Court Opinion

ID: 9820366
Source: CourtListenerOpinion
Date Created: 2023-09-01 07:10:02.677324+00
Date Added: 2024-06-11T09:03:19.896461
License: Public Domain

In The

                        Court of Appeals

            Ninth District of Texas at Beaumont

                         __________________

                        NO. 09-22-00252-CV
                         __________________

      MID-CONTINENT CASUALTY COMPANY, Appellant

                                 V.

  HARRIS COUNTY MUNICIPAL UTILITY DISTRICT NO. 400,
                     Appellee

__________________________________________________________________

            On Appeal from the 457th District Court
                   Montgomery County, Texas
                 Trial Cause No. 19-10-13793-CV
__________________________________________________________________

                    MEMORANDUM OPINION

     In this interlocutory permissive appeal, 1 we are asked whether

Mid-Continent Casualty Company (Mid-Continent), Appellant, must

     1 The trial court granted Mid-Continent permission to appeal from

the trial court’s interlocutory ruling denying Mid-Continent’s No-
Evidence and Traditional Motion for Summary Judgment, and this Court
accepted the appeal. See Tex. Civ. Prac. & Rem. Code Ann. § 51.014(d)
(authorizing a permissive appeal from an “order that is not otherwise
                                   1
reimburse its insureds, Harris County Municipal Utility District No. 400

(MUD 400), Anne Marie Wright (Wright), and Cheryl Smith (Smith),

Appellees or Insureds, for fees and expenses incurred by attorneys chosen

by the MUD 400 to defend the Insureds in an election contest lawsuit and

whether the insurer had a duty to reimburse its insureds for costs that

they incurred in hiring separate counsel to defend each insured in the

underlying lawsuit.

      The Insureds sued Mid-Continent for failing to pay their attorneys’

fees in defense of the underlying lawsuit. In their second amended

petition – the live pleading before us – the Insureds allege several causes

of action against Mid-Continent, including breach of contract, bad faith,

and several Insurance Code violations. Mid-Continent submitted a

hybrid traditional, and no-evidence motion for summary judgment on the

claims. The trial court denied the motion for summary judgment,

appealable” in a case that identifies a controlling question of law on
which there is substantial ground for disagreement and where an
immediate appeal may materially advance the ultimate resolution of the
lawsuit); Tex. R. Civ. P. 168 (requiring trial court to grant permissive
appeal by order that identifies controlling questions of law on which there
is a substantial ground for difference of opinion and stating why
immediate appeal may advance ultimate disposition of litigation); Tex.
R. App. P. 28.3 (addressing permissive appeals in civil cases).
                                     2
concluding Mid-Continent had a duty to reimburse its insureds for costs,

fees and expenses incurred by attorneys chosen by the insureds to defend

the insureds in the underlying lawsuit. For the reasons set forth below,

we reverse and remand.

                                Background

                           The Underlying Suit

     This dispute arises from an underlying lawsuit filed by Edgar

Clayton (Clayton) in June 2018 (the “Clayton Suit”). In the Clayton Suit,

Clayton challenged the result of the May 5, 2018 election of two open at-

large director positions on the MUD 400 board of directors. Clayton, who

placed third in the election, sued MUD 400, Wright, and Smith. In the

petition, he alleged violations of the Texas Election Code, specifically that

(1) illegal votes were counted because voters were not prevented from

voting more than once, and individuals who were not entitled to vote cast

votes that were counted; (2) voters who were eligible to vote were turned

away from the polls due to failures with availability of the temporary

voting trailer; and (3) election officials were engaged in fraud, illegal

conduct, or made mistakes regarding the ballots by mail that resulted in

ballots by mail not being counted, verified, or authenticated. Clayton

                                     3
asked the trial court to declare it impossible to look at the records from

the election and establish that any of the votes were cast by qualified

voters, that every vote cast be deemed an illegal vote, and that all votes

shall be subtracted from every total making the election void. Clayton

also asked the trial court to declare the election void and order a new

election, assessing all costs against MUD 400.

