Preview
Received and E-Filed for Record
2/26/2021 11:30 AM
Melisa Miller, District Clerk
Montgomery County, Texas
Deputy Clerk, Kayla Adams
CAUSE NO. 19-10-13793
HARRIS COUNTY MUNICIPAL IN THE DISTRICT COURT
UTILITY DISTRICT NO. 400
Plaintiff
v. MONTGOMERY COUNTY, TEXAS
MID-CONTINENT
CASUALTY COMPANY
Defendant
LLP OR CP LA LP MP
457th JUDICIAL DISTRICT
SUBJECT TO ITS MOTION FOR CONTINUANCE OF MID-CONTINENT’S
SUMMARY JUDGMENT SETTING:
PLAINTIFF MUD 400’S RESPONSE TO MID-CONTINENT CASUALTY COMPANY'S
TRADITIONAL AND NO-EVIDENCE MOTIONS FOR SUMMARY JUDGMENT
Plaintiff, Harris County Municipal Utility District No. 400 (“MUD 400”) has filed a motion
for continuance of Mid-Continent Casualty Company’s (“Mid-Continent”) setting on its
Traditional and No-Evidence Motions' for Summary Judgment (“Motion”). The setting is on
March 5, 2021, making MUD 400’s Response due on February 26, 2021. The first date that the
Court had available for the setting on MUD 400’s motion for continuance is February 26, 2021 -
d The sole “No-Evidence” motion raised by Mid-Continent is in Section VI of Mid-Continent’s
Motion, claiming that there is “no evidence” that a conflict of interest existed between the insureds
(Cheryl Smith, Ann Marie Wright, and MUD 400) requiring them to be represented by separate counsel
in the underlying lawsuit.
As shown in Section TIICA), below, MUD 400 refutes the “no evidence” motion by providing
summary judgment evidence in the form of the testimony of Attorney Bruce Tough (Exhibit 1, hereto
at page 62, line 7 through page 70, line 20) and Attomey Kenna Seiler (Exhibit 2, hereto at page 36,
line 11 through page 39, line 15; and page 41, line 11 through page 43, line 22; and page 44, line 3
through page 47, line 4) showing that there were actual conflicts between the insureds requiring
representation by separate counsel, and that none of the insureds waived the conflicts, As a matter of
law, under Texas Disciplinary Rules of Professional Conduct, Rule 1.06, the three insureds could not
be represented by a single attorney. With the presentation of summary judgment evidence showing at
least a scintilla of evidence of conflicts in this Response (and the evidence here is much greater), the
Court must deny Mid-Continent’s no-evidence motion.
The remainder of Mid-Continent’s motions are traditional summary judgment motions, and as
shown in this response, there is a genuine issue of material fact about each of Mid-Continent’s
traditional motions, requiring the Court to deny each motion.
MUD 400’s Response to Mid-Continent’s MSJs, Page 1the same date that this Response was due (and the Court’s current backlog on rulings means that
it is unlikely that MUD 400 will receive a ruling on its motion on February 26, 2021).
Because MUD 400 is stuck between a rock (the need for additional discovery in order to
fully respond to the Traditional and No-Evidence Motions for Summary Judgment) and a hard
place (inability to get a court ruling prior to the date its MSJ response is due) MUD 400 is filing
this Response subject to its Motion for Continuance and respectfully reserves and Tequests the
right to file a supplement to this Response after the additional discovery needed (as outlined in its
Motion for Continuance which is incorporated herein by reference) is completed.
Therefore, subject to its Motion for Continuance, MUD 400 responds to Mid-Continent’s
Traditional and No-Evidence Motions for Summary Judgment as set forth below.
Qutline of Response
1. In Section I of this Response, MUD 400 initially provides background information,
based on its summary judgment evidence, to provide the Court with an understanding of its claims.
