aggressively pursue collection efforts, while at the same time evaluating and entertaining a possible settlement with the insured that would permit the claimant to acquire rights against the insured’s carrier.

The insured defendant is best served by a prompt settlement. Second-best is a settlement with the claimant that shifts the fight to one between the claimant and the carrier. This option is second-best because litigation and thus the involvement of the insured and its employees continues if a bad faith coverage case is to follow. This likely includes the continued discovery of embarrassing information about the insured company and its liability in the case.

The insurer typically wants delay. Strangely, the coverage decision has not really been made before the verdict. Thus, the carrier will seek delay to acquire information on (a) the coverage issues, including an opinion, and (b) the merits of any possible appeal. The carrier will also need time to prepare for the filing of a bond. In this case, coordination of the two carriers would be required in order to post a single bond.

B. Policyholder Considerations The policyholder is best served by not getting too

close too soon to either the claimants or the carrier. The fact is that most claimants are strongly desirous of "cashing the check." Thus, the claimant in fear of a long, drawn-out, potentially meritorious appeal, that will highlight claimants' counsel's errors in trying the case, will have a greater incentive to settle if the carrot of an assignment is not dangled too early. The worst thing for the claimant is thus some action that will stay execution and thus allow the appeal to go forward without the insured being exposed. Bankruptcy is also a dangerous alternative from the claimant's perspective. It is often a foreign court and procedure, and of course it is "federal."

Likewise, the carrier is more likely to move quickly to the bargaining table if there is fear that an agreement with the claimant can be reached and the appeal dismissed. Carriers typically and logically like having two ways to win, the appeal of the merits and the coverage defenses.

1. Hire Independent Insurance Counsel

It is critical for the insured to hire its own coverage lawyer when it appears that there will be a significant coverage dispute or if the case presents a Stowers problem. Often, this does not appear to happen until after a disastrous verdict has been reached. At this late date, the evaluations must be done in a hurried atmosphere. Critical decisions must be made that may impact the very life of the insured entity. Counsel hired early on can carefully communicate with the insurer in such a way as to greatly enhance the bad faith potential against the carrier and, potentially best of all, assist in pushing one and all to an early settlement.

2. Push the Carrier for a Decision The policy-holder should begin an active

correspondence campaign to push the carrier to make the coverage decision as soon as possible. An alternative strategy is to sit back, let the carrier delay, and then, as the deadline appears relatively close, hit hard with correspondence noting the last minute jam the insured is being placed in without any obvious indication of relief. Clearly, the insured will urge that a prompt decision is critical to planning on how to deal with the possibility that the carrier walks away and denies.

3. Appellate Process and Selection of Counsel The policyholder should also consider asking for

independent counsel regarding the appeal. As a general rule, an appellate specialist from a firm other than the one trying the case brings a fresh, objective look at the case. There must be coordination with existing trial counsel because of the information gap


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provided by the fact there will be no copy of the record available for some time after the verdict. Moreover, the insured should consider hiring bankruptcy and/or a collection specialist to aid with understanding and planning to deal with the possibility that no bond is filed.

The Texas courts and those interpreting Texas law have clearly held that if the carrier offers a conditional defense, subject to reservation of rights, the insured has the right to insist that the carrier either provide an unqualified defense and thus waive its policy defenses or that it allow the insured to select its own attorney at the cost of the carrier. See, e.g., Steel Erection Co. v. Travelers Indem. Co., 392 S.W.2d 713 (Tex. Civ. App.--San Antonio 1965, writ ref'd n.r.e.)(holding that if the carrier does not waive its defenses, it must pay for defense counsel selected by the insured, because the carrier is not in the “position to defend the lawsuit, due to its conflict with [the insured], [and] is liable for the expended attorneys fees” of the attorney of the insured’s own selection).

The court in American Eagle Ins. Co. v. Nettleton, 932 S.W.2d 169, 174 (Tex. App.—El Paso 1996, writ denied), the court held:

Upon receiving notice of the reservation of rights, the insured may properly refuse the tender of defense and defend the suit personally.

Id.

In Britt v. Cambridge Mutual Fire Ins. Co., 717 S.W.2d 476, 481 (Tex. App.--San Antonio 1986, no writ), the court held that “the reservation of rights served as notice to [the insured] of the potential conflict of interest . . . [The insured] had the privilege of rejecting the limited representation and hiring a lawyer of his own choosing and looking to [the insurer] for payment of the attorneys' fees." Id. at 481.

In Rhodes v. Chicago Ins. Co., 719 F.2d 116, 120-21 (5th Cir. 1983) (Texas law), the insurer offered to defend subject to reservation of rights. The court observed:

When a reservation of rights is made, however, the insured may properly refuse the tender of defense and pursue his own defense. The insurer remains liable for attorneys' fees incurred by the insured and may not insist on conducting the defense. Refusal of the tender of defense is particularly appropriate, where, as here, the insurer's interests conflict with those of the insured.

Id. at 120-21 (emphasis added).

The cases allowing the insured the option of selecting independent counsel have turned on the provision of a reservation of rights letter. Thus, the threshold “conflict” is not clearly a battlefield for debate in Texas as it is in some jurisdictions. Some courts interpreting Texas law have enforced the right of the insured to select counsel where the underlying case merely involves alternative allegations, some of which are covered and some of which are not. LaFarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389, 397 (5th Cir. 1995); accord Rhodes, supra. As summed-up by the Fifth Circuit in Hartford, the carrier has the prerogative to reserve its rights to deny coverage “for any claims it might determine to be outside the policy,” and the insured likewise has the right to “refuse such a conditional tender of defense and proceed on its own.” The court added: “In these circumstances, Hartford remains obligated for that portion of the attorneys fees incurred from the time the duty to defend arose . . . .” Id. Some courts, however, suggest that a conflict is at the heart of the need for the provision of independent counsel. See Steel Erectors, 392 S.W.2d at 553.

In Northern County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex. 2004), the court examined the circumstances under which an insured may reject a tender of defense by the carrier. In that case, the carrier accepted coverage. The dispute between the parties centered over whether venue should be changed and who got to make that decision.

The Supreme Court began by noting that there are defined circumstances when a carrier "may not insist upon its contractual right to control the defense." Id. The court noted that in State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625, 627 (Tex. 1998), it had held that where the carrier has the authority to make "defense decisions as if it were the client 'where no conflict of interest exists.'" 140 S.W.3d at 688. Not every conflict or disagreement about the defense is a conflict of interest that would later the right of the carrier to control the defense. To so hold would basically eliminate the carrier's right to control as set forth in the policy terms.

The court clearly held that a conflict regarding the existence or scope of coverage would amount to a disqualifying conflict. Id. The court added that the reservation of rights "creates a potential conflict of interest." Id. (emphasis added). Importantly, the court observed that it is only when "the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends," that the conflict "will prevent the insurer from conducting the defense." Id. (citing 1 ALLEN D. WINDT, INSURANCE CLAIMS AND DISPUTES, sec. 4.20 at 369 (4th ed. 2001)). Relying again upon Windt, the court observed that there are four circumstances when "the insured may rightfully refuse to accept the insurer's defense":

http://www.TexasBarCLE.com/CLE/PMCasemaker.asp?table=TX_caselaw&volume=392&edition=S.W.2d&page=713&id=45198_01




http://www.TexasBarCLE.com/CLE/PMCasemaker.asp?table=US_5thcircuit&volume=719&edition=F.2d&page=116&id=45198_01








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(1) when the defense tendered "is not a complete defense under circumstances in which it should have been," (2) when "the attorney hired by the carrier acts unethically and, at the insurer's direction, advances the insurer's interests at the expense of the insured's," (3) when "the defense would not, under the governing law, satisfy the insurer's duty to defend," and (4) when, though the defense is otherwise proper, "the insurer attempts to obtain some type of concession from the insured before it will defend."

Id. It is hard figure out exactly what all of this means. It is clearly based on an out-of-state commentators musings about decisions in other jurisdictions. Moreover, it is quintessential dicta to a large extent. It will, however, undoubtedly lead some to urge that a mere reservation of policy defenses does not create a "conflict" sufficient to allow the insured to select its own counsel at the expense of the carrier. One would expect that if such a change had really been considered and intended, it would have required some discussion of Steel Erectors and the numerous other such cases. It would also require some reconciliation of the court's holding in Employers Cas. Co. v. Block, 744 S.W.2d 940, 944 (Tex. 1988), that a reservation creates a conflict sufficient to destroy privity and thus leads to the carrier not being collaterally estopped based on the judgment in the underlying suit. How can the conflict be such as to negate privity but not be sufficient to allow the appointment of independent counsel?

The court continues to thrash around the concept that there are circumstances where what happens in the underlying suit has something to do with coverage, in other words when liability facts and coverage facts are one and the same:

1. Employers Cas. Co. v. Block, 744 S.W.2d

940, 943 (Tex. 1988)(emphasis added), holding: In the instant case, the recitation in the agreed judgment that the "Blocks sustained property damage to their residence as a result of an occurrence on August 6, 1980" was not essential in determining CSI's liability, and therefore was not a material issue in the agreed judgment. Likewise, in light of the fact that the respective positions of CSI and Employers Casualty regarding coverage were in conflict, no privity existed between the parties, thus precluding the application of the collateral estoppel doctrine.

2. Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 83 (Tex. 1997), holding that:

It may sometimes be necessary to defer resolution of indemnity issues until the liability litigation is resolved. In some cases, coverage may turn on facts actually proven in the underlying lawsuit. For example, the plaintiff may allege both negligent conduct and intentional conduct; a judgment based on the former type of conduct often triggers the duty to indemnify, while a judgment based on the latter usually established the lack of a duty. In many cases, however, the court may appropriately decide the rights of the parties before the judgment is rendered in the underlying tort suit.

3. Utica Nat’l Ins. Co. v. American Indemnity

Co., 141 S.W.3d 198, 203 (Tex. 2004), quoting the above section from Griffin, but holding that the underlying suit did not actually address the pertinent coverage question of whether the insured's liability was "because of" or based on professional malpractice.

4. Northern County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex. 2004)(emphasis added), holding that when "the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends," that the conflict "will prevent the insurer from conducting the defense."

Thus, the concept of what things are decided in the underlying suit and their effect involve four distinct but related areas:

1. Collateral estoppel; 2. Justiciability in a declaratory action of the

duty to indemnify; 3. Whether a conflict is sufficient to disqualify

the carrier from defending the underlying suit;

4. Whether the conflict is one that requires a reservation of rights.

Collateral estoppel does not apply to not bind the carrier because of the absence of privity. The insured is always bound, however, to the extent a coverage issue on all fours with the policy terms is involved in that suit. Much of Utica involves an extended discussion of whether professional malpractice was excluded from the charge in the underlying suit. The









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insured was trying to urge that the verdict was somehow binding on the carrier as to the theories submitted. The court disposed of the issue with no mention of collateral estoppel, or the requirements of materiality and privity. The court simply found the charge did not resolve the question.

At least one case has applied Davalos in the context of the doctrine of independent counsel, Housing Authority of the City of Dallas v. Northland Ins. Co., 2004 WL 1877783 (N.D. Tex. 2004). The court found that there was a disqualifying conflict because the coverage defense involved a willful act exclusion, and there were allegations of willful acts in the underlying suit. The court found that because the same facts were involved and because the reservation of rights created a potential conflict of interest, the carrier could not conduct the defense of the insured. Id. The court held that the insured actually refused the tendered defense because of concerns it had about the slow progress of similar cases under the same defense firm, which was not a disqualifying conflict. Despite this fact, the court held that carrier simply could not lawfully proceed to defend in light of the actual disqualifying conflict. Id.

It is interesting to note that none of these cases discuss the concept of the "manipulable" defense. In other jurisdictions, the existence of a disqualifying conflict has revolved around whether the underlying defense would present the opportunity to affect coverage in some manner or to manipulate the case to non-coverage. In State Farm Lloyds v. Williams, 791 S.W.2d 542, 552 (Tex. App.--Dallas 1990, writ denied) (Williams I), we have a classic case of a non-manipulable defense. The community property of the wife's estate was liable for the torts of the husband regardless of what defense was presented; she was herself not guilty of excluded intended harm under the facts. Thus, regardless of what defense counsel did, it would not affect coverage.

The Texas Supreme Court, therefore, has not directly addressed whether independent counsel must be provided in Texas and has not discussed under what conditions such counsel must be provided. Another continuing issue not addressed by the lower courts discussing independent counsel is the question of reasonableness of fees and the application of guidelines.

Again, because the insured certainly does not want to harm the appeal and thus potentially breach the policy cooperation provisions, allowing the continued use and assistance of trial counsel is smart. The fact an insured has not previously requested independent counsel would not appear to provide a barrier to doing so post-verdict.

C. What Are the Options for Protection and/or Resolution

Listed below are the options for resolution/protection post-verdict in lieu of the posting of a supersedeas bond that the various interested parties must consider, along with the plusses and minuses of each option: • Policyholder Bonds the Appeal--The Longshot

in the Past May Become the Rule After House Bill 4

As a general rule, the policy obligates the carrier only to pay for the costs of a supersedeas bond; the carrier is not required by the terms of most standard liability policies to file a bond if the it believes that the claim is not covered. In the past, the insured was placed under enormous pressure to assign its rights against the carrier unless it had the financial wherewithal to put up 100% collateralization of the full bonded amount. In enacting House Bill 4, the legislature assured that no bond need require more than half of the insured's assets be committed as collateral and thus tied up, if you will. Moreover, as will be discussed at length below, insurance is viewed as an asset not subject to dissipation and thus may in fact be excluded from bond amount calculations.

o Pluses: This option used to not be

available at all unless the insured is financially solid. After the passage of House Bill 4, the insured is only required to post a supersedeas bond for actual damages, up to an amount that is equal to 50% of the "net worth" of the insured. TEX. CIV. PRAC. & REM. CODE, sec. 52.006 (a), (b). The insured still has the option of further reducing the amount of the bond upon proof of "substantial economic harm" under TEX. CIV. PRAC. & REM. CODE ANN. Sec. 52.006(c). In order to bond without reliance on these measures, the insured would most likely have to put up collateral and thus freeze its use for the balance of the appeal. A sizeable judgment makes this very impractical. If it can be achieved, bonding obviously permits a meritorious appeal to go forward, which may be very important if coverage is going to be a tough road to hoe.

o Minuses: Funds are committed and frozen absent a special business




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connection with a competent and financially solid surety.

• Carrier Pays And Settles.

o Pluses: Obviously the best scenario for

the policyholder. The insured can strongly motivate settlement by refusing to do an assignment and covenant with the claimant and continuing to threaten the carrier. This way the insured is pressuring both of its antagonists.

o Minuses: Negative loss history and special problems for professionals, such as health care professionals. The settlement does not necessarily end extra-contractual claims from being made.

• Assignment And/Or Covenant Agreement

With Claimant.

Why would the claimant want an assignment? Absent an assignment, the claimant has no standing generally to sue for extra-contractual liability against a liability carrier. No duty is owed by the carrier to the claimant absent some special statutory scheme, such as the automobile financial responsibility limits. Once a judgment is obtained, the claimant, as judgment creditor, has the right to collect against the carrier up to the amount of policy limits and no more. Thus, to go beyond limits, the claimant must get an assignment or force a settlement agreement including amounts in excess of limits.

o Pluses: The insured is protected and

the risk of the coverage defense falls on the claimant. This is as close to full protection as possible without getting it.

o Minuses: The matter continues in the form of a bad faith case, which requires continued involvement and cooperation of the insured and its employees and continued potentially embarrassing discovery. There is always the peril that the claimant will claim that surprises regarding the coverage case amounted to fraud on the part of the insured. Moreover, even a partial covenant not to execute could still have an impact on financial institutions with which the insured does business, e.g., available lines of credit, etc. Finally, any chance of reversing the verdict will likely be lost because typically the dismissal of

any appeal is a critical part of the deal. Often, dismissal itself may be urged as a breach of cooperation by the carrier. If the carrier has already breached the contract, e.g., violated Stowers, then the insured is excused from performing these conditions. Quorum Health Resources, L.L.C. v. Maverick County Hosp. Dist., 308 F.3d 451, 468 (5th Cir. 2002); see also Employers Cas. Co. v. Block, 744 S.W.2d 940, 943 (Tex. 1988). This scenario is the worst for the carrier because it loses the leverage of a good appeal and is immediately thrown into a bad faith suit. Care should be taken by the claimant and insured not to potentially run afoul of Gandy by arranging the dismissal of a meritorious appeal. Also, the carrier can argue that the damages to the insured must include consideration of what the appeal was likely to have achieved.

• Backing Agreement with the Carrier

o Pluses: If drafted correctly, this agreement should require the carrier to be responsible regardless of coverage or limits for the claim in question. The insured should avoid any such proposal that limits the carrier’s obligation to the one time appeal of the underlying claim because in the event of a new trial, the exposure could be even greater. This agreement also anticipates the continuation of the appeal. In short, carriers believing in the merits of the appeal can get their shot at it by entering such an agreement. This has the added benefit for the insured of reversal and vindication.

o Minuses: The agreement does not amount to a release from the claimant. Thus, if the carrier becomes insolvent, the insured could very well be left holding the bag.

• Bankruptcy

o Pluses: Bankruptcy appears to provide

an interesting alternative to the more typical assignment and covenant. The results are the same. The insured is fully protected and the insurer is not. There is some potential that at least a portion of the proceeds could be




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retained by the bankrupt estate as opposed to a complete give-away. The insured forced into bankruptcy has possibly new and additional damages that can be claimed in the bad faith case. St. Paul Surplus Lines Ins. Co. v. Dal-Worth Tank Co., 974 S.W.2d 51 (Tex.1998). For mass toxic tort defendants, the use of “pre-pack” bankruptcies provide an interesting device that is very similar to a “sweetheart” deal like that banned in State Farm Fire and Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex.1996). The courts have not resolved whether Gandy is superseded by federal law in this area.

o Minuses: The primary negative of bankruptcy is that it clearly damages the reputation of the insured. Nevertheless, the stigma today is not as great as it once was. The assignment and covenant can get the insured to the same place without the stigma of bankruptcy. The bankruptcy action still presupposes the continuation of the insurance bad faith case, which means that the insured still does not achieve a complete resolution and is still subject to the hassle of being involved in the bad faith case as a witness and source of documentary evidence.

