FIFTH CIRCUIT COURT OF APPEALS UPHOLDS INSURER’S DENIAL OF COVERAGE FOR THE COST OF INDEPENDENT COUNSEL

On June 29, 2012, the Fifth Circuit Court upheld an insurer’s denial of coverage for the cost of independent counsel after its insured, a Texas oil drilling services firm, rejected the insurer’s offer of representation in a lawsuit.  Downhole Navigator, L.L.C. v. Nautilus Ins. Co., --- S.W.3d ---, 2012 WL2477846, No. 11–20469 (5th. Cir. June 29, 2012).

The insured, Downhole Navigator L.L.C., was sued by an oil well operator after work Downhole performed for the operator caused damage to an oil well.  Downhole notified its commercial general liability insurer, Nautilus Insurance Co., of the suit.  In response, Nautilus offered a qualified defense under a reservation of rights to decline indemnifying Downhole if the suit against the drilling firm fell under one of several policy exclusions.  Downhole responded that Nautilus’ reservation of rights “created a material conflict with respect to the selection of counsel,” adding that the situation forced Downhole to select  its  own  counsel.   Downhole  demanded  that  Nautilus  cover  all  damages  related  to  the  claim including its attorneys’ fees.   Nautilus refused to reimburse Downhole for the cost of its independent counsel, advising that Downhole was not entitled to separate counsel under the circumstances.

Downhole then filed an action seeking a declaratory judgment that Nautilus had a contractual duty to defend and indemnify its insured in the third party lawsuit. The United States District Court for the Southern District of Texas agreed that the insurer was not required to reimburse Downhole for the cost of hiring an independent counsel.  The Fifth Circuit Court of Appeals affirmed, holding (1) because the facts to be adjudicated in the third party lawsuit were not the same facts upon which coverage depended, the potential conflict in this case did not disqualify the attorney offered by Insurer to represent Insured; and (2) therefore, Insured was not entitled to reimbursement from Insurer for the cost of hiring independent counsel.

U.S. Circuit Judges Edward C. Prado, Thomas M. Reavley and Priscilla R. Owen served on the panel. Judge Prado wrote the opinion of the Court.

[Editor’s Note:  MDJW congratulates Nautilus on this successful coverage appeal. Levon Hovnatanian, Jamie Cooper, and Ruth Brenton of MDJW represented Nautilus in the trial court and on appeal in this matter.]