In addition to Exhibits filed by Mid-Continent, MUD 400 includes the following summary
judgment evidence, by and through the following Exhibits filed with this Response and
incorporated herein by reference:
Exhibit 1: Deposition Testimony of Bruce Tough (Counsel for Ann Marie Wright);
Exhibit 2: Deposition Testimony of Kenna Seiler (Counsel for Cheryl Smith);
Exhibit 3: Affidavit of Chris Skinner, Outside General Counsel for MUD 400;
Exhibit 4: Deposition Testimony of Britt Harris (Mid-Continent’s Proposed Atty);
Exhibit 5: Deposition Testimony of Mid-Continent Adjuster Robert Bryant;
Exhibit 6: Deposition Testimony of Mid-Continent’s Elections Expert, Jared Najvar;
Exhibit 7: Deposition Testimony of Mid-Continent Adjuster Supervisor, Roderick Evans;
Exhibit 8: 3/21/19 letter to Mid-Continent from Chris Skinner, conveying invoices;
MUD 400’s Response to Mid-Continent’s MSJs, Page 2Exhibit 9: Affidavit of James Stilwell with fees chart and fees invoices attached.
2 First, MUD 400 uses the summary judgment evidence in Section I to set forth the
necessary fact background to this Response.
3. Next, in Section I, MUD 400 sets forth the pertinent law relating to the motions,
including:
(A) law related to conflicts of interest in the representation of multiple parties; insurer
liability for failure to investigate once on notice of conflicts; as well as the difference
between the Texas Disciplinary Rule regarding conflicts of interest in the
Tepresentation of multiple parties, and the Texas Rules of Evidence relating to privilege
on issues of common interest between separately represented parties,
(B) law related to the control of the defense of a lawsuit when there is an actual conflict
between an insurer’s reservation of rights letter and the facts being adjudicated in the
underlying case,
(C) law and elements of breach of an insurance policy/contract;
(D) law regarding extra-contractual insurance claims, if a breach of contract exists; and
(E) law regarding bad-faith insurance denials.
4. Further, in Section IIT, MUD 400 responds to Mid-Continent’s motions, applying
summary judgment evidence to the law set forth in Section II, showing:
(A) There were actual conflicts between the three defendants/insureds in the underlying
suit which were not waived, requiring separate counsel to represent each of the three
insureds (meaning the Court must deny Mid-Continent’s sole “no-evidence” motion);
(B) By failing to investigate whether there were conflicts that required separate counsel for
each insured, Mid-Continent committed bad faith;
MUD 400’s Response to Mid-Continent’s MSJs, Page 3(C)There was an actual conflict between Mid-Continent’s coverage position in its
reservation of rights letter, and the actual facts being adjudicated in the underlying case,
meaning the Insureds had the right to control the defense and Mid-Continent was still
required to pay for ti;
(D)By failing to investigate whether there were actual conflicts between Mid-Continent’s
reservation of rights letter and the actual facts being adjudicated in the underlying case,
Mid-Continent committed bad-faith;
(E) By denying the claim for the Insureds’ attorneys’ fees, when Mid-Continent was
required to pay for that defense, Mid-Continent breached the insurance policy and
contract with MUD 400;
{F) By denying the claim for the Insureds’ attorneys’ fees when coverage was reasonably
clear, Mid-Continent committed bad faith;
(G)By failing to timely pay MUD 400’s claim, Mid-Continent breached the insurance
policy and violated provisions of the Texas Insurance Code requiring timely payment
of claims.
5. Finally, in Section TV, MUD 400 summarizes its response showing the Court that
it should deny Mid-Continent’s traditional and no-evidence motions for summary judgment.
6. Bearing that outline in mind, MUD 400 begins by providing background
information, based on its summary judgment evidence, to provide the Court with an understanding
of its claims.
MUD 400’s Response to Mid-Continent’s MSJs, Page 4SECTION I- BACKGROUND AND SUMMARY JUDGMENT EVIDENCE
7. In May 2018, MUD 400 held an election for two seats on its board of directors.
Candidates Ann Marie Wright (“Wright”) and Cheryl Smith (“Smith”) (candidates who ran on
opposite tickets) received the two highest vote totals. The incumbent President, Edgar Clayton,
(“Clayton”) who had recruited Wright to run, lost the election by 7 votes. There were numerous
problems with the handling of the election and Clayton asked MUD 400 to hold a new election;
however, MUD 400 certified the election and declared Wright and Smith the winners. See
generally, Exhibit 2 to Mid-Continent’s Motion for Summary Judgment, Edgar Clayton’s Petition.