• Sell the Extra-Contractual Claim to the

Insurance Carrier o Pluses: The goal is to get the carrier to

agree to back the judgment in exchange for an assignment of the extra-contractual claim to the carrier. Another more likely variation is to simply sell the extra-contractual cause of action for cash. The intended result is that the insured loses the one thing of value that he or she had, thus perhaps forcing the claimant to settle or be more reasonable.

o Minus: If this deal is done post-verdict, it is likely it will be alleged to have been a fraudulent transfer. Moreover, the carrier remains exposed to the claimant, as judgment creditor, at least up to the policy limits. The insured under this approach achieves little other than vengeance against the claimant, who is seen as the real enemy.

• Enter a Matagorda Agreement With the Carrier

o Pluses: This type of agreement works

best where there is a coverage dispute that is within the policy limits. Under this type of agreement, the carrier fronts the money necessary to bond the case in exchange for the right to pursue the insured for the uncovered portions in the event the carrier has to pay the claim. It can be used to facilitate an appeal in a case with meritorious appellate points. It is similar in terms of benefits to the “backing” agreement discussed above. The hope is to achieve final protection and thus cap the loss in exchange for the opportunity to appeal the underlying suit and have a chance of getting the non-covered portions back at a later time. This scheme only works, of course, with a well healed as opposed to a judgment-proof insured.

o Minuses: For the policyholder, the good news is that someone else is fronting the money to suspend execution. The bad news is that the insured is still subject to a suit for reimbursement. If it follows after the appeal, the evidentiary trial may have long since gone stale.

o Warning: The Supreme Court is reexamining whether the Matagorda rule barring unilateral reservation of the right of reimbursement by the carrier should be the law in Texas. Excess Underwriters At Lloyd's, London and Certain Companies Subscribing Severally but not Jointly to Policy No. 548/TA4011F01 v. Frank's Casing Crew & Rental Tools, Inc., 93 S.W.3d 178 (Tex. App.--Houston [14 Dist.] 2002, petition for review granted). If the Court overrules Matagorda, the carrier could chose to unilaterally settle the underlying suit or appeal it, then settle or satisfy the judgment if it is upheld, and then seek reimbursement against the insured. This scheme will remain problematic as to amounts in excess of the policy limits, which would appear to be subject to a direct challenge as being “voluntary” or the acts of a “volunteer.”





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• Attempt to Get Court Approval to Modify the Amount of the Bond

o Pluses: Allows the carrier to get the

case bonded without committing itself and waiving coverage by fully bonding the case. Allows a meritorious appeal to go forward as a method for reducing the value of the claim. If the rules work as intended, the claimant is protected against the wasting of assets.

o Minuses: The process of applying for this relief relies on the disclosure of significant amounts of financial information which is invasive and could be later used as a blueprint for collection efforts if unsuccessful.

• Private Non-Execution Agreement With the

Claimant o Pluses: In this situation, the parties

agree that for the immediate payment of a guaranteed sum, the claimant will promise not to execute until a date certain after the exhaustion of all appeals. See TEX. R. APP. P. 24.1(A)(1); see, e.g., Matthiessen v. Schaefer, 807 S.W.2d 825, 826 (Tex. App.—San Antonio 1994) (parties agreed to use a letter of credit), rev’d on other grounds, 915 S.W.2d 479 (Tex. 1995). For the carrier, this again allows the appeal to go forward without having to waive coverage defenses by agreeing to post a bond. It is beneficial to the insured in that a meritorious appeal and thus exoneration are possible.

o Minuses: The insured is still exposed, and it will likely need to file suit against the carrier to protect against passage of the statute of limitations unless the carrier agrees to provide a tolling agreement. I have never seen this mechanism actually work. The problem for claimants is that it sets them up for a meritorious appeal to go forward. The claimant’s interests in that situation are better served by settling with the insured with an assignment/convent agreement and dismissing the appeal.

• Policyholder Stays the Course and Brings the Bad Faith Action Itself

o Pluses: This allows the policyholder to

have a chance to recover the bad faith damages itself, sharing only the judgment amount and interest with the claimant.

o Minuses: Most policyholders with a significant judgment against them would be shut down and put into bankruptcy or out of business absent a settlement, bond or some other protective arrangement. Large corporations can potentially stay the course, smaller ones cannot.

In any event, as will be discussed below, the claimant does have the power, according to some, to force a turnover of the insured’s rights against the carrier, particularly if the insured has brought the suit. Ironically, the insured is under pressure to bring suit because the statute of limitations accrues at the very least upon the judgment in the underlying suit becoming final, so long as the underlying judgment has not been superseded. Street v. The Honorable Second Court of Appeals, 756 S.W.2d 299 (Tex. 1988). Indeed, the bad faith case may not be stayed or abated by the trial court in the bad faith case if the judgment in the underlying suit has become final. Id. This would appear to be at odds with the approach taken in the context of legal malpractice limitations accrual.

D. Special Carrier Considerations 1. Reservation of Rights

The carrier should immediately review its coverage position in light of the verdict rendered. A reservation of rights letter directly addressing the verdict and what parts if any are covered or not and what the carrier’s position is regarding bonding should be provided in time for the insured to make critical decisions regarding how it intends to handle the predicament presented by the excess, potentially uncovered verdict. Consideration should also be given to a prompt declaratory action, which includes the judgment creditor as a party, if no declaratory has previously been filed. 2. Hiring Special Counsel

A truly catastrophic verdict should trigger an immediate call to an appellate specialist who has previously handled appeals of the magnitude as that presented to the insured and insurer. As noted above, the insured may hire their own counsel. Care should be taken to include trial counsel in the post-verdict




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phase. Trial counsel’s first-hand knowledge of the record, while often colored by the experience and emotions of the trial, is always very helpful in sorting through and addressing issues prior to the completion of an official trial record or transcript. 3. Declaratory Actions

The carrier with serious coverage issues should address them through a declaratory action if at all possible prior to the underlying suit proceeding to trial. The Supreme Court has indicated that the old rule that indemnity is not justiciable prior to trial of the underlying suit is not necessarily still applicable. If there is no duty to defend, then the trial court may declare that there is no duty to indemnify, since the duty to defend is greater than the duty to pay. The converse is, of course, not true. Establishing a duty to defend does not establish a duty to indemnify. Utica Nat’l Ins. Co. v. American Indemnity Co., 2003 WL 21468776, *6 (Tex., June 26, 2003) (“Merely because Utica had a duty to defend the underlying suit, however, does not mean that it is obligated to indemnify the insured. . . .”); accord Administaff, Inc. v. American International Specialty Lines Ins. Co., 2003 WL 22080760, slip op. at *5 (5th Cir., Sept. 9, 2003).

The most troublesome issue left unresolved in Texas is to what extent declaratory actions may be brought to resolve indemnity prior to resolution of the underlying suit outside of the context where there is no duty to defend.

Declaratory actions, if they can be brought, should be brought. Benefits are clearly provided under Gandy to the carrier who defends and attempts to get a declaration. No carrier is desirous of having coverage issues left unresolved after a bad verdict against the insured without a declaratory action at least in the works. a. Justiciability Barriers to Early Indemnity

Declaratory Actions Texas courts have long followed the rule that the

duty to defend presents a justiciable controversy sufficient to invoke jurisdiction for a declaratory action brought prior to resolution of the underlying suit. See, e.g., Fireman's Ins. Co. v. Burch, 442 S.W.2d 331, 332-34 (Tex. 1968). As to the duty to indemnify, the courts reasoned that because the insured might prevail in the underlying suit and thus never have to pay a judgment, there could be no justiciable controversy as to the duty to indemnify until after the underlying suit was resolved. Otherwise, the courts have reasoned that they would be improperly providing an advisory opinion.

b. Gandy Opening—Seeking A Solution In State Farm Fire & Cas. Co. v. Gandy, 925

S.W.2d 696, 714 (Tex. 1995), the court first hinted that pre-judgment declaratory actions on indemnity might be available under Texas law. The court held that an insurer must either accept coverage or make a good faith effort to resolve coverage before adjudication of the plaintiff's underlying claim. The court even went so far as to suggest that the claimant may wish to participate in the coverage litigation.

Many refused to find that Gandy changed the long-standing prior law holding that pre-judgment adjudication of indemnity was constitutionally improper. Indeed, most thought it very curious that a long-standing rule of constitutional dimension would be altered by a passing comment without any real discussion of the issue or the prior case-law such as Burch. c. Griffin Exception—Not Open-Ended

The Supreme Court revealed another wrinkle on this issue in Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 84 (Tex. 1997). In that case, the court held that in the factual circumstances presented in that case, the insured's right to indemnity could be determined prior to resolution of the underlying suit. The court in Griffin reasoned that the controlling constitutional provision at issue in Burch was Article V, section 8, of the Texas Constitution, which required a determination that the amount in controversy had to be valued at or amount to five hundred dollars. The court noted that until the underlying case went to judgment, no one could be sure of whether the amount in controversy requirement was met. One wonders why this requirement would not also present a problem in duty to defend cases as well. Also, it is indeed strange that this particular "amount in controversy" point was not discussed at all in Burch.

The Griffin court held that Section 8 has now been amended. The court held that the language was sufficiently broadened to permit a court to resolve jurisdiction issues pertaining to pre-judgment declaratory actions regarding indemnity prior to resolution of the underlying suit. The court also noted that it had "hinted" at this change in the law in Gandy when it observed that indemnity issues are not always "non-justiciable before liability is resolved." Id. at 83.

The court held that only some indemnity issues are justiciable. In this respect, the court made two critical points. First, the court warned:

It may sometimes be necessary to defer resolution of indemnity issues until the liability litigation is resolved. In some cases, coverage may turn on facts actually proven in the underlying lawsuit. For example, the






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plaintiff may allege both negligent conduct and intentional conduct; a judgment based on the former type of conduct often triggers the duty to indemnify, while a judgment based on the latter usually established the lack of a duty. In many cases, however, the court may appropriately decide the rights of the parties before the judgment is rendered in the underlying tort suit.

Id. (emphasis added). Of course, the example given is erroneous and contrary to prior Texas law. A mere finding that the insured is negligent does not submit and will not bind the carrier as to whether the intended harm exclusion or the accident requirement of the policy is met.

Second, the court in Griffin expressly limited its holding to the situation where the insured has no duty to defend and the same reasons that would negate the duty to defend negate any possibility the insurer would ever have a duty to indemnify. Thus, while "actual facts" are typically used to determine the duty to indemnify, the court held in Griffin that a court could hold that there was no duty to indemnify if there was no duty to defend under the pleaded facts. This court based its decision on the notion that the duty to defend is broader than the duty to indemnify, and if there was no duty to defend, there logically could be no duty to indemnify. Thus, Griffin is not an unlimited holding that declaratory actions will work in every case for determining whether there is a duty to indemnify, prior to resolution of the underlying suit. d. Restrictive Treatment By Lower Courts

The courts of appeal generally adopted a narrow reading of Griffin. In Calderon v. Mid-Century Ins. Co. of Texas, 1998 WL 898471, *4 (Tex. App.—Austin 1998, no writ), the court held that there was a duty to defend and thus it could not determine indemnity prior to resolution of the underlying suit. The court held that the underlying suit would determine whether there was a duty to indemnify and that to act prior to resolution of that suit would be "premature."

The San Antonio Court of Appeals reached the same result in Foust v. Ranger Ins. Co., 975 S.W.2d 329, 331 (Tex. App.—San Antonio 1998, writ denied). The court held there was a duty to defend and thus Griffin did not apply to allow indemnity to be determined. The court emphasized that Griffin did not profess to overrule the Burch rule against providing advisory pinions regarding indemnity. Id. at 332 n. 1. e. Matagorda—New Momentum

In Matagorda County v. Texas Ass’n of Counties Govt. Risk Mgmt. Pool, 52 S.W.3d 128 (Tex. 2000), the court held that a carrier was not entitled to

unilaterally reserve the right to and then sue the insured for reimbursement of amounts tendered towards settlement of the underlying case against the insured based on the fact that there is no coverage. Insurers have repeatedly urged that unilateral reimbursement is a critical protective device to avoid Stowers exposure. The court in Matagorda did permit the use of an agreement between the insured and the insurer to allow reimbursement, bilateral reimbursement.

The court in Matagorda reasoned that there was no great need for unilateral reimbursement in light of the availability of an early declaratory action brought prior to resolution of the underlying suit. The court stated that if the insured will not consent or agree to allow reimbursement, the carrier can always "seek prompt resolution of the coverage dispute in a declaratory action." The court broadly suggested that declaratory actions are readily available on questions of indemnity prior to resolution of the underlying suit. Id. at 135. The court added:

In Gandy, we required insurers either to accept coverage or make a good-faith effort to resolve coverage before resolving the underlying claim . . . TAC's position undermines Gandy by reducing insurers' incentive to seek early resolution of coverage disputes.

Id. The effect of this court's ruling will clearly be to encourage the filing of a declaratory action on coverage in every action involving coverage issues. This ruling will lead to great confusion and debilitating delay. The caseloads of the courts will double for every case with a coverage issue. Unless the court's statements in the Matagorda opinion regarding Griffin were intended to indicate that Griffin is being expanded, then declaratory actions are absolutely not available to resolve whether there is a duty to indemnify in most cases. They are certainly not available where there is a duty to defend, the opposite situation from that presented in Griffin. Declaratory actions would also not appear to be available where only some claims or damages may be covered.

The Griffin exception has now been followed in at least one federal declaratory action. In Southwest Tank and Treater v. Mid-Continent Cas. Co., 2003 WL 223445, *6 (E.D. Tex. 2003)(Davis, J.). In that case, the court broadly held that if there is no duty to defend, then there will not be a duty to indemnity. The court held that there was no duty to defend and thus no duty to indemnify based on the exclusion for the repair or replacement of property because the insured’s work was performed on it.

In Westport Ins. Co. v. Atchley, Russell, Waldrop & Hlavinka, 267 F. Supp.2d 601, 626 (E.D. Tex. 2003), the court held that the general rule in Texas is




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that indemnity cannot be determined until resolution of the underlying suit. The only exception, the court noted, is when the court determines that there is no duty to defend and no set of facts alleged would invoke coverage, citing Griffin. The court also refused to resort to extrinsic evidence to determine the duty to defend and thus also the duty to indemnify. f. Utica—Some Additional Explanation?

In Utica Nat’l Ins. Co. v. American Indemnity Co., 2003 WL 21468776, *6 (Tex., June 26, 2003), the Supreme Court gave slightly more insight into when indemnity can or cannot be determined as a matter of law based on the pleadings. The degree of insight is muddied by the fact this is a plurality opinion. Interestingly, the court made these comments in a case in which the parties agreed that the duty to defend could be determined as a matter of law and in which the underlying suit had already been settled and the coverage litigation filed afterward. One of the issues presented in the case was whether the injection of patients with an infected hypodermic needle was a cause of the insured’s liability. In other words, the court concluded that the policy in question, which excluded coverage for claims “due to” professional services, required proof that the professional act was a liability-causing act and not an innocent act that was a part of the chain of causation. Id. at *4-5. The Supreme Court noted that in Griffin, supra, it had held that indemnity often turns on the resolution of factual issues. The court, quoting Griffin, stated:

It may be sometimes necessary to defer resolution of indemnity issues until the liability litigation is resolved. In some cases, coverage may turn on facts actually proven in the underlying lawsuit. For example, the plaintiff may allege both negligent conduct and intentional conduct; a judgment based upon the former type of conduct often triggers the duty to indemnify, while a judgment based on the latter usually establishes a lack of a duty.

Utica, supra, at *6 (quoting Griffin, 955 S.W.2d at 84). The court applied this rule to the case before it, reasoning:

The injured patients alleged both professional and general liability. A determination by the finder of fact that the infection was caused by the breach of a professional standard of care—for example, a finding that the infection was caused by the doctor’s negligent administration of the anesthetic—would negate [the carrier’s] duty to indemnify [under the professional services

exclusion]. If, however, the professional services were rendered with due care, then the exclusion would not apply.

Id. Thus, it would appear that the fact of the settlement does not foreclose in any way the ability to resolve true coverage-related factual issues. Is the court suggesting that since the case basically came to it based on facts alleged and limited by agreement of the parties to those plead somehow makes Griffin relevant?

It is important to note that the opinion suggests that in appropriate cases the Griffin exception can still be used to determine the duty to indemnify, even if the underlying suit has settled and the duty to defend is moot. Thus, the court could resolve a moot issue to resolve a live indemnity controversy.

Of course, the reasoning in Utica is bewildering. Normally, the duty to indemnify is determined by the actual facts upon which “liability” is based. Here, there was a settlement and thus the determination of “liability” was not contained in a verdict and/or judgment. The court appears to be suggesting that because of the “due to” language, the parties will actually litigate for the first time whether the injection itself was done negligently and thus could have created a liability “due to” professional services. The court does not appear to answer whether more than the “injection” itself could be considered. The insureds were also alleged to have been negligent in maintaining the medicine box where anesthetic vials were kept. The opinion certainly does not appear to foreclose the use of this “professional act” as a theory. A footnote to the opinion states that the parties agreed that this theory would involve general as opposed to professional conduct. Id. at 7 n.2. This agreement was only “for purposes of this appeal.” One would expect that the gloves will be off at the new trial on this issue. Nevertheless, the dissenting opinion of Justice Enoch suggests that the court has indeed cut off any theory that the administration of the medicine lock-box as a basis of professional liability subject to exclusion. Id. at *7. The court also does not answer the question of what happens if there are mixed findings, in other words some liability “due to” professional services and some not. The court clearly rejected the notion that the injection was professional and served as the hub of the wheel of all liability, thus invoking the concurrent cause doctrine or related and interdependent doctrine to cut-off all liability, discussed in the briefs but not explained by name in the opinion.

Utica is still pending. Both sides have filed motions for rehearing. These motions raise a number of issues, including whether the concurrent cause and/or related and interdependent rules till exist after the plurality decision.