   Mid-Continent’s Insurance Policy Terms and Reservation of Rights

     Mid-Continent issued a Directors and Officers Policy 04-DO-

000158763, with effective dates of March 31, 2018, through March 31,

2019, insuring MUD 400, and its directors. Several forms and

endorsements are attached to the policy. The coverage endorsements

include a Non-Profit Organization Liability Policy form ML1395, (01/97).

On July 2, 2018, attorney James Stilwell, acting on behalf of MUD 400,

Wright, and Smith, notified Mid-Continent of the Clayton Suit and

requested that Mid-Continent tender a defense and indemnity to them in

the Clayton Suit. On July 24, 2018, Mid-Continent responded by offering

a defense, subject to a reservation of rights. Mid-Continent notified the

Insureds that attorney Britt Harris had been retained by Mid-Continent

to defend all Insureds in the Clayton Suit.

                                    4
     The terms of the relevant insurance policy include the following

language:

     I.     Insuring Clause

     A. The Insurer will pay on behalf of the Insured Loss resulting
        from any Claim first made against any of them during the
        Policy Period or Optional Extension Period, if applicable.

     B. The Insurer has the right and duty to defend any Claim to
        which this insurance applies, even if the allegations of the
        Claim are groundless, false or fraudulent. The Insurer may
        investigate and settle any Claim as the Insurer deems
        expedient, but the Insurer is not obligated to pay any Loss
        or defend any Claim after the Limit of Liability has been
        exhausted by payment of Loss.

     II. Definitions
     ...

     B. “Claim” means:

    (1) any written notice received by any Insured that any
       person or entity intends to hold such Insured responsible
       for a Wrongful Act; or

    (2) any judicial or administrative proceeding initiated
       against any Insured seeking to hold such Insured
       responsible for a Wrongful Act including any appeal
       therefrom.

     C. “Defense Cost” means reasonable and necessary legal fees
        and expenses incurred by any attorney designated by the
        Insurer to defend the Insureds and all other fees, costs,
        costs of attachment or similar bonds (but without any
        obligation on the part of the Insurer to apply for or furnish
        such bonds) and expenses incurred by the Insurer resulting

                                    5
        from the investigation, adjustment, defense and appeal of
        a Claim, but does not mean salaries, wages, or overhead or
        benefits expenses of the Insureds.
     ...

     III. Exclusions
     ...

     B. The Insurer shall not be liable to pay Loss resulting from
        any Claim:

     (4) based upon or attributable to any of the Insureds gaining
        in fact any profit, remuneration, or advantage to which
        such Insured was not legally entitled[.]
     ...

     V. Settlements and Cooperation

     B. … The Insureds shall not, except at personal cost, make
        any payment, admit any liability, settle any Claims,
        assume any obligation, or incur any expense without the
        Insurer’s written consent.

In its reservation of rights letter, Mid-Continent informed the Insureds

that the policy exclusion III. B. (4) may preclude or limit coverage under

the policy if it is determined that the claim made in the Clayton Suit falls

within that exclusion.

     After receiving Mid-Continent’s reservation of rights letter, Stilwell

responded by letter dated August 1, 2018, stating that there was “the

possibility of a conflict [of interest] in representation regarding Mid-

Continent’s desire to have a single attorney represent all (3) defendants

                                     6
in the case.” Stilwell further stated that “[d]ue to potential differences in

interest by and between the directors, and the Board as a whole, the three

defendants currently have separate representation in the lawsuit.”

Stilwell further stated that he “would be discussing Mid-Continent’s

reservation of rights with the Defendants with respect to whether the

exclusion raised in the letter raises an actual conflict of interest with the

insurer controlling the defense of the lawsuit.” Stilwell’s letter concluded:

     Given Mid-Continent’s reservation of rights, and the current
     representation by three separate attorneys due to potential
     conflicts with joint representation, as well as the need to
     discuss these issues with the insureds, I will be back in touch
     with you regarding the parties’ positions in response to your
     letter after the District’s next regularly scheduled board
     meeting on August 27, 2018.

