/>iInvariably, when an insured tenders a third-party claim, the first two questions asked by the insurance company are: (1) does it have a duty to defend this claim under the terms of the applicable policy; and (2) does it have a duty to indemnify its insured against any losses stemming out of the claim? Until a recent Texas Supreme Court case, it was unclear under Texas law whether answering "no" to Question No. 1 implicitly required the same answer to Question No. 2. However, on December 11, 2009, the Texas Supreme Court issued its opinion in D.R. Horton-Texas, Ltd. v. Markel International Insurance Company, Ltd., wherein it resolved this question when holding that the duty to indemnify is not dependent on the duty to defend, and that an insurer may have a duty to indemnify on a given set of facts, even if the duty to defend never arises.[1]
The background facts in D.R. Horton-Texas are important to why the Court reached its decision: James and Cicely Holmes (the "Holmes") purchased a home built by D.R. Horton-Texas, Ltd. ("D.R. Horton"). Shortly after moving into their new home, the Holmes reported that they discovered mold in their house due to faulty construction completed by D.R. Horton. They alleged that certain latent construction defects allowed water to penetrate the house, thereby causing mold. Consequently, the Holmes sued D.R. Horton for negligence and breach of warranty.
D.R. Horton claimed that the damage to the Holmes' residence was caused by the faulty work of one of its subcontractors. The subcontractor had previously obtained a commercial general liability insurance policy (the "Policy") from Markel Insurance Company, Ltd. ("Markel Insurance"). The subcontract named D.R. Horton as an additional insured under the terms of the Policy. After receiving notice of the Holmes' claim, D.R. Horton promptly tendered the claim to Markel Insurance for defense and indemnification. Markel Insurance declined to defend D.R. Horton because their insured, the subcontractor, was not referenced in the Holmes' petition as bearing any responsibility for the Holmes' damages. Further, Markel Insurance claimed that because it did not have a duty to defend D.R. Horton under the Policy, as a matter of course, it also did not have a duty indemnify D.R. Horton for any losses arising out of the Holmes' claim.
Thereafter, D.R. Horton settled the lawsuit filed by the Holmes. Subsequently, D.R. Horton brought suit against Markel Insurance for reimbursement of its defense costs and settlement funds. D.R. Horton moved for summary judgment claiming that Markel Insurance owed it a duty to defend against the Holmes' claim, as well as a duty to indemnify it against any of the losses it sustained in connection with such claim. As part of its summary judgment evidence, D.R. Horton presented extrinsic evidence to arguably establish that the subcontractor was at fault for the damages to the Holmes' home, rather than D.R. Horton. In response to D.R. Horton's motion for summary judgment, Markel Insurance filed a competing summary judgment claiming that it owed no defense or indemnification obligation to D.R. Horton. The trial court and the Houston 14th Court of Appeals agreed, holding that Markel Insurance had no duty to defend because the Holmes had not implicated the subcontractor in their petition, and that because there was no duty to defend, there could be no duty to indemnify.
Generally, under liability insurance policies, an insurer assumes a duty to both indemnify its insured and to defend its insured against any lawsuit, even if groundless, false or fraudulent, subject to the terms of the applicable insurance policy.[2] Pursuant to a long line of Texas case law, it is well established that the eight-corners rule determines an insurer's duty to defend.[3] Under the eight-corners rule, a liability insurer is to determine its duty to defend based solely on the terms of the insurance policy and the pleadings. In other words, no extrinsic evidence is to be considered when determining an insurer's duty to defend a third-party claim.