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III. RESOLVING COVERAGE ISSUES AFTER AN ACTUAL TRIAL The courts frequently state that the duty to

indemnify is determined by the “actual facts establishing liability in the underlying case” as opposed to the pleaded facts. Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819 (Tex. 1997). We will briefly examine the rules for determining the duty to indemnify after an actual trial. A. Facts Versus Allegations

An “actual” fact appears to be one that is distinct from merely a pleaded or alleged fact. Allegations are not “actual facts,” regardless of whether they appear in pleadings, motions or settlement agreements. Western Alliance Ins. Co. v. Northern Ins. Co. of New York, 176 F.3d 825 831 (5th Cir. 1999) (citing Employers Cas. Co. v. Block, 744 S.W.2d 940, 943 (Tex. 1988) (holding that facts recited in a settlement agreement was not dispositive on the duty to indemnify)). Moreover, “factual allegations in a petition do not necessarily all become facts merely because of a settlement of the suit.” Id. B. Pleaded Facts Do Not Control

In Heyden Newport Chemical Corp. v. Southern General Ins. Co., 387 S.W.2d 22, 25 (Tex. 1997), the Court explained that indemnity depends on “what the facts are or what might finally be determined to be the facts,” while the duty to defend depends “on what the facts are alleged to be.” The reason for the rule is that indemnity depends, under the policy terms, on the insured having a “legal obligation to pay.” Id. Thus, the pleadings in the underlying suit are not dispositive unless it is determined that there is no duty to defend. Texas Medical Liability Trust v. Zurich Ins. Co., 945 S.W.2d 839, 843 (Tex. App.—Austin 1997, pet. denied). Stated another way, the pleadings can be used to establish there is no duty to defend and thus no duty to indemnify, but the converse is not true. In other words, establishing a duty to defend does not establish a duty to indemnify. See, e.g., American States Ins. Co. v. Bailey, 133 F.3d 363, 369 (5th Cir. 1998)(holding that if there is no duty to defend, there can be no duty to indemnify); Andrews Transport, Inc. v. CNA Reinsurance Co., Ltd., 166 F. Supp.2d 516, 520 (N.D. Tex. 2001)(following Bailey); Malone v. Scottsdale Ins. Co., 147 F. Supp.2d 623, 629 (S.D. Tex. 2001)(citing Farmers Texas County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 83 (Tex. 1997)).

The District Court in Great American Ins. Co. v. Calli Homes, Inc., 2002 WL 31761246, * 3 (S.D. Tex. Sept. 20, 2002)(Rosenthal, J.), held that the duty to indemnify “is not based on the pleadings in the underlying lawsuit, but ‘is triggered by actual facts establishing liability in the underlying lawsuit.’” Id. (emphasis added)(quoting Cowan, supra).

In Chiriboga v. State Farm Mut. Auto. Ins. Co., 2003 WL 124202, at *5 (Tex. App.—Austin 2003), the court, in examining the venue issue of whether a declaratory action substantially arises in a given county, held that the duty to indemnify is determined by looking at the following sources of information: (1) the pleadings in the underlying suit; (2) the insurance policy; (3) the actual facts adjudicated in the underlying suit; and (4) facts pertaining to the coverage defense of why a particular entity was deleted from the policy coverage. C. Pleadings Are Still Considered

According to one court, the pleading of a covered action is still necessary in order to assert that indemnity is available. In Reser v. State Farm Fire & Cas. Co., 981 S.W.2d 260, 264 (Tex. App.—San Antonio 1998, opinion supplementing decision on overruling of rehearing Aug. 26, 1998), the claimant deleted the only covered claim, defamation, from its pleadings. The court rejected arguments that the mere existence and the carrier’s knowledge that there were facts supporting a defamation claim still required a finding that there was a duty to indemnify. The court reasoned:

The claim . . . must be asserted by the third-party. It is not the duty of the insurer to point out to a third party that the facts discovered by the insurer during its investigation give rise to additional claims not asserted by the third party. Indeed such a course of action would be adverse to both the insurer and the insured. Thus, while [the insurer] had a duty to investigate the claim against [the insured], the claimant . . . had the burden of stating its claim.

Id. (emphasis added).

Therefore, it is clear that pleadings can be considered in “hunt and seek” situations, where the question posed is what allegations were actually made. In some situations, the pleadings, the judgment and the verdict can be used to determine what is otherwise a pure question of law regarding coverage. D. Actual As Opposed To Potential Or

Hypothetical Facts The “actual” fact requirement appears to be tied in

part to issues of justiciability recognized for many years by Texas courts. Generally, a trial court cannot determine the duty to indemnify and “declare the insurer’s liability to indemnify its insured for damages that might be assessed against the insured in a pending lawsuit.” J.E.M. v. Fidelity & Cas. Co., 928 S.W.2d 668, 672 (Tex. App.—Houston [1st Dist.] 1996, no
















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pet.). “Any determination of an insurer’s duty to pay would be hypothetical before judgment is granted against the insured, and the court’s opinion would be purely advisory.” Id. Thus, the duty to defend is potentially based on hypothetical facts, but the duty to indemnify must be made after the actual facts are determined. E. Causal Nexus – Facts Establishing Liability

The duty to indemnify is determined by the “actual facts establishing liability in the underlying case.” Cowan, supra, at 821. Stated another way, the duty to indemnify “is not based upon the third-party’s allegations, but upon the actual facts that underlie and result in liability.” American Alliance Ins. Co. v. Frito-Lay, Inc., 788 S.W.2d 152, 153-54 (Tex. App.—Dallas 1990, writ dismissed). Another court has described the rule as giving the court the freedom “to examine the facts of the underlying claim.” Cluett v. Medical Protective Co., 829 S.W.2d 822, 827 (Tex. App.—Dallas 1992, denied)(considering extensive evidence regarding claim by husband against his child’s pediatrician for the alienation of the affections of his wife; examining evidence regarding whether there was treatment involving the “transference” phenomena, a legal criteria for the existence of a professional responsibility on the part of the physician as a condition to coverage). Yet another court has described the rule as providing that “the duty to indemnify arises from proven, adjudicated facts.” Hartrick v. Great American Lloyds Ins. Co., 62 S.W.3d 270, 275 (Tex. App.—Houston [1st Dist.] 2001, no pet. (emphasis added)). “No duty to indemnify arises unless the underlying litigation establishes liability for damages covered by the insuring agreement of the policy.” Id.

In Figari & Davenport, L.L.P. v. Continental Cas. Co., 846 F. Supp. 513, 521 (N.D. Tex. 1994), the insured sued the carrier for indemnity for payments made under the Colorado fee-shifting statute for sanctions imposed for bringing a frivolous suit. The court, following the “actual facts” rule, held that it had to consider the trial court’s rulings regarding sanctions rather than the motion for sanctions itself.

One court has characterized the rule as follows: “The duty to indemnify arises from the actual facts that are developed to establish liability in the underlying suit.” Quorum Health Resources, L.L.C. v. Maverick County Hosp. Dist., 308 F.3d 451, 468 (5th Cir. 2002)(emphasis added). Obviously, it makes a big difference whether the actual facts are limited to what is developed in the underlying suit or whether discovery may begin anew in the coverage case.

F. Can New Facts Be Developed and Admitted in the Coverage Trial Beyond The “Historical Facts” Developed in the Underlying Suit? In Swicegood v. The Medical Protective Co., 2003

WL 22234928, *11 (N.D. Tex., Sept. 19, 2003)(Fitzwater, J.), the insured contended that new evidence beyond that developed in connection with the trial of the underlying suit should be admissible in the coverage suit, and the insurer argued that the evidence in the coverage trial is limited to that produced in the actual trial of the underlying suit. The court held that new evidence may be introduced regarding a matter that was not adjudicated in the underlying suit. Id. at 12 (citing numerous cases involving Texas law in which this rule was followed: Block, supra; Utica, supra; and Enserch Corp. v. Shand Morahan & Co., 952 F.2d 1485, 1496 n. 17 (5th Cir. 1992)). The court refused to find that some or all of the evidence introduced in the underlying trial is admissible in the coverage trial. The court reasoned that such an approach would gut the “actual facts” rule of any meaning. Id. at 13. The court summarized its rule as follows:

The court predicts that the Texas Supreme Court will hold that new evidence can be introduced at a coverage trial when the proof is necessary to resolve a controlling coverage question that was not conclusively decided in the indemnity [or underlying] suit. By “not conclusively decided” the court means the issue was not determined in a way that binds all affected parties in the coverage case (e.g., via collateral estoppel). An undecided issue could include one that the parties in the indemnity case had no reason to litigate, e.g., an exclusion from coverage, where the burden of proof would be on the non-party insurer.

Id. at *14. A classic example of an undecided issue would be a policy defense based on breach of cooperation, which clearly depends on facts at least in part extrinsic to those developed and presented at trial. A breach of cooperation involving discovery abuse by the insured could potentially involve historic facts and consequences.

Citing Griffin, supra, the court continued to recognize that there are some “questions of law” regarding coverage that can be decided “on the record of the underlying suit” so that no new evidence would be admissible. The court gave as an example the decision in Hartrick v. Great Am. Lloyds Ins. Co., 62 S.W.3d 270 (Tex. App.--Houston 2001, no pet.) In that case, the court determined an “occurrence” issue by looking solely to the verdict form and the judgment from the underlying case. The court also looked to





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Great American Lloyds Ins. Co. v. Mittlestadt, 109 S.W.3d 784 (Tex. App.—Fort Worth 2003, no pet. hist.), which involved the issue of whether the insured was held liable for “property damage.” The Swicegood court concluded that the question of law, really a form of “hunt and seek,” presented in Mittlestadt was appropriately resolved by looking only at the trial transcript, the policy and the judgment. The Swicegood court should have also noted, however, that this is really a situation in which the insured is collaterally estopped to claim any other damages as a result of the underlying suit. The material coverage issue in that instance was clearly presented and resolved by the underlying suit.

The Swicegood court rejected Medical Protective’s argument that Mittlestadt held that the indemnity inquiry is always limited to the transcript and judgment in the underlying case and the judgment. The Swicegood court held that the issue of whether the factual inquiry is always so limited was not presented in Mittlestadt. This limited inquiry is appropriate only, according the Swicegood court, when a question of law is presented. Of course, if the record below is conflicting or does not clearly resolve the particular coverage issue, it cannot be a question of law.

The Mittlestadt court began its analysis by stating that there is no duty to indemnify unless the “underlying litigation establishes liability for damages covered by the insuring agreement of the policy.” 109 S.W.3d at 787. The court further reasoned that “[c]onsequently, we look only to the facts established in the underlying litigation to determine if a duty to indemnify exists.” Id. Strangely, the carrier in that case also argued that the court should not consider facts and evidence differing from the underlying suit. Id. The court held that its review was limited to “the record from the underlying suit, which includes the pleadings, the trial transcript, the insurance policy, and the judgment, all of which were before the trial court in the indemnity [underlying] suit.” Id. n.1. The court apparently side-stepped the bigger issue urged by the carrier by deciding there was a duty to indemnify at the very least based on the historic facts noted. Thus, Swicegood appears to be correct that Mittlestadt does not really resolve the issue of whether new evidence beyond the underlying trial may be considered.

Of course, neither case discusses what evidence may be considered if the underlying case settles without a trial or verdict. The historic evidence would vary, depending of the stage at which settlement was reached. It would seem very unfair, and perhaps unconstitutional, to limit the evidence to historical facts in this setting. There very well could be little or no discovery even produced when the case settled.

The Swicegood court concluded:

[T]he proof to be admitted at trial will consist of historical evidence from the Underlying Lawsuit and expert testimony to assist the jury in allocating or apportioning covered and non-covered damages. In other words, the evidence to be admitted will be limited to historical documents such as the Swicegood and Clinic policies, the court’s opinion in Swicegood I, the pleadings, trial transcript, jury charge, verdict, and judgment in the Underlying Lawsuit, the briefs and opinion in Swicegood II, and expert testimony to help the jury understand this evidence and decide whether the damages in the Underlying Lawsuit should be allocated between covered and uncovered conduct, and, if so, how.

Id. The court indicated the experts would also be expected to possibly testify that all or none of the wrongful acts for which damages were awarded either were or were not for covered acts. Id.

Clearly, the “historical” evidence from the underlying dispute did not clearly resolve “as a matter of law” the proper allocation. Thus, the evidence should not have been limited to just “historical” evidence. The court recognizes this to some extent in finding that expert testimony would be permitted. It is hard to imagine other evidence that could be used to sort out such a confusing situation. Perhaps testimony from lawyers in the case, as experts or otherwise, could be considered. Certainly, the court is correct that re-litigation of the merits would be unnecessary.

The identification of the alleged wrongful acts to be considered in determining the allocation was apparently established as a matter of law by what was tried, submitted and found by the jury in the underlying suit. See, e.g., Fairfield Ins. Co. v. Stephens Martin Paving, 2003 WL 22005877, slip. op. *7-8 (N.D. Tex. 2003)(Cummings, J.)(using jury findings in underlying suit for comparison to policy terms to determine whether a “conscious indifference” finding of gross negligence was excluded by the intended harm exclusion in a general liability policy and to determine if coverage for punitives would be contrary to public policy). This restricts the consideration of allegations for allocation purposes to theories actually plead and tried in the underlying suit. In contrast to cases involving settlements pre-trial of the underlying suit, cases like Swicegood, which have gone to verdict and judgment, do not necessarily require testimony from attorneys in the case, unless otherwise designated as experts, in order to assist the jury in sorting out the allocation.

Cases involving a pre-trial settlement may involve consideration of only pleaded theories. In other words, the courts will look to what was alleged, not what could have been alleged. The contrary view would






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allow consideration of pleaded theories along with other theories that could have been made. Decisions such as Swicegood certainly suggest that the former, more restrictive approach, is most appropriate.

The decision in Swicegood gives no guidance as to what will guide the jury in making allocation between covered and uncovered claims.

In any event, as we will learn below, the evidence that can be used in the coverage trial requires intimate knowledge of the rules governing collateral estoppel. Due process requires that the carrier have had a full and fair opportunity to litigate issue pertinent to its rights under the policy. Numerous cases in the estoppel section below discuss the types of evidence, historical or other, that may be considered in determining the duty to indemnify where collateral estoppel either does or does not apply. G. Duty To Defend Trumped By Actual Facts

Post-Verdict? In Cowan, the court held that there was no duty to

defend because there was no allegation in the underlying suit of a physical manifestation of mental anguish and thus there was no “bodily injury” as required by the liability policy at issue in that case. The court chose not to hold that there is no duty to indemnify as a result. Thus, it appears that where the case has gone to verdict, the fact that there is no duty to defend does not necessarily control whether there is a duty to indemnify. The court recognized that there was evidence adduced at the trial of the liability case that might have involved proof of a physical manifestation, such as evidence of headaches, stomachaches and sleeplessness. Cowan, supra, at 826 n.5. Thus, the court determined only that there was no duty to defend because there was no allegation of “bodily injury.” The court specifically noted that it was not addressing whether this evidence would have been dispositive on the duty to indemnify. The court determined that there was no duty to indemnify based on a different policy defense, that there was an “occurrence.”

The court did not clearly state that it was determining the duty to indemnify based on the lack of a duty to defend or whether it was based on “actual facts.” The court found that there was no “occurrence” “under the facts of this case.” Id. at 826. It would appear to be clear from the context of the opinion that the court determined that there was no duty to defend based on the occurrence defense under the pleadings. The court noted only the carrier’s use of the eight corners in holding that it had no duty to further investigate coverage. The court based its decision on the fact that it was undisputed that copies of revealing photographs of the claimant were made by the insured and shown by him to his friends. Id. The court did not restrict the “actual” facts to just the evidence adduced at trial.

Interestingly, in State Farm Lloyds v. Borum, 53 S.W.3d 877, 884 (Tex. App.—Dallas August 17, 2001, review denied (Dec. 6, 2001), reh'g of pet. for review denied (Feb. 14, 2002))(LaGarde, J.), the court held that the Griffin rule could be used to determine the duty to indemnify if no other evidence, such as the statement of facts from the trial of the underlying suit was presented to the court. The court stated:

Although resolution of the duty to defend is now moot regarding the expenses incurred, it is dispositive of State Farm’s duty to indemnify because, where there is no duty to defend, there is no duty to indemnify.

Id. at 892. This very interesting decision, penned by one of the State’s most outstanding appellate judges, Justice Sue LaGarde, is discussed more fully below regarding a number of topics relating to proving the duty to indemnify. H. "Actual Facts" – Numerous Scenarios Involve

Interplay with Collateral Estoppel and Gandy A number of scenarios should be considered

regarding the variations in determining the duty to indemnify. From the outset, it must be understood that a breach of the duty to defend will not in any way bar the insurer from contesting coverage or relieve the insured from the burden of establishing a duty to indemnify.

First, if the underlying suit goes to a verdict and judgment, the jury findings and the judgment will frame the legal liability upon which the duty to defend will or will not be triggered. Hartick, supra, at 275; see Pierce Mortuary College v. Professional Training Schools, 212 B.R. 549, 559 (N.D. Tex. 1997)(relying on jury findings in trial of underlying suit against insured).

Second, if the coverage issue presented is one that is not “on all fours” with the jury findings in the underlying suit, then the carrier is free to litigate the coverage issue in coverage litigation. National Union Fire Ins. Co. v. Bourn, 441 S.W.2d 592 (Tex. Civ. App.—Fort Worth 1969, writ ref’d n.r.e.)(holding that finding of negligence in the underlying suit was not binding on the carrier where the only issue submitted to the jury was whether the acts were at least negligent, thus not giving the choice of determining whether the acts were truly negligent or whether they involved intended harm).

In Hargis v. Maryland American General Ins. Co., 567 S.W.2d 923, 927 (Tex. Civ. App.—Eastland 1978, writ ref’d n.r.e.), the court noted that “[t]he question of liability and coverage are separate and distinct.” Where the precise coverage issues are not addressed, there can be no possible application of collateral estoppel against the carrier. Id.



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The decision of the Dallas Court of Appeals in State Farm Lloyds v. Borum, 53 S.W.3d 877, 884 (Tex. App.— Dallas August 17, 2001, review denied (Dec. 6, 2001), reh'g of pet. for review denied (Feb. 14, 2002))(LaGarde, J.), illustrates many of the pertinent collateral estoppel and res judicata points. In that case, the insured molested his minor stepdaughter. Causes of action for negligence and battery were submitted to the jury in the underlying suit. Id. at 882. The jury findings, but not the trial transcript, were part of the record before the trial court on summary judgment in the coverage case. The jury found negligence and battery, but it refused to find malice. Id. The jury awarded damages for physical pain and mental anguish, loss of earnings, and medical care.