     Robert Bryant, a claims adjuster for Mid-Continent, wrote Stilwell

on September 21 and October 25 stating that Mid-Continent “presently

agree[d] to provide coverage” to the Insureds, subject to a reservation of

rights. Bryant also requested Stilwell let Mid-Continent know if Harris

could proceed forward in defending the Clayton Suit for the Insureds.

Bryant wrote to Stilwell again on November 21, informing him that Mid-

Continent had consulted with a coverage attorney, Brent Cooper,

“regarding the matter of whether or not a potential disqualifying conflict

                                     7
of interest exists to preclude [Mid-Continent’s] ability to select defense

counsel.” According to Bryant, Cooper opined that Mid-Continent had the

right to select defense counsel “because the facts to be adjudicated are

not necessarily the same facts that control coverage.” The Clayton Suit

was eventually dismissed in favor of all Insureds.

                 Insureds Demand for Reimbursement

     On February 1, 2019, after the Clayton Suit had been dismissed,

Stilwell wrote Bryant and Mid-Continent claims supervisor Roderick

Evans, demanding reimbursement for attorneys’ fees and expenses.

Stilwell   stated, “Because   of the    potential     conflicts   with joint

representation as well as the existence of actual conflicts due to your

reservation of rights letter, the insureds defended the case with counsel

of their choosing[.]” According to the letter, on January 29, 2019, during

the trial, Clayton voluntarily dismissed his suit against the Insureds

with prejudice. Stilwell then informed Mid-Continent that the attorneys

who defended the Insureds in the Clayton Suit would submit their final

invoices for reimbursement of the costs of defense.

     On May 14, 2019, Mid-Continent forwarded a letter to Christopher

Skinner, the general counsel for MUD 400, denying the claims for

                                    8
reimbursement of the fees incurred by counsel chosen by the Insureds in

the defense of the Clayton Suit. Citing section V. B. of the insurance

policy, Mid-Continent informed the Insureds that expenses that are

incurred “without the Insurer’s (Mid-Continent) written consent will not

be covered by the Insurer or reimbursed to the Insured.” Furthermore, in

the letter Mid-Continent asserted that case law dictates that

independent or outside counsel’s fees will only be reimbursed when there

is an actual conflict of interest regarding coverage that arises, and since

no such conflict of interest existed in the Clayton Suit, the fees and

expenses incurred by MUD 400’s independent counsel are not covered

under the insurance policy and Mid-Continent has no duty to reimburse

the invoices submitted.

     Stilwell sent a pre-suit demand letter to Mid-Continent on July 10,

2019, demanding payment of the Insureds’ attorneys’ fees in the amount

of $151,759.60 for defense of the Clayton suit plus $5600 in attorneys’

fees for defending the wrongful denial. Stilwell’s letter again referenced

potential conflicts between the Insureds, stating that:

     Mid-Continent stated that it had hired a single attorney to
     represent all three defendants (despite the potential for
     conflicts between the parties…for instance, Ann Marie Wright
     and Mr. Clayton ran on a slate together in the election,

                                    9
     against Cheryl Smith and other candidates. Additionally,
     MUD 400 sought to defend the election through trial, when
     the individual directors may have wanted a do-over or a
     settlement. The potential conflicts between the parties
     prevented a single attorney from fully and zealously
     representing the differing interests of all three parties).

     On November 30, 2020, Mark Lewis, a Mid-Continent attorney,

mailed Stilwell a check made out to MUD 400 for $4290 to pay the fees

generated by Stilwell’s firm between the time that Stilwell first provided

a copy of Clayton’s petition to Mid-Continent and the time that Mid-

Continent offered to assume the defense of the Clayton Suit, under a

reservation of rights. Stilwell did not return the check but wrote to Lewis

and stated, “any deposit of it will not be in accord or satisfaction of MUD

400’s claim or ongoing lawsuit; and will not and does not release its

claims against Mid-Continent.”

