Enough is Enough: Fifth Circuit Holds Duty to Defend Does Not Include Costs of Prosecuting Insured’s Fee-Dispute Counterclaim

Aldous v. Darwin National Assurance Co., No. 16-10537 (5th Cir. Mar. 16, 2017), presents a thicket of coverage issues. However, the clearest and most significant one for the insurance industry is that the duty to defend, under Texas law, does not extend to the cost of prosecuting an insured’s counterclaim.

This coverage litigation started as an attorney-client dispute over the non-payment fees and then morphed into a legal malpractice action. Darwin National Assurance Co. insured Aldous under a professional liability insurance policy. Aldous, following a nine-figure judgment in her client’s favor, sought payment from her client of the contingent amount she and her co-counsel were owed. Aldous ultimately prevailed against her client, but prior to doing so, the client had filed counterclaims against her for breach of fiduciary duty, duress, breach of oral contract, fraud, and professional negligence. Aldous sought coverage under her Darwin policy for both the cost of defending against her client’s counterclaims, as well as the cost of prosecuting her affirmative claims arising out of the client’s non-payment of fees “to the extent those affirmative claims were inextricably intertwined with her defense.”

On this particular issue, the Texas federal district court held that Aldous was not entitled to have Darwin pay the costs related to the prosecution of her affirmative claims against her client “even if she could show those affirmative claims were inextricably intertwined with her defense against [the client’]s counterclaims.” The Fifth Circuit affirmed this part of the district court’s order. The Fifth Circuit began by noting, “No Texas court has ever held that the duty to defend includes the duty to pay legal fees incurred in the course of prosecuting affirmative claims that are inextricably intertwined with the defense.” The Fifth Circuit then continued, “The duty to defend the entire suit does not give rise to a duty to prosecute claims helpful to or even inextricably intertwined with that defense, however.” (Emphasis in original.)

This ruling on an insurer’s duty to fund the prosecution of counterclaims is highly favorable to insurers, providing certainty and cost limitation on a recurring issue of great importance.

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