U.S. DISTRICT COURT DISMISSES EXCESS INSURER’S DECLARATORY JUDGMENT SUIT ASSERTING POLICY AUTO EXCLUSION

Last week, the United States District Court for the Southern District of Texas concluded that an insurer’s declaratory judgment suit seeking a declaration that an excess liability policy did not provide coverage for an auto accident should be dismissed because there was not yet a justiciable controversy. In AIG Property Casualty Company v. Schultz, 2021 WL 185239, at (S.D.Tex., 2021) (S.D. Texas, Jan. 19, 2021, mem. op.), Schultz was involved in an automobile accident that allegedly injured the Garcias.  Suit was filed against Schulz in the District Court of Harris County, Texas seeking over $1 million in damages. No judgment had yet been rendered in the case, and liability had not been established. AIG filed a suit in federal court seeking a declaration that it owed neither a duty to defend nor a duty to indemnify Schultz.

Shultz argued the duty to indemnify is not yet a subject of justiciable controversy because Defendant has not-yet been held legally liable in the underlying state court lawsuit.  AIG argued that a justiciable controversy exists between the parties because “Schultz tendered the Garcia Lawsuit to AIG and requested indemnity coverage for at least two large settlement demands, although the AIG Policy does not cover the loss.”

The court found that although under Texas law the duty to indemnify typically cannot be adjudicated until there has been a judgment in the underlying suit, a narrow exception does exist where there is no possibility for coverage. Using the “eight corners” rule, the court found that even though the policy contained an auto exclusion, the possibility remained that facts could be developed that could trigger coverage. Additionally, the court found that because no judgment had been rendered in the underlying lawsuit, any ruling addressing the duty to indemnify would constitute an advisory opinion. Ultimately, the court found that the facts are not sufficiently developed for any meaningful decision to be reached regarding the duty to defend or indemnify.  Defendant’s motion to dismiss was granted without prejudice.