Downhole Navigator, L.L.C. v. Nautilus Insurance C, 2012 U.S. App. LEXIS 13342

Downhole had a commercial general liability policy with Nautilus from mid-2008 to mid-2009; Sedona Oil and Gas sued Downhole for negligence on March 3, 2009.
Nautilus issued a defense under a reservation of rights; Downhole rejected the defense due to a claimed conflict from the reservation and hired independent counsel.
Nautilus refused to reimburse Downhole for the cost of its independent counsel; Downhole filed a declaratory judgment action seeking defense, indemnity, and reimbursement.
The magistrate judge granted summary judgment that Nautilus did not have to reimburse independent counsel costs but reserved ruling on indemnity; the district court affirmed this ruling on appeal.
Sedona’s negligence claim concerns Downhole’s deviation work; policy exclusions include testing/consulting, professional services, data processing, and other coverage-defining provisions.
Texas law governs the dispute; the court applies Davalos and analyzes whether the facts to be adjudicated in Sedona are the same as the facts on which coverage depends.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether insurer must reimburse independent counsel costs	Downhole relies on Davalos; argues conflict precludes insurer control and costs should be reimbursed.	Davalos permits control absent same-facts coverage issues; because Sedona’s facts are not the same as coverage decisions, no reimbursement is required.	No; Downhole not entitled to reimbursement.
Whether the Davalos standard is displaced by Unauthorized Practice of Law Committee v. American Home Assurance Co.	Unauthorized Practice relaxed Davalos, allowing insurer staff representation when interests align during reservation of rights.	Unauthorized Practice did not create a blanket rule; it does not broadly redefine when conflicts arise.	Declined to adopt a broader Davalos relaxation; conflict not established here.
Whether the facts to be adjudicated in the Sedona suit are the same as the facts on which coverage depends	If they are the same, insurer could not control defense without creating a conflict.	The Sedona facts (negligence in deviation work) are not the same as facts that would determine coverage (e.g., testing/consulting, professional, or data processing).	Not the same; no conflict disqualifying insurer-chosen defense.

Merchants Fast Motor Lines, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 939 S.W.2d 139 (Tex. 1997) (insurer owes defense and may have control, depending on conflict and coverage issues)
N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004) (conflict arises when facts to be adjudicated are the same as facts determining coverage)
Unauthorized Practice of Law Committee v. American Home Assurance Co., 261 S.W.3d 24 (Tex. 2008) (insurer staff-attorney defenses allowed if interests are congruent; no blanket rule to preclude)
Rx.com Inc. v. Hartford Fire Ins. Co., 426 F. Supp. 2d 546 (S.D. Tex. 2006) (conflict-of-interest principle: coverage outcomes should not be controlled by insurer’s chosen counsel)
State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625 (Tex. 1998) (lawyer owes duty to insured; conflicts arise if insurer’s instructions would compromise defense)