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Texas Insurance Law: New Developments in the Selection of Defense Counsel

Texas courts recently clarified the following question: Who gets to select defense counsel—the insurer or the insured? In Northern County Mutual Insurance Co. v. Davalos, the Texas Supreme Court, in an opinion authored by former Chief Justice Phillips, held that, in certain situations, the insured has the right to reject to insurer’s tender of defense and select counsel of its own choosing paid for by the insurer. The United States District Court for the Northern District of Texas subsequently reached the same holding in Housing Authority of City of Dallas v. Northland Insurance Co. ANDREW GRAHAM

In Davalos, the liability policy contractually obligated the insurer to provide a defense for covered claims and granted the insurer the right to conduct that defense. The insured, however, refused the insurer’s tendered defense because of a disagreement over the venue where the case should be defended.

Davalos, the insured, a resident of Matagorda County, was injured in an automobile accident in Dallas County. Davalos sued the driver of the other car in Matagorda County. The driver of the other car then sued Davalos in Dallas County. Although Davalos was insured, he turned the Dallas litigation over to the attorneys representing him in the Matagorda County suit. These attorneys answered the suit filed against Davalos in Dallas County and moved to transfer venue to Matagorda County. Davalos’ counsel then notified his insurer of the Dallas County suit. In response to being notified of the Dallas County suit, the insurer stated that it did not wish to hire the counsel that Davalos had selected, that it opposed his motion to transfer venue to Matagorda County, and that it had chosen other counsel to defend Davalos in Dallas County.

Given these facts, the issue presented to the Texas Supreme Court was whether a disagreement over venue between the insurer and

the insured was a sufficient reason for the insurer to lose its right to conduct the defense while remaining obligated to pay for it. The Court had previously acknowledged, without explanation, that an insurer’s right to control the defense generally includes the authority to make defense decisions “where no conflict of interest exists.” Relying on that precedent, the lower appellate court held that Davalos’ disagreement with the insurer created a conflict of interest and, as a result, the insurer breached the duty to defend by insisting on the right to control the defense in the face of that conflict. The Texas Supreme Court disagreed, holding that a disagreement about venue between the insurer and the insured did not amount to a conflict of interest.

Significantly, the Court did not limit its opinion to the venue issue. The Court also discussed what amounts to a conflict of interest. The Court stated that the existence or scope of coverage is ordinarily a basis for a disqualifying conflict. Accordingly, a conflict of interest may arise between the insurer and the insured when the insurer issues a reservation of rights based on the same facts that will be needed to determine liability. Moreover, adopting the analysis of a well-known insurance treatise, the Court concluded that the following types of conflicts may also justify an insured’s refusal of an offered defense: (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.”

After Davalos, insurers may now face a variety of circumstances where they will be obligated to pay for the defense of an insured that they do not have the right to control.

No Indemnification for Manufacturer from Component-Part Manufacturer Without Evidence of a Defective Part

The Texas Supreme Court recently found that a manufacturer could not seek indemnity from a component-part manufacturer since there was no evidence that the component part was defective. BRAD BROWN

In Bostrom Seating, Inc. v. Crane Carrier Company, 140 S.W.3d. 681 (Tex. 2004), plaintiff sued Crane for serious injuries he sustained after being involved in a rollover accident while driving a garbage truck manufactured by Crane. Crane subsequently brought third- party actions against a number of component-part manufacturers, including Bostrom Seating, the manufacturer of the driver’s seat, seeking statutory and common-law indemnification.

Crane appealed the trial court’s directed verdict for the component-part manufacturers. The court of appeals reversed after finding that an indemnity action exists for a manufacturer against a component-part manufacturer under both statute and common law and that there was sufficient evidence to support a finding that Bostrom was responsible for defectively designing the garbage truck’s seat.

Bostrom appealed to the Texas Supreme Court, which, on a case of first impression, agreed with Bostrom that Crane could not

seek indemnification from Bostrom since there was no evidence to establish that Bostrom’s seat was defective. The Court did not address the issue of whether, had there been evidence of a defect, Crane could seek statutory or common law indemnification from Bostrom.

The Court agreed with two Texas appellate courts as well as numerous other states’ courts in finding that “if the component- part manufacturer does not participate in the integration of the component into the finished product, it is not liable for defects in the final product if the component itself is not defective.” Accordingly, if there is no evidence to suggest that the component part was in fact defective, the component-part manufacturer is “relieved of any liability for a design or manufacturing defect in the final product, including any action for indemnification.”

The Court found that, at best, the evidence presented supported a conclusion that the use of the seat in the truck created a defective restraint system design. However, Crane was in control of the design of such system, and Bostrom, which was not involved in the design of the truck, could not be found liable for the restraint system’s possible defectiveness.


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