It is common knowledge in the insurance industry that an insurer’s duty to defend is broad. Recently, a U.S. District Court reminded us just how broad that duty is when it held that a complaint with only two scarce factual allegations triggered an insurer’s duty to defend.

When a company or individual procures liability coverage, it is purchasing two fundamental promises from the insurance company: (1) the obligation to fund the policyholder’s defense against third-party claims (the duty to defend), and (2) the obligation to pay for any resulting liability that may arise from a settlement, judgment, or other resolution (the duty to indemnify). Across the country, the duty to defend is exceedingly broad and intentionally deferential to the policyholder. In many jurisdictions, that duty is triggered so long as there are any allegations against the insured that could potentially give rise to coverage under the policy. Accordingly, even where factual allegations are sparse or fall beyond the scope of coverage, a carrier must step up and defend if there is a possibility for coverage. The United States District Court for the Southern District of Texas’ opinion in Hudson Excess Insurance Co. v. Filipp Oilfield Services, LLC exemplifies these principles.

In Hudson, the insurer sought declaratory relief regarding its duty to defend and indemnify Filipp for claims asserted against it by Galatas in a Texas state court lawsuit that arose out of Galatas’ injuries while allegedly working at Filipp’s job site. The underlying lawsuit contained nothing more than the following factual allegations: “On or about January 23, 2023, Plaintiff [Joshua Galatas] was working at a job site owned, operated, and/or managed by Defendants [Filipp] in Harris County. While performing his work, a fire and/or explosion occurred that severely burned Plaintiff and caused injuries to multiple parts of his body.” A hospital bed photograph followed these allegations. These were the only factual allegations in the underlying lawsuit.

Filipp tendered the claim to its general liability insurer, Hudson. Hudson agreed to defend Filipp under a reservation of rights and subsequently filed the instant coverage action. Hudson argued that because the policy precluded coverage for claims asserted by “Employees, Contractors, Volunteers and Other workers,” Galatas’ claim was not covered and Hudson had no duty to defend Filipp. The court disagreed.

The court held that to determine Hudson’s defense obligation, it was required to “apply the eight-corners rule and look solely to the insurance policy and plaintiff’s petition . . . ‘without regard to the truth or falsity’ in the allegations or ‘without reference to facts otherwise known or ultimately proven.’” Additionally, the court held that it could not consider extrinsic evidence of Galatas’ employment status, which was not alleged in the underlying lawsuit, because such a determination would “overlap with the merits” question of whether Filipp owed Galatas a duty as his employer. Accordingly, the court concluded that it could not determine whether Galatas’ claim fell within the policy’s employer liability exclusion and Hudson was required to defend Filipp.

Key Takeaways

This case has several key takeaways for policyholders.

First, when facing a third-party claim, policyholders should carefully consider the allegations and each liability policy it has purchased to determine which policies may respond. If there is even the potential for coverage, policyholders should give timely notice to the corresponding insurer(s). This may require that a policyholder give notice of the same claim under multiple lines of insurance. Because the duty to defend is exceedingly broad, this strategy increases a policyholder’s probability of securing a defense – for which it has already paid premiums – even if the insurer’s duty to indemnify is questionable. For example, a policyholder may face a suit alleging both bodily injury due to an accident and financial loss due to the policyholder’s alleged error or negligence. The policyholder should tender the lawsuit to its commercial general liability insurer as well as its errors and omissions insurer. While each insurer may ultimately dispute the extent to which they owe indemnity, it is possible that both will have a duty to defend the policyholder.

Second, while not discussed in the court’s opinion, this case serves as a reminder of the need for independent counsel. Traditionally, an insurer defending a policyholder selects and retains the policyholder’s defense counsel and controls the defense. This model can lead to a conflict of interest for defense counsel – who must defend the policyholder, but knows the insurer will likely provide future business. This conflict is particularly apparent when certain findings in the underlying suit would give the insurer the ammunition it needs to deny coverage. In this scenario, many states (including Texas) require the appointment of independent counsel. Independent counsel would not be selected or retained by the insurer and the insurer would not control the defense. In Hudson, there was a clear conflict of interest between Hudson and Filipp: if it was determined that Galatas was Filipp’s employee in the underlying lawsuit, Filipp would be found liable and Hudson would be able to deny coverage based on the employer liability exclusion. The appointment of independent counsel helps resolve this conflict by ensuring that defense counsel is not influenced by the insurer’s interest in denying coverage.

Policyholders should be attuned to these practical realities and, when necessary, be sure to consult experienced insurance coverage counsel in order to maximize potential coverage when faced with third-party claims.