Texas Insurance Law Newsbrief - March 1, 2024

Texas Insurance Law Newsbrief


The Supreme Court of Texas conditionally granted an insurer’s request for mandamus relief, after finding that the trial court abused its discretion in ruling that a settlement agreement was binding and admissible to establish coverage and the amount of the insured’s loss.

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In In re Ill. Nat'l Ins. Co., No. 22-0872, 2024 Tex. LEXIS 158 (Feb. 23, 2024), the insured, Cobalt International Energy, was sued by various investors after Cobalt’s stock price plummeted due to SEC investigations over Cobalt’s alleged facilitation of illegal payments to Angolan government officials and after allegations arose that Cobalt materially misrepresented the oil content of its wells. Cobalt provided notice to its insurers of the SEC investigation, the well allegations, and the suit filed by the investors, however, the insurers denied coverage. Cobalt had purchased towers of liability insurance from numerous insurance companies and although the policies issued did not require the insurers to provide Cobalt a defense, they did require the insurers “to advance defense costs ‘for which’ the policies ‘provide coverage.’” But the insurers refused advance defense costs, after denying that their policies provided coverage. As a result, Cobalt had to self-fund its defense and then filed suit against the insurers to recover those costs.

Cobalt filed for bankruptcy, and eventually the investors and Cobalt executed a settlement agreement for $220 million, which the parties believed to be the maximum amount of potential coverage available. In the settlement agreement, Cobalt accepted an obligation to satisfy the settlement amount, and the investors agreed to release all claims against Cobalt once the coverage litigation was finished. The investors also agreed to look solely to the insurers and their policies to recover the $220 million.  Both the bankruptcy court and federal court overseeing the investors suit approved the settlement. The investors then intervened in the suit Cobalt had filed against the insurers, requesting a declaratory judgment that the insurers were obligated to pay the settlement amount. The insurers raised three main challenges (1) asserting the investors lacked standing to sue them, (2) the insured, Cobalt, its officers and directors had not suffered a covered loss, and (3) “alternatively, the settlement agreement was not binding on the insurers or admissible to establish coverage or the amount of any covered loss.” The trial court held, among other things, that the settlement agreement was admissible in the coverage litigation, not subject to collateral attack, and could be relied on by the jury to establish the amount of Cobalt’s loss. The insurers then sought mandamus relief in this case.

Although the Supreme Court found that the settlement legally obligated Cobalt to pay, and thus it suffered a “loss” under the policies, the settlement agreement was not binding against the insurers nor was it admissible in the coverage litigation. The court found that a settlement between an insured and a third party is not binding on an insurer if it did not result from a “fully adversarial trial” in which the insured bore an actual risk of liability for the damages awarded or had some other meaningful incentive to ensure the settlement accurately reflected the damages and thus the insured’s loss. Here, the terms of the settlement agreement protected Cobalt against any actual risk of liability beyond the obligation to pay insurance benefits it may or may not receive. The court further held that the “fully adversarial trial” requirement applied even when the insurer neither accepted coverage nor made a good faith effort to adjudicate coverage. Accordingly, the insurer’s petition for writ of mandamus was conditionally granted, ordering the trial court to vacate its orders “to the extent they rely on the holding that the settlement agreement is admissible and binding to establish coverage under the policies and the amount of any covered loss.”

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The United States District Court for the Northern District of Texas recently granted an insurer’s motion to compel appraisal, finding that the insurer did not waive their right to appraisal.

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In Castellaw v. Liberty Ins. Co., Civil Action No. 3:23-CV-2116-X, 2024 U.S. Dist. LEXIS 28409 (N.D. Tex. 2024), the insureds, Carson and Kyle Castellaw, filed a claim for property damage to their home resulting from a plumbing leak. The Castellaws and Liberty disagreed over the amount of damage to the home, and although Liberty made some payments, the Castellaws were unhappy with the amount and claim-handling. Months later, the Castellaws sent a pre-suit notice, reigniting negotiations, and the parties began exchanging bids, retaining contractors, and conducting independent investigations of the property. After negotiations fell through once again, the Castellaws filed suit. The following day, Liberty invoked the right to appraisal under the policy. Although the Castellaws initially agreed to the appraisal and even named an appraiser, they later revoked their consent, arguing that they agreed to the appraisal only under duress, as Liberty forced them to appoint an appraiser within a short time limit. Liberty then filed this motion to compel appraisal.

The Castellaws argued that the insurer waived its right to appraisal. To establish this, however, the Castellaws had to prove that (1) the parties reached an impasse, (2) after the impasse, an unreasonable amount of time passed before the insured invoked the appraisal clause, and (3) the unreasonable delay prejudiced the insured. The parties disagreed on when the impasse occurred, but the court noted that a showing of an impasse in negotiations requires more than mere disagreement. Rather, the insured must show that the insurer was negotiating in bad faith and that the insurer believed that further negotiations would be futile yet continued to feign negotiations. The court found that delayed response time by Liberty alone did not support the Castellaw’s contention that an impasse had occurred. The court found that the Castellaws failed to show that there was a delay, much less an unreasonable delay, when the parties reached an impasse on the same day they filed suit, and when Liberty invoked appraisal only one day later. Accordingly, the court granted Liberty’s motion to compel appraisal.

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