                  Insureds’ Suit Against Mid-Continent

     MUD 400, Wright, and Smith filed suit against Mid-Continent for

the alleged wrongful refusal to pay for the attorneys’ fees, expenses, and

costs they paid their attorneys to defend the Clayton Suit. MUD 400’s

second amended petition – the live pleading before us – asserts claims for

breach of contract, violations of the Texas Insurance Code, and breach of

the duty of good faith and fair dealing. Mid-Continent filed a Traditional

                                    10
and No-Evidence Motion for Summary Judgment or Partial Summary

Judgment, contending that Mid-Continent offered to defend the Insureds

in the Clayton suit under a reservation of rights, but the Insureds

rejected the defense attorney chosen by Mid-Continent and hired its own

attorneys. Mid-Continent argued:

     Unless an actual conflict of interest existed between [the
     Insureds] and Mid-Continent, Mid-Continent had the right to
     choose defense counsel for [the Insureds] in the underlying
     claim, and Mid-Continent had no obligation to pay the fees of
     attorneys it did not hire. As a matter of law no such conflict
     existed. Consequently, Mid-Continent is not liable to pay the
     [Insureds’] defense costs.

     According to Mid-Continent, in the Clayton Suit, no conflict of

interest existed between Mid-Continent and the Insureds, and no conflict

of interest was established between the individual insureds and the MUD

400. So, Mid-Continent argues, the Insureds had no right to choose their

own counsel, and there was no need for separate counsel. Mid-Continent

contends it complied with the legal and contractual obligations under the

policy, and it has no obligation to pay and no liability to the Insureds, as

a matter of law.

                                    11
     The trial court denied Mid-Continent’s motion for summary

judgment and gave the parties permission to seek a permissive

interlocutory appeal of the order. 2 The order states in relevant part:

     Having reviewed the Defendant’s Motion for Summary
     Judgment, the Response, the two Supplemental Responses,
     and the Reply, the Court rules that:

     (1) Mid-Continent Casualty Company had a duty to reimburse
         its insureds for fees and expenses incurred by attorneys
         chosen by the insureds to defend the insureds in the
         underlying lawsuit; therefore, the Court DENIES
         Defendant’s Traditional and No-Evidence Motion for
         Summary Judgment; and

     (2) Mid-Continent Casualty Company had a duty to reimburse
         its insureds for the costs that they incurred in hiring
         separate counsel to defend each insured in the underlying
         election contest; therefore, the Court DENIES Defendant’s
         Traditional and No-Evidence Motion for Summary
         Judgment.

     The Court has determined that this order involves controlling
     questions of law as to which there are substantial differences
     of opinion, and an immediate appeal from the order may
     materially advance the ultimate termination of the litigation.

     The controlling questions of law include:

     (1) whether Mid-Continent Casualty Company had a duty to
         reimburse its insureds for fees and expenses incurred by
         attorneys chosen by the insureds to defend the insureds in
         the underlying lawsuit; and

     2 See Tex. Civ. Prac. & Rem. Code Ann. § 51.014(d).

                                    12
     (2) whether Mid-Continent Casualty Company had a duty to
         reimburse its insureds for the costs that they incurred in
         hiring separate counsel to defend each insured in the
         underlying election contest.

     We granted review of the permissive appeal of the trial court’s

Second Amended Order Denying Defendant’s Motion for Summary

Judgment.3

                 Duty to Defend Under Eight-Corners Rule

     In the insurance policy at issue here, Mid-Continent had certain

obligations to defend the Insureds. The duty to defend is distinct from,

and broader than, the duty to indemnify.4 An insurer must defend its

insured if the third-party plaintiff’s factual allegations potentially

support a covered claim, while the facts actually established in the

underlying suit determine whether the insurer must indemnify its

insured for the underlying claim.5 Thus, an insurer may have a duty to

defend but, in the long run, no obligation to indemnify. 6

     3
         See Tex. R. App. P. 28.3(k).
     4   Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 490 (Tex.
2008).
     5 Id.
     6 Id. at 490-91.

