General Contractor Cannot Bring Direct Action Against Subcontractor’s Insurer Regardless of General Contractor’s Status as Additional Insured Under Subcontractor’s Policy

Ohio Cas. Ins. Co. v. Time Warner Entm’t Co., L.P., 244 S.W.3d 885 (Tex. App. Feb. 6, 2008)

In this case, a general contractor brought a declaratory judgment action against its subcontractor’s primary and umbrella insurers to recover the cost of removing and replacing fiber optic cable that the subcontractor installed improperly.  Although the trial court granted summary judgment in favor of the general contractor, the Dallas Court of Appeals reversed.

The Court of Appeals observed that the general contractor lacked standing to bring a direct action against the subcontractor’s liability insurers or to seek a declaration of coverage obligations since liability had not been established by judgment or settlement.  Although the general contractor maintained that Texas’ longstanding no-direct-action rule was inapplicable in this case, since the general contractor was named as an additional insured under the subcontractor’s policies, the Court of Appeals rejected that argument.

Relying on the language of the policies at issue, the Court of Appeals observed that coverage was not triggered until the insured became “legally obligated to pay” through judgment or settlement.  Here, the general contractor elected to repair and replace the defective cabling to avoid liability to the property owner, but at no time was the general contractor legally obligated to pay those sums.  Accordingly, the general contractor failed to establish that it was owed a duty as an additional insured.  Further, because the general contractor did not hold a judgment against or a settlement with its subcontractor, the general contractor had no standing to sue the insurers pursuant to the duties they owed to the subcontractor as its liability insurer.