“No Direct Action” Rule Bars Claimant’s Declaratory Judgment Claim Against Insurer

The Texas Supreme Court has ruled that the state’s “no direct action” rule barred a personal injury claimant from suing an insurer until the insurer’s legal obligation to pay damages has been established.  In re Essex Ins. Co., No. 13-1006 (Tex. Sup. Ct. Nov. 21, 2014).  In so doing, the court reversed the trial court’s denial of the insurer’s motion to dismiss the declaratory judgment coverage action.

The claimant sued the policyholder, a tortilla manufacturing company, for personal injuries he sustained while operating a machine at the company’s facility.  After the insurer rejected the claimant’s offer to settle his claims for the policy limit, the claimant added the insurer as a defendant, seeking a declaratory judgment that the policy required the insurer to indemnify the company for its liability to the claimant.  The insurer moved to dismiss the claim, arguing that the state’s “no direct action” rule barred the claim until the company’s liability is established.  The trial court denied the motion, and the court of appeals denied the insurer’s petition for a writ of mandamus.

On the insurer’s petition to the state supreme court, the claimant argued that the “no direct action” rule did not apply because he sought only a declaration of coverage and not a money judgment.  The court rejected the claimant’s reliance on cases permitting insurers or insureds to bring direct coverage actions, noting that the claimant had not “cited to any cases in which we have held that the plaintiff, who is not a party to the insurance policy, may seek or obtain a declaratory judgment regarding an insurer’s duty to indemnify an insured defendant against liability to the plaintiff before that liability has been determined.”  The court granted mandamus relief, concluding that the “no direct action” rule applies “whether the plaintiff is seeking declaratory relief or money damages from the insurer.”