Allied World Specialty Ins Co. v. McCathern, P.L.L

Case: 17-10615 Document: 00515321485 Page: 1 Date Filed: 02/26/2020
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
February 26, 2020
No. 17-10615
Lyle W. Cayce
Clerk
ALLIED WORLD SPECIALTY INSURANCE COMPANY, formerly known as
Darwin National Assurance Company,
Plaintiff - Appellant
v.
MCCATHERN, P.L.L.C., formerly known as McCathern Mooty, L.L.P.; LEVI
MCCATHERN,
Defendants - Appellees
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:16-CV-2489
Before ELROD, COSTA, and HO, Circuit Judges.
PER CURIAM:*
McCathern P.L.L.C. and its named partner, Levi McCathern (together,
“McCathern”) are facing a legal malpractice lawsuit brought by one of the
firm’s clients, West Star Transportation, Inc. (“West Star”). In this declaratory
judgment action, McCathern’s insurer, Allied World Specialty Insurance Co.
(“Allied World”), contends that it does not have to defend the malpractice case.
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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McCathern moved to dismiss. The district court granted the motion in part,
concluding that Allied World has a duty to defend. After oral argument, we
held this case in abeyance for almost eighteen months because Levi McCathern
filed for bankruptcy. The bankruptcy court recently modified the automatic
stay to allow this appeal to go forward. With this case finally out of
hibernation, we affirm.
I.
McCathern Represented West Star in the Robison Action
In January 2009, McCathern was retained to represent West Star in a
personal injury action filed by Charles and Cheri Robison in Texas state court.
West Star was covered by a Lexington Insurance Company policy with a
$500,000 limit.
Early in the lawsuit, the Robisons’ counsel sent McCathern a letter
purporting to be a Stowers 1 demand. It offered to settle the Robisons’ claims
for the remaining available limit of the Lexington Policy. By its terms, the
Stowers letter would expire at 5:00 p.m. on May 8, 2009. Lexington instructed
McCathern to accept the Stowers demand on May 6, 2009. Levi McCathern
contends he did so by telephone before the deadline, but he did not accept the
offer in writing until 42 minutes after the deadline. The Robisons’ counsel
rejected the written acceptance as untimely.
The parties disputed whether McCathern timely accepted the settlement
offer. Relying on the supposed oral acceptance of the Stowers demand,
McCathern filed a motion to enforce the settlement and asserted the
affirmative defense of settlement on behalf of West Star. But the court denied
“Sending a demand letter (commonly called the ‘Stowers’ letter) warns the insurance
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carrier of a potential claim for violation of its duty to its own insured . . . . The letter points
out the potential added liability and damages that can be assessed against the carrier . . . for
failure to accept a demand for fair settlement within policy limits.” 2 TEXAS PRACTICE GUIDE
PERSONAL INJURY 2d § 6:120.
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West Star’s motion to enforce the alleged oral agreement and later granted
summary judgment rejecting the affirmative defense of settlement.
The case proceeded to trial where the jury found against West Star and
awarded over $5.5 million to the Robisons. The judgment was affirmed on
appeal. W. Star Transp., Inc. v. Robison, 457 S.W.3d 178, 182 (Tex. App.—
Amarillo 2015, pet. denied).
Malpractice Litigation Against McCathern
In 2016, two lawsuits were filed against McCathern alleging that it was
liable for the multimillion dollar judgment against West Star. First, Lexington
filed a federal declaratory judgment action against the McCathern, West Star,
and the Robisons. Lexington alleged that West Star’s liability in excess of the
Lexington Policy’s limits was the result of McCathern’s failure to timely accept
the Stowers demand.
West Star filed suit against McCathern and Lexington in Texas state
court. West Star alleged, among other things, that McCathern engaged in the
following malpractice:
• “Failing to properly monitor the file on behalf of [West Star]”;
• “Failing to work the file on behalf of [West Star]”;
• “Failing to timely and properly communicate with [West Star],
including but not limited to, failing to keep [West Star] properly
apprised of the Stowers deadline and resolution of the case”;
• “Failing to properly research all issues of fact[] and law”;
• “Failing to timely respond to the Stowers demand brought by the
Robisons”; and
• “In all things failing to act as a reasonably prudent attorney under
the same or similar circumstances.”
West Star maintained that “[a]ll of these acts of negligence, among others,
taken together and separately, proximately caused Plaintiff West Star to be
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exposed to an excess judgment in the current amount of $6,583,860.94, and
increasing daily at a rate of $867.55.”
The federal court in the Lexington case dismissed its suit in favor of the
one West Star brought in state court. See Lexington Ins. Co. v. W. Star Transp.,
Inc., 2017 WL 3867770, at *2–3 (N.D. Tex. May 2, 2017). The West Star action
remains pending.
