An insurance company must defend its insured if there is a mere potential that the lawsuit against the insured is covered, and there are serious consequences when an insurer refuses to do so. In California, if a default judgment is entered because the insured cannot defend itself, there is no retrial of the underlying action; the insurer that could have but refused to defend cannot relitigate the insured’s liability or the claimant’s damages. Amato v. Mercury Cas. Co., 53 Cal. App. 4th 825, 831 (1997). In Texas, the result should be the same, but the insurance industry hopes to advance bad law to the contrary. The Texas Supreme Court will hear an appeal of the decision in Yorkshire Ins. Co. Ltd. v. Roy Seger, et al., Case No. 07-12-00090-CV, Seventh District (July 19, 2013). In Yorkshire, the opinion on appeal held that there are no damages against an insurer when the insured (i) did not engage in a “fully adversarial trial” after the insurer refused to defend, (ii) suffered a judgment, and (iii) then assigned the judgment to the claimant. California law allows no insurer that breached its duty to defend to avoid liability that its breach helped create by leaving its insured defenseless. We shall see if the Texas Supreme Court stands by the principles underlying its decision in Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W. 3d 660 (Tex. 2008), which barred an insurer that refused to defend from challenging the reasonableness of a settlement.
