Dallas area insurance lawyers need to read a Texas Supreme Court, 2014 opinion. It is styled, In re Essex Insurance Company.
This is a mandamus proceeding wherein the Court reaffirmed Texas’s “no direct action” rule barring third-party plaintiffs from suing a tortfeasors’s liability insurance company directly until the tortfeasor’s liability has been finally determined by agreement or judgment. In this case, Rafael Zuniga sued San Diego Tortilla (SDT)) after a serious injury sustained while operating a tortilla machine. SDT’s liability insurance company, Essex, agreed to defend SDT, subject to a reservation of rights to deny coverage based in part on an exclusion for bodily injury to the named insured’s employees. Zuniga and SDT asserted that Zuniga was working as an independent contractor.
After Essex rejected Zuniga’s offer to settle for policy limits, Zuniga filed an amended petition adding Essex and seeking a declaration that the policy requires Essex to indemnity SDT for its liability to Zuniga. Essex filed to dismiss the claims against it under Texas Rule of Civil Procedure 91a, arguing that the “no direct action” rule, Zuniga’s lack of standing, and lack of ripeness bar Zuniga from suing Essex until SDT’s liability has been determined. The trial court denied the motion to dismiss. Essex filed a petition for writ of mandamus, which the appeals court denied, but which this court granted.
Zuniga’s basic argument is that its claims against Essex do not violate the “no direct action” rule because he was seeking only a declaration of Essex’s obligation to cover SDT, not a money judgment. Unfortunately for Zuniga, however, the high court noted that it had already held that the “no direct action” rule applied to declaratory judgment actions in the case styled, Angus Chemical v. IMC Fertilizer. Moreover, allowing Zuniga to pursue claims against Essex while the SDT suit was proceeding would prejudice both Essex and SDT in their defenses against Zuniga’s claims because it would: (1) create a conflict of interest for Essex, and (2) necessarily require the admission of evidence of liability insurance in violation of Texas Rule of Evidence 411. This prejudice would exist regardless of the declaratory relief sought.
Zuniga also argued that the court had previously allowed parties to seek declaratory judgment regarding an insurance company’s duty to indemnify even before the insured defendant’s liability had been determined. The court responded saying:
But none of these cases implicates the “no direct action” rule because in each of these cases, it was the insurer or the insured defendant, not the plaintiff, who sought declaratory relief, or had the insured defendant’s liability to the plaintiff had in fact been determined before the declaratory judgment suit was filed.
Zuniga failed to cite to any cases in which the Texas Supreme Court held that the plaintiff who is not a party to the insurance policy may seek a declaratory judgement regarding an insurer’s duty to indemnify an insured defendant before that liability had been determined. As a result, the court concluded that the trial court had abused its discretion, conditionally granted mandamus relief, and directed the trial court to vacate its order denying Essex’s motion to dismiss and grant the motion.
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