The Borum court rejected arguments by the insured that the carrier was bound by the judgment and findings made by the jury in the underlying case and that the carrier’s attempt to relitigate the negligence/intended harm issue was not an improper collateral attack on the underlying judgment. Id. The court noted that the jury’s damage findings were related to “injury” and “occurrence,” which were undefined by the charge. Thus, the jury findings did not conclusively establish that “bodily injury” as required by the policy was actually causally related to the non-intentional conduct. Id. It should be noted that the damage findings were tied solely to the negligence, and not the battery, findings. Further, the jury charge combined “Physical pain” together with “mental anguish,” thus preventing the court from being able to determine if any of the amounts actually awarded by the jury were for physical pain as opposed to mental anguish. Id. at 885.

The court in Borum held that the carrier was not bound by the findings under the doctrine of collateral estoppel. The court noted that when there is a coverage conflict, the insurer and the insured are not in privity. Id. at 886. Sending a reservation letter and participating in the defense of the underlying suit will not create privity and thus bind the carrier to the findings in the underlying suit. Id.

The Borum court turned to the Griffin rule to determine the duty to indemnify since the pleadings and the judgment from the underlying suit were the only evidence presented on summary judgment in the coverage case. Thus, this is the only case known to this author applying the Griffin rule for determining indemnity by the duty to defend rules post-verdict.

The court rejected arguments that the course of behavior of the insured could be subdivided between early “boundary violations” and later sexual misconduct. Id. at 890. The court found that the so-called “boundary violations” themselves involved sufficiently extreme conduct that the court could infer intent as a matter of law. Id. In any event, the court found that the claims of boundary violations were tied

to the allegations of sexual molestation. Id. n. 8. The court also rejected arguments that the failure to report child abuse was not severable from the sexual molestation itself. He court found that boundary violations culminating in sexual molestation are not separate and apart from the sexual contact. The court noted that a boundary violation such as exposing genitals in an aroused state would not result in inferred intent as a matter of law when such acts did not culminate in sexual contact. Id. at 892-93.

The same rule applies to the attempted use of agreed judgments to bar the insurer from litigating coverage issues. Employers Cas. Co. v. Block, 744 S.W.2d 940, 943 (Tex. 1988)(holding that factual recitals attempting to place the case within the policy period were not binding on the carrier). Moreover, the carrier is not in privity with the insured for collateral estoppel purposes if there is a coverage issue being contested. Also, immaterial factual findings from the underlying suit are not material, i.e., essential to the judgment in the underlying case, and thus not the proper subject of collateral estoppel. Block, supra.

It must be noted that the court in Block also held that a carrier may not “collaterally attack” an agreed judgment “by litigating the reasonableness of the damages recited therein.” Id. at 943. This ruling was expressly overruled by the Supreme Court in State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996). The Court stated:

In no event . . . is a judgment for plaintiff against defendant, rendered without a fully adversarial trial, binding on defendant’s insurer or admissible as evidence of damages in an action against defendant’s insurer by plaintiff as defendant’s assignee. We disapprove the contrary suggestion in dicta in Employers Casualty Company v. Block, [supra] and United States Aviation Underwriters, Inc. v. Olympia Wings, Inc., 896 F.2d 949, 954 (5th Cir. 1990).

Id. (emphasis added). The court’s discussion of the process followed in California regarding when and if agreed judgments or settlements are binding on the carrier is of critical important. It is clear from the court’s discussion that it has no intention of allowing relitigation after settlement to determine what the insured’s liability would have been had he not settled without a trial. The court concluded that the process of relitigating such issues was on its face virtually impossible. “Once the parties have changed positions, their views are altered, and it is very difficult to determine what might have been.” Id. at 719. The court stated that this form of “inquiry should ordinarily be avoided, absent compelling reasons to the contrary.” Id. The court concluded:







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In no event should a judgment agreed to between plaintiff and defendant be binding on defendant’s insurer. If an insurer’s liability is to be litigated in an action by a plaintiff as a defendant’s assignee after such a judgment is rendered, it should be done on the strength of the plaintiff’s claims rather than the generosity of defendant’s concessions.”

Id. The court certainly believed it had provided ample protection for the insured in such situations by encouraging the use of early declaratory actions to resolve the coverage dispute before the need for entering into settlement with the plaintiff.

In brief, if the verdict has findings that negate coverage, the carrier may rely upon them even if they are not in privity with the insured for purposes of collateral estoppel. However, if the carrier is disputing or questioning coverage, then jury findings in the underlying suit are not binding on the carrier. It is only findings that are a mirror image reflection of the coverage issue that can be used to determine the duty to indemnify.

Another excellent illustration of these principles is set forth in Columbia Mutual Insurance Co. v. Fiesta Mart, Inc., 987 F.2d 1124, 1127-28 (5th Cir. 1993). In that case, the underlying judgment was accompanied by state court findings that there had been an “occurrence,” “bodily injury,” and/or “property damage” and findings that allocated between applicable policy periods. Relying on Block, the Fifth Circuit held that the “characterizations” made in the findings by the court were “not essential to determining [the insured’s] liability.” Id. at 1127. The court also stated that there was “no valid reason for the court to apportion damages between applicable policy periods.” Id. at 1128. In any event, there was a conflict over coverage and thus there was no privity sufficient to permit the carrier to be bound by the findings in the underlying suit.”1

Third, if the case settles, there is, as noted, no ascertainment of the basis of liability against the insured. Of course, there is some question whether and to what extent an indemnity claim even continues to exist if there has not been an adjudication after a fully adversarial trial. Gandy, supra, at 714. See also Britt v. Cambridge Mut. Ins. Co., 717 S.W.2d 476 (Tex. App.—San Antonio 1986, refused n.r.e.)(holding that 1 Professor Windt suggests that Fiesta Mart supports the proposition that proof in re-litigation cases is limited to “the pleadings, the jury charge, any written opinions and the trial transcript in the underlying litigation.” I WINDT, INSURANCE CLAIMS AND DISPUTES, sec. 6:26, p. 742 n. 4 (4th ed. 2002). Indeed, the case was reversed and remanded for a trial “litigating coverage.” Fiesta Mart, supra, at 1128.

failure of the insured to present a reasonable defense to the underlying suit barred any attempted application of collateral estoppel against the carrier; involving submission of multiple stab wound case as a “negligence” case).

In brief summary, if there is no dispute about which causes of action are not covered and which ones are covered, then re-litigation of facts outside the scope of those submitted in the underlying suit would not appear to be appropriate. This rarely, if ever, occurs. If there is a contest over whether the findings involve ultimate issues of coverage, and the insurer is not bound by those findings, which is likely the case, then proof outside of the confines of that submitted in the underlying suit would clearly be available because coverage would have to be litigated for the first time. Moreover, if there are allegations of collusion, then the facts utilized would not be restricted. I WINDT, supra, at 742-743, nn. 2, 6. Contrary to the suggestions of Professor Windt, strong arguments can be made that there is no logical reason to restrict discovery and evidence in a coverage case to just that developed and used in the underlying case. Indeed, if the carrier is not constitutionally bound under collateral estoppel, then it would appear to be unconstitutional to delimit the evidence discoverable and admissible in the coverage trial. I. How Far Afield May the Carrier Go –

Superimposing Coverage Defenses Beyond the Scope of Relief Sought Texas law does not clearly resolve how far the

carrier can go in superimposing coverage or exclusion defenses on the determination of the duty to indemnify. For example, consider a Coverage B case in which a claim for misappropriation is made, but no issues regarding knowing or intentional conduct are submitted. Can the carrier then urge that even though the plaintiff chose not to base its case on such theories, the basic package of facts involved with the claim really involve knowing conduct? In other words, can the carrier avoid coverage based on defenses that depend upon a claim more serious than the one the claimant actually used to go to the jury? Is the carrier at all bound in the coverage case to the actual “legal obligation to pay as damages” set forth and made a part of the underlying suit?

Another example to consider is the situation where an insured committed numerous acts of intentional child molestation. The case tried against the insured submitted only incidental or so-called negligent contact, not the more serious sexual contact. Most would have a hard time taking an intentional course of conduct and subdividing it. This would appear to be very different from using the same conduct and trying to urge it is more serious than the claimant was willing to attempt to prove.




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J. Related and Interdependent Causes, Concurrent Causation and Allocation—Understanding the Directions Coverage Litigation May Take Briefly, the strategy in the multiple cause situation

is simply this: (1) the carrier seeks to establish that all alleged wrongful acts are related and interdependent with excluded conduct and thus all causes are excluded; (2) if this is unsuccessful, the insurer will urge that at least there are concurrent causes, thus barring coverage; (3) the insured must then argue that it can allocate between covered and uncovered claims, thus preserving some degree of coverage. We will now turn to a concise discussion of the controlling doctrines, considering issues of proof regarding this critical part of proving the duty to indemnify.

Any discussion of these doctrines must note the decision in Utica, supra, which sidesteps these issues in the face of a court of appeals opinion directly addressing them. The carriers rehearing motion emphasis that the decision may be read as a death notice for concurrent cause and the related and interdependent doctrine, thus placing Texas in the most liberal states in the union on multiple cause cases. See, e.g., State Farm Auto Ins. Co. v. Partridge, 514 P2d 123 (Cal. 1973).

The classic example of a related and interdependent act is the situation where parents are sued for negligently entrusting a vehicle to their child. The Texas Supreme Court has held that the claim for entrustment is sufficiently related and interdependent upon proof of the negligent operation of a motor vehicle that one can say that the entrustment claim is really one involving the use and operation of a motor vehicle and thus excluded by a standard homeowners policy. Fidelity & Guaranty Ins. Underwriters, Inc. v. McManus, 633 S.W.2d 787 (Tex. 1982). This doctrine focuses on the actual source of the damages. In short, beware of causes of action predicated on excluded conduct. See, e.g., Commercial Union Ins. Co. v. Roberts, 7 F.3d 86 (5th Cir. 1993)(holding that sexual molestation caused all injuries in the case were not “severable and distinct” from other allegations, but in fact the acts in question converged and were related and interdependent on sexual molestation; emphasizing that without the molestation there would have been no claim). In other words, separate acts become one act if they are interdependent.

The classic example of severable and distinct, and therefore independent, causes is Warrilow v. Norrell, 791 S.W.2d 515 (Tex. App.—Corpus Christi 1989, no writ). In that case, the court found that the acts of (a) failing to have a defective gun repaired and (b) failing to keep an empty chamber under the hammer, and (c) negligently assisting a tire repair on the side of the road were separate and not interdependent causes. Only cause (c) was excluded. See also Guaranty National

Ins. Co. v. North River Ins. Co., 909 F.2d 133 (5th Cir. 1990)(holding that non-professional, administrative decision regarding window maintenance was a separate and distinct and independent proximate cause of injury). This case and its progeny involve multiple causes, at least one covered and one not.

Under the concurrent cause doctrine, when both covered and uncovered causes combine to create a property loss, the insured may only recover for those damages solely attributable to covered perils. Travelers Indemnity Co. v. McKillip, 469 S.W.2d 160, 162 (Tex. 1971); Wallis v. United Services Automobile Association, 2 S.W.3d 300, 302 (Tex. App.—San Antonio 1999, writ denied). As noted above, the Texas courts have consistently held that the insured has the burden of presenting evidence to the jury upon “which it can allocate damages to the covered peril.” Id. (citing Lyons v. Millers Cas. Ins. of Texas, 866 S.W.2d 597, 601 (Tex. 1993)). The difference between concurrent cause, one excluded and one covered cause combining to concurrently cause a single loss, and the related and interdependent rule is the former involves multiple causes while the later gathers multiple acts and ties them to a single cause.

Some have incorrectly suggested that the concurrent causes rule is a way to find coverage. Bituminous Cas. Corp. v. Maxey, 110 S.W.3d 203 (Tex. App.—Houston [1st Dist.] 2003, no writ hist.)(finding that negligent operation of a vehicle (excluded) and failure to repair brakes (not excluded) were not separate and independent causes of a vehicular accident and thus “concurrent causation” doctrine did not apply). This misnomer appears to be describing nothing more than independent rather than interdependent causes. It is clear that in this situation the insured has the burden of proof regarding an allocation between the non-covered and covered causes. Swicegood v. The Medical Protective Co., 2003 WL 22234928, *5-7 (N.D. Tex., Sept. 19, 2003). Even under this misnomer, concurrent causation does not mean that the insured wins; instead, the insured must allocate. If the insured fails to allocate, the insured will lose. Winn v. Continental Cas. Co., 494 S.W.2d 601, 605 (Tex. Civ. App.—Tyler 1973).

Practitioners must beware of the related and interdependent doctrine in the context of “intent” cases. In King v. Dallas Fire Ins. Co., 85 S.W.2d 185, 189 (Tex. 2002), the court held that where the policy provision at issue requires consideration of the insured’s relationship to the event, the related and interdependent rule does not apply. In that case, the court held that the “occurrence”/accident requirement involves consideration of whether each insured seeking coverage engaged in non-accidental conduct, not just whether one did. The court distinguished McManus, noting that there the exclusion focused on a general category or type of conduct, the use of an automobile,

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which did not have to be viewed from the perspective of each insured. Such conduct was excluded regardless of who did it. The problem with King is that that was precisely the situation it faced. The court ignored the fact that “occurrence” did not require an “accident” from the standpoint of “the insured.” Thus, as in McManus, the coverage defense did not require a view from the perspective of each insured, it barred coverage for the category of conduct—non-accidental conduct. IV. THE DUTY TO DEFEND ON APPEAL A. Typical Policy Language

The standard general liability policy provides that there is a duty to defend “any suit” seeking damages covered by the insuring agreement and definitions in the policy. The policy defines “suit” as meaning a “civil proceeding in which damage because of ‘bodily injury,’ ‘property damage,’ ‘personal injury’ or ‘advertising injury’ to which this policy applies are alleged.” “Suit” is additionally defined to include alternative dispute resolution proceedings.

The policy states that the duty to defend ends when the limits have been exhausted in the payment of judgments or settlements. It does not state that this is the only circumstance when the duty to defend ends. Obviously, if the pleadings are amended to delete the only covered claim, the duty to defend ends without exhaustion. Rhodes v. Chicago Ins. Co., 719 F.2d 116, 120-21 (5th Cir. 1983) (Texas law)(holding that the duty to defend must be examined based on each amended pleading).

The current CGL form (1993) clearly provides supplementary payments for some appellate related expenses. For example, the policy states:

We will pay, with respect to any claim or “suit” we defend:

3. The cost of bonds to release attachments, but only for bond amounts within the applicable limit of insurance. We do not have to furnish these bonds.

This information does not appear to add a great deal in terms of resolving if there is a duty to appeal.

Another related question is what exactly makes up the “eight corners” for determining the duty to defend when a judgment is entered. Is it the verdict form, the pleadings, the verdict form and the pleadings, or the judgment itself and the policy?

Two noted treatises on insurance law state that other jurisdictions have generally recognized that there is a duty to appeal, and thus pay the defense costs for appeal, if there are reasonable grounds to believe that the insured’s interests might be served by an appeal. I WINDT, INSURANCE CLAIMS AND DISPUTES, sec. 4.17 (4th ed. 2001); OSTRAGER & NEWMAN, THE

HANDBOOK ON INSURANCE COVERAGE DISPUTES, sec. 5.02[d] (12th ed. 2004). The cases are severely split on this issue in other jurisdictions. Only one Texas case has even attempted to address the issue. B. Limited Texas Law

In Waffle House, Inc. v. Travelers Indem. Co. of Illinois, 114 S.W.3d 601 (Tex. App. -- Fort Worth, 2003), the insured employer sustained an adverse judgment for defamation against a former employee. The insurer argued that there was no duty to defend or indemnify because the loss was excluded by the employment-related practices exclusion. Indeed, the court determined that the entire judgment, including the punitive damages award, was within the coverage afforded under the primary insurer's policy. Id. at 611. The court rejected the insurer's arguments concerning coverage and held that the judgment against the insured was at least partially within the coverage of the policy. One of the questions explicitly presented in the case was when the duty to defend ended. The primary policy explicitly provided that the duty to defend continued until the policy limits were exhausted by qualifying payments. The court held that the primary insurer had a duty to defend the insured’s former employer through the appellate process until the policy was exhausted by qualifying payments. Id.

The Waffle House opinion is subject to some question from an analytical standpoint. The case provides no discussion of the extensive authorities on the subject of the duty to appeal. The decision also fails to even apply the basic rules of contract construction. This is exemplified by the court’s statement that there is a duty to defend anything and everything to exhaustion. The court notes that the policy simply provides no other instruction as to when the duty to defend ends. This, of course, ignores the well-accepted position of Texas courts that amendments to pleadings alter and can destroy the duty to defend, clearly prior to and in no way dependent on exhaustion of the policy limits. See Rhodes, supra. The opinion does not ask whether an appeal is a “suit” as defined in the general liability policy. The duty to defend is clearly restricted and terminates depending on whether the thing being defended is that which the policy designates and upon whether the allegations satisfy the coverage requirements of the policy.

C. Do "Allegations" Control?

What does one look to in order to determine the duty to appeal? Do you look to the live pleadings at trial? Do you look to Causes of action that were submitted, ignoring those jettisoned? See, e.g., Katerndahl v. State Farm Fire and Cas. Co., 961 S.W.2d 518, 521 (Tex.App.-San Antonio, 1997); see also Reser v. State Farm Fire & Cas. Co., 981 S.W.2d 260, 264 (Tex. App.—San Antonio 1998, opinion








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supplementing decision on overruling of rehearing Aug. 26, 1998).

Under Texas law, the carrier is not bound under collateral estoppel principles by the judgment if there has been a reservations of rights, which destroys privity. Employers Cas. Co. v. Block, 744 S.W.2d 940, 943 (Tex. 1988). If the trial of the underlying suit leads to a judgment based on non-covered items, the carrier is certainly free to assert as much against the insured based on collateral estoppel as soon as the judgment is final. If the judgment is based on the election of a cause of action not covered or if there are findings exonerating the insured on the only covered grounds, this too may be used at least to determine the duty to indemnify. Moreover, the judgment must conform to the pleadings in the case, which are in effect superseded by the entry of judgment. Tex. R. Civ. P. 301. Of necessity, the judgment must dispose of all parties and claims. North E. ISD v. Aldridge, 400 S.W.2d 893, 895 (Tex. 1966).

