Texas Becomes a Direct Action State’
Got your attention, didn’t I? One of those things every Texas insurance professional knows is that Texas is not a direct action state—simply put, an injured third party cannot sue the tortfeasor’s insurance company “directly.” Rather, the third party has to get a judgment (or settlement) against the insured and then it may bring suit against the insurance company standing in the shoes of the insured.
But what if the Texas Supreme Court changed its oft mercurial mind?
“Never!,” you say, “This is a bedrock of Texas insurance law.” Well, maybe so, but the issue is pending before the Court as this column goes to press in the case of In Re: Central Mutual Insurance Company, No. 04-0014, a petition for writ of mandamus filed on Jan. 6, 2004.
The Central Mutual mandamus stems from a San Antonio case filed by Esther Foose against John Cox for injuries sustained in a multi-car accident. Foose alleges that Cox was driving fast, lost control and hit another car, causing the second car to hit yet another car. The car driven by Foose was then struck by both Cox and the first car he had hit. Foose also had sued William Cox, the owner of the car, for negligent entrustment of the car to John.
Foose later added Central Mutual, W. Cox’s carrier, as a defendant, seeking a declaratory judgment that Central Mutual owed W. Cox a duty to defend and indemnify to him for any judgment. Central Mutual objected to the trial court’s subject matter jurisdiction, and apparently Foose did not even file a response. Even so, the trial court denied the plea to the jurisdiction and later the Fourteenth Court of Appeals denied a petition for mandamus. The last stop is the Texas Supreme Court.
The specific issue, as framed by Central Mutual, is depicted in very stark terms. Central Mutual states that:
“Texas has never been a direct action state. Rather, the law has always been clear that an injured third party cannot sue a tortfeasor’s liability insurance company directly until the tortfeasor’s liability has been finally determined by agreement or judgment. Furthermore, in order for subject matter jurisdiction to exist, the law has always required standing and a justiciable controversy. The Texas Constitution has never allowed advisory opinions. Did the law change when the Legislature and this Court weren’t looking or did the trial court improperly assert jurisdiction over a declaratory judgment action by a tort plaintiff against the insured-tortfeasor’s liability insurance carrier?”
Central Mutual is essentially asking the Texas Supreme Court to re-confirm the State’s long tradition of being a non-direct action state. But has the Court previously invited tort plaintiffs to do just what Foose did?
When can you DJ?
Another way of looking at the issue raised by Central Mutual, however, is not only who has standing to file a declaratory judgment action, but also when is it appropriate to do so given the significant changes in Texas law over the last decade. Let’s assume, as in Central Mutual, that there has been no judgment entered in favor of the injured party against the alleged insured tortfeasor on the underlying claim. The “cause of action” of the injured party/plaintiff against the insurer should logically be limited to a declaration contingent upon a finding of liability and damages against the insured. The central question is whether a declaratory judgment action is proper prior to the resolution of the claim of the underlying dispute. A little background on Texas law is in order.
For years, the rule in Texas was that an insured or carrier could file a declaratory judgment action on the duty to defend at any stage of an underlying suit because there was an actual controversy. In Firemans Fund Ins. Co. v. Burch, 442 S.W.2d 331 (Tex. 1968), the Texas Supreme Court held that while the duty to defend presents a justiciable controversy, the duty to indemnify is premature during the pendency of the underlying case since the insured might prevail in the underlying suit and thus there would never be a duty to pay a judgment. Hence, there could be no justiciable controversy as to the duty to indemnify until after the underlying suit has reached conclusion. Then along came State Farm Fire Cas. Co. v. Gandy, 95 S.W.2d 696 (Tex. 1995). In Gandy, the Court implied, hinted, and generally pointed to the possibility that pre-judgment declaratory judgment actions on indemnity might be proper, or even necessary. The Court held that an insurer must accept coverage or make a good faith effort to resolve coverage issues before adjudication of the underlying claim in order to avoid the “sweetheart deals” or “setup judgments” that were relatively common in the 1980s and early 1990s. So Gandy opened the door to the possibility of a preemptive declaratory judgment action on indemnity.
The Texas Supreme Court then followed Gandy with yet another apparent extension of the opportunity, or requirement, to file early declaratory judgment actions in Farmers Texas County Mutual Co. v. Griffin, 955 S.W. 2d 81 (Tex. 1997). In Griffin, the Court noted changes in the Texas Constitution after Burch permitting a court to resolve jurisdictional issues pertaining to pre-judgment declaratory judgment actions regarding indemnity prior to the resolution of an underlying suit. However, the Court in Griffin limited its holding to situations where the insured has no duty to defend and the same reasons that would negate the duty to defend also negate the possibility of a duty to indemnify. So the door opened further, but how far is unclear.
What is clear is that a declaratory action as to indemnity, even though the underlying case is still proceeding, is appropriate under certain circumstances. But, under current Texas law, claimants such as Foose are not considered parties to the insurance contract and therefore have no standing, or right, to bring a direct action against the insurance company of the insured/defendant for coverage as some type of third-party beneficiary. Allstate Ins. Co. v. Watson, 876 S.W. 2d 145 (Tex. 1994). While claimants do have beneficiary status to sue where the coverage is statutory mandated, such as under the Texas Financial Responsibility Act, these exceptions are very limited. The rule of thumb is, once a judgment has been obtained against the insured, the claimant may take action to recover up to the policy limits under a liability policy as “judgment creditor.” Owens v. Allstate Ins. Co., 996 S.W.2d 207 (Tex. App. – Dallas 1998, pet. denied).
On the other hand, the Texas Supreme Court has not fully addressed whether claimants can or should be parties to declaratory judgment actions. In Gandy, it implied that the injured party could actually “aid” in the resolution of coverage questions through declaratory judgment actions. In Griffin, it restated the suggestion that “plaintiffs may wish to participate in the [declaratory] litigation.” As you may have already realized, there are many more questions than answers here.
Where does Central Mutual fit in?
The case in Central Mutual provides the Texas Supreme Court with an opportunity to provide some clear guidelines as to when declaratory judgment actions are appropriate and whether claimants have standing to file or participate in declaratory judgment actions against the insurance carrier to determine its obligations, both defense and indemnity, to the insured/defendant. So what will it do?
Okay, my crystal ball is relatively cloudy today. In an election year, I would be surprised if the Court decides to do something terribly controversial. Expressly blessing the trial court’s decision to allow the claimant to proceed with a coverage action against the insured/defendant’s carrier would be controversial. On the other hand, the Court may take this opportunity to both reiterate the prohibition against tort claimants bringing in the carrier as a party to the underlying action or also providing clearer guidelines as to when declaratory judgment actions are appropriate during the pendency of the underlying suit.
Realistically, I think the more likely approach is that the Texas Supreme Court will reverse the trial court and re-affirm that Texas is not a direct action state without going further. However, I think we will be very pleasantly surprised if the Court decides to take this occasion to set clearer guidelines as to when declaratory judgment actions are appropriate as to the duty to indemnify.
Clearly, this is one case to watch.