THIS WEEK, a Federal District Court in Texas held that insurance code section 21.55 (18% penalty) applies to the insurer’s breach of its duty to defend an insured. The insured sued Hartford for attorneys fees and penalties alleging that Hartford failed to defend it when it was sued for millions of dollars in an underlying suit. The Hartford moved to dismiss the statutory 21.55 penalty claim contending that it applied only to first party claims and an insured’s demand for a defense was not a first party claim, citing TIG Ins co. v Dallas Basketball, Ltd, 129 S.W.3rd 232 Tex App.-Dallas 2004, pet. denied). The insured countered that the statutory penalty does apply, citing a cluster of cases, including Northern County Mutual v. Davalos,, 84 S.W.3rd 314 (Tex. App.-Corpus Christi, 2002), reversed on other grounds, 140 S.W.3rd 685 (Tex. 2004).
Recognizing that the Texas intermediate appellate courts were split on the issue and the Texas Supreme Court had not yet resolved the conflict, this federal court made an “Erie Guess” on Texas state law and predicted that the Texas Supreme Court would hold that an insured’s demand for a defense is a first party claim, and the breach thereof, would enable an insured to recover an 18 % penalty in addition to its defense costs and expenses incurred in defending itself in the underlying suit. Rx.Com v Hartford Ins Co. (S.D.Tex. 2005).
We think this federal court is clearly wrong and the Texas Supreme Court will rule otherwise if the issue ever reaches that court. Moreover, this opinion fails to tell the whole story. Our firm (Chamberlain-McHaney) took over the defense of the insured when the insured’s hand picked personal lawyer gave up and withdrew, claiming he was owed $600,000 in fees. After we took over the defense, we conducted all the relevant discovery in the case and obtained a full dismissal without any settlement payment whatsoever. And, might we add, at a mere fraction of the cost.
LEGISLATIVE UPDATE: YESTERDAY, the Texas Association of Defense Counsel, through its President (yours truly), submitted a proposed committee substitute bill to the Senate State Affairs Committee which would provide that a non-settling defendant can take a dollar for dollar credit for each dollar a settling co-defendant pays to the plaintiff. The Texas Civil Justice League, the leading tort reform group in Texas, joined in support of the bill. If this bill becomes law, the non-settling defendant will no longer have the onerous and expensive burden of proving the comparative fault of a settling co-defendant and will further enable co-defendants to co-operate with one another in a unified effort to defeat the plaintiff’s claims. It will also eliminate the need for future legal seminars on how to calculate comparative fault when a co-defendant settles.
CHUCK WAGONS AND CHEERLEADERS: The Senate has a new member form the Texas Panhandle. His name is Ken Selinger. This rookie Senator filed a bill that would make the chuck wagon the official vehicle of the Great State of Texas. While presenting his bill to the full senate, he was peppered with questions from his fellow senators. He gamely answered most questions, but then began to tire. When a Senator from Austin rose to ask if he would yield the floor for yet another question, the novice senator snapped back: “No, I have already yielded more than a cheerleader at a drive-in.” The chuck wagon bill remains pending.
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