Anyone who does insurer-side coverage on a regular basis has faced this scenario. Suit has been filed against an insured. The insurer is well aware of it. But, for whatever reason, the insured has not sought a defense. What’s the insurer’s obligation here? Step in and address coverage and undertake a defense, if warranted. Or do nothing until the insured asks the insurer to do something?

This was the question before the Texas appeals court in Egly v. Farmers Ins. Exchange, No. 03-17-467 (Tex. Ct. App. Feb. 15, 2008). Ismael Hernandez was involved in a motor vehicle accident with Victor Egly. Hernandez was insured under an automobile policy issued by Farmers Insurance. Egly sued Hernandez. While Hernandez never notified Farmers of the suit, Egly’s attorney did – several times. “Egly’s attorney warned Farmers that Egly would obtain a default judgment against Hernandez if no answer was filed. Farmers sent messages to Hernandez inquiring about the case, but Hernandez never responded to those messages.”

True to his word, Egly obtained a default judgment against Hernandez. Egly sued Farmers to collect. Farmers filed a motion for summary judgment, maintaining that it owed Egly nothing because Hernandez never informed Farmers of the suit as required by the policy. The trial court granted Farmers’s motion for summary judgment and Egly appealed.

The parties’ competing positions, before the Texas appeals court, were simple – “Farmers argues that it did not receive notice from Hernandez concerning the accident and Egly’s suit and that it was prejudiced by this lack of notice. Egly responds that, because Farmers undisputedly had actual notice of Egly's suit against Hernandez, Farmers failed to establish as a matter of law that it suffered prejudice.”

The Texas appeals court affirmed, pointing to ample precedent for its decision. The court looked to the Texas Supreme Court’s 2008 decision in National Union v. Crocker, where the Texas high court held that “[m]ere awareness of a claim or suit does not impose a duty on the insurer to defend under the policy; there is no unilateral duty to act unless and until the additional insured first requests a defense—a threshold duty that the insured fulfills under the policy by notifying the insurer that the insured has been served with process and the insurer is expected to answer on its behalf.” (emphasis in original).

The court’s decision was tied to a prejudice determination and it looked at the notice provision in the policy as having two purposes: “Here, the first purpose of the notice requirement is satisfied, because Farmers had actual notice of Egly’s suit and could have prepared a defense. However, the second purpose is not satisfied, because Hernandez never notified Farmers that he ‘expect[ed] the insurer to interpose a defense’ or was ‘looking to the insurer to provide a defense.’ Therefore, Farmers had no duty to defend against Egly's suit. And because Farmers had no duty to represent Hernandez, it cannot be liable to Egly under the policy. . . . Because Hernandez never notified Farmers of Egly’s suit or requested representation, and because Egly obtained a default judgment against Hernandez that it sought to enforce against Farmers, Farmers has established as a matter of law that it was prejudiced by this lack of notice.”

I am fairly certain that policyholder and claimant attorneys find this decision to be unnerving.

[Note: Elvis, my favorite canine CO reader, would not have acted like Hernandez. Elvis loves to tender. See nearby article “The King Reads Coverage Opinions.”]