It is difficult to imagine an appeal that would not potentially affect all claims, covered or not, made the basis of the judgment or not. Many jurisdictions, like Texas, do not allow piecemeal litigation, and thus a reversal and remand will be on all claims. Tex. R. App. P. 43.3. Thus, for example, a reversal and remand of a gross negligence or malice finding results in a reversal and remand of the entire case. Appeal therefore presents the opportunity for findings affecting coverage to be in effect cleansed and covered causes to be resurrected. Therfore, do you look to the causes of action that might be submitted in the event a new trial was granted? D. Ramifications of Recognizing the Duty

Can the carrier appeal if the insured does not want to? Yes, one would think, if there is not a disqualifying conflict. See Northern County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex. 2004). If the right to have the carrier is part of the duty to defend, the carrier generally has the right to control the defense.

E. Other Jurisdictions

Some jurisdictions hold that there is simply no duty to defend on appeal. In Peterson v. Farmers Cas. Co., 226 N.W.2d 226, 229 (Iowa 1975), the court held that the duty to defend is purely contractual in nature and that there was no duty to appeal if not explicitly imposed in the language of the policy.

At least one jurisdiction has held that a duty to defend exists regardless of whether there are meritorious grounds for the appeal. In Palmer v. Pacific Indem. Co., 254 N.W.2d 52 (Mich. 1977), and again in Iacobelli Constr. Co., 343 N.W.2d 517, 522 (Mich. 1983), the Michigan Supreme Court held that the duty to defend necessarily includes a duty to appeal

on request regardless of whether the insurer believes that reasonable grounds for appeal exist. The courts reached this result over concern for the burden on the insured of financing an appeal and the possibility that the appeal will vindicate the insured’s position with respect to coverage. It seems unlikely that Texas would hold that an insurer has such an absolute duty to appeal. If for no other reason, Texas law sanctions frivolous appeals. Thus, if a duty to appeal exists, that duty will be circumscribed the obligation of all litigants not to pursue a frivolous appeal.

The rule adopted in the majority of jurisdictions that have addressed the question hold that an insurer’s duty to appeal is contingent on type and strength of the grounds to be asserted on appeal.

Of this majority, it appears that most jurisdictions follow the “reasonable grounds” rule. These courts hold that an insurer has a duty to appeal whenever reasonable grounds exist for the prosecution of an appeal. Reasonable grounds do not require that a more favorable judgment be a certainty. Rather, they only require that the appeal not be frivolous and have at least some chance of success. Hashion Motors, Inc. v. Western Internat’l Hotels, 600 S.W.2d 526, 540 (Mo. App. 1980).

A particularly instructive example of this line of decisions is Cathay Mortuary (Wah Sing), Inc. v. United Pac. Ins. Co., 582 F. Supp. 650 (N.D. Cal. 1984). In that case, the jury returned a verdict of $15,000 in actual damages covered under the policy and $45,000 in punitive damages that were not covered by statute and under the terms of the policy. The insurer refused the insured’s request to prosecute an appeal for alleged errors in the jury instructions relating to punitive damages, and tendered $15,000 in payment of the covered portion of the judgment to the claimant. The court held that, even though the punitive damages award was not within the scope of coverage under the policy, the insurer was nonetheless obligated to pursue post-judgment motions and, if necessary, to appeal so long as reasonable grounds existed, even though those grounds related to an excluded loss.

The precise tie between coverage and the subject of the appeal is somewhat murky. It is in fact clear that in some jurisdictions there is no duty to appeal an uncovered claim. See, e.g., Crist v. Insurance Co. of No. America, 529 F. Supp. 601, 606 (D. Utah 1982). Similarly, the duty to appeal does not exist if the duty to defend did not exist in the first instance. See, e.g., OSTRAGER & NEWMAN, THE HANDBOOK ON INSURANCE COVERAGE DISPUTES, sec. 5.02[d] (12th ed. 2004)(discussing Illinois Founders Ins. Co. v. Guidish, 248 Ill. App.3d 116, 122 , 618 N.E.2d 436, 441 (1st Dist. 1993)).





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V. POLICY PROVISIONS REGARDING SUPERSEDEAS BONDS The current CGL form (1993) clearly provides

supplementary payments for some appellate related expenses. For example, the policy states:

We will pay, with respect to any claim or “suit” we defend:

. . . . 3. The cost of bonds to release attachments, but

only for bond amounts within the applicable limit of insurance. We do not have to furnish these bonds.

Under such provisions, the courts have generally held that the carrier is not obligated to actually post the supersedeas bond, regardless of the coverage situation. I WINDT, INSURANCE CLAIMS AND DISPUTES, sec. 4.17 (4th ed. 2001). Prior versions of this language stated that the insurer would pay “premiums on appeal bonds.” Interestingly, one court has held that the carrier must pay for the full cost of the bond even if the amount of the judgment exceeds the policy limits. Burford Equipment Co. v. Centennial Ins. Co., 857 F. Supp. 1499, 1504-05 (M.D. Ala. 1994).

Carriers who undertake to file a bond in effect are admitting and accepting coverage for the full amount of the bond. The surety and bonding requirements are such that the funds are committed under a new contractual obligation that in effect supersedes itself the insurance contract. The carrier is of course off the hook if the case is reversed and remanded for a new trial, thus obviating agreement with the surety on the bond. Carrier’s taking this type of aggressive position should at a minimum make clear in a reservation of rights letter exactly what they intend for the future and thus inform the insured that a new trial will not amount to a concession of coverage. VI. AN INTRODUCTION TO SUPERSEDEAS

BONDS IN TEXAS AFTER HOUSE BILL 4 House Bill 4 made a number of significant

changes applicable to judgments entered on or after September 1, 2003. A. The Amount of the Bond

Under the revisions set forth in HB 4, subject to a cap not to exceed 50 percent of the judgment debtor’s net worth or $25 million, the amount of security for a supersedeas bond must equal the sum of:

(1) the amount of compensatory damages awarded in the judgment;

(2) interest for the estimated duration of the appeal; and

(3) costs awarded in the judgment.

TEX. CIV. PRAC. & REM. CODE, sec. 52.006 (a), (b). Thus, punitive damage awards do not have to be included in determining the appropriate amount of the supersedeas bond. 1. Establishing and Contesting Net Worth

Under TEX. R. APP. P. 24.2(c)(1), the judgment debtor must file an affidavit as to his or her net worth simultaneous with filing of a bond or substitute. The affidavit must state the current net worth and must state "complete, detailed information concerning the debtor's assets and liabilities from which net worth can be ascertained." The affidavit is prima facie evidence of net worth. Like attempts to modify or reduce the amount of the bond, the presentation of "complete and detailed" financial information could, if unsuccessful in justifying reduction of the amount of the bond, provide a ready road map for future execution efforts.

The judgment creditor can file an unverified "contest" concerning "net worth." Discovery may be conducted on this issue. A hearing will be held after 24.2 discovery is complete. Id. at 24.2(c)(2), (3). The judgment debtor has the burden of proof. The trial court must enter an order stating the net worth along with a statement "with particularity" as to the "factual basis for that determination." Id. at 24.2(c)(3). 2. Is Insurance Included in Net Worth?

The primary question raised by this legislation and rules is whether "net worth" includes the contingent claim of the insured against the carrier for contractual and/or extra-contractual liability. Based on the legislative history of section 52.006, there appears to be little question that liability coverage is not a part of net worth. Thus, whether a defendant has coverage available is not a factor is determining the amount of the bond.2

The primary purpose of the supersedeas provisions of House Bill 4 was to allow meritorious appeals to go forward without requiring the appellant to ruin itself financially in the process. The 50% figure

2 Remember also that prejudgment interest, on the amount covered by the policy, is available under the supplementary payments provision and would be in addition to the policy limits. Costs taxed against the insured are also available in addition to the policy limits. Finally, note that the 1993 form CGL provides that post-judgment interest is available “on the full amount of any judgment that accrues after entry of judgment” and before the carrier has paid, “offered to pay, or deposited in court the part of the judgment that is within the applicable limit of insurance.” Obviously, a carrier contesting whether there is any coverage could not tender any amount into the registry of the court without potentially waiving its policy defenses. Thus, post-judgment interest on amounts in excess of the policy limits would be available unless there was simply no coverage at all.




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itself appears to reflect the notion that bonding requires generally 100% collateralization for most private, non-insurance companies. Insurance is not subject to dissipation, or so said a number of legislators. If this is true, then in many cases, the insured will have a negative net worth, requiring only a token bond amount at most, such as a dollar.

The suggestion was made that section 52.006 should be amended to add insurance to the definition of "net worth" or otherwise make it a factor to be considered. Some say that the following exchange summarizes the intent of the legislature:

CHAIRMAN: We had one person testify that up in the, the 50% of the judgment debtor's worth, or $25 million, that, that you should add a consideration for insurance. WALDROP: Yes. I heard that testimony and that's on my list to address. Very strongly disagree with that comment. If there is insurance that is backing up the j--judgment, there is not a need for the bond. That insurance is there, that insurance cannot be dissipated by the judgment debtor. That it, there is no need in that situation for the bond to get either higher or lower. Simply because there is an insurance company that might be standing back there, that might have the cash to post a bond, does not change the fact that it is not needed in that kind of situation. And we should not do something that writes into this statute any type of revision that could affect the relationship between the insured and his carrier. Because carriers do not always come in and defend cases with the idea that they're gonna ultimately be liable. There is, there can be the potential for disputes there, and who pays the bond is often disputed. It is absolutely not a problem. The judgment debtor cannot dissipate the insurance. It is either there or it isn't and it will be there the day that judgment is final, in whatever appellate court it is final. There is no need to make such a, an exception.

Clearly, comments were made suggesting that the proposed bill should be amended to include insurance. For example, one witness for Texans for Civil Justice, Steve McConnico, indicated a desire to include insurance as a consideration. ((Senate Affairs Committee, 5/7/03, Tape 1, pp. 15-17.) No such amendment was passed. Testimony to this effect was received as well, indicating that insurance be added as a separate factor or as a part of the definition of "net

worth." Again, no such amendment was passed. (Senate Affairs Committee, 5/7/03, Tape 1, pp. 26-27.)

No one suggested that "net worth" should include contingent claims for extra-contractual liability or that it should include such claims for disputed coverage amounts.

Some of points made in debate are subject to question. The notion that insurance that is not committed through a bond cannot be dissipated is certainly subject to debate. What if another judgment is entered against the insured in another case while the first case is on appeal? Have the policy limits been exhausted by a verdict and judgment for which no actual payment has been made?

Both Generally Accepted Accounting Principles and pronouncements of the Financial Accounting Standards Board indicate that contingent recoveries are treated differently from contingent losses. It would appear that a chose-in-action against a carrier would present significant difficulties in getting into the proper mode of analysis for determining an individual's "new worth." See Financial Accounting Standards Board, FAS 5, Accounting for Contingencies (March 1975)(requiring that before an estimated loss from a loss contingency can be accrued two conditions must be met; to record a loss contingency the two conditions that are required to be met are; first, information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements; it is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss; noting that the term "probable" is defined in the FAS statement as, the future event or events are likely to occur.); AICPA, SOP 82-1, Accounting and Financial Reporting for Personal Financial Statements (October 1982)(requiring that before a contingent gain can be recorded the following factors must be met: (a) the rights are for fixed or determinable amounts; (b) the rights are not contingent on the occurrence of a particular event; and (c) the rights do not require the future performance of service by the holder). It should be noted that other comprehensive bases of accounting include, but are not limited to, the cash basis of accounting, the accrual method of accounting, regulatory methods of accounting, and the federal income tax method of accounting. None of these other comprehensive bases accounting specifically speak to the recording of contingent assets or liabilities.

In any event, there is no doubt that those challenging bonds calculated by ignoring the value of the chose in action against the carrier will try to use the hearing and challenge to the amount of the bond as an opportunity to litigate much of the merits of any coming extra-contractual claim. Again, as noted


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above, the legislative history may quickly end such excursions. B. The Time for Filing

Enforcement of judgments is governed by Tex. R. Civ. P. 621 et. seq. Judgments are enforced by execution or other process. A writ of execution will not issue until after a final and appealable judgment is signed. Hood v. Amarillo Nat’l Bank, 815 S.W.2d 545, 548 (Tex. 1991). A supersedeas bond suspends the available remedies for enforcement of a judgment. The mere filing and perfection of an appeal does not stay enforcement of the judgment. Robinson v. Lufkin Fed. Savs. & Loan Assoc., 1997 WL 33571, *1 (Tex. App.—Beaumont 1997)(citing Tex. R. Civ. P. 627; Tex. R. App. P. 47(a)). The bond must be filed at the point of the entry of the judgment in order to avoid liens from attaching and to avoid garnishment actions3 from seizing and freezing critical financial resources of the defendant. The filing of such a bond also prevents not only he application of liens, it also prevents post-judgment discovery from going forward. TEX. PROP. CODE ANN. Sec. 52.0011(a)(1) (Vernon Supp. 2004). These collection devices are available immediately upon entry of judgment.

A trial court may allow immediate execution on a judgment if an affidavit is filed by the judgment holder stating that the defendant is about to remove his personal property subject to execution out of the county, or is about to transfer or secret such personal property for the purpose of defrauding his creditors. Perfection Casting Corp. v. Aluminum Alloys, Inc., 733 S.W.2d 385, 386 (Tex. App.–San Antonio 1987, no writ). See also TEX. R. CIV. P. 628. Other remedies are tied to the finality of the judgment.

If no supersedeas bond or notice of appeal has been filed, the clerk of the court shall issue a writ of execution upon such judgment upon application of the successful party after the expiration of thirty days from the time a final judgment is signed. If a timely motion for new trial is filed, the clerk shall issue the execution upon the judgment on the application of the party or his attorney after the expiration of thirty days from the time the order overruling the motion is signed or from the time the motion is overruled by the operation of law. Tex R. Civ. P. 627.

3 The Texas Civil Practice and Remedies Code, Chapter 63 discusses writs of garnishment. A garnishment is upon signing of a valid, unless a supersedeas bond has been filed. (Tex. R. Civ. P. 657–judgment is “deemed final and subsisting for the purpose of garnishment from and after the date it is signed. . . .”) See Anderson v. Lykes, 761 S.W.2d 831, 834 (Tex. App.—Dallas 1988, orig. proceeding). The form of the writ is found in Tex. R. Civ. P. 661.

C. Who Can Sign and Provide the Bond 1. Sufficient sureties

A supersedeas bond is a surety bond. A surety is one "who undertakes to pay money or to do any other act in the event that his principal fails therein." BLACK'S LAW DICTIONARY 1441 (6th ed. 1990); accord Universal Auto. Ins. Co. v. Culberson, 51 S.W.2d 1071, 1072 (Tex. Civ. App.-Waco 1932, no writ). "The relation of principal and surety as applied to individuals necessarily involves separate personalities." Id. A person cannot be a surety for himself. Id. Thus, a third-party, legally separate from the debtor and not a party to the suit, contracts to pay the judgment plus interest if the appeal is unsuccessful. Amwest Surety Ins. Co. v. Graham, 949 S.W.2d 724, 726 (Tex. App.-San Antonio 1997, writ denied); see TEX. R. APP. P. 24.1(a), (b)(1)(D), (d).

The surety must be "sufficient" under Rule 24.1(b)(D). At a minimum, the surety, in order to be sufficient, must be able itself to discharge the judgment. State Farm Lloyds, Inc. v. Williams, 1993 WL 449197, *1 (Tex. App.-Dallas 1993)(unpublished).

The trial court has jurisdiction, upon proper motion, to review and determine the sufficiency of sureties, "including the relationship between the sureties and the appellant and the likelihood that the sureties will in fact be able or willing to satisfy the judgment." See, e.g., Wells v. Colin, 1997 WL 200755 (Tex. App.-Dallas 1997) (unpublished) (involving motion to review based on the appellant's transfer of substantial assets to a limited partnership in which his parents, the sureties, were also limited partners). Little or no direct guidance is given in the rules on this point. a. Who may serve as sufficient surety

The case law reveals the following rules regarding who may be a "sufficient" surety:

• An entity that is legally separate from the

judgment debtor. 1 STATE BAR OF TEXAS, TEXAS APPELLATE PRACTICE MANUAL, § 13.3 (citing Universal Automobile Ins. Co. v. Culberson, 51 S.W.2d 1071 (Tex. Civ. App.-Waco 1932, motion granted)).

• The surety is insufficient if its only asset is stock in the judgment debtor. See Trans American Nat. Gas. Corp. v. Finkelstein, 905 S.W.2d 412, 414 (Tex. App.-San Antonio 1995, no writ), discussed in O'Connor, supra, at 132.

• A non-party. Id. (citing Elliott v. Lester, 126 S.W.2d 756 (Tex. Civ. App.-Dallas 1939)).

• One defendant may not be a surety for another defendant in the same suit. Ringgold v. Graham, 13 S.W.2d 355, 356 (Tex. Comm'n App. 1929, judgm't adopted).

















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• The person signing the bond must be authorized by a valid power of attorney or corporate resolution. See, e.g., Kantor v. Herald Publishing Co., 632 S.W.2d 656, 658 (Tex. App.-Tyler 1982, no writ). Care should be taken to demand to review of any potential side-agreements or indemnity arrangements related to the bond. Often, such agreements will be referenced in the power of attorney.

b. Liability Insurers as Sureties

In Universal Transport & Distributing Co. v. Cantu, 75 S.W.2d 697, 698 (Tex. Civ. App.-San Antonio 1934, orig. proceeding), the court held that a liability insurer is not a party to the underlying suit against the insured and is therefore competent to become a surety on a supersedeas bond. The court noted that the carrier was not a party to the suit in any way and thus was “competent to become surety on” the supersedeas bond for its insured.

In Brown & Root, Inc. v. DeSautell, 554 S.W.2d 764 (Tex. App.—Houston [1st Dist.] 1977, writ ref’d n.r.e.), the court held that even a liability insurer that was a wholly owned subsidiary of the defendant/judgment debtor could provide a sufficient supersedeas bond. “The surety in this case was a separate legal entity, is not a party to the suit, its solvency is not questioned, and the bond was approved by the clerk. . . .” Id. (citing Canut, supra, and other authorities).

