TEXARKANA COURT LOOKS TO FACTS TO DETERMINE DUTY TO DEFEND, APPLIES MENCHACA TO DISMISS EXTRA-CONTRACTUAL CLAIMS

The Texarkana court of appeals recently conducted a textbook duty-to-defend analysis under a CGL policy, highlighting the importance of focusing on the factual allegations showing the origin of the damages, rather than the legal theory of recovery.  In Bush Constr., Inc. v. Texas Mut. Ins. Co., No. 06-18-00021-CV, 2018 WL 3862859 (Tex. App.—Texarkana Aug. 15, 2018) (slip op.), the insured’s employee was injured on the job while using a piece of equipment designed and maintained by the insured.  The claimant asserted a cause of action against his employer under the Federal Employers’ Liability Act (FELA), which was expressly excluded from coverage, but the insured argued that because he had also asserted a cause of action for products liability, which was not excluded, the carrier must defend the whole suit. The court cut through the legal theories and looked at the alleged facts, which made clear the claimant was injured while he was performing work subject to the FELA, which barred coverage for all his damages, regardless of the theory of recovery.    

After concluding the carrier had no duty to defend and therefore had not breached its contract, the court went on to dismiss the insured’s extra-contractual claims. The court applied the Texas Supreme Court’s recent holding in USAA Texas Lloyds v. Menchaca to conclude that the lack of coverage for the claim barred all extra-contractual causes of action. The insured argued its claims for unfair claim settlement practices under Texas Insurance Code Chapter 541 were not coverage-dependent, but the court once again relied on Menchaca to reject this proposition.

Editor’s Note: The court did not mention the body of Texas law holding that common-law and statutory claims for bad faith are simply not recognized by Texas law in the context of third-party claims under liability policies. This is likely because this claim consisted solely of the insured’s demand to recover its own defense costs incurred in the underlying suit after the carrier withdrew its defense, which is functionally a first-party claim (i.e., it is payable to the insured) even though it is asserted under a liability policy.  A claim for indemnity, which is a pure third-party claim, would not have been controlled by Menchaca.  Meanwhile, Menchaca continues to be applied often by both state and federal courts in first-party cases for the proposition that in virtually all fact scenarios, lack of coverage defeats all extra-contractual claims.