Eastern District of Texas Rules that Insurer’s Delayed Acceptance of the Duty to Defend Constitutes a Breach of that Duty

In Yowell v. Seneca Specialty Ins. Co., 2015 WL 4575450, 2015 U.S. Dist. LEXIS 98719 (E.D.Tex., Jul. 28, 2015), the Eastern District of Texas ruled that an insurer’s unexplained, 140-day delay in agreeing to defend its insured constitutes a breach of the duty to defend.  As a consequence, the court ruled that the insurer had waived its right to control the defense, though it did not lose the right to contest the reasonableness and necessity of the attorney’s fees subject to reimbursement.

Factual and Procedural Background

Plaintiffs Barry and Rebecca Schneider (the “Schneiders”) filed a lawsuit against David Yowell and David Yowell Construction, LLC (collectively “Yowell”) asserting claims for breach of contract, fraud, and violation of the Texas Deceptive Trade Practices—Consumer Protection Act (DTPA) arising out of allegedly defective construction work performed by Yowell on their home.  Yowell retained counsel to defend it in the lawsuit and, less than a month after being retained, defense counsel tendered the defense to Yowell’s CGL insurer, Seneca Specialty Insurance Company (“Seneca”).  Seneca rejected the tender and denied coverage.

Later, when the Schneiders filed an amended petition adding claims for negligence and breach of express and implied warranties, Yowell’s defense counsel again tendered the defense to Seneca, but Seneca never responded to the tender.  After several more failed attempts to obtain Seneca’s involvement in the defense, Yowell filed suit seeking a declaratory judgment that Seneca has a duty to defend and asserting claims for breach of contract and violation of the Texas Prompt Payment of Claims Act.  Soon after suit was filed—but 140 days after Yowell’s tender—Seneca agreed to participate in Yowell’s defense subject to a reservation of rights.  Yowell subsequently moved for partial summary judgment on its claims.

The Court’s Rulings

In ruling on Yowell’s motion for summary judgment, the court first addressed a question that no Texas state court has answered: whether an insurer’s delay in agreeing to provide a defense to its insured constitutes a breach of the duty to defend.  Seneca argued that it did not breach this duty because it “never explicitly denied a defense to Yowell” after the amended petition was tendered and “it eventually agreed to defend Yowell.”

The court disagreed.  It explained that Seneca failed to submit any summary judgment evidence to show that the delay was reasonable.  In fact, it had provided no explanation for why it needed 140 days to determine whether it had a duty to defend.  Nor had it made any showing that it needed any information apart from the petition and the policy.

As a result of Seneca’s delay, the court continued, Yowell was forced to continue to pay its attorney for almost five months.  Thus, the court concluded, “Seneca’s 140-day delay was, in essence, a denial of a defense,” and “[s]ince Seneca waited without apparent explanation for 140 days before agreeing to provide a defense it now does not dispute it owes to Yowell, . . . Seneca breached its duty to defend.”  Because the court found that the duty to defend had been breached, the court, applying Lamar Homes, Inc. v. Mid–Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007), also held that the insurer had violated  the Prompt Payment of Claims Act.  This violation gives rise to the Act’s 18% per annum damages provision applied to the incurred defense costs.

The court next ruled that, by breaching its duty to defend, Seneca had waived its right to control Yowell’s defense.  In Texas, it is “well settled that once an insurer has breached its duty to defend, the insured is free to proceed as he sees fit” and he may “engage his own counsel and either settle or litigate, at his option.”  Accordingly, the court concluded, Yowell is free to use the attorney of its choice to defend the Schneider lawsuit.

Seneca did not, however, waive its right to contest the reasonableness and necessity of the defense costs incurred by Yowell.  In reaching this decision, the court followed precedent from the Fifth Circuit holding that attorney’s fees recoverable as damages for breach of the duty to defend must be reasonable and necessary.

Finally, the court concluded that, because Seneca had breached the policy by breaching the duty to defend, Yowell was entitled to recover the attorney’s fees it incurred in the lawsuit against Seneca up to the date of the order.

Conclusion

This case is noteworthy because it highlights the importance in Texas of promptly responding to an insured’s request for a defense—even when an insurer is agreeing to defend—and the potential consequences of failing to do so.  At least for now in the Eastern District of Texas, the fact that an insurer has never “explicitly denied” a defense and “eventually” agrees to defend may not insulate it from claims that it has breached the duty to defend if it has no explanation for the “delay” in accepting the tender.