A different approach was taken in Elliott v. Lester, 126 S.W.2d 756 (Tex. Civ. App.-Dallas 1939, no writ). The court there held that an insurer for a common carrier is the primary obligor by statute to a party injured by a common carrier. The court emphasized that under Tex. Rev. Civ. Stat. Art 911b (Motor Bus Transportation Act), “the insurer is required to pay the plaintiff’s judgment . . . .” The court reasoned:

Therefore, with the Lloyds America being the sole surety on the supersedeas bond in this appeal, and otherwise primarily liable on the judgment, the purpose of the supersedeas bond, to give additional security to appellee, is defeated and nullified. It is clearly incongruous for Lloyds America to act as surety on a supersedeas bond and serve as insurer of the judgment. The position of insurer in the present suit is entirely inconsistent with its position as surety on the supersedeas bond. A supersedeas bond which gives appellee no additional security than the solvency of the principal obligor is not "a good and sufficient bond", to stay the remedies allowed for enforcement of the judgment.

Id. at 759. This reasoning is dubious since under the rules a cash deposit of the debtor’s monies may be made in lieu of bond. Indeed, the purpose of the bond is to secure payment of the judgment. In any event, a liability carrier provides additional assets to assure payment besides just those of the insured debtor.

The court then went on a bizarre foray with no citation to authority. It reasoned that by defending the insured, the carrier participated in the trial and whether technically a party or not, the carrier was “estopped by the judgment . . . .” This is of course contrary to current Texas law, under which a carrier is not collaterally estopped where it is defending under a reservation of rights. Employers Cas. Co. v. Block, 744 S.W.2d 940, 943 (Tex. 1988). In any event, the compulsory nature of the statutory scheme is certainly not present in the typical case and thus the holding of Elliott is of limited scope and application.

The Elliott court distinguished and rejected Cantu. The court observed:

We recognize apparent conflict with the San Antonio Court of Civil Appeals in the case of Universal Transport & Distributing Co. v. Cantu et al., 75 S.W.2d 697, 698, on similar question, wherein the court merely said: "It is true that the Commercial Standard Insurance Company was the carrier of the indemnity insurance for the Universal Transport & Distributing Company, who is the appellant in this cause. The insurance company is not a party in any way to the suit, and is therefore competent to become a surety on this supersedeas bond." The San Antonio Court seems not to have considered that the insurance company was required by statute and by the terms of its policy to pay any claimant suffering injury through the insured, provided such claim was reduced to judgment; or considered the fact that the purpose of a supersedeas bond is to give additional security to appellee who recovered a judgment in the court; or considered that the insurance company participated in the proceeding, as to estop it from claiming it was not a party to the litigation. However, be that as it may, we are not in accord with the holding in the cited case, rather rest our conclusion on the fact that Lloyds America was the real party at interest in the suit, a primary obligor to the judgment, thus, as a surety on the supersedeas bond, gives appellee no additional security, as provided by statute.

Id.









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c. Insurance Code Issues—Capital and Surplus Article 7.19-1(b) of the Texas Insurance Code

provides that a surety attempting to write a bond that "is in an amount in excess of 10% of the surety company's capital and surplus" may be required by the court or public officer to reinsure that portion of the risk that exceeds 10% of the company's capital and surplus "as a condition of accepting the bond . . . ." The statute further provides that the "amount reinsured by any reinsurer may not exceed 10% of the reinsurer's capital and surplus."

The Texas Department of Insurance is required to furnish on request the amount of the allowed capital and surplus as of the date of the last annual statutory financial statement for a surety company or reinsurer authorized and admitted to business in the State of Texas. TEX. INS. CODE ANN. Art. 7.19-1(b) (Vernon Supp. 2000).

The only case to address the meaning of Article 7.19-1 is State Farm Lloyds, Inc. v. Williams, 1993 WL 449197, *1 (Tex. App.-Dallas 1993)(unpublished). In that case, the court held that this statute does not require that the carrier write any particular lines of coverage, such as fire and allied lines of insurance. The court also noted that the statute does not bar a carrier from writing a bond that exceeds 10% of capital and surplus. Instead, the court or public officer involved has the discretion to require that reinsurance be obtained. The court held that the failure to have such reinsurance was therefore not a basis for finding the bond inadequate. The court recognized that the carrier offered to present a certificate of reinsurance at the hearing on the sufficiency of the bond.

The court in Williams recognized that there is a mandatory statutory provision in TEX. INS. CODE ANN. Art 6.16 (Vernon Supp. 2000), which requires that no carrier (a) authorized to do business in the state; (b) which writes fire and allied lines of insurance, as defined by statute, Board ruling or custom; (c) shall expose itself to any one risk "to an amount exceeding ten (10%) per cent of its paid-up capital stock and surplus, unless the excess shall be reinsured by such company in another solvent insurer." Article 6.16 applies so long as the insurer is authorized to write "fire and allied lines of insurance." The carrier cannot avoid the statute by urging that it was authorized but had not issued any such policies. Op. Tex. Att'y Gen. No. JM-850 (1988). Similar restrictions are placed on insurers incorporated in jurisdictions outside the United States. The reinsurance company must be one authorized to transact reinsurance or insurance in the state as to the lines of insurance set forth in the statute. Id. at 6.16(2).

A judgment creditor should bring evidence relating to either statute to the attention of the clerk or raise it in support of a motion to review sufficiency of the bond filed with the trial court. The Texas

Department of Insurance can and will provide information on capital and surplus and certificates as to whether the carrier writes "fire and allied" lines of insurance. Williams, 1993 WL 449197, at *1 (certificate from Texas Insurance Commissioner presented for the first time on appeal could not be considered in determining whether the trial court abused its discretion in denying a motion to strike bond). d. Other Insurance-Related Issues

A number of additional issues are raised by the supersedeas process as it relates to liability insurers. First, an insurer that agrees to obtain a supersedeas bond will normally do so through a sister or subsidiary company. As with any other company, care must be taken to make sure that the company providing the bond has its own assets and is indeed a separate entity. Also, one should consider whether discovery should be conducted to determine whether collateral agreements have been reached between the carriers that may somehow undermine the requirement recognized by some courts for a separate additional assurance. The mere fact that collateral has to be put up for the bond is not itself a legitimate basis for claiming the bond is insufficient. Fronting and other similar arrangements can certainly be imagined in which problems might, however, arise.

Second, an insurer who has raised coverage defenses in a reservation of rights will give up those defenses, unless special action is taken, if it bonds the judgment. The bond amounts to a new contract that is not dependent on the conditions, terms and exclusions of the insurance policy. A reservation letter stating that the bonding is not intended to be a waiver of policy defenses and reserving the right to reimbursement of any amounts ultimately required to paid on the bond that involve amounts not covered by the underlying liability policy may provide a basis for both bonding the case so the appeal can go forward, but preserving the ability to recoup uncovered amounts if the appeal is unsuccessful. This approach is not without peril. One district court has required bonding through a separate company where the carrier reserves the right to reimbursement and files a declaratory action seeking either to be reimbursed if payment under the bond is required or that the insured's parent corporation be substituted on the bond. e. Multiple sureties

Some judgments are simply too big for any one surety to handle. Nothing in the rules suggests that multiple sureties may not be used. In fact, Rule 24.1(b)(D) states that the bond must be signed by "a sufficient surety or sureties . . . ."

Obviously, the greater the number of sureties, the greater the burden of establishing the sufficiency of the


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sureties. One commentator states that where multiple sureties are used to do a joint bond for multiple defendants, each surety should promise to pay the entire judgment. Julia F. Pendery & Ken W. Good, Chaining the Rottweiler-Miscellaneous Challenges in Supersedeas Bond Practice, in STATE BAR OF TEXAS, ADVANCED CIVIL APPELLATE LAW COURSE, U, U-7 (1997). Thus, the sureties would in effect be jointly liable for the judgment. Certainly, one can imagine a scenario in which joint sureties could be used without joint liability by disclosing the percentages each is to pay and at what attachment point (like primary, excess and super-excess policies). Additional proof of solvency would be required under TEX. INS. CODE ANN. Art. 7.19-1(b) (Vernon Supp. 2000) or TEX. INS. CODE ANN. Art 6.16 (Vernon Supp. 2000). If the liability is, however, to be joint and several, then each surety would likely be required to independently satisfy the Insurance Code provisions. Obviously, if multiple sureties are used and their liability is joint and several, then proof that one of the sureties is solvent to pay the judgment is sufficient. See, e.g., Ruiz v. Watkins, 701 S.W.2d 688 (Tex. App.-Amarillo 1985, orig. proceeding). 2. Principals

The judgment debtor or the judgment debtor's agent must sign the bond. TEX. R. APP. P. 24.1(b). The bond is defective on its face if it is not signed in this manner, and it is unlikely the trial court clerk will approve it. If the trial court clerk does approve it, the bond is subject to challenge.

In the case of multiple judgment debtors, each one must file a bond or deposit unless exempted by statute. If any relief or award in the judgment is joint and several, the filing of a bond by only one of the judgment debtors will not inure to the benefit of the other judgment debtors. Valerio v. Laughlin, 307 S.W.2d 352, 353 (Tex. Civ. App.-San Antonio 1957, orig. proceeding). Each judgment debtor must either separately file a bond or deposit for the full amount of the judgment against him (inclusive of the joint and several amount), or the joint and several judgment debtors may file a single, joint bond. Gullo-Haas Toyota, Inc. v. Davidson, Eagleson & Co., 832 S.W.2d 418, 419 (Tex. App.-Houston [1st Dist.] 1992, no writ); Fortune v. McElhenney, 645 S.W.2d 934, 935 (Tex. App.-Austin 1983, no writ). This requirement is necessary to ensure the adequate protection of the judgment creditor in the event the judgment is reversed as to only one of the appealing judgment creditors or if the judgment creditor is unable to collect against one of the judgment debtors. Fortune, 645 S.W.2d at 935. VII. MODIFICATION OF THE BOND AMOUNT

Carriers facing a judgment in excess of policy limits face the issue of whether a partial supersedeas

bond may be filed. Again, the dilemma facing the carrier is that if it bonds the entire case, it will contractually bind itself through a new surety contract to pay amounts greater than those set forth in the policy. Roland C. Gross, Partial Supersedeas: The Ability of Insurance Companies to Stay Execution by Posting a Bond in the Amount of the Policy Limits, 16 BAD FAITH LAW REPORT 29 (March 2000) [hereinafter Gross]. If no supersedeas is posted, the carrier could be sued by the judgment creditor for amounts up to the policy limits. Moreover, the insured may suffer substantial credit and other damage if the judgment is not stayed. A. Modification Under Rule 24.2(b)—The Texaco

v. Pennzoil or 47(b) Standard—“Will Suffer Irreparable Harm” As discussed above, unless the trial court orders

the reduction of the amount of the bond, a partial supersedeas may not be undertaken. TEX. R. APP. P. 24.2(b). Indeed, one Texas court has expressly held that a carrier who is not a party to the underlying suit may not post a supersedeas bond in the amount of its policy limits and thus less than the amount of the verdict. See, e.g., Haney Elec. Co. v. Hurst, 608 S.W.2d 355 (Tex. Civ. App.-Dallas 1980, no writ).

Under TEX. R. APP. P. 47(b), the predecessor to Rule 24.2(b), at least one court held that the insured had to prove that he or she had enough assets to satisfy the amount of the judgment in excess of the policy limits, and would be irreparably harmed by having to seek a bond in order to get a modification of the amount of the bond. Harvey v. Stanley, 783 S.W.2d 217, 218 (Tex. App.-Fort Worth 1989, no writ)(holding that offer to post policy limits where insured defendant/judgment debtor had no other assets did not justify a reduction of the bond amount under. TEX. R. APP. P. 47(b), now replaced by Rule 24.2(b), because the judgment debtor did not have enough assets to satisfy the judgment and Rule 47(b) did not permit modification of the bond amount just because of the fact the judgment debtor cannot post a bond in the full amount). This was a preposterous situation that should have been remedied by changes to the rules. Harvey, 783 S.W.2d at 218 (noting criticism of Rule 47(b) as "purely cosmetic" and of failing to serve those who need it most).

In Isern v. Ninth Court of Appeals, 925 S.W.2d 604, 606 (Tex. 1996), the Texas Supreme Court implicitly overruled Harvey, holding that the trial court had discretion to permit the filing of a supersedeas bond for only the amount of the defendant's liability insurance under Rule 47(b). The supreme court noted that the trial court found: (1) a full bond would be in the amount of $3.1 million; (2) the liability insurer would only post a $500,000 bond; (3) the defendant/insured had assets of $500,000, including a
















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$150,000 homestead; (4) the defendant/insured could not post the remainder in excess of $500,000; (5) absent a modification of the bond amount, the defendant/insured would be forced into bankruptcy; and (6) if bankruptcy ensued, the plaintiffs would be left with a bankrupt defendant and no security. Id. The supreme court held that the court of appeals abused its discretion in overturning the ruling of the trial court permitting the filing of a $500,000 bond. Id. (overruling Laird v. King, 866 S.W.2d 110, 115 (Tex. App.-Beaumont 1993, orig. proceeding)).

Some will suggest that Isern was not necessarily the last word on this issue even under the 47(b) standard or irreparable harm. For example, the court did not find that the facts established as a matter of law a basis for requiring modification of the bond amount. Instead, the court only found that the trial court did not abuse its discretion. Could the trial court have reached the opposite conclusion based on these facts and still have been within his proper scope of discretion? Also, the court did not discuss whether there were bad faith or Stowers claims being urged against the carrier. Is not the right to sue the carrier an asset of the defendant worth potentially more than the policy limits? As the discussion below indicates, most jurisdictions have refused to consider the potential bad faith claim in determining whether a partial bond in the amount of policy limits can be filed.

The majority of jurisdictions looking at the issue have held that a carrier may partially supersede as to its interests up to policy limits. This result has not been changed where allegations of bad faith were urged. Gross, supra, at 32. The insured in this situation can either bond the remaining amount or execution will issue just against the insured for the portion not covered by the policy limits bond. Id. Courts rejecting the majority view have either complained that the rules in their states do not permit a partial supersedeas or have held that the carrier is not a party to the underlying suit and thus it would be "inappropriate" for the insured /defendant to benefit from the fact that it did not purchase enough insurance. Id. B. House Bill 4—“Likely to Suffer Substantial

Economic Harm” It is important to focus on the standards for

modification controlling under Texas law. Rule 24.2(b) requires a finding that posting a full bond “will irreparably harm” the judgment debtor, and posting a bond for a lesser amount would not substantially impair the appellee’s ability to recover under the judgment after all appellate remedies are exhausted. House Bill 4 created TEX. CIV. PRAC. & REM. CODE ANN. Sec. 52.006(c), which provides that on a showing that the judgment debtor “is likely to suffer substantial economic harm” if required to post a full bond, the court may lower the amount “to an amount that will

not cause the judgment debtor substantial economic harm.” The trial court is still empowered to enjoin the judgment debtor from dissipating or transferring assets to avoid satisfaction of the judgment. . . .” Any such order may not interfere with the debtor’s “use, transfer, conveyance, or dissipation of assets in the ordinary course of business.”

Section 52.005 provides that the Supreme Court may not adopt rules in conflict with the subchapter under which the standard for reducing the bond is set forth. The rules are allowed to operate only where they are not in conflict with section 52.006(c).

Section 52.006(c) clearly lessens the standard for modification of the bond amount. The nature of the harm under the new standard must be “economic” and need not be permanent in character or “irreparable.” Moreover, the focus on the protection of the creditor’s interest in the collectability of the judgment is clearly greater under Rule 24.2(b). Section 52.006(c) does not consider whether modifying the bond amount would impair the creditor’s ability to collect the judgment.

If the modification of the bond amount to the policy limits was permitted under Rule 47(b) in Isern, then it would appear that the same result would apply under similar facts under the new, less restrictive regime set forth under 52.006(c). This of course provides a potential helpful solution for carriers, and insureds for that matter, in a threatened Stowers setting. Filing a modified bond allows the appeal to go forward and gives the insured two chances to win: (a) on appeal, or (b) in the Stowers claim. VIII. TURNOVER ORDERS

Texas law permits the collection of judgments that are not superseded through court proceedings. One well-recognized avenue for recovery is a turnover of assets ordered by the district court. Section 31.002 of the TEX. CIV. PRAC. & REM. CODE provides:

(a) A judgment creditor is entitled to aid from a

court of appropriate jurisdiction through injunction or other means in order to reach property to obtain satisfaction on the judgment if the judgment debtor owns property, including present or future rights to property, that:

(1) cannot readily be attached or levied on

by ordinary legal process; and (2) is not exempt from attachment,

execution, or seizure for the satisfaction of liabilities.

(b) The court may:

(1) order the judgment debtor to turn over

nonexempt property that is in the



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debtor's possession or is subject to the debtor's control, together with all documents or records related to the property, to a designated sheriff or constable for execution;

(2) otherwise apply the property to the satisfaction of the judgment; or

(3) appoint a receiver with the authority to take possession of the nonexempt property, sell it, and pay the proceeds to the judgment creditor to the extent required to satisfy the judgment.

(Emphasis added.) The Texas Courts have addressed the issue of whether a claimant can force the assignment or turnover of causes of or chooses in action with respect to insurance and extra-contractual insurance claims.

In Charles v. Tamez, 878 S.W.2d 210, 204 (Tex. App.—Corpus Christi 1994, writ denied), the court addressed whether causes of action for legal malpractice of the defense counsel and contractual and extra-contractual claims against the carrier under Stowers could be made the subject of a turnover order. The court observed:

A cause of action is a property right and can be subject to turnover under the statute. Associated Ready Mix, Inc. v. Douglas, 843 S.W.2d 758, 762 (Tex.App.--Waco 1992, orig. proceeding); Republic Ins. Co. v. Millard, 825 S.W.2d 780, 784 (Tex.App.--Houston [14th Dist.] 1992, orig. proceeding); Renger Mem. Hosp. v. State, 674 S.W.2d 828, 830 (Tex.App.--Austin 1984, no writ). Under the statute, Charles had only to show that Tamez owned property (the causes of action) which met the requirements (not exempt or susceptible to normal attachment or levy) to justify turnover. Associated Ready Mix, 843 S.W.2d at 762. . . Courts have held, however, that the turnover statute does not apply in cases where turnover would violate public policy.

Id. at 206. The court rejected an Open Court’s challenge and a general public policy attack on the general use of turnover orders regarding bad faith and legal malpractice causes of action The court noted the dissimilarity of such claims to a defendant getting a turnover of the causes of action against itself, which had been held previously to be contrary to public policy. Id. at 206-207.