                                    13
     Whether an insurer owes a duty to defend “is a question of law

which the appellate court reviews de novo.” 7 In determining a duty to

defend, we follow the eight-corners rule, sometimes called the complaint-

allegation rule. 8 “The rule directs Texas courts to determine an insurer’s

duty to defend its insured based on (1) the pleadings [filed] against the

insured and (2) the terms of the insurance policy.”9 Under the eight-

corners rule, an insurer’s duty to defend its insured from a underlying

suit is determined by the pleadings and allegations in the underlying suit

(here the Clayton Suit), considered in light of the policy provisions,

without regard to the truth or falsity of those allegations.10 The eight-

corners rule takes its name from the fact that only two documents are

ordinarily relevant to the determination of the duty to defend: the policy

and the plaintiff’s pleading. 11 Extrinsic evidence or facts outside the

     7 E & L Chipping Co., Inc. v. Hanover Ins. Co., 962 S.W.2d 272, 274

(Tex. App.—Beaumont 1998, no pet.).
      8 Zurich Am. Ins. Co., 268 S.W.3d at 491.
      9 Monroe Guar. Ins. Co. v. BITCO Gen. Ins. Corp., 640 S.W.3d 195,

199 (Tex. 2022).
      10 GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d

305, 308 (Tex. 2006).
      11 Id.

                                     14
eight-corners are only considered in limited circumstances, which do not

apply here.12

                         Right to Control Defense

     Liability insurance policies, like the one at issue here, typically

confer on an insurer the right to control the defense of claims against the

insured. 13 The insurer’s right of control generally includes “the authority

to select the attorney who will defend the claim and to make other

decisions that would normally be vested in the insured as the named

party in the case.”14

     Under certain circumstances, however, an insurer may not insist

upon its contractual right to control the defense. 15 The insurer’s right to

control the defense gives way when the insurer is burdened by a conflict

     12 See Monroe, 640 S.W.3d at 201.
     13 Unauthorized Practice of Law Comm. v. Am. Home Assur. Co.,

Inc., 261 S.W.3d 24, 26 (Tex. 2008).
      14 N. Cty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex. 2004).
      15 Id. In Davalos, the Supreme Court also provided other examples

of when an insured might be allowed to refuse the insurer’s offered
defense and seek damages for a breach of the duty to defend, but none of
those other examples are at issue in this case. See In re Farmers Tex. Cty.
Mut. Ins. Co., 621 S.W.3d 261, 269 (Tex. 2021) (citing Davalos, 140
S.W.3d at 689).
                                     15
of interest. 16 “Ordinarily, the existence or scope of coverage is the basis

for a disqualifying conflict. In the typical coverage dispute, an insurer

will issue a reservation of rights letter, which creates a potential conflict

of interest.” 17 “[W]hen the facts to be adjudicated in the liability lawsuit

are the same facts upon which coverage depends, the conflict of interest

will prevent the insurer from conducting the defense.”18 Thus, a potential

conflict is not sufficient to entitle insureds to independent counsel.19

Rather, a conflict of interest exists that prevents the insurer from

controlling the defense when the insurer has reserved its rights and the

facts to be adjudicated in the underlying suit are the same facts upon

which coverage depends.20

     16 Id. at 688-89; see also Partain v. Mid-Continent Specialty Ins.

Servs. Inc., 838 F.Supp.2d 547, 566 (S.D. Tex. 2012).
      17 Davalos, 140 S.W.3d at 689.
      18 Id.
      19 Id. at 689-90; Allstate Cty. Mutual Ins. Co. v. Wootton, 494 S.W.3d

825, 837 (Tex. App.—Houston [14th Dist.] 2016, pet. denied).
      20
         Wootton, 494 S.W.3d at 837.
                                       16
                               Discussion

  Did Mid-Continent owe a duty to reimburse the Insureds for fees and
  expenses incurred by attorneys chosen by the Insureds to defend the
                    Insureds in the Clayton Suit?

     The parties both describe the Clayton Suit as an election contest.

