Texas Court Holds Suit Under D&O Policy Not Ripe for Declaratory Judgment

In its recent decision in American Construction Benefits Group, LLC v. Zurich Am. Ins. Co., 2014 U.S. Dist. LEXIS 5147 (N.D. Tex. Jan. 15, 2014), the United States District Court for the Northern District of Texas had occasion to consider whether a D&O insurer’s coverage obligations were triggered by a threatened, but not yet filed, derivative action lawsuit.

Zurich insured ACBG under a directors and officers policy. ACBG procured reinsurance for its member company, J.D. Abrams, L.P., through a third company.  While negotiating a renewal of the reinsurance, ACBG’s president agreed to an exclusion for a specific medical procedure that had been performed on a child of an Abrams employee.  The reinsurer subsequently denied coverage for the $1.2 million in costs associated with the procedure.  ACBG later sought coverage for this amount from Zurich, claiming that its president committed a wrongful act when it agreed to the exclusion in the reinsurance contract.  While Zurich acknowledged ACBG’s claim, it never formally asserted a coverage position. 

ACBG members later filed a declaratory judgment action against Zurich.  Zurich, in turn, moved to dismiss the complaint, asserting that the suit was premature since no claim had yet been asserted against ACBG that could trigger Zurich’s duties to defend or indemnify.  In response, ACBG members acknowledged that while no derivative suit had yet been filed, they were contemplating one and it therefore was imminent.

The court observed that the existence of an underlying pleading is a prerequisite under Texas’ “eight corner rule” for determining a duty to defend.   As such, and because ACBG’s members had not yet filed their allegedly imminent derivative action, the court determined that the duty to defend question was not ripe for judicial consideration.  The court ruled similarly with respect to Zurich’s potential duty to indemnify, noting that under Texas law, an insured cannot obtain a ruling on a duty to indemnify absent a judgment or settlement of an active litigation.  In passing, the court noted that:

ACBG's complaint is devoid of any allegation that it will be harmed if this court withholds declaratory relief. Because there is no underlying suit, ACBG faces no immediate risk that it will be forced to contribute to a settlement agreement or face a bad-faith suit. And ACBG does not allege that its members have threatened to sue unless ACBG relinquishes its rights.

The court also rejected ACBG’s claim against Zurich for violation of Texas’ claims handling statute based on Zurich’s failure to promptly affirm or deny coverage.  Because there was no underlying suit that could trigger Zurich’s duty to defend or indemnify, explained the court, it necessarily followed that it could not be held to have improperly delayed its decision with respect to such duties.