Texas Supreme Court Weighs In On An Insurer’s Right To Intervene In A Liability Lawsuit

On February 3, 2006, the Texas Supreme Court issued an opinion affirming the virtual representation doctrine thereby allowing an insurer to intervene in the insured’s appeal in order to assert a potentially dispositive issue that the insured had agreed with the plaintiff to abandon on appeal. See In re Lumbermens Mut. Cas. Co., 49 Tex. Sup. Ct. J. 329 (February 3, 2006).

The Lumbermens case is significant for several reasons. First, it provides clarification from the Texas Supreme Court regarding the existence of the virtual representation doctrine, specifically in the insurance context. Second, it outlines the requirements for utilizing the doctrine. Lastly, the opinion also clarifies the standard for obtaining mandamus relief where a court has denied intervention under the virtual representation doctrine.

In Lumbermens, the Texas Supreme Court notes that although generally only parties of record may appeal a trial court’s judgment, occasionally courts have allowed unnamed parties to pursue an appeal in order to vindicate important rights. In Lumbermens, the court ultimately finds that the insurer’s interest in appealing a choice-of-law issue which is potentially dispositive to coverage issues in the case is sufficient to invoke the equitable doctrine. The court first looks to whether the insured and insurer have the same interest in the case. Although the insured and insurer now disagreed regarding the issues on appeal, the court specifically notes that in light of the $29 million supersedeas bond posted by the insurer, both parties still had the ultimate goal in the case—to reverse the underlying judgment. The court also looks at other factors, such as the post-judgment action of the parties, including the timeliness of the intervention. The Texas Supreme Court notes that although the application of the virtual representation doctrine is a case specific inquiry, the ten week delay in the insurer’s intervention on appeal was not untimely given the uncertainty in the standard for allowing such intervention.

In granting the petition for mandamus in Lumbermens, the Court applied an abuse of discretion standard. We note though that although the Texas Supreme Court found that the court of appeals had abused its discretion in not allowing the insurer to intervene, because the doctrine is an equitable one, courts nevertheless have wide discretion to look at the particular facts of each case to determine whether the doctrine applies.

The Texas Supreme Court also notes the factors recently outlined by the Fifth Circuit Court of Appeals in Ross v. Marshall, 426 F.3d 745 (5th Cir. 2005). In Ross, the insured entered into a settlement with the plaintiffs wherein the plaintiffs agreed to not execute on the insured’s property in exchange for the insured’s agreement to not pursue his appeal of the underlying judgment and to assign the plaintiffs his bad faith claims against the carrier. In determining whether the insurer properly intervened in the case in order to pursue the insured’s abandoned appeal, the Fifth Circuit looked to the length of time in which the would-be intervenor knew of its interest before intervening, the extent of the prejudice the existing parties may suffer because of the delay in intervention, the extent of prejudice that will occur if intervention is denied, and the existence of unusual circumstances militating against or for the timeless of the intervention.

In both Lumbermens and Ross, the courts applied the virtual representation doctrine to allow the insurer to intervene on appeal. Accordingly, these cases provide another avenue, beyond a lack of cooperation defense, for insurers to challenge findings in the trial court which their insured fails to pursue. Insurers, however, should be timely in asserting the doctrine and must likely be prepared to post a supersedeas bond on appeal, which may ultimately bind their liability in the case.

Thompson Coe represented the insurer in Ross v. Marshall case at the Fifth Circuit.