Our June 2011 Alert reported on a Texas district court decision holding that a policyholder was not entitled to be reimbursed for the cost of hiring defense counsel after having rejected its insurer’s offer to defend subject to a reservation of rights. Downhole Navigator, L.L.C. v. Nautilus Ins. Co., 2011 WL 4889125 (S.D. Tex. May 9, 2011). Last month, the Fifth Circuit affirmed the ruling. Downhole Navigator, L.L.C. v. Nautilus Ins. Co., 2012 WL 2477846 (5th Cir. June 29, 2012).  

Applying Texas law, the Fifth Circuit held that the insurer’s reservation of rights did not create a conflict of interest that would justify divesting an insurer of its right to control the policyholder’s defense. In particular, the court noted that the facts to be adjudicated in the underlying litigation were not the same as those upon which coverage depended. The court rejected the policyholder’s contention that “the prospect that the attorney provided by [the insurer] could develop facts harmful to Downhole’s pursuit of coverage” was sufficient to constitute a conflict. Such concerns are unjustified, the court held, in light of appointed counsel’s duty of loyalty vis-à-vis the policyholder.