Texas Bar Journal • December 2024
Insurance Law
Written by Jeannie Nguyen
In 2024, the Supreme Court of Texas issued two significant opinions regarding property and liability insurance disputes in Texas.
First, in Rodriguez v. Safeco Insurance Co. of Indiana, the court held that an insurer’s full payment of an appraisal award plus any possible statutory interest precludes an award of attorneys’ fees under Chapter 542A of the Texas Insurance Code. The insured sued his insurer for underpaying a claim for tornado damage to his home.1 After two years of litigation, the insurer invoked appraisal and promptly paid the appraisal award, plus interest.2 At issue was whether the insured could still recover attorneys’ fees under the formula in § 542A.007.3 Answering a question certified by the U.S. Court of Appeals for the 5th Circuit, and resolving a split of authority, the court confirmed that an insurer’s payment of the full appraisal award, plus interest, discharges any liability under the policy and extinguishes the insured’s right to attorneys’ fees under § 542A.007.4
Second, the court provided guidance regarding coverage for settlements without a liability insurer’s participation in In re Illinois National Insurance Co., which involves settlement of a securities fraud lawsuit brought by GAMCO against Cobalt. After Cobalt’s insurers denied coverage, Cobalt ultimately entered into a settlement agreement with GAMCO for $220 million, the maximum potential coverage under Cobalt’s insurance policies, payable exclusively from insurance recoveries.5 Under the agreement, GAMCO would pursue Cobalt’s rights against Cobalt’s insurers and release claims against Cobalt and its officers and directors once the coverage litigation ended, regardless of any recovery from Cobalt’s insurers.6 Cobalt denied any liability and had the right to receive up to $28.5 million of insurance recoveries for its defense costs plus interest.7
After adverse rulings from the trial court in the coverage litigation, Cobalt’s insurers sought mandamus relief, asserting: (1) the settlement agreement did not constitute a“loss” for which Cobalt was “legally obligated to pay,” as required for coverage under the policies; (2) GAMCO’s claims against Cobalt’s insurers were barred by the no-direct-action rule, which prohibits a claimant from suing a tortfeasor’s insurer unless the tortfeasor’s obligation to pay has been established by judgment or agreement with the insurer’s consent; and (3) the settlement agreement was not binding as to the insurers’ duty to indemnify.8
The court rejected the insurers’ argument on the first two issues.9 The insured’s contractual agreement to settle an underlying lawsuit creates a “legal obligation to pay,” regardless of whether the insured admits to wrongdoing or liability.10 Furthermore, liability insurers agree to “pay on behalf of” the insured—within policy limits—amounts the insured becomes legally obligated to pay, regardless of actual payment or collectability from the insured.11 Consequently, the no-direct- action rule does not apply.12
On the third issue, the court determined that the settlement agreement was not binding against the insurers or admissible to establish coverage or the amount of Cobalt’s loss in the coverage litigation.13 A settlement between an insured and claimant is not binding on the insurer unless it resulted from a “fully adversarial trial,” where the insured had a meaningful incentive to ensure the settlement accurately reflected the claimant’s damages or the insured’s covered loss.14 The settlement agreement was not “fully adversarial” because it protected Cobalt from any actual risk of liability beyond payment of potential insurance benefits.15
JEANNIE NGUYEN is
counsel to Norton Rose Fulbright in Houston. Her practice includes
advising and defending carriers in insurance coverage matters, with an
emphasis on complex, multi-party coverage disputes and bad faith
litigation involving commercial general liability, construction defects,
negligent procurement, and directors and officers liability policies.
