Although a Claim Is Inextricably Intertwined with a Defense, There Is No Duty to Defend

 

April 17, 2017

 

The United States Court of Appeals, Fifth Circuit, made an important decision for the insurance industry in the past week, determining that under Texas law, an insurance company's duty to defend does not extend to prosecuting their insured's counterclaim. Aldous v. Darwin National Assurance Co., No. 16-10537 (5th Cir. Mar. 16, 2017)

 

The case began as an attorney-client dispute and eventually became a malpractice suit. The initial dispute was over a trust and the funds located in the trust. The insurer, Darwin National Assurance Co., provided professional liability insurance to Charla Aldous, an attorney. Aldous provided legal services for a client resulting in a nine-figure judgment in the client's favor. Aldous was successful in her claim for attorney's fees against her client.

 

While that suit was ongoing, the client filed counterclaims against Aldous for breach of fiduciary duty, duress, breach of oral contract, fraud, and professional negligence. Aldous sought coverage under her Darwin National policy for the counterclaims filed against her, and for the initial affirmative suit involving the attorney fees because those claims were inextricably intertwined with her defense.

 

The district court held that Darwin National did not owe coverage for the affirmative suit that Aldous brought against her client for payment, no matter how intertwined her defense was with the counterclaims brought by the client. The Fifth Circuit affirmed this section of the district court's order. The Fifth Circuit also noted that Texas has never held that the duty to defend does not extend to become a duty to prosecute claims that are helpful or “inextricably intertwined” with a defense.

 

Editor's Note: The ruling in this case that an insurer has no duty to defend the prosecution of the insured's counterclaim is good for insurers as it provides cost limitation on an issue that arises often in insurance litigation. Although there are several other coverage issues that arise in this case, this was the most clear and significant for the insurance industry.