No Duty to Defend Doesn’t Mean No Duty to Indemnify, 5th Circuit Rules

A federal appeals court has clarified, at least under the realm of Texas law, when an insurer has a duty to indemnify – even if it has no duty to defend a tort action against the insured thanks to an unambiguous pollution exclusion.

“While the duty to defend is determined ‘solely by the facts alleged in the petition and the terms of the policy,’ the duty to indemnify ‘generally cannot be ascertained until the completion of litigation, when liability is established, if at all,'” a panel of the U.S. 5^th Circuit Court of Appeals wrote in a Liberty Mutual Insurance case decision handed down this week.

In overruling part of a lower court’s decision and questioning other recent court actions, the appellate judges concluded that “the assumption that the duty to indemnify cannot exist where there is no duty to defend is ‘faulty.'”

The decision could complicate some litigation for insurers, or perhaps lead some to further tweak the wording of exclusions.

The case began in 2016 in South Carolina, where Copart Inc. operates a sprawling automobile salvage yard near Columbia, readying cars for dealer auction. Eight property owners near the operation filed suit in 2016 in South Carolina, charging that the operation was damaging their bucolic properties by polluting a creek system with “alarming levels” of petroleum chemicals and other hazardous fluids that leaked from the cars.

That litigation settled in 2022. But the insurance coverage issue continued: Copart, a publicly traded company with operations in 11 countries, held commercial general liability and umbrella policies with Liberty Mutual Fire Insurance and its sister firm, Liberty Insurance Co. Liberty asked the court to declare that it had no duty to defend or indemnify Copart in the tort action.

Copart is headquartered in Dallas, and the insurance duty case was heard in Texas federal court.

Both sides agreed that the policies’ exclusions clearly barred coverage for damages caused by pollution from the Copart operations. But at the district court and in the appeal, Copart’s attorneys argued that the exclusions referred only to actual pollutants, such as chemicals, contaminants and waste. The underlying lawsuit brought by the nearby property owners also mentioned “non-pollutants,” such as water, sediment and soil, as damaging their land.

Those were not excluded, Copart said, thus requiring coverage by the insurer.

The district court and the appellate judges did not buy it. “None of Copart’s arguments is persuasive,” reads the July 31 5^th Circuit opinion, written by Judge Stephen Higginson.

“It exceeds the bounds of plausibility to interpret the complaint as alleging ‘independent’ harm by the non-pollutant substances,” Higginson noted, upholding the lower court’s finding that Liberty Mutual had no duty to defend.

Despite that, the 5^th Circuit found that the lower court misinterpreted Texas case law by concluding that no duty to defend automatically means no duty to indemnify. The district judge relied on a 1998 federal appeals court decision, finding that “logic and common sense” dictate that assertion.

But the appellate panel noted that a later 5^th Circuit decision, in Colony Insurance vs. Peachtree Construction, held that a duty to defend is determined by the terms used in the underlying lawsuit and by the policy; but the litigation must be concluded to determine if indemnity is due.

“In many cases an insurer may have a duty to defend but, eventually, no duty to indemnify,” the 2011 Peachtree decision reads. “This has led some courts to observe that in Texas the duty to defend is broader than the duty to indemnify, because an insurer is obligated to defend whenever there is any potential basis for liability under the policy, while the duty to indemnify may never be realized. Other courts have run with this concept, erroneously holding that because the duty to defend is broader than the duty to indemnify, there can be no duty to indemnify absent a duty to defend.”

In other words, evidence in the underlying suit may ultimately show that non-pollutants caused the damage to the South Carolina property owners, sidestepping the policy exclusion, the 5^th Circuit wrote.

“If, for example, relevant evidence shows that the plaintiffs’ ‘cloudy water’ was caused only by sand and sediment, then the pollution exclusion may not apply. If this were so, Liberty may be obligated to indemnify Copart,” the court said.

The judges remanded that part of the case back to the district court to determine Liberty Mutual’s indemnity obligation, if any.

The court acknowledged that the underlying suit has been settled. But it did not explain how the lower court might now determine if the evidence reflects damage from non-pollutants. The lead attorney for Liberty Mutual could not be reached Tuesday.