And the title of the Petition in the Clayton Suit describes the claim as an

“election contest.” To succeed on a claim for an election contest, the

claimant must prove that the outcome of the contested election, as shown

by the final canvass, is not the true outcome because either illegal votes

were counted, or an election officer or other person officially involved in

the administration of the election prevented eligible voters from voting,

failed to count illegal votes, or engaged in other fraud or illegal conduct

or made a mistake.21 Mid-Continent argued in the trial court and on

appeal that no facts upon which coverage depends would be adjudicated

in the resolution of the Clayton Suit. MUD 400 disagrees and asserts that

the issue presented in Mid-Continent’s reservation of rights letter would

be based on facts to be adjudicated in the Clayton Suit.

     The Insureds argue that the “plain wording of the exclusion

precludes coverage if: (1) An insured received an advantage; and (2) that

     21 Tex. Elec. Code Ann. § 221.003(a).

                                    17
advantage was one the insured was not legally entitled to.” According to

the Insureds, “Mid-Continent raised this exclusion due to Clayton’s

allegations that both Wright and Smith had received the advantage of

illegal votes (and no one is entitled to illegal votes).” Furthermore,

according to the Insureds, Clayton’s “lawsuit also alleged that MUD 400

had received the advantage of not holding and paying for a new election

(when it was not entitled to certify the prior election due to illegal votes).”

      In its reservation of rights, Mid-Continent informed the Insureds

that it reserved the right to decline coverage for “Loss resulting from any

Claim based upon or attributable to any of the Insureds gaining in fact

any profit, remuneration, or advantage to which such Insured was not

legally entitled….” Because Mid-Continent’s insurance policy excludes

coverage for loss resulting from the Insureds gaining “any profit,

remuneration, or advantage” to which such Insureds are not legally

entitled, we must determine if this exclusion is dependent upon the facts

to be adjudicated in the Clayton Suit. The Insureds contend that the key

word here is the word “advantage.” The term “advantage” is not defined

in the policy. In construing the term advantage, here we apply the

traditional canon of noscitur a sociis – “‘that a word is known by the

                                      18
company it keeps.’”22 Accordingly, “advantage,” like “profit” and

“remuneration,” in this context must refer to something like a monetary

advantage. Applying this traditional rule of construction, ordinary people

would read Exclusion III. B. (4) of the policy to exclude coverage of a

monetary advantage gained by the Insureds to which they were not

legally entitled to receive.

      In the underlying suit, Clayton’s petition refers to several election

irregularities. The irregularities alleged by Clayton include the District

failing to properly conduct early voting by having an inaccessible voting

trailer and having only one election official present at the voting trailer;

ballots by mail being improperly handled and thus having no way to

determine if ballots by mail were properly accepted, rejected, or counted;

and a failure to properly record voter information in the Combination

Form during early voting and on election day, making all of the votes

illegal votes. None of these allegations are monetary advantages gained

by the Insureds.

      22Fiess v. State Farm Lloyds, 202 S.W.3d 744, 750 (Tex. 2006)
(quoting Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 575 (1995)).
                                    19
     Mid-Continent argues that the Davalos “same facts” requirement is

not met because the facts to be adjudicated in the underlying lawsuit –

election irregularities – were not the same facts upon which coverage

depended – the Insureds receiving an advantage to which they were not

legally entitled. Moreover, Mid-Continent urges that to prevail in the

underlying lawsuit, Clayton did not have to prove that the Insureds

received any advantage, but rather Clayton had to prove that eligible

voters were denied the right to vote or that the irregularities were such

as to usurp or render a determination of the will of the voters.

     After examining the allegations in the Petition and the wording in

the policy, and applying Davalos, we agree with Mid-Continent that the

facts upon which coverage depends will not be adjudicated in the

underlying election contest suit. Nowhere in Clayton’s pleadings does

Clayton allege that Wright, Smith, or MUD 400 received a monetary

advantage. The pleadings fail to allege that either Wright or Smith

received illegal votes. Along those same lines, MUD 400’s argument that

it received the “advantage” of not holding and paying for a new election

may mean MUD 400 avoided further expense of a new election, but it

does not mean that the election of May 18th provided MUD 400 with a

                                    20
monetary advantage. Rather, at most, it means MUD 400 would avoid a

disadvantage if the election was not set aside as void. Furthermore, the

trial in the Clayton Suit, based on the allegations in the Clayton Petition,

would not adjudicate whether the Insureds received a monetary

advantage to which they were not legally entitled. On the facts before us

in this case, we conclude that the election contest as alleged in the

Clayton Suit does not give rise to a disqualifying conflict of interest

between the Insureds and Mid-Continent.