8. Edgar Clayton brought an election contest (the “Underlying Lawsuit”), Jd. He sued
MUD 400, Wright and Smith. Jd. His petition raised many different allegations of wrongdoing
related to the election (essentially pleading everything but the kitchen sink). Id, However, among
those allegations and bases for his election contest were claims that Wright and Smith had received
the advantage of illegal and improper votes to which they were not legally entitled, and that MUD
400 received the advantage of not holding and paying for a new election when the May 2018
election was fundamentally flawed. Jd.
9. MUD 400, for itself and on behalf of Wright and Smith, tendered the lawsuit to its
insurance carrier, Mid-Continent for defense and indemnity. However, prior to Mid-Continent
responding regarding whether it would tender a defense, the lawsuit answers were due. After
discussing the suit at a board meeting and determining that there were material conflicts among
the three defendants; that the three defendants would not waive those conflicts; and that the
defendants requested separate counsel, MUD 400 hired its own counsel and began paying for the
defense of Wright and Smith pursuant to a board policy on indemnification of directors. Exhibit
3, Affidavit of Chris Skinner. Also see Exhibit 1, Deposition testimony of Bruce Tough (Counsel
MUD 400’s Response to Mid-Continent’s MSJs, Page 5for Ann Marie Wright) at page 62, line 7 through page 70, line 20 (specifying that the three
defendants had material, adverse conflicts and that one lawyer could not represent all three
defendants); and Bxhibit 2, Deposition testimony of Kenna Seiler (Counsel for Cheryl Smith) at
page 36, line 11 through page 39, line 15; and page 41, line 11 through page 43, line 22; and page
44, line 3 through page 47, line 4) (specifying that the three defendants had material, adverse
conilicts and that one lawyer could not represent all three defendants).
10. After the three Defendants’ separate counsel had filed separate answers (See
Exhibits 15, 16, and 17 to Mid-Continent’s Motion for Summary Judgment — the three answers to
the Edgar Clayton Lawsuit), on or around July 24, 2018, Mid-Continent notified MUD 400 it
would defend all three defendants with a single appointed attorney (Britt Harris). See Mid-
Continent’s Reservation of Rights Letter dated July 24, 2018, Exhibit 5 to Mid-Continent’s Motion
for Summary Judgment.
11. Additionally, Mid-Continent also informed the Insureds that Mid-Continent was
reserving its right to deny coverage for the lawsuit. Jd.
12. However, Mid-Continent:
A. had not informed Britt Harris that he would be defending three different defendants.
Exhibit 4, Deposition testimony of Britt Harris, page 30, line 7 through page 31, line 19 and page
36, line 9 through page 37, line 1 and page 47, line 5 through page 47, line 22;
B. selected counsel with no election contest experience. Britt Harris had never defended
an election contest. Jd. at page 16, line 11 through page 17, line 14; and
C. did not run any conflict analysis related to the proposed joint representation of the three
Insureds. Because Britt Harris did not know he was being asked to defend multiple defendants, he
did not perform any conflict analysis to determine if he could represent Wright, Smith and MUD
MUD 400’s Response to Mid-Continent’s MSJs, Page 6400. Id. at page 30, line 7 through page 31, line 19; and page 36, line 9 through page 37, line 1;
and page 47, line 5 through page 47, line 22.