In contrast, an insurer's duty to indemnify is not based on the third-party's allegations, but rather upon the actual facts proven and whether the damages caused by actions or omissions of the insured are covered under the terms of the policy.[4] In other words, the duty to indemnify is determined not by the pleadings, but instead, by evidence presented at trial. Consequently, in D.R. Horton-Texas, the Texas Supreme Court held that the duty to defend and the duty to indemnify "are distinct and separate duties." Thus, the Court held that one duty may exist without the presence of the other duty. In reaching this holding, the Court recognized that the Houston 14th Court of Appeals, as well as several other courts, had mistakenly applied its earlier ruling in the Farmers Texas Mutual Insurance Company v. Griffin case,[5] to hold that where there is no duty to defend, there can also be no duty to indemnify as a matter of law.[6] In a footnote, the Court expressly rejected this line of cases. Instead, the Court held that separate inquiries must be made based upon two different standards to determine whether an insurer has a duty to defend and/or a duty to indemnify its insured.
The Texas Supreme Court's holding can be best understood when applying the holding to the facts in the D.R. Horton-Texas case. As noted above, in D.R. Horton-Texas, the Holmes failed to plead any facts in their petition to indicate that the subcontractor was responsible for the negligent construction of their home. To the contrary, the Holmes identified D.R. Horton as being solely responsible for their damages. Therefore, when determining its duty to defend D.R. Horton as to the Holmes' claims, Markel Insurance rightfully concluded that, pursuant to the eight-corners rule (i.e., based exclusively on the petition and the Policy), it had no obligation to offer D.R. Horton a defense in this matter. On the other hand, because the duty to indemnify is determined on the actual facts, the Texas Supreme Court held that it was free to consider the extrinsic evidence filed in support of D.R. Horton's motion for summary judgment showing that the subcontractor, rather than D.R. Horton, had been responsible for the negligent work at issue. After considering the extrinsic evidence on file, the Supreme Court determined that there was a fact issue on whether Markel Insurance had a duty to indemnify D.R. Horton and remanded the case back to the trial court for further consideration.
What is the take away from the D.R. Horton-Texas holding? While it remains true that generally if there is no duty to defend, there is also likely to be no duty to indemnify, this is not an absolute rule because these two duties are separate and distinct and are determined under different standards. Therefore, an insurer must be prepared for the situation where it appears from reading the petition that there is no duty to defend; nonetheless, there still may be more facts developed during the course of litigation that trigger an indemnification obligation. Consequently, the initial determination that there is no duty to defend a claim does not rule out the possibility that facts may later establish a duty to indemnify an insured against losses covered under the applicably insurance policy. Thus, an insurer may decide to defend an action-even if the pleadings do not trigger a duty to defend-when it appears likely that facts will be later developed that will trigger a duty to indemnify. Otherwise, the insurer loses control over the litigation and settlement process.
[1] 2009 WL 4728008 (Tex.).
[2] D.R. Horton-Texas, Ltd. v. Markel Ins. Co., Ltd., 2009 WL 4728008 (Tex.) (citing 14 LEE R. RUSS & THOMAS F. SEGALLA, COUCH ON INSURANCE § 200:3 (3d ed. 2009); see also Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 490 (Tex. 2008)).
[3] Guideone Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 307 (Tex. 2006).
[4] See Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d at 490; see also Canutillo Indep. Sch. Dist. V. Nat'l Union Fire Ins. Co., 99 F.3d 695, 701 (5th Cir. 1996).
[5] Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81 (Tex. 1997) (wherein the Court articulated a limited holding that there is no duty to indemnify when all the same reasons that negate the duty to defend negate any possibility that the insurer will ever have a duty to indemnify).
[6] See also D.R. Horton-Texas, Ltd. v. Markel Ins. Co., Ltd., 2009 WL 4728008 (Tex.) (footnote 4). See e.g., Reser. v. State Farm Fire & Cas. Co., 981 S.W.2d 260, 263 (Tex. App.-San Antonio, no pet.); see also 14 COUCH ON INSURANCE § 200:3 (citing Grimes Constr., Inc. v. Great Am. Lloyds Ins. Co., 188 S.W.2d 805, 818 (Tex. App.-Fort Worth 2006) ("The duty to defend is thus broad that the duty to indemnify; if an insurer has no duty to defend, it has no duty to indemnify."), rev'd on other grounds, 248 S.W.3d 171 (Tex. 2008).
