Laura Marie Rhodes v. Chicago Insurance Company, a Division of Interstate National Corporation, et al.

719 F.2d 116 (5th Cir. 1983) · United States Court of Appeals for the Fifth Circuit · November 10, 1983 · No. No. 82-1710

Summary

The Fifth Circuit reversed and remanded a summary judgment in an action seeking payment under a professional malpractice insurance policy after the insured settled or obtained an agreed judgment in an underlying state-court proceeding. The court held that material factual questions remained regarding the policy’s coverage, when the insurer’s duty to defend arose, whether that duty was breached, and the consequences for the insurer’s obligation to pay.

Holdings

  1. Under Texas law, the duty to defend is determined solely from the face of the latest operative pleading, without reference to facts outside the pleadings, because an amended pleading supersedes the prior pleading.
  2. An insurer must defend when the complaint alleges at least one potentially covered cause of action, even if it also alleges claims that are not covered or are excluded.
  3. An insurer that wrongfully fails to defend forfeits the right to control the defense and is bound by a reasonable settlement or judgment, with liability for damages assessed against the insured up to the policy limits and potentially for defense attorneys' fees.
  4. A timely and sufficiently informative reservation of rights, made in good faith when the insurer reasonably believes the complaint may allege uncovered conduct, does not itself breach the duty to defend; if the insured rejects the tender, the insurer remains liable for reasonable and prudent damages attributable to covered conduct, but not uncovered conduct.

Questions Presented

  1. Whether the insurers had a duty to defend Shirley under the original, first amended, or second amended complaint under Texas's complaint-allegation rule.
  2. When any duty to defend arose and whether the insurers breached that duty.
  3. What consequences followed from a breach of the duty to defend, including the insurers' liability for the settlement or judgment, attorneys' fees, and policy conditions.
  4. If the reservation of rights was proper and there was no prior breach, whether the insurers' payment obligation was limited to reasonable and prudent damages attributable to covered conduct.

Disposition

reversed_and_remanded

Cases Cited (15)

  • Maryland Casualty Co. v. Moritz, 138 S.W.2d 1095, 1097-98 (Tex. Civ. App.—Austin 1940, writ ref'd)(followed)
  • Superior Insurance Co. v. Jenkins, 358 S.W.2d 243, 244 (Tex. Civ. App.—Eastland 1962, writ ref'd n.r.e.)(followed)
  • Heyden Newport Chemical Corp. v. Southern General Insurance Co., 387 S.W.2d 22, 26 (Tex. 1965)(followed)
  • Great American Indemnity Co. v. Corpus Christi, 192 S.W.2d 917, 919 (Tex. Civ. App.—San Antonio 1946, writ ref'd n.r.e.)(followed)
  • Ranger Insurance Co. v. Rogers, 530 S.W.2d 162, 167 (Tex. Civ. App.—Austin 1975, writ ref'd n.r.e.)(followed)
  • Ridgway v. Gulf Life Insurance Co., 578 F.2d 1026, 1029 (5th Cir. 1978), reh'g denied, 583 F.2d 541 (5th Cir. 1978)(followed)
  • Gulf Insurance Co. v. Parker Products, Inc., 498 S.W.2d 676, 679 (Tex. 1973)(followed)
  • Steel Erection Co. v. Travelers Indemnity Co., 392 S.W.2d 713, 716 (Tex. Civ. App.—San Antonio 1965, writ ref'd n.r.e.)(followed)
  • Witt v. Universal Automobile Insurance Co., 116 S.W.2d 1095, 1098 (Tex. Civ. App.—Waco 1938, writ dism'd)(followed)
  • Garden Sanctuary, Inc. v. Insurance Co. of North America, 292 So. 2d 75, 78 (Fla. Dist. Ct. App. 1974)(followed)

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