  Did Mid-Continent owe a duty to reimburse its Insureds for the costs
        they incurred in hiring separate counsel to defend each
                     Insured in the Clayton Suit?

     Texas Disciplinary Rules of Professional Conduct Rule 1.06 governs

conflicts of interest in representation.23 In relevant part, the rule

provides that a lawyer shall not represent a person if the representation

of that person “involves a substantially related matter in which that

person’s interests are materially and directly adverse to the interests of

another client of the lawyer or the lawyer’s firm[.]”24 A lawyer may only

represent multiple clients in a substantially related matter if (1) the

     23 Tex. Disciplinary Rules Prof’l Conduct R. 1.06.
     24 Id. 1.06(b)(1).

                                    21
lawyer reasonably believes the representation of each client will not be

materially affected and (2) each of the clients consent after full disclosure

of the existence, nature, implications, and possible adverse consequences

of the common representation and the advantages involved. 25

     As evidence of a conflict between the Insureds that necessitated

separate counsel for each Insured, MUD 400 relied on deposition and

affidavit testimony from attorneys Bruce Tough (who represented Wright

in the Clayton Suit), Kenna Seiler (who represented Smith in the Clayton

Suit), and Chris Skinner (general counsel for MUD 400). The deposition

testimony and affidavit generally averred that a MUD 400 board meeting

discussion uncovered material conflicts among Wright, Smith, and MUD

400; that the three Insureds would not waive those conflicts, and that the

Insureds requested separate counsel. Moreover, MUD 400 contends that

Mid-Continent “received actual notice of the multi-party conflict[]” “by

phone call and by letter that potential conflicts between the three

defendants to the Clayton lawsuit precluded all three from being

represented by a single attorney[.]”

     25 Id. 1.06(c).

                                     22
      We conclude that MUD 400’s arguments are without merit.

Appellees contend there was a conflict as supported by the deposition and

affidavit testimony of the three attorneys which contain legal conclusions

that all three Insureds required separate counsel because of conflicts. Of

importance here, we note that the information on which Appellees rely

falls outside the eight-corners of the pleadings and the insurance policy.26

Additionally, that evidence contains legal conclusions which are

insufficient to defeat summary judgment.27

      Next, based on the evidence in the record, it appears that from the

time Mid-Continent received notice of the claim to the time the trial was

concluded, Mid-Continent had the policy, Stilwell’s letters, and Clayton’s

petition. To be sure, Stilwell’s August 1st letter references “potential”

conflicts or the “possibility” of conflicts. In fact, his letter references

“potential” conflicts at least four times – but the letter does not state that

there are actual conflicts. Stilwell’s August 1st letter also states he needs

to discuss the potential conflicts with the insureds. In Stilwell’s February

      26
           Monroe Guar. Ins. Co., 640 S.W.3d at 199.
      27 See Mercer v. Daoran Corp., 676 S.W.2d 580, 583 (Tex. 1984);

Marquis Acquisitions, Inc. v. Steadfast Ins. Co., 409 S.W.3d 808, 814
(Tex. App.—Dallas 2013, no pet.).
                                  23
1st letter, he informed Mid-Continent of the voluntary nonsuit of the

Clayton Suit, but the letter still refers only to “potential conflicts with

joint representation.”

