Joe Partain v. Mid-Continent Casualty Compa
2014 U.S. App. LEXIS 11903
| 5th Cir. | 2014Background
- Mid-Continent insured Hallmark Design Homes and its principals under successive commercial general liability policies for the period 2004–2009.
- Kipp Flores Architects (KFA) sued Hallmark and its principals alleging copyright infringement; Insureds tendered the defense to Mid-Continent.
- Mid-Continent agreed to defend under a reservation of rights, identifying potential coverage defenses (e.g., acts occurring outside policy periods; knowing/willful conduct).
- Insureds insisted on their chosen counsel, claiming a disqualifying conflict of interest; Mid-Continent refused to pay those fees and tendered its own counsel.
- Insureds sued Mid-Continent in state court for breach and statutory claims; district court granted summary judgment for Mid-Continent, holding no disqualifying conflict existed and insurer fulfilled its duty to defend.
- On appeal, the Fifth Circuit affirmed, applying Texas law and the Davalos “same facts” test to conclude Mid-Continent’s tender satisfied its duty to defend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Mid-Continent’s reservation of rights created a disqualifying conflict entitling Insureds to select counsel at insurer’s expense | Reservation of rights plus insurer control creates a conflict because insurer’s counsel may shape facts/strategy to favor insurer’s coverage position | Under Texas law (Davalos), a conflict is disqualifying only if the facts to be adjudicated in the underlying suit are the same facts on which coverage depends | No disqualifying conflict; Mid-Continent satisfied duty to defend by tendering its counsel |
| Whether underlying adjudication of accrual (statute of limitations) overlaps with coverage occurrence date so as to create conflict | Accrual and occurrence timing run on same factual track; adjudicating accrual will necessarily adjudicate occurrence (coverage) | Accrual is discovery/date plaintiff knew of injury; occurrence (when infringement happened) is distinct — underlying suit only requires adjudication of accrual, not occurrence | No overlap sufficient to create conflict; adjudication of accrual need not decide occurrence for coverage |
| Whether a finding of willfulness under the Copyright Act equates to a knowing act under the policy exclusion | Willfulness finding would show knowing conduct and thus decide coverage (policy excludes knowing violations) | Willfulness under §504(c)(2) can cover reckless conduct and does not necessarily establish the policy’s narrower “knowing” standard | Willfulness under the Copyright Act can include reckless conduct and therefore does not necessarily decide the knowing-conduct exclusion; no disqualifying conflict |
| Whether Insureds can recover fees paid to their chosen counsel despite refusing insurer’s tender | Insureds seek reimbursement of fees because insurer’s reservation of rights created a conflict and insurer refused to fund their counsel | Insurer argues it fulfilled duty by tendering counsel and there was no disqualifying conflict; so fees are not recoverable | Fees not recoverable; insurer did not breach by insisting on its right to select counsel |
Key Cases Cited
- N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004) (articulates the “same facts” test for when a reservation of rights creates a disqualifying conflict)
- Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007) (statutory term “willful” includes reckless conduct; common-law meaning applies absent contrary indication)
- Downhole Navigator, L.L.C. v. Nautilus Ins. Co., 686 F.3d 325 (5th Cir. 2012) (Fifth Circuit endorses Davalos “same facts” test)
- Unauthorized Practice of Law Comm. v. Am. Home Assur. Co., 261 S.W.3d 24 (Tex. 2008) (insurer ordinarily controls defense and selects counsel when it owes duty to defend)
- Burlington Ins. Co. v. Texas Krishnas, Inc., 143 S.W.3d 226 (Tex. App.–Eastland 2004) (duty to defend arises when pleadings fairly allege potentially covered claims)