13. Further, Mid-Continent’s reservation of rights letter raised an exclusion under the
policy specifying that Mid-Continent would not pay for any loss relating to any of the three
defendants having received an advantage to which they were not legally entitled. See Mid-
Continent’s Reservation of Rights Letter dated July 24, 2018, Exhibit 5 to the Motion for Summary
Judgment. Mid-Continent raised this exclusion due to Edgar Clayton’s allegations that both
Wright and Smith had received the advantage of illegal votes (and no one is entitled to illegal
votes). See Exhibit 5, Deposition testimony of Mid-Continent Adjuster, Robert Bryant at page 39,
line 11 through page 40, line 4; and page 74, line 21 through page 75, line 14; and page 82, lines
19-25; and page 83, line 19 through page 85, line 2; and page 86, lines 11-21; and page 87, line
25 through page 90, line 1; and page 213, line 6 through page 214, line 17. The lawsuit also
alleged that MUD 400 had received the advantage of not holding and paying for a new election
(when it was not entitled to certify the prior election due to illegal votes). Id. at page 79, line 14
through page 80, line 24; and page 100, lines 13-18; and page 101, lines 4-13; and page 214, lines
18-24,
14. Election contests are bench trials, and the pleadings frame the facts to be
adjudicated by the Judge as the trier of fact. See Exhibit 6, Deposition testimony of Jared Najvar
({Mid-Continent’s designated Elections Expert) at page 12, line 23 through page 13, line 4; and
page 31, line 8 through page 32, line 11; and Exhibit 4, page 18, line 3-20 and page 19, line 15
though page 20, line 5, Deposition testimony of Britt Harris.
15. With allegations of illegal votes having been pled, Election Code, Section 212.011
specifies that the Judge is to determine if there are any illegal votes, and if the votes were for a
MUD 400’s Response to Mid-Continent’s MSJs, Page 7particular candidate, to then subtract them from that candidate’s total. TEx. ELECTION CODE,
§212.011. Exhibit 6, Deposition testimony of Jared Najvar (Mid-Continent’s designated Elections
Expert) at page 14, lines 10-22 and page 42 line 18 through page 43, line 6 and page 43, line 16
through page 44, line 13; and Exhibit 4, Deposition testimony of Britt Harris, page 21, lines 2-15;
and page 22, lines 7-16. Further, the Judge is to determine whether to void the prior election. If
the Judge orders a new election, MUD 400 would have to pay for the new election. TEX. ELECTION
Cops, §221.014. Also, see Exhibit 6, Deposition testimony of Jared Najvar (Mid-Continent’s
designated Elections Expert) at page 29, line 3 through page 30, line 5.
16. With allegations of Wright and Smith having received illegal votes, and Edgar
Clayton seeking to cause MUD 400 to hold a new election, the actual facts being adjudicated in
the underlying suit were the same facts necessary to determine whether or not Mid-Continent’s
exclusion was applicable. See Exhibit 1, Deposition testimony of Bruce Tough (Counsel for Ann
Marie Wright) at Page 75, line 5 through page 81, line 22; and Exhibit 2, Deposition testimony of
Kenna Seiler (Counsel for Cheryl Smith) at page 49, lines 13-23; and page 52, line 17 through
page 56, line 24. Further, see Exhibit 5, Deposition of Adjuster Robert Bryant, at page 113, line
16 through page 114, line 3. Also see Exhibit 6, Deposition testimony of Jared Najvar (Mid-
Continent’s designated Elections Expert) at page 29, line 3 through page 30, line 5; and page 37,
line 7 through page 38, line 3; and page 43, line 16 through page 44, line 13; and page 47, lines
12-16; and page 61, lines 6-23; and page 71, lines 16 through page 72, line 3; and page 72, line
16 through page 73, line 18. Finally, see Exhibit 7, Deposition of Roderick Evans (Mid-
Continent’s adjuster Supervisor on this claim) at page 66, line 9 -23; and page 67, lines 9-20; and
page 70, line 9 through page 71, line 7; and page 73, lines 8-15; and page 78, lines 1-22; and page
MUD 400’s Response to Mid-Continent’s MSJs, Page 898, lines 2-9; and page 98, line 17 through page 99, line 1; and page 99, line 24 through page 100,
line 3; and page 115, line 4 though page 117, line 14.
17. Upon receipt of the reservation of rights letter, MUD 400 sent a response to Mid-
Continent identifying that conflicts between the three defendants in the Edgar Clayton lawsuit
precluded representation by a single attorney (the “multi-party conflict”), and that there was an
actual conflict between exclusion raised in the reservation of rights letter and the facts being
adjudicated in the lawsuit (the “coverage conflict”), precluding Mid-Continent from controlling
the defense. Exhibit 6 to the Motion for Summary Judgment. With the Insureds having told Mid-
Continent about both the multi-party conflict, and the coverage conflict, Mid-Continent knew or
should have known about these issues. Jd.