McCathern’s Insurance Policy
McCathern was insured under a professional liability policy issued by
Allied World for the period from September 18, 2009, to September 18, 2010
(the “Policy”). Under the Policy, “the Insurer shall have the right and duty to
defend any Claim seeking Damages that are covered by this Policy and made
against an Insured even if any of the allegations of the Claim are groundless,
false or fraudulent.” Further, the Policy provides coverage for “all amounts in
excess of the Retention . . . that an Insured becomes legally obligated to pay as
Damages and Claim Expenses because of a Claim arising out of a Wrongful Act
. . . that is first made during the Policy Period or any Extended Reporting
Period.” The Policy defines Wrongful Act to mean “an actual or alleged act,
error or omission by an Insured, solely in the performance of or failure to
perform Legal Services.”
Although the Policy generally covers malpractice claims asserted against
the insured during the policy period, it does not apply to certain claims based
on wrongful acts that occurred before the policy’s inception date when the
insured should have known it was facing potential liability before purchasing
the insurance. This Prior Knowledge Condition provides:
[P]rior to the inception date of the first policy issued
by the Insurer if continuously renewed, no Insured
had any basis (1) to believe that any Insured had
breached a professional duty; or (2) to foresee that any
such Wrongful Act or Related Act or Omission might
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reasonably be expected to be the basis of a Claim
against any Insured[.]
When it was sued in the malpractice litigation, McCathern asked for
Allied World to defend it. Allied World undertook the defense subject to a
reservation of its rights.
District Court Proceedings
Allied World then filed this lawsuit seeking declarations that it has no
obligation to defend or indemnify McCathern. The dispute turns on whether
the Prior Knowledge Condition applies. McCathern moved to dismiss,
emphasizing several allegations in the malpractice litigation that invoked
Allied World’s duty to defend. The district court granted McCathern’s motion
on the duty to defend. As for Allied World’s duty to indemnify, the district
court held that a ruling would be premature. Id. The district court entered
partial judgment under Federal Rule of Civil Procedure 54(b) on its duty to
defend ruling.
II.
Under Texas law, an insurer’s duty to defend is determined by the “eight-
corners rule.” Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 491 (Tex.
2008). The rule refers to the eight corners of the only two documents that are
relevant to the analysis: the insurance policy and the pleadings of the
underlying suit. GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197
S.W.3d 305, 308 (Tex. 2006). The court does not consider the merits of the
claim or the truth or falsity of the allegations. Id. The duty to defend applies
as long as there is a possibility that any claim might be covered. Zurich, 268
S.W.3d at 491 (citing 14 COUCH ON INSURANCE § 200:1 (3d. ed. 2007)
(“Typically, even if only one claim in a complaint containing multiple claims
could be covered, the insured must defend the entire action and the insurer
must demonstrate that all the claims of the suit fall outside the policy’s
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coverage to avoid defending the insured.”)). An insurer owes the duty if the
petition in the underlying suit contains factual allegations which fall within
the scope of coverage provided for in the insurance policy. Id. at 490 (citing
GuideOne, 197 S.W.3d at 310). All doubts concerning the duty must be
resolved in favor of the insured. See id. at 491; Heyden Newport Chem. Corp.
v. S. Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965).
To state a plausible claim for declaratory relief that no duty to defend
exists, Allied World was thus required to show either that (1) none of the
allegations in the underlying actions are potentially covered under the Policy;
or (2) the underlying pleadings only alleged facts excluded by the Policy. See
City of College Station v. Star Ins. Co., 735 F.3d 332, 336 (5th Cir. 2013);
Fidelity & Guar. Ins. Underwriters, Inc. v. McManus, 633 S.W.2d 787, 788
(Tex. 1982) (“If the petition only alleges facts excluded by the policy, the insurer
is not required to defend.”). Allied World has failed to do either.
III.
Allied World has a duty to defend against claims arising from wrongful
acts that occurred “during the Policy Period” and against claims arising from
wrongful acts that occurred before the Policy Period if certain conditions are
satisfied. Because we conclude that some of the alleged wrongful acts occurred
“during the Policy Period,” we agree with the district court that Allied World
has a duty to defend McCathern against the underlying malpractice litigation. 2
Allied World argues that West Star’s suit centers on McCathern’s failure
to accept the Stowers demand, which happened four months before the Policy’s
inception. West Star, however, alleges multiple acts of “negligence.” Those
other allegations include (1) failing to properly monitor the file, (2) failing to
2 Because we conclude there are allegations based on acts occurring during the policy
period, we do not need to address the parties’ arguments about whether McCathern should
have known of acts that predated the inception date when it purchased the policy.
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work the file, (3) failing to protect West Star from an excess judgment, (4)
failing to properly research factual and legal issues, and (5) failing to act as a
reasonably prudent attorney under the same or similar circumstances.
