U.S. DISTRICT COURT DISMISSES THIRD-PARTY PLAINTIFFS’ COVERAGE SUIT FOR LACK OF STANDING

Last week, the United States District Court for the Western District of Texas concluded that third-party plaintiffs lacked standing to bring a coverage suit against an insurer and, thus, dismissed the plaintiffs’ suit. In Blakeley Turner et. al. v The Cincinatti Ins. Co., No. 6-19-CV-00642-ADA, 2020 WL 1216419 (W.D. Texas, March 12, 2020, mem. op.), Plaintiffs were students of a Waco trade school operated by ATI Acquisition Company (“ATI”). Plaintiffs sued ATI alleging violations of the Texas Deceptive Trade Practices Act, breach of contract, and breach of warranty, complaining that ATI misrepresented the quality of its program.  ATI was insured by the Cincinnati Insurance Company (“CIC”), but CIC denied ATI a defense and indemnity. Soon thereafter, ATI filed for Chapter 7 Bankruptcy. As ATI was defunct by the date of trial, it provided no defense and a default judgment was entered against it, in favor of Plaintiffs.

Subsequently, Plaintiffs sued CIC asserting that CIC wrongfully denied coverage to ATI. CIC responded with a motion for summary judgment asserting that Plaintiffs had no standing to bring the coverage suit.

On appeal, the United States District Court, relying on Great American Ins. Co. v. Hamel, 525 S.W.3d 655 (Tex. 2017), concluded that Plaintiffs had no standing to sue CIC.  “The Hamel opinion expressed that a claimant against an insurer obtains standing to litigate a coverage trial through either a judgment resulting from a fully adversarial trial or a valid assignment.” Because Plaintiffs were “not the recipients of a valid assignment and the judgment upon which they rel[ied] [was] not the result of a fully adversarial trial”, the United States District Court dismissed Plaintiffs’ claims for lack of standing.