David White over at the Law and Insurance blog wrote yesterday about a recent Fifth Circuit decision that narrowly construed the Texas Supreme Court’s decision in Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., 236 S.W.3d 765 (Tex. 2007) docket and briefs.
David’s post, titled “Federal Court Refuses to Extend Mid-Continent Ruling to Defense Costs”, is worth reading.
The new Fifth Circuit decision is Trinity Universal Ins.Co. v. Employers Mut. Cas. Co., No. 08-20532 (5th Cir. Jan. 4, 2010) (PDF slip opinion).
Both Mid-Continent and Trinity Universal deal with situations where multiple insurance carriers for one defendant cannot agree.
In Mid-Continent, the question was whether one insurer could take the lead on paying out a settlement and then recover from the others. The Texas Supreme Court, in a certified question from the Fifth Circuit, answered “no”. It has been suggested (including by David) that this decision might given incentives to insurers that could impede settlements.
But Trinity Universal did not involve this “duty to indemnify” but rather the “duty to defend.” (( In a liability-insurance policy, the “duty to indemnify” is the insurer’s duty to pay the third party’s claim. If you are in a car accident that is your fault, the “duty to indemnify” would require your insurer to pay the other party for the damages. The “duty to defend,” on the other hand, would require the insurer to pay for your legal defense. The two duties are distinct. ))
In the context of those defense costs, the Fifth Circuit held that the Mid-Continent rule did not apply. Instead, because of differences in how this contract language was structured, insurers can still sue each other for recovery of the appropriate share of the defense costs.
The obvious impact is that insurers have less incentive to hold out from paying these defense costs. The less obvious impact, David’s post concludes, is that having all of the insurers participate in the defense may make the problems created by Mid-Continent a little less likely to occur:
Trinity Universal may mitigate some of the hardship from the Mid-Continent decision. Insurers will find no benefit in taking a wild swing at denying a duty to defend and so will more likely take a seat at the table early in the game. A seat at the table gives all insurers the same access to defense counsel’s evaluations of the merits of the case and the likely damages a jury could award. Thus, the insurers will be more likely to work together. They may even agree to participate in any settlement agreed to by a majority of the defending insurers, thus obviating Mid-Continent at the settlement stage.