According to West Star, “[a]ll of these acts of negligence, among others, taken
together and separately, proximately caused Plaintiff West Star to be exposed
to an excess judgment . . . .” In applying the Prior Knowledge Condition, we
thus are not limited to considering when McCathern failed to accept the
Stowers demand.
The question thus becomes: When did the other alleged acts occur? West
Star’s petition does not specify. But as we read the allegations, some or more
of the negligent acts may have occurred, and in fact likely did occur, after the
Policy’s inception date. For example, McCathern’s alleged failure to “monitor”
and “work” the file, or to properly research certain issues, would seemingly
apply throughout the personal injury suit. Even if the timing of these acts is
indeterminable, the pleadings should be liberally construed in favor of the duty
to defend. Zurich, 268 S.W.3d at 491; see also Harken Expl. Co. v. Sphere Drake
Ins. PLC, 261 F.3d 466, 476–77 (5th Cir. 2001) (interpreting ambiguous
allegations broadly to find that they occurred during relevant policy period).
Allied World responds that the non-Stowers malpractice allegations are
legal conclusions, not factual allegations. It is the latter, Allied World points
out, that determine whether there is a duty to defend. See Farmers Tex. Cty.
Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 1997) (“A court must focus on
the factual allegations rather than the legal theories asserted in reviewing the
underlying petition.”); Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchants
Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997); see also Adamo v. State
Farm Lloyds Co., 853 S.W.2d 673, 676 (Tex. App.—Houston [14th Dist.] 1993,
writ denied). But this is not a case like Griffin, which was an attempt to
manufacture a duty to defend by pinning a legal label to facts that did not fit
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the cause of action. The underlying incident in that case was a drive-by
shooting. Griffin, 955 S.W.2d at 82. The owner of the car from which the shots
were fired argued that his auto insurer had a duty to defend him from a suit
brought by the shooting victim. Id. The auto policy covered negligent acts but
not intentional ones. Id. at 82–83. The victim in the underlying lawsuit
alleged facts showing an intentional shooting but asserted negligence claims.
Id. at 83. The Supreme Court of Texas held that there was no duty to defend
because the facts alleged intentional conduct despite the negligence label
affixed to those allegations. Id.
Here there is no argument that the legal conclusion in West Star’s
lawsuit—malpractice—does not fit the factual allegations. The allegations
that McCathern did not monitor the file, conduct legal research, or
communicate with the client are factual assertions—as opposed to causes of
action—even if they are vague. Allied World’s challenge to the factual
allegations thus seems to be that they are not specific enough or may not prove
true. But at the duty-to-defend stage it is not for us to say whether West Star
will be able to prove that McCathern was negligent in failing to monitor the
personal injury suit or in failing to research legal issues. See, e.g., Gehan
Homes, Ltd. v. Emp’rs Mut. Cas. Co., 146 S.W.3d 833, 842–43 (Tex. App.—
Dallas 2004, pet. denied) (“There is a vast difference between a court analyzing
pleadings . . . and a court conducting an evaluation of the merits of the
underlying claim. . . . If we were to hold that there is no duty to defend, we
would be doing precisely what Texas courts have long held we cannot do—
evaluate the merits of the claim and ignore the facts alleged.”). As for the
specificity, Texas courts recognize that even “vague” allegations may give rise
to a duty to defend. See, e.g., Lexington Ins. Co. v. Nat’l Oilwell NOV, Inc., 355
S.W.3d 205, 213 (Tex. App.—Houston [1st Dist.] 2011, no pet.) (Bland, J.);
Burlington Ins. Co. v. Tex. Krishnas, Inc., 143 S.W.3d 226, 231 (Tex. App.—
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Eastland 2004, no pet.). Indeed, it is because the allegations in the underlying
lawsuit will often be too vague or general (Twombley and Iqbal do not apply in
state court) that Texas law has long applied a tiebreaker in a “case of doubt as
to whether or not the allegations of a complaint . . . compel the insurer to defend
the action”: the uncertainty is “resolved in [the] insured’s favor.” Heyden, 387
S.W.2d at 26 (quotation omitted); see also Zurich, 268 S.W.3d at 491. We have
recognized the powerful role of this rule, describing it as “very favorable to
insureds.” Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d
365, 368 (5th Cir. 2008).
Based on these principles, the district court correctly concluded that at
least some of the malpractice allegations against McCathern “potentially
implicate[d]” the Allied World policy. That triggers the duty to defend. As it
only takes one such claim to trigger the duty to defend, Zurich, 268 S.W.3d at
491, the parsing that can be required in a duty to indemnify case—determining
which if any covered allegations gave rise to the liability, Data Specialties, Inc.
v. Transcontinental Ins. Co., 125 F.3d 909, 911 (5th Cir. 1997)—is not
necessary. The question at this time is only the duty to defend.
The judgment is AFFIRMED.
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