Hunton Insurance Recovery Blog

The Fifth Circuit recently reaffirmed that an insurer’s duty to indemnify hinges on the facts determined in the underlying case, not the allegations. Thus, as confirmed by the Fifth Circuit’s July 31, 2023 decision in Liberty Mut. Fire Ins. Co. v. Copart of Conn., Inc., No. 21-10938, 2023 WL 4862793 (5th Cir. July 31, 2023), an adverse duty-to-defend decision may not foreclose a liability insurer’s indemnity obligations.

In Copart, the policyholder (Copart), an operator of a machine salvage junkyard, faced a lawsuit alleging property damage caused by pollutants, water, soil, and sediment flowing from the junkyard into plaintiffs’ property. Copart sought coverage for the lawsuit under its commercial general liability and umbrella insurance policies. But the insurers denied coverage and sued Copart seeking a declaration that they neither owed Copart a duty to defend nor a duty to indemnify based on a pollution exclusion in their insurance policies. The district court ultimately granted summary judgment for the insurers on the duty to defend because, according to the district court, the pollution exclusion unambiguously applied to claims as alleged in the underlying complaint. The district court went further and held that “[b]ecause [the insurers have] no duty to defend the Underlying Suit, it follows that [the insurers also have] no duty to indemnify.”

Copart appealed challenging, among other rulings, the district court’s reflexive assumption that its duty-to-defend decision was dispositive of the insurers’ duty to indemnify.

The Fifth Circuit agreed with Copart’s challenge. The Court held that the district court’s assumption was “faulty” under Texas law because an adverse duty-to-defend decision is not necessarily determinative of the duty to indemnify. The Court reasoned that the duty to defend is determined based on the allegations in the complaint, while the duty to indemnify is properly decided based on the facts as established at trial. It follows, therefore, that “a duty to indemnify could be shown notwithstanding the absence of a duty to defend” because the “facts adduced at trial might differ from the allegations” as initially plead. The reasoning is consistent with the premise that it is the established facts that determine indemnity and aligns with the often-seen reality that the proven facts differ greatly from those alleged.

The Fifth Circuit held, therefore, that the pollution exclusion’s unambiguous application to the facts as alleged did not conclusively foreclose the insurers’ duty to indemnify because the evidence established at trial could demonstrate liability caused by conduct falling outside the scope of the pollution exclusion. Thus, the Fifth Circuit remanded the matter to the district court for further factfinding concerning what indemnify obligations, if any, the insurers owed Copart.

The Copart decision is a salient reminder that CGL and umbrella liability policies afford broad coverage, both for defense and indemnity and that policyholders who receive an adverse duty to defend decision should not reflexively assume that they likewise cannot obtain indemnity for any ultimately established liability. The basis for the proven liability must be analyzed on its own merits. Only where there is no “conceivable set of facts” that could give rise to insurance coverage should an adverse defense determination carry over to affect indemnity, but establishing such an absence of potentially covered liability is a very high bar for the insurer. Consultation with experience coverage counsel can help to determine the salvage value in any adverse duty-to-defend decision.