18, It was reasonably clear in July 2018 that the multi-party conflict prevented a single
attorney from representing all three defendants. See Exhibit 1, Deposition testimony of Bruce
Tough (Counsel for Ann Marie Wright) at page 62, line 7 through page 70, line 20; and Exhibit 2,
Deposition testimony of Kenna Seiler (Counsel for Cheryl Smith) at page 45, line 17 through page
47, line 4.
19. It was also reasonably clear in July 2018 that the facts being adjudicated in the
lawsuit were the same facts involved in determining if the exclusion was applicable. See Exhibit
1, Deposition testimony of Bruce Tough (Counsel for Ann Marie Wright) at Page 75, line 5 through
page 81, line 22; and Exhibit 2, Deposition testimony of Kenna Seiler (Counsel for Cheryl Smith)
at page 49, lines 13-23; and page 52, line 17 through page 56, line 24.
20. Despite being told of the multi-party conflict, Mid-Continent did nothing to
investigate it. See Exhibit 5, Deposition testimony of Mid-Continent Adjuster, Robert Bryant at
page 49, lines 19-23; and page 53, lines 22-25; and page 54, line 2 through page 55, line 7. Further,
MUD 400’s Response to Mid-Continent’s MSJs, Page 9Adjuster Bryant contended he would have counted on Britt Harris to tell him if there were any
conflicts (See Adjuster Bryant’s testimony at Exhibit 5, at page 54, lines 2-10); however, Adjuster
Bryant never told Britt Harris he would be representing three defendants, and Britt Harris never
performed any multi-party conflict analysis for the Edgar Clayton lawsuit. Exhibit 4, Deposition
testimony of Britt Harris, at page 30, line 7 through page 31, line 19; and page 36, line 9 through
page 37, line 1; and page 47, line 5 through page 47, line 22.
21. Worse, despite being told of the coverage conflict, Mid-Continent did nothing to
investigate the facts being adjudicated. It did not contact any of the three lawyers for the three
defendants. It did not contact the general counsel for MUD 400. It did not inquire of the lawyers
for Edgar Clayton. It did not require statements or additional information from the three insureds.
It did not get all of the documents from the court file (and did not get the exhibits to Edgar
Clayton’s petition — only the petition without exhibits). See Exhibit 5, Deposition testimony of
Mid-Continent Adjuster, Robert Bryant at page 55, line 23 through page 56, line 14; and page 58,
line 16 through page 65, line 17; and See Exhibit 7, Deposition testimony of Mid-Continent’s
Supervisor, Roderick Evans at page 81, lines 13-17, and page 102, line 3 through page 106, line 7
and page 119, line 18 through page 120, line 1. The only thing that Mid-Continent did was hire
Dallas Attorney, Brent Cooper. See Exhibit 5, Deposition testimony of Mid-Continent Adjuster,
Robert Bryant at page 64, line 23 through page 65, line 17. Brent Cooper made an unsupported,
conclusory allegation that there were no conflicts between the insureds, and an unsupported,
conclusory allegation that there was no coverage conflict. See Exhibit 11 to the Motion for
Summary Judgment. However, it was reasonably clear at that time that there were multi-party
conilicts, and that there was a coverage conflict precluding Mid-Continent from controlling the
defense (which Mid-Continent still legally had to pay for). See Exhibit 1, Deposition testimony of
MUD 400’s Response to Mid-Continent’s MSJs, Page 10Bruce Tough (Counsel for Ann Marie Wright) at Page 71, line 18 through page 73, line 7 and page
79, line 15 through page 81, line 22; and Exhibit 2, Deposition testimony of Kenna Seiler (Counsel
for Cheryl Smith) at page 45, line 17 through page 47, line 4; and page 55, line 3 through page 56,
line 24).
22. Based on the coverage conflict, MUD 400, Cheryl Smith and Ann Marie Wright
defended the Edgar Clayton lawsuit with their own, independent counsel. The case went to trial
in January 2019 — 8 months after the election. Part way through the trial, counsel for Edgar Clayton
threw in the towel/raised the surrender flag and non-suited the election contest. See Exhibit 1,
Deposition testimony of Bruce Tough (Counsel for Ann Marie Wright) at Page 99, line 22 through
page 100, line 22; and Exhibit 2, Deposition testimony of Kenna Seiler (Counsel for Cheryl Smith)
at Page 70, lines 9-17.
