Permissive Interlocutory Appeals and Determining the Duty to Defend

By: Diana Faust

Section 51.014(d) of the Texas Civil Practice and Remedies Code provides a mechanism for permissive interlocutory appeal of an otherwise non-appealable order where (1) the order involves a controlling question of law as to which there is a substantial ground for difference of opinion, and (2) an immediate appeal from the order may materially advance the ultimate termination of the litigation.[1]  Generally, if the viability of a claim rests upon the court’s determination of a question of law, the question is controlling.[2]  And, when the question is novel or difficult, there is little or no controlling Texas law or that law is in conflict among Texas courts of appeal, then substantial ground for difference of opinion is shown.[3]  In a coverage case involving whether a duty to defend is owed, section 51.014(d) provides an efficient means to have the issue fully adjudicated early in the litigation.

Since section 51.014(d)’s original enactment as agreed interlocutory appeal and through its current version providing for permissive interlocutory appeal, Texas courts of appeals, including the Supreme Court of Texas, have considered controlling questions of law addressing matters of statutory interpretation,[4] standing,[5] choice of law,[6] and the application of various legal claims and defenses.[7]  At this time, the Supreme Court of Texas has granted review in several cases arising through agreed or permissive interlocutory appeals.[8]

Courts of appeals have also reviewed trial courts’ interpretation of various types of contracts, such as partnership agreements,[9] oil and gas agreements,[10] and policies of insurance,[11] including the duties owed and rights granted through those policies.  In many reported cases, permissive appeal arises through the trial court’s interlocutory denial of a motion for partial summary judgment.  Thus, in a coverage case asserting breach of the duty to defend as one claim or seeking a declaration of the duty to defend, this issue is the type of controlling legal question of law appropriate for permissive interlocutory appeal.  And, resolving the issue early in the litigation may result in the case being dismissed against the carrier if no duty to defend is owed.[12]

The ins and outs of the statutory requirements for permissive interlocutory appeal are beyond the scope of this article, but practitioners should be aware they are numerous and the statute will be strictly construed in determining whether permissive appeal of an interlocutory order is authorized under the circumstances.  Generally, the party seeking review of such non-appealable orders must request that the trial court grant permission for an interlocutory appeal and the trial court must sign an order granting that permission.  The order must affirmatively show that the trial court actually ruled on the controlling question of law as to which there is a substantial ground for difference of opinion, and must explain the reason that an immediate appeal from the order may materially advance the ultimate termination of the litigation.  Importantly, if the issue is presented through a motion for partial summary judgment, the denial of the motion must not be based on the existence of a genuine issue of material fact.

Two cases of interest involve review of the trial court’s determination of the duty to defend through the agreed interlocutory appeal and permissive interlocutory appeal process, supporting that these procedures should be utilized in finally adjudicating the issue early in the coverage litigation. 

The first, KLN Steel Products, Limited v. CNA Insurance Companies,[13] involved the determination of the duty to defend under a CGL policy through an agreed interlocutory appeal.  There, KLN Steel Products Company, Ltd. (KLN) sued CNA Insurance Companies, National Fire Insurance Company of Hartford, Continental Casualty Company (collectively CNA), and an excess carrier, seeking a declaration that CNA and the excess carrier owed a duty to defend KLN and indemnify KLN against a competitor's suit.  KLN also asserted claims for breach of contract and extra-contractual claims.  All parties moved for summary judgment and the trial court denied all parties' motions.  Because the denial of a summary judgment is not an appealable order, the case proceeded to appeal through an agreed interlocutory appeal under the prior version of section 51.014(d).  That section, in addition to requiring the parties’ and the trial court’s agreement to an interlocutory appeal, also required that the order appealed from address the same two elements found in the current version of the statute:  (1) the order involves a controlling question of law as to which there is a substantial ground for difference of opinion, and (2) an immediate appeal from the order may materially advance the ultimate termination of the litigation.

The court of appeals exercised jurisdiction over the statutory agreed interlocutory appeal, and the case proceeded through appeal just as if a final judgment or order had been signed by the trial court. 

The first controlling question of law in the appeal involved the determination of CNA’s duty to defend claims for alleged personal injury and advertising injury arising from the publication of material disparaging an organization's goods, products, or services under Illinois law.  The court of appeals interpreted the meaning of “disparage” as used in the policy, analyzed the underlying lawsuit’s allegations, and determined that the lawsuit did not allege that KLN disparaged the claimant’s goods, services, or business. 

The next controlling question of law involved whether CNA owed the duty to defend for alleged personal and advertising injury arising out of “infringing on another’s copyright, trade dress or slogan in your advertisement.”  The court of appeals interpreted the meaning of “trade dress infringement,” and concluded that allegations that the insured misappropriated dimensions and other design features of a product which the insured used to build and offer its own equivalent products through advertising did not fall within coverage as a claim for potential trade dress infringement.  And, because the insured failed to establish coverage under the CNA policies, the court of appeals did not reach the issue of application of any exclusions claimed by the carriers.

