Employers Casualty Company v. Tilley
1973 Tex. LEXIS 278, 16 Tex. Sup. Ct. J. 365, 496 S.W.2d 552 (1973)
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Rule of Law:
An insurer is estopped from denying coverage based on a policy violation (e.g., late notice) when, through an attorney it retained to defend the insured, it actively develops evidence adverse to the insured on the coverage question without disclosing the conflict of interest to the insured and obtaining their informed consent.
Facts:
- On November 25, 1967, Douglas Starky was injured at a Prudential well site while Tilley, as an independent contractor, was furnishing tools and employees for lifting casing pipe.
- Grady Fore, Tilley's foreman who was operating the lift, knew of Starky's accident, but it was disputed whether Tilley himself had actual notice of the accident before being sued.
- Starky filed a personal injury lawsuit against Tilley on September 19, 1969.
- Tilley claimed he had no knowledge of the accident until the lawsuit was filed, offering this as his excuse for not notifying his insurer, Employers Casualty.
- On October 6, 1969, Employers Casualty secured a standard non-waiver agreement from Tilley and engaged an attorney to represent Tilley in the Starky personal injury suit.
- For nearly 18 months, the attorney, while representing Tilley, also performed services for Employers Casualty by developing evidence adverse to Tilley regarding the policy's late notice provision.
- The attorney did not advise Tilley of this apparent conflict of interest between Tilley and Employers Casualty.
- The evidence gathered by this attorney for Employers Casualty subsequently became the basis for Employers Casualty's separate suit against Tilley seeking to deny coverage.
Procedural Posture:
- On January 22, 1971, Employers Casualty Company filed a declaratory judgment action in state trial court against Joe Tilley, d/b/a Joe’s Rental Tools and/or Oil City Casing Crews, Joe’s Rental Tools Company (collectively "Tilley"), seeking a determination that Tilley's late notice relieved Employers Casualty of its obligation to defend a personal injury suit instituted by Douglas Starky against Tilley.
- Tilley filed a cross-action, alleging, among other things, waiver and estoppel.
- Both parties moved for summary judgment in the trial court.
- The trial court denied Employers Casualty's motion and granted Tilley's motion, rendering judgment that the policy was in full force and effect, Employers Casualty was obligated to defend Tilley in the Starky suit, and Employers Casualty must pay any judgment entered against Tilley up to the limits of its policy.
- Employers Casualty appealed to the Court of Civil Appeals (an intermediate appellate court) from the trial court's judgment.
- The Court of Civil Appeals reformed the trial court's judgment by striking the portion obligating Employers Casualty to pay any judgment entered against Tilley but affirmed the trial court's judgment as reformed. Employers Casualty was the appellant and Tilley was the appellee at this appellate stage.
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Issue:
Does an insurer waive or become estopped from asserting a policy defense, such as late notice, if the attorney it provided to defend the insured simultaneously develops evidence against the insured on the coverage question without informing the insured of the conflict of interest?
Opinions:
Majority - Daniel, Justice
Yes, an insurer is estopped from asserting a policy defense, such as late notice, when the attorney it provided to defend the insured simultaneously develops evidence against the insured on the coverage question without informing the insured of the conflict of interest. The court held that an attorney selected, employed, and paid by an insurance company to represent an insured owes the insured the same unqualified loyalty as if the insured had originally employed them. If a conflict of interest arises between the insurer and the insured, the attorney has a duty to immediately advise the insured of the conflict and the opportunity to obtain other counsel. The attorney in this case, without advising Tilley of the conflict, actively worked against Tilley's interest by developing evidence to support Employers Casualty's late notice defense. This conduct violated the Code of Professional Responsibility and established "Guiding Principles" for lawyers and insurers. A standard non-waiver agreement does not nullify these ethical duties or permit such adverse conduct. The insurer's failure to disclose the conflict and its use of the attorney to gather prejudicial evidence against Tilley constituted a violation of public policy, leading to estoppel as a matter of law.
Concurring - Sam D. Johnson, Justice
Yes, an insurer is estopped from asserting a policy defense, such as late notice, when the attorney it provided to defend the insured simultaneously develops evidence against the insured on the coverage question without informing the insured of the conflict of interest. Justice Johnson concurred in the result, strongly emphasizing that the attorney's actions—developing evidence against Tilley, briefing against Tilley's position for the insurer, and not disclosing the conflict—constituted a waiver and estoppel as a matter of public policy. He stressed that the court should focus on the ethical considerations of the attorney-client relationship, citing the Code of Professional Responsibility (Canons 4, 5, 6, and 34). He argued that the attorney's loyalty should have been solely to Tilley, and the insurer's actions through that attorney transgressed the fundamental fiduciary duties inherent in the attorney-client relationship, irrespective of a non-waiver agreement. He contended that the "guiding principles" should explicitly be the court's Code of Professional Responsibility, which governs attorneys' permissible actions.
Analysis:
This case significantly reinforces the ethical obligations of attorneys in tripartite relationships (insurer-insured-attorney) and sets a high bar for insurers regarding conflict of interest disclosure. It clarifies that a non-waiver agreement does not excuse an insurer or its appointed counsel from the duty to disclose conflicts or from the prohibition against actively working against the insured's interest. The decision ensures that insureds receive undivided loyalty from their legal representatives, even when the insurer pays the fees, and establishes that violation of these ethical duties can lead to an estoppel against the insurer, impacting future coverage disputes.
