Choosing an insurance attorney is usually the choice of the person being sued. However, if a person is being sued under an insurance policy, it is the insurance company who gets to choose the attorney. A 2004, Texas Supreme Court case illustrates this. The case is styled, Northern County Mutual Insurance Co v. Davalos. Here are some of the relevant facts of the case.
The automobile liability policy in this case obligated the insurer to provide a defense for covered claims and granted the insurer the right to conduct that defense. The insured, however, refused the insurer’s tendered defense because of a disagreement about where the case should be defended.
Davalos, a resident of Matagorda County, was injured in an automobile accident in Dallas County. Davalos sued the driver of the other car in Matagorda County. The other driver and his wife then sued Davalos and a third driver involved in the accident, but in a separate action in Dallas County. Although Davalos was insured by Northern, he turned the Dallas litigation over to the attorneys representing him as a plaintiff in Matagorda County. These attorneys answered the Dallas suit and moved to transfer venue to Matagorda County. The attorneys then notified Northern of the Dallas litigation.
Northern responded to Davalos, stating that it did not wish to hire the attorneys he had selected to defend the Dallas case, that it opposed his pending motion to transfer venue to Matagorda County, and that it had chosen another attorney to defend Davalos in Dallas County. The letter suggested that liability protection under the policy might be threatened if Davalos’ personal attorneys did not abandon their venue motion and withdraw, stating that:
If your personal attorneys continue to defend you in the Dallas County lawsuit and continue to pursue the motion to transfer venue, we will take the position that there is no liability protection under the policy, and the outcome of the Dallas County case will be your personal responsibility.
Northern requested that Davalos instruct his personal attorneys to withdraw as your attorney of record in the Dallas County case and allow the following attorney to substitute in as your attorney of record and defend you under the terms of your Texas personal automobile liability policy and provided information on the attorney. Northern further advised Davalos that he was free to retain his own attorney, at his own expense, to consult on the Dallas County case and that Northern would cooperate with that attorney to the extent it did not jeopardize the defense.
One of Davalos’ attorneys wrote to reject Northern’s offered defense, advising that he considered Northern’s demands to be unconscionable and actionable. The attorney complained that Northern had at best offered only a qualified defense, insufficient to satisfy the full obligations of its duty to defend. The attorney further advised Northern that it could not select defense counsel because of its conflict with Davalos over the venue motion. Finally, the attorney intimated that he expected Northern to pay him to defend Davalos.
Although Davalos refused to comply with Northern’s requests, the Dallas litigation was not moved to Matagorda County. Instead, Davalos’ Matagorda case was transferred on motion of another party to Dallas County. Further, despite Davalos’ rejection of its defense, Northern settled the claims against Davalos.
Prior to this settlement, Davalos sued Northern in Matagorda County, asserting that the insurer had breached its duty to defend in the Dallas County action. In addition to breach of contract, Davalos alleged that Northern had acted in bad faith and had violated the Texas Insurance Code. Both sides moved for summary judgment.
After the parties stipulated to damages, the trial court rendered a final judgment in Davalos’ favor for breach of contract and for violation of the Texas Insurance Code. Northern petitioned this Court for review.
Northern argued that it complied fully with its duty to defend. Northern suggests that a coverage dispute is the only type of disagreement that is sufficient to defeat an insurer’s contractual right to conduct the defense. Because it never disputed that the collision was covered and because it offered to defend Davalos without a reservation of rights or non-waiver agreement, Northern concluded that Davalos had no right to refuse its defense.
Davalos responded that Northern attached improper conditions to that defense and inappropriately threatened his coverage, thereby forfeiting its right to conduct the defense. Moreover, Davalos submits that his disagreement with Northern about venue was itself a sufficient conflict of interest to defeat Northern’s contractual right to conduct his defense. Davalos concludes that Northern remained obligated to pay for his defense because it failed to meet its duty to defend by offering an unconditional defense.
Whether an insurer has the right to conduct its insured’s defense is a matter of contract. The Policy here granted Northern that right, providing that the insurer would “settle or defend, as we consider appropriate, any claim or suit asking for [bodily injury or property] damages.” The right to conduct the defense includes the authority to select the attorney who will defend the claim and to make other decisions that would normally be vested in the insured as the named party in the case.
Every disagreement about how the defense should be conducted cannot amount to a conflict of interest. If it did, the insured, not the insurer, could control the defense by merely disagreeing with the insurer’s proposed actions.
Ordinarily, the existence or scope of coverage is the basis for a disqualifying conflict. In the typical coverage dispute, an insurer will issue a reservation of rights letter, which creates a potential conflict of interest. And when the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends, the conflict of interest will prevent the insurer from conducting the defense. On the other hand, when the disagreement concerns coverage but the insurer defends unconditionally, there is, because of the application of estoppel principles, no potential for a conflict of interest between the insured and the insurer.
Other types of conflicts may also justify an insured’s refusal of an offered defense. One authority lists four separate circumstances in which the insured may rightfully refuse to accept the insurer’s defense: (1) when the defense tendered “is not a complete defense under circumstances in which it should have been,” (2) when “the attorney hired by the carrier acts unethically and, at the insurer’s direction, advances the insurer’s interests at the expense of the insured’s,” (3) when “the defense would not, under the governing law, satisfy the insurer’s duty to defend,” and (4) when, though the defense is otherwise proper, “the insurer attempts to obtain some type of concession from the insured before it will defend.” Thus, the insured may rightfully refuse an inadequate defense and may also refuse any defense conditioned on an unreasonable, extra-contractual demand that threatens the insured’s independent legal rights. Under this latter circumstance, for example, Northern could not have required Davalos to dismiss his Matagorda suit as a condition for defending him, and such a demand would have justified Davalos’ rejection.
But here the disagreement concerns the appropriate venue for the defense of a third-party claim, not Davalos’ independent right to pursue his own remedy. Davalos submits that the venue decision should have been left to the defense attorney selected by Northern. Because the insurer interfered with that decision, Davalos concludes that Northern tendered only a qualified defense.
Northern’s actions did not actually deprive Davalos of the defense attorney’s independent counsel on any issue. Davalos did not ask Northern to provide a defense until after his own personal attorneys had filed an answer and moved to transfer venue. Northern nevertheless agreed to defend, asking that its named attorney be substituted as record counsel and that Davalos’ personal attorneys withdraw and not pursue the motion to transfer venue. Northern also asked that Davalos act expeditiously to transfer the defense to the new attorney. Davalos did not respond for several weeks and ultimately refused to accept the defense. If he had accepted the defense, he could have submitted the issue of venue or any other issue to defense counsel for an independent determination. It is difficult to imagine a set of circumstances in which a choice of venue might amount to a disqualifying conflict of interest. The county where a covered claim should be defended is a strategic litigation decision that must be made in conducting the insured’s defense. The choice of venue should ordinarily have no impact on the insured’s legitimate interests under the policy.
In this case, Davalos chose to reject Northern’s tender and conduct his own defense because he really did not want the case defended in Dallas County. That was his right. But having rejected the insurer’s defense without a sufficient conflict, Davalos lost his right to recover the costs of that defense. Because Northern’s offer to defend Davalos in Dallas County satisfied its obligation under the policy, Northern did not breach its duty to defend.
For these reasons, this court reverse the judgment of the court of appeals and trial court and rendered judgment that Davalos take nothing.
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