23. After the completion of the suit, Mid-Continent was informed of the trial victory
and that invoices would be sent. Exhibit 10 to the Motion for Summary Judgment. The invoices
were sent. Exhibit 8, a 3/21/19 letter to Mid-Continent from Chris Skinner, sending the invoices
from the underlying suit; and_Exhibit 3, Affidavit of Chris Skinner. The invoices were for the
reasonable and necessary fees for the defense of the Edgar Clayton lawsuit. See Exhibit 1,
Deposition testimony of Bruce Tough (Counsel for Ann Marie Wright) at Page 83, line 8 through
page 98, line 5; and Exhibit 2, Deposition testimony of Kenna Seiler (Counsel for Cheryl Smith)
at page 57, line 14 through page 70, line 8 (proving up the fee bills for Wright and Smith as the
tespective lawyer’s business records and that the fees were reasonably and necessary); and Exhibit
9, Affidavit of James Stilwell (proving up the fee bills for MUD 400 as his firm’s business records
and that the fees were reasonably and necessary).
MUD 400’s Response to Mid-Continent’s MSJs, Page 1124. After receipt of the fees, Mid-Continent denied the claim and refused to pay the fee
bills. Exhibit 11 to the Motion for Summary Judgment. Mid-Continent made self-serving
conclusory statements that: (1) the payments were voluntary, (2) there were no conflicts between
the three defendants (arguing separate counsel were not necessary); and (3) there was no coverage
conflict (arguing that the Insureds could not control the defense of the Edgar Clayton lawsuit), and
the attorneys were not attorneys selected by Mid-Continent. Id.
25. Despite Mid-Continent’s denial and refusal to pay the reasonable and necessary
fees for the successful defense of the Edgar Clayton lawsuit, it was reasonably clear at the time of
the denial that the fees were covered. See Exhibit 1, Deposition testimony of Bruce Tough
(Counsel for Ann Marie Wright) at page 79, line 15 through page 81, line 22.
26. Mid-Continent’s denial and refusal to pay breached the insurance policy and
contract. See Exhibit 1, Deposition testimony of Bruce Tough (Counsel for Ann Marie Wright) at
Page 81, line 23 through page 83, line 6; and Exhibit 2, Deposition testimony of Kenna Seiler
(Counsel for Cheryl Smith) at page 56 line 25 through page 57, line 13.
27. After Mid-Continent’s May 2019 denial and breach, MUD 400 sent a demand letter
for payment outlining the issues and law for Mid-Continent including as to the multi-party conflict,
the coverage conflict, Mid-Continent’s breach of the contract, and the extra-contractual torts and
insurance code violations committed by Mid-Continent. See Exhibit 13 to Mid-Continent’s
Motion for Summary Judgment.
28. When Mid-Continent still did not pay, MUD 400 brought this lawsuit.
29. In Section II, below, MUD 400 sets forth the pertinent law relating to the motion and
this Response, including:
MUD 400’s Response to Mid-Continent’s MSJs, Page 12(A) law related to conflicts of interest in the representation of multiple parties; insurer
liability for failure to investigate once on notice of conflicts; as well as the difference
between the Texas Disciplinary Rule regarding conflicts of interest in the
representation of multiple parties, and the Texas Rules of Evidence relating to privilege
on issues of common interest between separately represented parties,
(B) law related to the control of the defense of a lawsuit when there is an actual conflict
between an insurer’s reservation of rights letter and the facts being adjudicated in the
underlying case,
(C) law and elements of breach of an insurance policy/contract;
(D) law regarding extra-contractual insurance claims, if a breach of contract exists; and
(E) law regarding bad-faith insurance denials.