     Applying the eight-corners rule, we conclude that Clayton’s petition

did not allege facts that would necessitate separate counsel. Clayton does

not allege anything in his petition that would make the interests of

Wright, Smith, or MUD 400 adverse to the interests of each other. Nor

did Clayton allege facts that would limit a single lawyer’s responsibilities

to each Insured. Instead, the petition alleges that violations of the Texas

Election Code occurred, specifically that (1) illegal votes were counted

because voters were not prevented from voting more than once, and

individuals who were not entitled to vote cast votes that were counted;

(2) voters who were eligible to vote were turned away from the polls due

to failures with availability of the temporary voting trailer; and (3)

election officials were engaged in fraud, illegal conduct, or made mistakes

regarding the ballots by mail that resulted in ballots by mail not being

counted, verified, or authenticated.

     To sum it up, Clayton’s petition does not allege facts or claims that

indicate there is a conflict between the Insureds, and Stilwell’s letters

                                    24
describe only “potential conflicts” between the Insureds. We therefore

conclude that Mid-Continent had no duty to reimburse its Insureds for

the costs they incurred in hiring separate counsel to defend each Insured

in the Clayton Suit.

            Additional Issues Raised by Mid-Continent on Appeal

      In its appellate brief, Mid-Continent raised additional issues that

were not specifically identified as controlling questions by the trial court.

Those additional issues include whether Mid-Continent is entitled to

summary judgment on MUD 400’s extra-contractual claims, that is,

MUD 400’s claims for the breach of the duty of good faith and fair dealing

and to summary judgment on the Insurance Code claims.

      When we accept a permissive appeal, we must “do what the

Legislature has authorized and ‘address the merits of the legal issues

certified.’”28 This includes “addressing all fairly included subsidiary

issues and ancillary issues pertinent to resolving the controlling legal

issue.”29

      28Elephant Ins. Co., LLC v. Kenyon, 644 S.W.3d 137, 147 (Tex.
2022) (quoting Sabre Travel Int’l, Ltd. v. Deutsche Lufthansa AG, 567
S.W.3d 725, 733 (Tex. 2019)).
     29 Id.

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     Here, the controlling questions of law that were certified to us were

whether Mid-Continent had a duty to reimburse its insureds for fees and

expenses incurred by attorneys chosen by the insureds to defend the

insureds in the underlying lawsuit and (2) whether Mid-Continent had a

duty to reimburse its insureds for the costs that they incurred in hiring

separate counsel to defend each insured in the underlying contest.

     In resolving the trial court’s controlling questions of law, we

concluded that Mid-Continent offered to defend the Clayton Suit with an

attorney selected by Mid-Continent, the Insureds rejected the offer, and

the Insureds chose their own attorneys, and Mid-Continent had a

reasonable basis to deny the requests for reimbursement because no

conflict of interest existed between the petition and the policy (addressing

issue one) and no conflict of interest existed between the Insureds

themselves (addressing issue two). The alleged claims for bad faith and

Insurance Code violations are ancillary issues that were not certified by

the trial court, and we decline the invitation to examine and decide these

additional issues because we are confident that given our resolution of

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the two certified issues, the trial court will be able to decide whether

these additional claims have any merit. 30

                                Conclusion

     For the foregoing reasons, we conclude Mid-Continent had no duty

to reimburse its Insureds for fees and expenses incurred by attorneys

chosen by the Insureds to defend the Insureds in the Clayton Suit.

Furthermore, we conclude that Mid-Continent had no duty to reimburse

its Insureds for the costs they incurred in hiring separate counsel to

defend each Insured in the Clayton Suit. Therefore, the trial court erred

in ruling that Mid-Continent owed a duty to pay its Insured for fees and

expenses incurred by attorneys chosen by the Insureds to defend the

Insureds in the Clayton Suit. We therefore reverse the trial court’s

judgment and remand the matter for further proceedings consistent with

this opinion.

     30 The general rule is that an insured cannot recover policy benefits

for an insurer’s statutory violation if the insured does not have a right to
those benefits under the policy. USAA Tex. Lloyds Co. v. Menchaca, 545
S.W.3d 479, 490 (Tex. 2018).
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     REVERSED AND REMANDED.

                                      ______________________________
                                           LEANNE JOHNSON
                                                Justice

Submitted on April 6, 2023
Opinion Delivered August 31, 2023

Before Golemon, C.J., Horton and Johnson, JJ.

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