The court recognized that the question of value is difficult. The court endorsed the use of a sheriff’s sale of the causes of action to assure fair value. Id. at 207.

The court framed the primary issue before it as follows: “The crucial public policy question in this case is whether courts may or should allow a creditor essentially to "force" litigation of a debtor's claim against his will, particularly one arising out of a relationship as personal as that of attorney or insurer and client.” Id. The insured in Charles believed that his defense attorneys acted in his best interests. The court noted:

Unless [the insured/defendant] is proved incompetent, he alone can determine if he believes that his counsel misrepresented him. His satisfaction is paramount. In an analogous situation, plastic surgery which horrifies some will be acceptable or even welcomed gladly by others. Put more simply, one person's trash is another's treasure.

Id. The court made clear that this was not a matter purely of personal choice because to do so would cede too much discretion to the debtor/insured. “We reiterate that our holding is strictly limited to the intrinsically personal, subjective cause of action for legal malpractice for failure to settle under the Stowers doctrine. Tamez never attempted to assert any of the actions for which Charles seeks turnover. Rather, he denied dissatisfaction with his representation by Adams & Graham in his affidavit and in his testimony.” Id. The court therefore held:

We hold that unasserted, denied causes of action for legal malpractice for failure to settle under the Stowers doctrine are not assets subject to turnover. We find that allowing a party to force a suit for malpractice on behalf of a satisfied opponent does not promote the specific purpose of the turnover statute or the overall purpose of the Texas legal system. We explicitly do not reach the question of whether asserted or ignored claims for legal malpractice may be turned over. See Chaffee v. Smith, 98 Nev. 222, 645 P.2d 966 (1982) (barring transfer of unasserted legal malpractice action but reserving opinion on transferability of previously asserted actions). The trial court did not abuse its discretion by denying turnover of these causes of action to Charles.

Id. at 208. With respect to the claims against the carriers, the court held:

Charles also sought turnover of causes of action against Tamez's insurer, Farmers. The complaints Charles would urge on Tamez's







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behalf against Farmers are tied up in the same facts as those she would urge against Adams & Graham. Our decision on the turnover of those actions is the same.

The duty to settle lawsuits under Stowers is an essentially personal duty. We recognize that an insured's right to sue for failure to settle is subject to both equitable subrogation and assignment. American Centennial, 843 S.W.2d at 482-84 (subrogation); Garcia v. American Physicians Ins. Exch., 812 S.W.2d 25, 33-34 (Tex.App.--San Antonio 1991), rev'd on other grounds, 876 S.W.2d 842 (1994). We do not believe that it is subject to involuntary assertion. Tamez said in his affidavit that he had no complaint regarding Farmers representation of him. He stated that he would not have allowed Farmers to settle for policy limits if he remained exposed to the hospitals' liens. He apparently believes that he was better off with no settlement and continued representation than he would have been with a settlement with Charles and no representation against the hospitals. That is his call to make. Unless he is adjudged incompetent, neither we nor anyone else is in a position to superimpose our judgment on this issue.

Tamez's satisfaction distinguishes this case from Garcia, 812 S.W.2d 25. In Garcia, an injured party recovered against an insured; while that suit was on appeal, the insured filed suit against his insurer for mishandling his defense. Id. at 28. Before trial of the second case, the injured party entered an agreement with the insured not to execute any judgment against the insured that exceeded policy limits; in return, the insured assigned his rights to sue his insurers. Id. at 32-33. The Garcia situation is similar to our facts with two key differences: Tamez has said he is satisfied and has not agreed to assign his rights. He apparently does not believe that he has been lied to, deceived, or misled--or, if he has, that he has been injured thereby.

Id. Accord Nationwide Mutual Ins. Co. v. Chaney, 2002 WL 3117806188 (N.D. Tex. 2002)(Lindsay, J.)(holding: “It appears from [the insured’s] testimony that he believed he would be better off without an assignment of the claim and continued representation by Nationwide in this matter and any bankruptcy proceedings than he would have been with an assignment to Chaney and no representation.”). The

court provided further explanation about the basis of its holding:

A difference in the alignment of interests distinguishes this case from American Centennial. In American Centennial, the supreme court found that an excess insurance carrier could be equitably subrogated to the rights of an insured. 843 S.W.2d at 483. The equitable subrogation occurs because the excess carrier and the insured share the desire for the primary insurer to settle for policy limits; in fact, the excess carrier may have even more incentive to insist upon reasonable settlement than does the insured. Id. Here, the injured party does not share or assume the insured's interest in seeing that the insurer settle for policy limits. The injured party's only interest in quick settlement is avoidance of trial preparation and costs. We do not find that as compelling as the excess carrier's interest, which overlaps and even overtakes the insured's interest. The full burden of the excess judgment does not fall on the injured party, even if, as here, the insured currently has no assets to satisfy the judgment. While it is indeed unfortunate that Charles's damages may go uncompensated, we will not let sympathy cause us to drive a wedge between a satisfied client and his insurance company. We prefer to leave that relationship intact, and let the cloud of the unsatisfied judgment hang over the client. We hold that public policy bars turnover of unasserted, denied causes of action against insurers for failure to settle lawsuits. We explicitly do not address whether asserted or ignored causes of action against insurers for unreasonable failure to settle may be turned over.

We recognize the potential for fraud and collusion in this regard. We must depend on assertion of the causes of action and statutes proscribing fraud and conspiracy to deter such collusion. We see no indication of such fraud or collusion on the record here.

We do not believe that our decision here deprives Charles of a valuable asset. A cause of action asserting that Tamez was injured likely would wither in the face of his adamance that he was not injured by his representation and that his attorneys and insurance company did as he wished by not settling. We deprive Charles only of an insubstantial illusion of an asset, and we









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relieve the judicial system of a hollow lawsuit.

Id. The concerns of the court about forcing a suit that otherwise might not be brought is similar to the reasoning in Gandy that pre-judgment assignments in exchange for covenants often result in unnatural changes of position that reflect a flexibility regarding the truth that is deleterious to the honor of the judicial system.

In Jones v. Valdez, 1996 WL 288984 (Tex. App.—San Antonio 1996, no writ), the court held that the “personal” nature of the causes of action in Tamez did not easily transport to other causes of action. The court held that a cause of action by an employee against an employer for indemnity did not have such characteristics. The court also noted that there was other evidence a cause of action in fact existed. Importantly, the court noted that the debtor and the creditor were in dispute over the production of documents pertinent to the indemnity claim. The debtor was concerned about the revelation of privileged documents. This is a particularly troubling concern where the appeal, although not superseded, is going forward and there is the potential of a new trial being sought and granted in the post-verdict or appellate process. The court approved of examining the documents in camera.

In 1997, just a year later, the Corpus Christi Court of Appeals again addressed the turnover issue in an insurance/Stowers context in Trinity Universal Insurance Company v. Bleeker, 944 S.W.2d 672, 677 (Tex. App.—Corpus Christi 1997), rev’d on other grounds, 966 S.W.2d 489 (Tex.1998). The court there distinguished the case before it from Tamez, holding:

Appellant argues that all recovery must be denied in this case because Bleeker testified that he agreed with Trinity's pursuit of a complete release of all parties as part of any settlement agreement. In support of this argument, appellants cite Charles v. Tamez, 878 S.W.2d 201, 208-09 (Tex.App.--Corpus Christi 1994, writ denied). We believe the facts of Charles v. Tamez distinguish it from this case. That case began in a similar fashion to this one. Tamez, whose only assets were an insurance policy with limits of $20,000, was responsible for a traffic accident. All the parties agreed that his liability well exceeded $20,000. Tamez's lawyers refused a settlement offer for the policy limits because the plaintiff was not offering a release from all potential claimants and the hospitals that held liens. The plaintiff's settlement offer expired and the

plaintiffs sued Tamez for his negligence in the traffic accident, obtaining a judgment for $180,000. As Tamez was unable to pay the judgment from his own resources, the plaintiffs sought to compel Tamez to turn over his cause of action against his lawyers under the Stowers doctrine for failing to accept the settlement offer. Tamez opposed the turnover, stating that he would not have wanted to accept the settlement offer, and turnover was denied by the trial court. Because of public policy concerns about the relationship between lawyers and clients, we refused to reverse the judgment and order turnover of a Stowers claim when the client refused to assert the claim and denied dissatisfaction with his attorneys. Id. at 206-09.

In this case, Bleeker never opposed the turnover order. No appeal was taken from the turnover order, and this argument is being urged for the first time after the completion of the trial on the Stowers case brought in Bleeker's name against his insurance company. Trinity is essentially arguing that the turnover order should not have been granted. However, the turnover order is not part of the judgment of this case. If the turnover order was to be challenged on grounds that the Stowers claim was opposed by Bleeker, that claim should have been made by Bleeker as an appeal of the turnover order, which was not done.

Bleeker's testimony also fails to indicate the same level of agreement with his attorneys and insurers that was expressed by Tamez. In a deposition after the completion of the trial assessing his liability for the traffic accident, Bleeker was asked repeatedly whether he would have preferred to obtain a release of all parties. Not surprisingly, he answered "yes," and "that would be best." Bleeker was never asked, either while the settlement offer was open or during his later deposition, whether he would approve of the settlements his insurer was offered, asking either for $20,000 or interpleader of the policy limits in exchange for a release of some, but not all, of the plaintiffs. In contrast, Tamez challenged the turnover order in court and stated that he would not have wanted to accept the settlement offer that was presented to his attorneys. As there is no evidence that Bleeker ever challenged or opposed the turnover of his cause of action





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against his insurers, we hold that Charles v. Tamez does not control this case, and decline to reverse the judgment on these grounds.

Id.

None of these courts resolves the problem of the

inconsistency of a turnover of a cause of action dependent on the resolution of the underlying suit where that suit is on appeal. We know that the statute of limitations begins to run at the very least upon the entry of judgment and perhaps even earlier. See, e.g., Linkenhoger v. American Fidelity & Casualty Co., Inc., 152 Tex. 534, 260 S.W.2d 884 (1953)(holding causes of action against carrier accrued upon entry of final judgment); Woods v. William M. Mercer, 717 S.W.2d 791 (Tex. App.—Texarkana 1986), aff’d on related grounds, 769 S.W.2d 515 (Tex. 1988)(holding that causes of action accrued in combined failure to defend and to settle case when first injury occurred, which was date of denial of defense).

One of the dangers of attempting the turnover of the extra-contractual claims is that it may actually involve litigation of the merits of aspects of that claim. See, e.g., Nationwide Mutual Ins. Co. v. Chaney, 2002 WL 3117806188 (N.D. Tex. 2002)(Lindsay, J.)(holding: “It appears from [the insured’s] testimony that he believed he would be better off without an assignment of the claim and continued representation by Nationwide in this matter and any bankruptcy proceedings than he would have been with an assignment to Chaney and no representation.”). Remember, under the turnover statute, the court must first find that there is in fact a cause of action to be transferred. IX. DEALING WITH THE CLAIMANTS--

ASSIGNMENTS AND COVENANTS AND OTHER ISSUES In Texas, as a general rule, the right to sue the

carrier in tort or for statutory violations and seek extra-contractual liability belongs exclusively to the insured, not the claimant. The carrier owes no duty to the claimant. The claimant may only sue up to policy limits on its own once it is a judgment creditor. See Allstate Ins. Co. v. Watson, 876 S.W.2d 145 (Tex. 1994); Charles v. Tamez, 878 S.W.2d 201, 208 (Tex.App.--Corpus Christi 1988, writ denied). Thus, absent an assignment, the claimant cannot sue for more than the limits.

For the corporate and professional policyholder, an assignment of rights to the claimant is not a first-choice. The law regarding assignments after an actual trial is still relatively undeveloped. A few critical rules or concerns must be addressed from the outset.

A. Policyholder Concerns About Assignments The policyholder should have several concerns

relating to proposed assignments:

• Make sure the claimants are represented by insurance counsel competent enough to make a legitimate agreement that will not come back in some way on the insured.

• Do nothing that brings disrepute on the insured, such as any form of collusive activity

• Avoid cooperation clauses that require anything more than telling the truth.

• Avoid making any representations about the coverage or extra-contractual case.

The claim is obviously compromised by an assignment accompanied by the insured retaining a stake in the outcome. If the insured believes the claim is that meritorious, it should consider keeping the claim for itself and prosecuting the case itself. Many insureds, however, simply cannot weather the post-verdict collection storm, particularly turnover orders.

Now, lets turn to the primary sources of concern raised by State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996). We will seek to address some of the more troubling practical situations presented in the post-Gandy world. B. Assignability

An assignment cannot be made where the carrier has offered to defend subject to reservation of rights and has timely pursued the prosecution of a declaratory action. Gandy, supra. The court stated an assignment is invalid and unenforceable if

(1) it is made prior to an adjudication of plaintiff's claim against [the insured] in a fully adversarial trial, (2) [the insured's provider] has tendered a defense, and (3) either (a) [the insured's provider] has accepted coverage, or (b) [the insured's provider] has made a good faith effort to adjudicate coverage issues prior to the adjudication of plaintiff's claim.

Id. The Supreme Court has left open whether under other scenarios a pre-trial assignment will be enforceable. In no event, however, is a judgment rendered without a fully adversarial trial available as proof of damages and therefore binding on the carrier in a later action for extra-contractual liability.

The Texas Supreme Court in Gandy reasoned that it did not believe it possible to determine what the result against the insured would have been, and stated "[i]t is one thing to say that [an insured's] liability must








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be determined as if he had not settled with the plaintiff; it is quite another thing to do it." Thus, independent of the assignability of the causes of action, the Court held:

In no event . . . is a judgment for plaintiff against defendant, rendered without a fully adversarial trial, binding on defendant’s insurer or admissible as evidence of damages in an action against defendant’s insurer by plaintiff as defendant’s assignee.

925 S.W.2d at 714. C. Covenants Not to Execute

Covenants not to execute have certainly not received the imprimatur of the Texas Supreme Court under any circumstances. Some court of Appeals decisions strongly suggest that a covenant is to be treated in legal effect as a release in order to avoid circuity of action. In other words, rather than requiring a suit or counterclaim for breach of the covenant, the party benefiting from the covenant need only assert it as a release and thus a complete bar to liability. William M. Mercer, Inc. v. Woods, 717 S.W.2d 391 (Tex. App.--Texarkana 1986), aff'd in part and rev'd in part on other grounds, 767 S.W.2d 575 (Tex. 1988). Thus, claimants are typically very wary of including even a covenant promising to execute only against the insurance policy of the insured for fear that the baby will be thrown out with the bath water. Moreover, any tinkering with the collection/execution "sword of Damocles" presented by the judgment, could significantly affect the damages that can be claimed in the extra-contractual suit. The existence of an un-superseded judgment against the insured is a proof of damage or injury to the insured even if the judgment is not paid by the insured. See, e.g., Montfort v. Jeter, 567 S.W.2d 498 (Tex. 1978); Hernandez v. Great American Ins. Co., 464 S.W.2d 91, 95 (Tex. 1971); William M. Mercer, Inc. v. Woods, 717 S.W.2d 391 (Tex. App.--Texarkana 1986), aff'd in part and rev'd in part on other grounds, 767 S.W.2d 575 (Tex. 1988).

Certainly, there is older Texas case-law suggesting that a covenant not to execute will not be treated as a release. Woods, supra. The argument goes that the covenant will not be treated as a release so that the insured will have a valuable right that can then be assigned to extricate itself from the dilemma in which a wrongfully denying carrier has placed it. Id.

Some claimants will simply not even offer a covenant because of these manifold concerns. For the policyholder, an agreement providing an assignment without a covenant certainly leaves that insured open to the judgment, even if execution is not actually attempted. The claimants will sometimes give a "wink and nod" agreement not to execute on anything except the insurance policy and carrier-related rights. Such

agreements have a degree of peril attached in that they are not in writing and thus not necessarily enforceable, particularly if combined with a merger clause in the contract stating that the written terms comprise the entire agreement of the parties.

Out-of-state policyholders and claimants should consider choice of law in connection with not only coverage, but also in connection with the question of the types of agreements and enforceability of such agreements under the alternative state's laws. D. Dismissal of the Appeal

Many claimants will seek dismissal of the appeal as part of the assignment agreement. Sometimes the policyholder itself may want to simply dismiss any appeal and go forward with litigation against the carrier, regardless of what the claimant proposes. Dismissal in any situation presents a number of perils.

First, if the carrier in fact has a duty to defend on appeal, which current law says it does, then one would assume that the insured still owes the same obligations on appeal it would otherwise, such as the duty to cooperate, not to settle without the consent of the carrier, etc. Moreover, the insured likely has the right to control the defense and settlement of the case. Of course, if the carrier has already otherwise breached the contract, such as the situation where the carrier has clearly violated the duty to settle under the contract and Stowers, then the breach of conditions by the insured in dismissing the appeal and settling with the claimant will be legally excused. The insured has no duty to perform if the carrier has already breached.

Note that if the Stowers and/or breach of the duty to settle claim is unsuccessful, then the coverage that might otherwise have been available will be lost. In other words, if there is coverage for all or part of the claims, that coverage could be lost by dismissal of the appeal if there is no lawful excuse for performance established. So, by pushing for dismissal to pursue the Stowers claim, the result could be the loss of valuable coverage through the unexcused breach of conditions and/or breach of the carrier's right to control.

Of course, a breach must be material. This typically means that the insurer must be prejudiced. Moreover, the duty to appeal, as noted, typically turns on whether there are meritorious points on appeal. Thus, dismissal would not be a breach of conditions or contract if the appeal was not likely to be successful in any event. This area is one that is fertile for the use of experts at trial. Indeed, ultimately, it may present a question of law for the court as in appellate legal malpractice cases.

The carrier's right to control will also be a critical issue in such cases. Obviously, if a reservation of rights is outstanding, the carrier may not have the right to control the case. Moreover, as discussed above as to Davalos, there would appear to be other circumstances







32

where the carrier has no right of control. Even where the insured rightfully controls the defense, the insured has, according to some authority, a duty to competently defend the underlying suit. Warren v. American National Fire Ins. Co., 826 S.W.2d 185, 186 (Tex. App--Fort Worth 1992, writ denied).

