Dentons on Taylor v. Allstate Insurance Co.: When Is a Texas Liability Insurer Liable for Inadequate Defense of a Case?

Dentons on Taylor v. Allstate Insurance Co.: When Is a Texas Liability Insurer Liable for Inadequate Defense of a Case?

In Taylor v. Allstate Insurance Co.,[1] a Texas court of appeals held that the only common-law tort causes of action available against a liability insurer for allegedly inadequate defense of its insured are breach of contract and a Stowers[2] (failure to settle) claim, but that a contract claim might be available.  This commentary takes that case as a starting point to examine the larger topic of insurer liability for inadequate defense.

Taylor was involved in an auto accident where the passenger in the other car was catastrophically injured.  At a mediation, Allstate tendered its $250,000 limits and Taylor settled for $3 million in excess of limits.[3]  He then sued defense counsel and Allstate, alleging that he had excellent defenses, notably that the injuries were caused by failure to wear a seatbelt, which were not properly investigated and developed.[4]  He further alleged that Allstate negligently managed his defense and tortiously interfered with his contractual and attorney-client relationship with defense counsel.

Vicarious liability was foreclosed by State Farm Mutual Automobile Insurance Co. v. Traver. 980 S.W.2d 625 (Tex. 1998), [enhanced version available to lexis.com subscribers].  As this commentary notes:

Without taking a position on whether insurers ought to be held vicariously liable for defense counsel’s errors, one could suggest that it is shortsighted for insurers to argue against such liability.  Insurers greatly value the right to select and direct defense counsel, and that right is regularly questioned.  Defense of that right would be aided by forthrightly standing behind defense counsel and compensating insureds for any damage caused by their errors (subject to a right of indemnification from defense counsel).  Be that as it may, Traver is the law of Texas, so that basis of liability is not available to insureds.

The Taylor court relied on other cases which it found to foreclose any tort claim (other than a Stowers claim) for an insurer's handling of a third-party liability claim.  However, as the commentary notes, it noted another possibility:

Taylor contended that, even if he had no tort claim, he had a contract claim.  The supreme court had stated in Head that “an insured is fully protected against his insurer's refusal to defend or mishandling of a third-party claim by his contractual and Stowers rights."  From this, Taylor argued that “the Texas Supreme Court expressly contemplates the existence of some contractual right.”[5] The Taylor court agreed that all of the cases it cited had addressed only tort claims, leaving a contract claim potentially open.  The contract here was not in the record, so its terms could not be evaluated to determine what contractual duties Allstate might have had.  The court remanded for further proceedings on that issue.

The commentary reviews the relevant authorities and arguments bearing on whether Texas courts might recognize such a claim.

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[1]  Taylor v. Allstate Ins. Co., 356 S.W.3d 92 (Tex. App.—Houston 2011 rev. denied), [enhanced version available to lexis.com subscribers].
[2]  G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544, 547 (Tex. Comm'n App. 1929) [enhanced version available to lexis.com subscribers], holding approved).
[3]  Taylor v. Alonso, 395 S.W.3d 178, 180 (2012), [enhanced version available to lexis.com subscribers], (parallel claim against defense counsel).
[4]  Taylor  v. Allstate, 356 S.W.3d at 95.
[5]  Taylor v. Allstate Ins. Co., 356 S.W.3d 92, 101 (Tex. App.—Houston 2011 rev. denied).

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    William T. Barker is a member of Dentons US LLP’s Insurance Litigation & Coverage Practice Group and practices in the firm’s Chicago office. He has a nationwide practice in the area of complex commercial insurance litigation, including coverage, claim practices, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is the co-author, with Ronald D. Kent of New Appleman Insurance Bad Faith Litigation, Second Edition and with Charles

Silver of Professional Responsibilities of Insurance Defense Counsel; he has written over 100 published articles on insurance and litigation subjects. He has been described as “[t]he leading lawyer commentator” on the relationships between insurance and civil procedure. Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 & n.4 (1995). He is an Adviser to the American Law Institute project on Principles of the Law of Liability Insurance. He is a member of the Editorial Board of New Appleman on Insurance Law Library Edition and New Appleman Insurance Law Practice Guide. He is Editorial Board Director and Senior Contributing Editor of Insurance Litigation Reporter and a member of the Board of Editors of Defense Counsel Journal.

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