The court of appeals next considered whether the excess carrier owed the duty to defend, and concluded that because the primary and excess policies included the same terms, conditions, and exclusions, the insured failed to establish coverage under the excess policy for the same reasons it concluded no duty to defend was owed by CNA.  The court affirmed the trial court’s order denying the summary judgment in favor of KLN and reversed the trial court’s order denying summary judgment for the carriers.  The court further rendered judgment, as a matter of law, that neither carrier owed the duty to defend KLN in connection with the complaint at issue.

The second, Mid-Continent Casualty Company v. Krolczyk,[14] involved a permissive interlocutory appeal.  There, the court decided whether an insured owed the duty to defend under a CGL policy or whether certain exclusions applied.  The court held that because the allegations in the underlying petition potentially support a covered claim outside the exclusions, declaratory judgment was proper in favor of the insured. 

The case arose from a dispute about the construction of a road built for a subdivision and the insurance coverage for damage to that road.  Krolczyk built a road through the center of a subdivision and later sued the subdivision’s homeowners association for damage to the road alleged to have been caused by home owners moving dump truck-loads of earth over the road and over Krolczyk’s objection.  The homeowners association counterclaimed, alleging faulty construction of the road by Krolczyk, and asserted causes of action for breach of contract, deceptive trade practices, common law fraud, negligent misrepresentation, and fraud in a real estate transaction.  The association sought damages to replace two-thirds of the road.

Krolczyk tendered the association’s claims to Mid-Continent, who issued a reservation of rights letter, acknowledging its duty to defend but reserving its right to determine whether coverage was limited by the policy.  A few weeks later, Mid-Continent informed Krolczyk it had determined that the policy did not cover the damages sought by the association, and Krolczyk filed a petition seeking declaratory judgment that he was entitled to a defense under the policy.  Mid-Continent asserted the “your work” exclusion applied to preclude coverage.[15]  The parties filed cross-motions for summary judgment, which the trial court denied.  The parties sought permission to pursue a permissive interlocutory appeal, and the trial court granted the motion and stayed the litigation pending the appeal.  The controlling legal issue presented was whether Mid-Continent owed Krolczyk a duty to defend under its insurance policy.

The court of appeals analyzed the underlying lawsuit’s allegations, that Krolczyk had built the road in three phases, over an extended period of time without reworking the base of the road, and that Krolczyk did not properly or adequately construct the road to allow for drainage alongside the road.  The lawsuit alleged that the base failed as a result of the failure to rework the base or construct adequate drainage, causing the asphalt to crack and pothole after less than one year of use.  The suit alleged that the road was rendered useless and unable to meet the standards of the county.  The court of appeals first concluded the lawsuit’s allegations suggest there is a potentially covered claim. 

The court next considered whether the exclusion j(6) applied, and interpreted “that particular part” language in the exclusion so as not to require the court to consider the road as a unitary whole rather than to separate parts of the road project (construction of the base, providing adequate drainage, surfacing the road).  The court explained that the construction of a road is not comparable to a small, unitary item that lacks separate parts on which different types of work is performed.  Favoring the insured in construing the lawsuit’s allegations and the policy, the court of appeals held that the road project was not an indivisible whole under the lawsuit’s allegations, but instead was composed of several particular parts to which the exclusion may or may not apply.  As a result, the association’s lawsuit potentially included a covered claim, and the “your work” exclusion did not abrogate Mid-Continent’s duty to defend the suit.

The court of appeals next considered whether the “earth movement” exclusion applied.[16]  Applying the ordinary and generally-accepted meaning of the policy’s terms, the court interpreted the exclusion to mean that the property damage alleged must be related to the movement of “land, earth, or mud” which did not encompass concrete or other man-made materials.  Again favoring the insured, the court adopted the insured’s reasonable interpretation of the exclusion—that it does not apply to the movement of man-made materials.  Because the allegations of the petition did not specify whether the part of the base of the road that was exposed to the elements washed out by rain water was built of land, earth or mud, the allegations did not state facts sufficient to clearly bring the case within or without the coverage, and Mid-Continent was obligated to defend. 

The court concluded Mid-Continent had not met is burden to prove that the policy’s exclusions barred coverage of the claims, that it owed the insured the duty to defend, and held that the trial court improperly denied the insured’s motion for summary judgment but properly denied Mid-Continent’s motion.  The court of appeals rendered a declaratory judgment that Mid-Continent owed a duty of defense to Krolczyk.

As these cases demonstrate, the procedural permissive interlocutory appeal provides a mechanism for fully and finally adjudicating the controlling legal question of whether a duty to defend is owed early in the litigation.  Insurers and Insureds alike should consider the use of this statute to effectively and efficiently navigate through coverage litigation.