FIFTH CIRCUIT UPHOLDS INSURER’S RIGHT TO CHOOSE COUNSEL WHEN DEFENDING UNDER A RESERVATION OF RIGHTS

July 2, 2014

Last Tuesday, the Fifth Circuit applied the rule of Northern County Mut. Ins. Co. v. Davalos,[1] which holds that an insurer who defends an insured under a reservation of rights retains the right to control the defense by selecting counsel, unless the facts to be adjudicated in the liability suit are the same facts on which coverage depends.  In Graper v. Mid-Continent Cas. Co., --- F.3d---, 2014 WL 2870553, No. 13-20099 (5th Cir. June 24, 2014), the insured was sued for an alleged copyright infringement.  Mid-Continent agreed to defend, but reserved its rights.  The coverage questions included whether the infringement took place during the policy period, and whether the infringement was knowing. The insured rejected the tender of counsel and defended itself with its own counsel, then sued Mid-Continent for its defense costs.

One of the insured’s major defenses in the liability suit was statute of limitations, and the insured argued it was based on the same facts that would determine the coverage question of whether the loss occurred during the policy period. The court made a nuanced distinction between the date the infringement occurred, which would control coverage, and the date the claimant’s cause of action for infringement accrued, which would control the limitations defense. Although these two facts are similar, they are not the same.  While adjudication of the accrual date would generally signal that the occurrence must have preceded it in time, it would not actually establish the date of the occurrence.

The insured also argued it was entitled to its own counsel because of the allegation that its infringement was “willful,” which overlapped the policy’s exclusion for “knowing” conduct.  Again the court made a careful distinction between the legal standards to be determined.  “Willful,” as construed under the Copyright Act, is a lower standard than “knowing” and may be based solely on a finding of recklessness.

Therefore, in a “close but no cigar” opinion, the Fifth Circuit affirmed Mid-Continent’s right to appoint defense counsel for the insured and held it was not obligated to pay for the insured’s own chosen counsel.  The Fifth Circuit has now signaled several times that it will apply the Davalos rule strictly.


[1] 140 S.W.3d 685 (Tex. 2004).