Second, even if dismissal of the appeal does not amount to a breach of the policy terms barring coverage, it could be urged in connection with trial of the issues of proximate cause and damages, i.e. the duty to mitigate. In other words, the insured's decision to dismiss could be urged as the ultimate cause of damage, not the actions of the insured. This is undoubtedly a tougher defense for the carrier than a breach of condition defense. Additionally, it is still unclear if Texas law will recognize some form of fraud and collusion defense in this setting, over and above the protections of Gandy.

Claimants have to remain concerned that the Supreme Court is not finished in this area of the law. It is entirely possible that the court could find that extracontractual claims are simply never assignable. The court could also find that there can be no valid Stowers demand until coverage has been resolved, assuming the carrier is made a good faith effort to pursue resolution of the coverage issues. The court still has the option of expanding the availability of declaratory actions to get an early answer to coverage questions. Finally, the court could still overturn Matagorda and allow the carrier itself to settle with the claimant and then sue the insured for reimbursement. This is of course only a solution for the carrier if the insured is solvent. E. Post-Verdict in a Fully Adversarial

Proceeding? 1. "Fully Adversarial"

The supreme court's requirement in Gandy that a judgment be the result of a "fully adversarial trial" in order to be binding on the carrier can be broken down into three elements:

(1) Fully: an adverb that quantifies the extent or degree to which the trial must be adverse. The American Heritage Dictionary defines this term as "totally or completely." Because of prior abuses involving assignments and covenants, and the creativity of Texas counsel, the court appears to be drawing a very definitive line, leaving no gray areas for "wink and nod" agreements.

(2) Adversarial: This term relates to actual antagonism existing between the respective parties. This term is the antithesis of collusion. An "adversary system" is defined as a network of laws and procedures "characterized by opposing parties who

contend against each other for a result favorable to themselves . . . ." BLACKS LAW DICTIONARY (6th ed.). An "adversary proceeding" is defined as one "having opposing parties; contested, as distinguished from an ex parte hearing or proceeding. One of which the party seeking relief has given legal notice to the other party, and afforded the latter the opportunity to contest it." Id.

(3) Trial: The type of proceeding at issue. Clearly, more is intended than a mere hearing. A "trial" is defined as "a judicial examination and determination of issues between parties to [an] action . . . before a court that has jurisdiction." Id.

The judicial approaches to the term "actual trial" must immediately be distinguished. Gandy clearly requires more than an "actual" trial, it requires a "fully adversarial" trial. See infra discussion at 20-21 of American Eagle Ins. Co. v. Nettleton, 932 S.W.2d 169 (Tex. App.--El Paso 1996, writ denied). An "actual" trial would appear to connote a "real" trial. Gandy focuses more on the quality of the trial and the degree of conflict or antagonism.

"Actual trial" has been defined by the courts in a variety of settings. One such area is that whether a party has sufficiently participated in an "actual trial" so as to have forfeited the ability to proceed with a bill of review. See, e.g., Stubbs v. Stubbs, 685 S.W.2d 643, 644-45 (Tex. 1985) (Hill, C.J.) (interpreting "actual trial" as used in TEX. REV. CIV. STAT. ANN. art. 2249a, ' 1). In this context, the term has been defined as "the hearing in open court, leading up to the rendition of judgment, on the questions of law and fact." Id. (citing Lawyers Lloyds of Texas v. Webb, 137 Tex. 107, 152 S.W.2d 1096, 1097 (1941)). Full participation in a motion for summary judgment except the hearing, a confession of judgment, and filing an answer or new trial motion have been found to not be participation in an "actual trial." 685 S.W.2d at 644-45.

"Actual trial" is also a term used in the field of insurance. Typically, liability policies provide in part that no action may be brought against a carrier unless there has been a judgment rendered after an actual trial. In this context, "actual trial" presupposes a "contest of issues leading up to final determination by the court or jury, in contrast to resolving the same issues by agreement of the parties, i.e., without a contest." Wright v. Allstate Ins. Co., 285 S.W.2d 376, 379-80 (Tex. Civ. App.--Dallas 1955, writ ref'd n.r.e.). A settlement and a judgment in accordance with that settlement does not amount to an "actual trial." Id.

The "no-action" clause containing the "actual trial" requirement has been ineffective in dealing with the problems presented by set-up judgments because it is waived if the jury finds that the carrier breached the









33

contract. Gulf Ins. Co. v. Parker Products, Inc., 498 S.W.2d 676, 679 (Tex. 1973). Thus, Gandy provides a stronger tool that is less susceptible to waiver that seeks to assure the verity of the judgment that is to be the basis for the damage award against the carrier in the context of the determination of the binding effect of the judgment on the carrier. The court may take a slightly different approach on the question of assignability.

Gandy on its face states that for an assignment to be found unenforceable, the insurer must have tendered a defense under the policy and accepted coverage or taken prompt action to seek a judicial determination of coverage. Thus, in this context, the court in effect parallels the no-action approach of not focusing on the requirement of an "actual trial" if the contract is breached.

Additional guidance as to the meaning of "fully adversarial trial" can be found in a series of cases dealing with the duty of the insured to reasonably defend itself. These cases rely on rules relating to the "full and fair" litigation requirement of the doctrine of collateral estoppel. In Britt v. Cambridge Mut. Ins. Co., 717 S.W.2d 476, 483 (Tex. App.--San Antonio, writ ref'd n.r.e.), the court upheld a finding that the insured failed to present a reasonable defense after forcing the withdrawal of an insurer selected defense counsel based on a conflict of interest presented by the insurer's reservation of rights. The trial was described as follows:

(1) The insured agreed to waive all procedural formalities relating to the gathering of evidence, testimony and exhibits and the twenty-day notice of trial setting. Id. at 478.

(2) The so-called "trial" tool place in chambers. Id.

(3) Evidence was presented while the judge was absent. Id.

(4) The evidence consisted of the testimony of the claimant, three exhibits admitted based on a stipulation, including admissions in which the insured confessed liability. Id. at 479.

(5) Cross-examination of the claimant consisted of seven questions that "fortified" the damages position of the claimants. Id.

(6) The proceeding was described as like a friendly suit where "everybody was agreed to everything." Id.

The court used the law of collateral estoppel to fashion a rule that collateral estoppel would not result in the underlying "judgment" being binding on the carrier where the insured failed to fully, fairly and reasonably litigate the issues involved in that judgment. Id. at 482 (citing RESTATEMENT (SECOND) OF JUDGMENTS '

57(2)(b)). See infra discussion at 18-20 of State Farm Lloyds Insurance Co. v. Maldonado, 935 S.W.2d 805 (Tex. App.CSan Antonio 1996, no writ).

Similarly, in Warren v. American National Fire Ins. Co., 826 S.W.2d 185, 186 (Tex. App--Fort Worth 1992, writ denied), the insured rejected a defense tendered subject to reservation of rights by his excess carrier. The primary insurer was insolvent. The insured failed to respond to requests for admissions and a summary judgment imposing liability was eventually imposed against the insured based on the resulting deemed admissions. Id. The court held that the insured had a duty to take reasonable steps to provide an adequate and reasonable defense. Id. at 188-89. The court found that the actions taken by the insured presented a glaring case of lack of cooperation with the carrier and collusion with the claimant. Id. at 189 (see Laster v. American Nat'l Fire Ins. Co., 775 F. Supp. 985, 995 (N.D. Tex. 1991) for an extensive discussion of the collusive facts).

One decision, noting Gandy, reviewed the issue of "fully adversarial trial" in the context of a collusion defense. While this procedural approach is different from Gandy, the reasoning is constructive. In Continental Cas. Co. v. Westerfield, 961 F.Supp. 1502 (D.N.M. 1997), the court cited Gandy with approval for the proposition that an agreed judgment coupled with a non-enforceable agreement amounted to an improper, collusive "Mary Carter" agreement. Because the courts of New Mexico have not yet held that such agreements violate public policy, the court conducted its analysis under the "collusion" defense recognized in New Mexico. Many of the court's comments reflect the public policy concerns of the Supreme Court in Gandy and explain in part its emphasis on the need for a "fully adversarial trial."

The court in Westerfield recognized that collusion is found where the evidence "demonstrates an absence of conflicting interest -- the <lack of opposition between a plaintiff and an insurer that otherwise would assure that the settlement is the result of hard bargaining.=" Phrased another way, "collusion occurs when plaintiff and insured enter into <a questionable collaboration . . . to impose an uncompromised full balance of a judgment upon the insurer, while the insured incur[s] no real detriment.=" Id. at 1505. The court noted that the submission of facts based upon affidavits to the court in the underlying suit itself disclosed the absence of a genuine adversary issue between the parties. Under such circumstances, the trial court in the underlying suit could not safely proceed to judgment. The court emphasized that the mere involvement of the trial judge in the hearing on the agreed judgment was insufficient to avoid a finding of collusion.










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The Westerfield court noted that in the case before it the agreement permitted the insured to retain a ten (10%) percent interest in any judgment against the insurers. This, the court concluded, created an "actual identity of interest" between the insured and the claimant. Id. at 1506. Interestingly, the judge in the underlying suit testified extensively in the suit against the insurance carrier. The judge noted that he was given a copy of the settlement, but he admitted that the failed to read that portion of it that indicated that the insured had a stake in the outcome. Thus, he did not perceive the "commonality of interest in the supposedly <adverse= parties appearing before him and that failing to actively defend could actually serve to benefit [the insured] financially." Id. at 1507.

The judge from the underlying suit noted in his testimony that he was given no evidence or argument in support of the insured's position regarding the damages' calculation. The counsel for the insured "did not call a single witness, never objected or asked a question on cross-examination and passed up every opportunity to present a position contrary to that of [the claimant]." Id. at 1508. The court further elaborated that there was "no opposition to any of the evidence or arguments proffered by [the claimant]." The defense counsel admitted that the claimants put on a case and that the defense "did not refute it."

The Westerfield court concluded that this "trial proceeding" was in fact a sham. The court added:

To fail to find collusion in fashioning an unreasonable settlement under these circumstances would be to authorize manipulation which compromises the integrity of the adversary system. A stamp of judicial approval must be more than a rubber stamp of a one-sided presentation when it is presented under the guise of a dispute.

Id. at 1509. The court concluded that summary judgment for the insurer was appropriate.

Based on the approach taken in Gandy, the question of whether there was a "fully adversarial trial" presents a question of law for resolution by the trial court. The best defense approach is to conduct vigorous discovery of the facts surrounding the "set-up" transaction. The best approach for claimants and insureds is to remain cognizant that much more is required than a friendly suit prove-up.

Gandy teaches that the mere fact that a trial court signs an agreed judgment that recites facts indicating adversity is insufficient to avoid the public policy concerns expressed by the Supreme Court. In short, the court refused to give any special deference to the actions taken by the trial court in the underlying suit. Instead, the court compared recitals in the court's

judgment with the real facts to bolster its finding of improper activity.

Gandy presents an attempt to effect one of the more subtle forms of "sweetheart" deal. The claimant's counsel attempted to convert sweetheart deal into a necessity treated by the misconduct of the defense counsel, particularly as it related to discovery. The problem was that despite the carefully orchestrated attempts to set the underlying case up for discovery sanctions, the trial court was unlikely to enter death penalty sanctions based on the defense lawyers' misconduct alone. As a result, the underlying case could still have been litigated.

Would the result have been different in Gandy if sanctions had actually been entered? Probably not. A case resolved by discovery sanctions would most certainly not amount to a case in which a reasonable defense was provided by the insured. An insured cannot put on a poor defense and then say that he is damaged because a true, unqualified defense would have reached a different result. A case resolved by sanctions is not one resolved by a fully adversarial trial.

The sanctions situation would appear to be different from a default situation where the insured truly has no funds with which to hire a defense attorney. The stench of manipulation of the system is not present here. Protections can still be imposed as well, such as allowing the carrier to still contest the reasonableness of the result. In the end, the "fully adversarial trial" requirement is a vouchsafe that reality rules, not self-interested manipulation.

Gandy may result in fewer insureds opting to expel insurer selected defense counsel. Where the insured selects the attorney and controls the defense, the insured is responsible for the quality of the defense. The better approach for insureds would appear to be to allow the insurer selected counsel defend the case and hope for either victory or a defeat that can be blamed on the defense counsel. The questionable validity of Ranger Ins. Co. v. Guin, 723 S.W.2d 656, 659 (Tex. 1987), as a means for holding the carrier responsible for the malpractice of the defense counsel could signal an end even to this approach insofar as it contemplates a suit against the carrier as opposed to just the defense attorney. 2. Scenarios a. Default Judgment

The courts have not addressed whether a default judgment can ever amount to a fully-adversarial proceeding. One would certainly expect that an insured too poor to defend itself may proceed to safely assign its rights. The question becomes more troubling where the insured decides to voluntarily "lay down." Obviously, previously, a carrier breaching the duty to settle or defend could not urge that a settlement was



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unenforceable against it because rendered without the insurer's consent or without an "actual trial" as required by the "no-action" condition of the policy. Gandy may be found to reflect public policy concerns that would not appear to be excused under any circumstances. b. Arbitration An agreement to arbitrate the underlying claim without consent of the carrier may run afoul of Gandy. Certainly, where there is no record of the proceedings or only a partial record, the result will likely not be binding. Where the record reveals itself that there was not a "fully adversarial" proceeding, a full contest of the issues, then Gandy will likely apply. An arbitration should not make it easier to avoid a real conflict in terms of the trial itself. c. Carrier Wrongfully Refuses to Defend The non-assignability rule of Gandy does not apply if the insurer has wrongfully refused to defend the insured. Polinard v. United Services Automobile Assoc., 1996 WL 460040 (Tex. App.--San Antonio, Aug. 14, 1996). The court reasoned that the third element of Gandy, that the carrier accepted coverage or that the carrier made a good faith effort to litigate the validity of the coverage claims prior to adjudication of the claimant=s suit against the insured, was not satisfied where the insurer has wrongfully refused to defend. d. Agreement to Have a Fully Adversarial

Proceeding The El Paso Court of Appeals, in American Eagle

Ins. Co. v. Nettleton, 932 S.W.2d 169 (Tex. App.--El Paso 1996, writ denied), very quickly jumped on the Gandy bandwagon. In Nettleton, the insured agreed that upon entry of a final judgment against it after a bench trial, the plaintiff would agree not to execute against any assets of the insured, even if the anticipated insurance litigation was unsuccessful. Id. at 170. Clearly, the agreement removed all incentive for the insured to present a complete defense in the trial. In fact, the defendant called no witnesses and failed to offer any evidence at trial.

The court held that the underlying judgment did not bind the carrier under the doctrine of collateral estoppel as to the coverage issues. The court noted that Gandy expressly disapproved of the characterization of any attack on a damage finding as an improper collateral attack on the underlying judgment. Id. at 176. The court concluded that Gandy also disapproved of Ashenanigans@ such as the agreement in the case before it.

e. Judgment Silent As To Amount of Damages--In

Rem In State Farm Fire & Casualty Co. v. Williams,

933 S.W.2d 740 (Tex. App.-Dallas 1996)(opinion

withdrawn pending rehearing), the court avoided directly addressing Gandy in a classic Aset-up@ scenario. In the underlying suit, the claimants obtained a judgment under 5.06 of the Texas Family Code against the community property of the bystander, innocent spouse in an intentional shooting situation. The court held that this particular judgment could not amount to proof of damages as a matter of law because no definitive amount was stated in the judgment. The court held that the actual value of the judgment depended on the value of the community property belonging to the innocent spouse=s estate at the time of the judgment.

Because the judgment contained language limiting its enforceability, the court distinguished the facts before it from those in Allstate Ins. Co. v. Kelly, 680 S.W.2d 595 (Tex. App.--Tyler 1984, writ ref=d n.r.e.), which held the judgment in the underlying case proved damages as a matter of law. The court stated:

We think it beyond question that the extent and potential harm of a judgment whose enforcement is limited to only certain assets cannot be determined from the face of the judgment alone and without reference to those assets.

Id. n. 4.

The court held that the claimants waived the right to recover damages because they did not obtain a jury finding as to the amount of damages suffered because of the limited judgment. Id. at 740. Thus, the court did not address arguments made by State Farm that the covenant not to execute obtained by the insured was in fact a release, barring any recovery. Id.

Importantly, the Williams court rejected arguments made by the claimants that the decision in Gandy supported the determination of damages as a matter of law. The claimants suggested that Gandy applied to bar only non-adversarial trials. The court rejected these arguments, emphasizing that Gandy clearly did not involve a judgment of limited enforceability, as in Williams. g. Coverage Trial Does Not Substitute for Fully

Adversarial Proceeding--And Turnover Does Not Allow Avoidance of Gandy The Dallas Court of Appeals recently addressed

the Gandy rules in Stroop v. Northern County Mut. Ins. Co., 133 S.W.3d 844 (Tex. App.--Dallas 2004, pet. denied). In that case, actual cash payments were made by the insured to the claimants in return for a release. Additionally, the insured "agreed" to the entry of a judgment against it. Id. at 847. Finally, the insured was to receive a 25% stake in the recovery against the insurer. Id. The insurer denied a defense based on







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cancellation. Id. It should be noted that after the enrty of the agreed judgment, the trial court entered a turnover order forcing the assignment of all of the judgment debtor's "claims and causes of action" against the insurer. Id.at 850.

In Stroop, the claimant argued that the trial in the coverage case supplied the necessary "fully adversarial proceeding" and thus a settlement and assignment agreement entered into with the insured prior to adjudication of the underlying tort suit was binding on the carrier. The court flatly rejected these arguments. The court noted that the adversarial requirement was not met because the insured was not present at the coverage trial. Thus, the coverage suit sought to determine hypothetically disputed fact questions between a party, the claimant,/assignee, and a non-party, the insured. The court appears to ignore the fact that the insured had made an assignment. and thus the claimant and the insured were "one." This would appear to present an even stronger argument under Gandy that there was a decided lack of natural adversity.

The court held that while the carrier in Stroop tried to defend the actions of the insured in the coverage case, it simply could not do so because of the lack of ability to control witnesses and a general lack of information and cooperation from the insured. The court found this to be the type of distortion of the judicial process found noxious by the court in Gandy. Id. at 849.

The court also rejected arguments that the turnover alternatively resulted in a transfer of the causes of action against the carrier. The court refused to find that the post-agreed-judgment turnover "cleansed" the transaction and made it enforceable under Gandy. Id. Thus, because the agreed judgment was not binding on the carrier, the claimant/assignee could not prove damages against the carrier as a matter of law. Id.

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