Texas High Court Finds No Direct Action Rule Can Apply to DJ Actions Brought Against Insurers in Some Cases

The general rule in Texas is that injured parties cannot sue the tortfeasor’s insured directly until the insurer’s liability has been finally determined by agreement or judgment. See, e.g., Angus Chemical Co. v. IMC Fertilizer, Inc., 939 S.W.2d 138 (Tex. 1997) (per curiam); Great American Ins. Co. v. Murray, 437 S.W.2d 264, 265 (Tex. 1969). See, also, Aviles v. Aguirre, 292 S.W.3d 648, 649 (Tex. 2009) (per curiam); State Farm County Mut. Ins. Co. of Texas v. Ollis, 768 S.W.2d 722, 723 (Tex. 1989) (per curiam). Recently, the Texas Supreme Court held that a worker could not bring a direct action for declaratory judgment on coverage prior to establishing the liability of the tortfeasor.

The Texas Supreme Court in In re Essex Ins. Co., 2014 WL6612590 (Tex. Sup. Ct., Nov. 21, 2014), considered whether an injured worker who lost his hand by operating a tortilla machine at San Diego Tortilla (SDT) could directly sue SDT’s insurer in a declaratory judgment action to establish the insurer’s indemnity obligation under SDT’s policy prior to securing a judgment against SDT. The trial court permitted the suit against the insurer prompting the Texas Supreme Court to grant mandamus relief.

Essex insured SDT. Essex argued before the Texas Supreme Court that the trial court had abused its discretion by refusing to dismiss the injured worker’s claims because Texas’ “no direct action” rule prohibited a plaintiff from directly suing a defendant’s liability insurer to recover benefits under the insurance policy until such time as the defendant’s liability to the plaintiff had been established.

The injured worker argued that his claims against Essex did not violate the “no direct action rule” because the worker was merely seeking a declaration that the Essex policy covered SDT’s liability to the worker, as opposed to a money judgment against the insurer in the amount of that liability, and because the Texas Declaratory Judgments Act expressly permitted the worker to seek such relief. The worker argued that the Texas Supreme Court had previously held that parties could seek a declaratory judgment regarding an insurer’s duty to indemnify before the insured defendant’s liability had been determined. Citing Burlington N. & Santa Fe Ry. Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, 334 S.W.3d 217, 219-20 (Tex. 2011). However, the Court found that the cases cited by the worker did not implicate the “no direct action rule” because in each of the cases that were cited it was the insurer or the insured defendant, not the plaintiff, who sought declaratory relief, or the insured defendant’s liability to the plaintiff had in fact been determined before the declaratory judgment action was filed. The injured worker cited no cases which had held that the plaintiff, who was not a party to the insurance policy, could seek to obtain a declaratory judgment regarding an insurer’s duty to indemnify an insured defendant against liability to the plaintiff before that liability had been determined.

Because Texas law did not permit the injured worker to sue the insurer directly for a declaration of the insurer’s duty to indemnify SDT before SDT’s liability to the worker had been determined, the Texas Supreme Court concluded that the trial court abused its discretion by denying the motion to dismiss the worker’s claim.