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In a case closely watched by the insurance industry, the Texas Supreme Court held on July 2 that an automobile insurer did not breach its contractual duty to defend an insured in a personal-injury suit by insisting that the insured withdraw a motion to move the suit to his home county. However, the high court’s unanimous opinion in Northern County Mutual Insurance Co. v. Timoteo Davalos did not address whether Article 21.55 of the Texas Insurance Code applies to an insured’s demand for a defense from third-party claims — an issue that has troubled insurers and led to conflicting opinions in various state and federal courts. The state Supreme Court decided it did not have to resolve the issue in Davalos. “We conclude that Northern’s conduct in this case did not violate the terms of Article 21.55, whether or not the statute properly applies to a liability insurer who fails to promptly accept or reject its insured’s defense,” Chief Justice Tom Phillips wrote for the court. At issue in Davalos is whether a disagreement between an insurance company and its insured over venue in an underlying personal injury suit is a sufficient reason for the insurer to lose its right to control the defense, while still remaining obligated to pay for it. According to the state Supreme Court’s opinion, Davalos suffered injuries in a 1995 traffic accident in Dallas County. Davalos, a Matagorda County resident, sued Steven Weinberg, the driver of the other car, in the 130th District Court in Matagorda County, Texas, and Weinberg sued Davalos and Billy Joe Lockett, a third driver involved in the accident, in a separate action in the 68th District Court in Dallas County. As noted in the opinion, Davalos turned the Dallas litigation — Weinberg v. Davalos and Lockett — over to the attorneys representing him as a plaintiff in the Matagorda County suit — Davalos v. Weinberg — and then moved to transfer the Dallas suit to Matagorda County. Phillips noted in the opinion that in a letter Northern notified Davalos that it didn’t want to hire the attorneys he had selected to defend the suit in Dallas County and opposed Davalos’ motion to transfer that case to Matagorda County. Northern’s letter suggested that liability protection might be threatened if Davalos’ personal attorneys did not abandon their venue motion and withdraw from that case, Phillips wrote. Robert Fugate, Northern’s appellate counsel and a director in Dallas’ Fanning, Harper & Martinson, says Davalos preferred to have the case heard in Matagorda County, but the insurance company preferred to keep the case in Dallas County because that’s where the accident occurred. “The crux of the suit is who got to make that decision,” Fugate says. Fugate, who represents Northern along with Fanning, Harper shareholders George Lankford and Don Martinson, says Davalos’ policy with Northern gave the insurance company control of Davalos’ defense against the Weinberg claim. Although Davalos refused to comply with his insurance company’s requests, the Dallas suit was not transferred to Matagorda County, and Northern settled the claims in the 68th District Court at no cost to Davalos, according to the state Supreme Court’s opinion. Before the settlement, Davalos sued Northern in the 130th District Court, alleging that the insurance company had breached its duty to defend and violated Article 21.55. According to the state Supreme Court opinion, Davalos filed a motion for partial summary judgment, and Northern filed a summary judgment motion. In 1999, the 130th District Court granted Davalos’ motion, denied Northern’s motion and entered a final judgment in Davalos’ favor for breach of contract and the alleged Article 21.55 violation. In 2002, a divided 13th Court panel affirmed the judgment, holding that Northern breached its duty to defend by insisting that Davalos withdraw his change of venue motion. The court also held that Northern violated Article 21.55 of the Insurance Code when it failed to meet the statutory deadline for accepting or rejecting Davalos’ claim. “The parties’ different choices on the change of venue is an obvious conflict of interest,” Justice J. Bonner Dorsey, then a member of the 13th Court, wrote for the majority. Justice Federico Hinojosa joined in the decision, while Justice Errlinda Castillo dissented. The state Supreme Court concluded that the fight over venue was not a sufficient reason to take away Northern’s contractual right to conduct Davalos’ defense. A LIVE ISSUE Mark A. Ticer, Davalos’ attorney, says the state Supreme Court’s holding overlooks the facts of the case. Ticer, the principal in the Law Office of Mark A. Ticer in Dallas, contends that Northern failed to defend Davalos when it insisted Davalos waive his motion to transfer venue. “His defense was conditioned on waiving the venue,” Ticer says, adding that Davalos will file a motion for rehearing in the state Supreme Court. Attorneys who represent insurers and policyholders may be more interested in the Article 21.55 issue that the state Supreme Court left unresolved in Davalos than they are in the court’s decision. “It is certainly an open question and one the court will have to address eventually,” says Shane Kimzey, senior associate with Baker Botts in Houston. Kimzey is one of the attorneys who filed an amicus curiae brief with the Supreme Court in Davalos on behalf of Texas Farm Bureau Mutual Insurance Co. and two other insurers. The chief concern expressed in the brief is how the court would treat third-party claims under Article 21.55 “The plain language of the statute says it doesn’t apply [to third-party claims],” Kimzey says. Insurers’ concern about the application of Article 21.55 to third-party claims focuses on the amount of risk to which they might be exposed. Under Article 21.55, known as the Prompt Payment of Claims Act, an insurer who fails to accept or reject its insured’s claim in a timely manner faces paying not only the claim, but also an 18 percent per annum penalty, based on the amount of the claim, plus attorneys’ fees. The application of Article 21.55 to third-party claims would greatly expand the scope of cases that may subject insurers to the statute’s penalties, Kimzey says. “It’s important to our clients to know what kind of liability is out there and whether they face these kinds of claims,” Fugate says. Some courts — most recently Dallas’ 5th Court of Appeals in its Feb. 25 decision in TIG Insurance Co. v. Dallas Basketball Ltd., et al. — have rejected the contention that Article 21.55 applies to third-party claims. Other courts — including the 13th Court in Davalos — have concluded that refusal to pay defense costs when an insured is sued by a third party is a first-party claim and therefore subject to the Article 21.55 penalties. James Cornell, of counsel at Haynes and Boone in Houston and immediate past chairman of the State Bar of Texas Insurance Section, says the fact that the state Supreme Court didn’t address the Article 21.55 issue in Davalos is significant. Cornell says policyholders have long contended that the duty to defend is a first-party obligation subject to the Article 21.55 requirements. Because the Supreme Court did not say that Article 21.55 does not apply to the duty to defend, that argument remains intact, he says. Cornell adds, “It’s still a live argument.”

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