SECTION Il —- LAW RELATING TO THE MSJ RESPONSE
1) Law of Conflicts of Interest Necessitating Separate Counsel: Texas Discipli Rules
of Professional Conduct, Rule 1.06; (2) Case Law on Insurer Liability for Failure to
Investigate Multi-party Conflicts After Notice of Same; and (3) the Difference Between
the Disciplinary Rule Regarding Conflicts of Interest in Multi-party representation, and the
Texas Rules of Evidence Regarding Privilege on Common Interest Issues Between
Separately Represented Parties
30. Three areas of law are important to the discussion of “multi-party conflicts” in this
Response to Mid-Continent’s Motion for Summary. First, Mid-Continent contends that there were
no conflicts among the three Insureds (Cheryl Smith, Ann Marie Wright and MUD 400) who were
sued in the Underlying Lawsuit. Accordingly, this Section (Section II (A)(1)) discusses the
Disciplinary Rules which set the standard for when one attorney can represent multiple parties in
a single matter (and conversely, when conflicts necessitate separate counsel for the different
parties). Next, this Section (Section JI (A)(2)) addresses caselaw regarding Mid-Continent’s duty
to investigate the multi-party conflict after notice and Mid-Continent’s liability for failure to do
MUD 400’s Response to Mid-Continent’s MSIJs, Page 13so. Finally, because Mid-Continent’s MSJ misstates the standard and attempts to conflate the
privilege rules relating to issues of common interest among separately represented parties, with
the Disciplinary Rules regarding when separate counsel are needed to represent separate parties
with conflicts in a lawsuit, this Section (Section II(A)(3)) addresses the difference between the
Disciplinary Rules (which sets the standard for when separate counsel are needed) and the Rules
of Evidence (which identifies when separately represented parties may confer with attomey-client
privilege protection on common interest issues).? Section III (A) looks at the summary judgment
evidence regarding Mid-Continent’s attempt to name a single attorney (who had never handled an
election contest) to represent the three Insureds ~ without telling the appointed lawyer he was
representing three parties; the summary judgment evidence regarding notice given to Mid-
Continent about the need for separate counsel; and Mid-Continent’s complete disregard of the
notice and total failure to conduct any investigation of the multi-party conflict. With respect to the
first issue, MUD 400 now addresses the Disciplinary Rule identifying when conflicts require
separate counsel for multiple parties involved in the same lawsuit:
(1) Law of Conflicts of Interest Necessitating Separate Counsel: Texas Disciplinary
Rules of Professional Conduct, Rule 1.06.
31. The Texas Disciplinary Rules of Professional Conduct, Rule 1.06, sets forth the
standard on when conflicts of interest among multiple parties necessitates their representation by
separate counsel. Said differently, it specifies when a single counsel can, and cannot, represent
multiple parties in the same lawsuit. The text of Rule 1.06 states:
? Section IT addresses the law related to the Summary Judgment issues, and Section II applies the
summary judgment and evidence related to those issues. Therefore, with respect to the evidence related
to the multi-party conflict issues, Section IMI (A) applies the summary judgment evidence regarding
Mid-Continent’s attempt to name a single attomey (who had never handled an election contest) to
represent the three Insureds; the summary judgment evidence regarding notice given to Mid-Continent
about the need for separate counsel; and Mid-Continent’s complete disregard of the notice and total
failure to conduct any investigation of the multi-party conflict.
MUD 400’s Response to Mid-Continent’s MSJs, Page 14Texas Disciplinary Rules of Professional Conduct
Rule 1.06 Conflict of Interest: General Rule
(a) A lawyer shall not represent opposing parties to the same litigation.
(b) In other situations and except to the extent permitted by paragraph (c), a lawyer
shall not represent a person if the representation of that person:
(1) involves a substantially related matter in which that person’s interests
are materially and directly adverse to the interests of another client of
the lawyer or the lawyer's firm; or
(2) reasonably appears to be or become adversely limited by the lawyer's or
law firm's responsibilities to another client or to a third person or by the
lawyer's or law firms own interests.
c) A lawyer may represent a client in the circumstances described in (b) if:
wy! rep!
(1) the lawyer reasonably believes the representation of each client will not
be materially affected; and
(2) each_affected or potentially affected _client_consents_to such
representation after full disclosure of the existence, nature, implications,
and possible adverse consequences of the common representation and
the advantages involved, if any.
TEX, Disc. R. PROF. CONDUCT, R. 1.06 (emphasis added).
