United States: Fifth Circuit Makes Numerous Rulings Regarding Coverage For Insureds Defense Costs And Denies Insurers Reliance On Billing Guidelines

Case:  Aldous v. Darwin Nat'l Assurance Co.,
           U.S. Fifth Circuit Court of Appeals
           851 F.3d 473 (5th Cir. 2017)

In Aldous v. Darwin Nat'l Assurance Co., he plaintiffs, Charla Aldous and her law firm Charla G. Aldous, P.C. d/b/a Aldous Law Firm, sued their professional liability insurer, Darwin National Assurance Company, regarding defense costs Darwin owed, where plaintiffs' attorney in the underlying malpractice suit also pursued claims for the insured and against the former client. The district court dismissed certain claims on a 12(b)(6) motion and decided the remainder of the case on summary judgment. The U.S. Fifth Circuit Court of Appeals reversed and remanded for further proceedings.

The litigation arose out of the Aldous plaintiffs' representation of Albert Hill, III, in trust litigation as an heir to the Hunt Petroleum Corp. fortune. Aldous, along with two other attorneys, Lisa Blue and Steve Malouf, secured a $114.7 million judgment on a contingency basis, but Hill refused to pay the fee. Aldous, et al. retained Alan Loewinsohn to sue to recover their fee, and Hill counterclaimed for breach of fiduciary duty, duress, breach of contract, fraud and professional negligence. The counterclaims triggered Darwin's policy with regard to Aldous. (The other attorneys had separate policies with a different insurer). Darwin agreed to pay Loweinsohn to defend Aldous along with Blue and Malouf, agreeing to split Loewinsohn's costs three ways with the other malpractice insurers. The court ruled in favor of Aldous, Blue and Malouf, awarding $21.9 million for the earned contingency fee in the trust litigation, $479,595 in costs in the trust litigation, and costs and fees of $2,586.560.11 in defending Hill's counterclaims.

Darwin then contended that the total amount of defense costs payable to Loewinsohn was only $668,068.38, with Darwin owing only $222,689.44, which was its one-third share. Darwin further claimed that Aldous should reimburse the $279,676 extra it had advanced during the underlying litigation. Aldous thus filed suit in Texas state court for breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas Insurance Code and Texas Deceptive Trade Practices Act. Darwin removed the case to federal court and counterclaimed for breach of contract and unjust enrichment.

The federal district court granted summary judgment in favor of Darwin, holding that Aldous was judicially estopped from claiming more than $668,068.38 in defense costs, based on affidavits submitted in the underlying litigation against Hill. The court also concluded that Aldous could not recover fees incurred in prosecuting her claims against Hill, even if it was inextricably intertwined with her defense, because of the judicial estoppel. As a further result, the district court ruled that Darwin could recover the overpayment but it could not assert breach of contract claims, as contrary to the anti-subrogation rule.

The U.S. Fifth Circuit Court of Appeals first addressed the issue of judicial estoppel, since that ruling precluded Aldous from establishing a breach of contract against Darwin and underpinned Darwin's claim for equitable relief on the overpayment. The Court first noted that in cases of diversity jurisdiction, federal courts are bound to apply federal principles of judicial estoppel (not state rules). To prevail, Darwin had to establish that Aldous's position was "clearly inconsistent with its previous one" and that Aldous had convinced that court to accept that previous position. After reviewing the evidence provided in the underlying litigation with Hill, the Fifth Circuit concluded that Aldous had never taken the position that defense costs were limited to $668,068, but rather simply presented fees that were solely related to defense, while there were additional fees of over $2 million that were incurred for both defensive and affirmative claims. Since there was no judicial estoppel, Aldous' claims for breach of contract were viable. Further, the precise amount of defense costs remained a disputed issue of fact.

The Fifth Circuit further addressed Darwin's contention that it did not breach the insurance contract in failing to pay the additional amounts of defense costs, because the policy gave Darwin discretion to determine what constituted "reasonable claim expenses," which Darwin contended include only charges covered by the policy. The Court refused to determine if this policy provision was generally enforceable, because it concluded that Darwin had in fact failed to make any determination about the reasonableness of the claim expenses before refusing to pay them. The Court did note that if the policy gave Darwin an "unquestionable right to pay only to the extent it pleases," then coverage would be illusory. The Fifth Circuit also stated that the insurer's Billing Guidelines could not bind Aldous, because they were not part of the insurance contract.

In light of the erroneous judicial estoppel, the district court had refused to consider Aldous' claim for a declaratory judgment that Darwin had to pay all of the attorneys' fees and costs that were "inextricably intertwined" with the defense and pursuit of affirmative claims. The Court of Appeals quickly disposed of those claims, holding that no Texas court had ever held that the duty to defend included payment of legal fees for prosecuting affirmative claims. Thus, the Court rejected those claims.

Likewise, the appellate court addressed Aldous' claims for breach of the common law duty of good faith and fair dealing, which had been dismissed on Darwin's motion to dismiss for failure to state a claim. The Court noted that under Texas law, an insurer has a duty of good faith and fair dealing in handling its own insured's claims, but it has no similar duty to its insured to investigate and defend claims by a third party. The federal court concluded that the loss for which Aldous made a claim was Hill's, a third-party, so Darwin owed no duty of good faith or fair dealing. The Fifth Circuit also upheld the dismissal of Aldous' claims under the Texas Insurance Code and the Texas Deceptive Trade Practices Act, because Aldous had no independent injury for the mishandling of the claims, following its prior decision in Parkans Int'l, LLC v. Zurich Ins. Co., 299 F.3d 514 (5th Cir. 2002).

Next, the Court of Appeals addressed Darwin's claims to recover the amount it had overpaid for Aldous' defense. First, the Court concluded that Darwin had no claim for equitable reimbursement under Texas law, citing to Excess Underwriters at Lloyd's, London v. Frank's Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 45 (Tex. 2008) and Miga v. Jensen, 299 S.W.3d 98, 103 (Tex. 2009). Rather, the insurer's remedy is to include a right of reimbursement in the insurance contract or to obtain a clear and unequivocal consent from the insured to the payment in light of disputed coverage along with consent to a right to seek reimbursement.

Finally, the Fifth Circuit determined that Aldous' recovery of legal fees from Hill, which Darwin had already paid, was not a breach of the insurance contract. Rather, Darwin could have and should have asserted its subrogation rights in the underlying lawsuit against Hill. Since it failed to do so, it could not recover those amounts through a breach of contract claim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions