When The Duty To Indemnify Is Broader Than The Duty To Defend

When The Duty To Indemnify Is Broader Than The Duty To Defend

When it comes to coverage principles this one is as black as coal: the duty to defend is broader than the duty to indemnify and if an insurer does not have a duty to defend, it does not have a duty to indemnify.

But in Texas it can be a different story. A determination that an insurer has no duty to defend may not bring the fat lady out on stage. Texas allows an insured to come back for a curtain call and seek coverage for damages in an action for which there was no duty to defend. This Texas-ism was on display in Acadia Ins. Co. v. Martin, No. 13-798 (N.D. Tex. May 28, 2014), [enhanced version available to lexis.com subscribers].

At issue before the Texas federal court was the potential availability of coverage for Martin, Ltd. for a fatal accident in connection with its work designing and installing a new sewer system for Gordon, Texas. An employee of another contractor was directed to open a manhole, climb inside and remove a plug from the sewer line. When he removed the plug, toxic fumes were released and he died.

The employee’s parents filed suit against several project participants including Martin. Acadia Insurance Company, Martin’s insurer, filed an action seeking a declaration that it owed no duty to defend or indemnify Martin and others for the underlying suit. Acadia argued that it had no duty to defend because the underlying suit fell within the pollution exclusion. The parties seeking a defense did not dispute that methane is a pollutant or that the pollution exclusion otherwise applied to the facts alleged in the underlying suit. Instead they asked the court to consider extrinsic evidence that they contended demonstrated that the employee may have died from a lack of oxygen. The court refused to consider such extrinsic evidence on the basis that it was impermissible to do so under Texas law. Thus, the court concluded that, based on Texas’s eight corners rule, Acadia had no duty to defend.

In most states this would be the end of it. But not so in Texas. Following its conclusion that Acadia had no duty to defend, the court did not turn out the lights. Instead it turned to the question whether Acadia may have a duty to indemnify – which is based on the facts actually established and not simply those alleged in the underlying complaint.

In support of its argument that no coverage was owed, Accadia submitted the autopsy report for the decent and the results of the OSHA investigation. The autopsy report had been amended to change the cause of death from “asphyxia due to methane gas inhalation” to “asphyxia due to oxygen displacement in a confined space.” The OSHA investigation indicated that death was from asphyxiation due to the inhalation of toxic vapor.

The court held that “the corrected autopsy report raises a genuine issue of material fact as to whether Ramirez’s death falls outside the pollution exclusion of Plaintiffs’ policies.” While the report was amended to list “asphyxia due to oxygen displacement in a confined space,” Acadia argued that such oxygen “would have to have been displaced by methane or some other gaseous substance that was present in a concentration capable of causing injury or death.” The court disagreed: “[Acadia], however, fail[s] to demonstrate that the substance which displaced the oxygen was in fact a pollutant as defined by the policies. It is not sufficient for Plaintiffs to note that the oxygen must have been displaced by another substance. Rather, Plaintiffs must show, by competent summary judgment evidence, that the substance which displaced the oxygen was a pollutant under the policies and that the means by which the oxygen was displaced falls within the exclusions.” There you have it – the Texas two-step in action.

Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.

The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.

    Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.

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