Texas Supreme Court Preserves Insurers’ Right to Choose Defense Counsel

July 8, 2004

A new Texas Supreme Court decision will preserve insurers’ ability to properly manage the settlement and defense of insurance claims under liability insurance policies, according to the American Insurance Association (AIA).

On July 2, 2004, the Texas Supreme Court reversed a previous appellate ruling (Northern County Mutual Insurance Company v. Timoteo Davalos) from the Texas Court of Appeals (Thirteenth District). The American Insurance Association led a joint amicus effort supporting the position of Northern County Mutual.

“We are very pleased with the Texas Supreme Court decision,” said J. Stephen Zielezienski, vice president and associate general counsel of AIA. “If the decision had not been reversed, the appellate ruling, particularly given the nominal dispute at issue, could have eroded insurer litigation management—a service that Texas insurance consumers expect insurers to provide contractually when they purchase liability insurance.”

The appellate court had concluded that a mere dispute between an insured and its insurer over the proper venue for an action created a conflict requiring the insurer to relinquish control of the defense to the insured and to allow the insured to select its own counsel. Insurer control of the defense, through the attorney of the insurer’s choice, allows claims to be defended efficiently, competently, and economically.

Removing or impairing those controls, as the lower court decision would have done, could have led to higher legal services costs (and higher insurance premiums) for Texas consumers. If upheld, the appellate ruling also could have opened the flood-gates to subsequent litigation raising alleged conflicts between insurers and insureds designed to undermine an insurer’s legitimate, contractual right to manage claims.

Fortunately, the Texas Supreme Court avoided these consequences when it rejected the appellate court’s decision, while also reaffirming the insurer’s right to control the defense in all but limited conflict situations, primarily those based on coverage disputes.

“The appellate decision under review ignored well-established Texas law governing the rights and obligations of insurers and insureds under standard policies of liability insurance,” said Kathi Giddings, a partner at Akerman Senterfitt in Tallahassee, Fla., and AIA’s national coordinating counsel on litigation management issues. “The Texas Supreme Court has long-recognized that, in exchange for defense of covered claims, liability insurance policies generally grant control of settlement and the defense to the insurer. An insurer has wide discretion in managing a litigated claim so long as its decisions do not compromise the legitimate interests of an insured. That discretion includes the authority to select, employ, and pay the attorney who will defend the claim, accept or reject settlement offers, and make other decisions that would normally be vested in the insured.”

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