32. With respect to this case, 1.06(a) is not in issue. Mid-Continent did not insure
Plaintiff Edgar Clayton. Instead, it only insured all three defendants in the Underlying Lawsuit -
Cheryl Smith, Ann Marie Wright, and MUD 400. Therefore, the pertinent conflict sections are
Rule 1.06(b) and (c). Section 1.06(b) only allows representation of multiple clients in the same
lawsuit (a “substantially related matter”) if (per section 1.06(c)(1)) the lawyer believes the
representation of each client will not be materially affected. If the representation would be
materially affected, the multi-party representation cannot occur. As set forth in Section III(A),
below, the summary judgment evidence (testimony of two different attorneys) proves that the
representation of the three Insureds/Defendants would have been materially affected by joint
representation.
MUD 400’s Response to Mid-Continent’s MSJs, Page 1533. Additionally, Rule 1.06(b)(1) specifies that if the joint representation in the suit
would involve matters in which the multiple clients’ interests are materially and directly adverse
to one another, the multi-party representation cannot occur, As set forth in Section IIIA), below,
the summary judgment evidence (testimony of two different attorneys) proves that the
representation of the three Insureds/Defendants would have involved matters in which their
interests were materially and directly adverse.
34. Next, Rule 1.06(b)(2) specifies that a multi-party representation in the same suit
cannot occur if the representation of each person reasonably appears to be or become adversely
limited by the lawyer’s responsibilities to another client. A lawyer has a duty to zealously advocate
for his client. As set forth in Section HI(A), below, the summary judgment evidence (testimony
of two different attorneys) proves that the representation of each of the three Insureds/Defendants
would have been adversely limited by a single lawyer’s duty to zealously advocate for each of the
other clients in the multi-party representation.
35. Finally, Rule 1.06(c)(2) specifies that in the instance that the interests are not
adverse, will not be adversely limited, and will not be materially affected, the multi-party
Tepresentation can only occur if each of the multiple clients consents to joint representation after
full disclosure of the information required in the Rule. As set forth in Section TII(A), below, the
summary judgment evidence (testimony of two different attorneys and the affidavit of Chris
Skinner) proves that had multi-party representation been possible under the Rule, none of the three
Insureds consented to multi-party representation upon the necessary disclosure— meaning conflicts
precluded joint representation of the three insureds/defendants by a single counsel.
36. In short, Disciplinary Rule 1.06 is the standard for determining whether conflicts
among multiple parties to the same suit precludes joint representation by a single attorney; and as
MUD 400’s Response to Mid-Continent’s MSJs, Page 16shown by the summary judgment evidence below (Section III(A)) in the Underlying lawsuit, the
three Insureds/Defendants had conflicts precluding multi-party representation by a single attomey.
Mid-Continent’s belief otherwise is legally and factually incorrect. And what makes Mid-
Continent’s position even more reprehensible is that (as shown in Section III(A)) Mid-Continent
attempted to (1) appoint an attomey with absolutely no election contest experience to tepresent all
three defendants in an election contest; (2) failed to inform the appointed attorney that he would
be representing three different defendants; and (3) upon Mid-Continent receiving notice of
potential conflicts among the three Insureds/Defendants, Mid-Continent entirely failed to
investigate those conflicts. Accordingly, this Response next addresses the case law on Mid-
Continent’s duty to investigate the multi-party conflicts, once it had notice that potential conflicts
existed.
(2) Case Law on Insurer Liability for Failure to Investigate Multi-party Conflicts
After Notice of Same.
37. Three Texas cases address an Insurer’s liability for failure to investigate conflicts
among insureds: (1) the Texas Supreme Court in Traver;3 (2) the Dallas Court of Appeals in
Marquis Acquisitions;' and (3) The U.S. Fifth Circuit Court of Appeals, applying Texas law, in
Segerstrom.° Based on these cases, the rule is that an insurer who has notice of potential conflicts
among multiple insureds has a duty to investigate the conflicts and liability for failing to do so.
38. In the Texas Supreme Court’s Opinion in Traver, an insured contended that his
Insurer-appointed counsel was negligent, and that the Insurer consciously undermined the
Insured’s defense. Traver, 980 S.W.2d at 626-27 and 629, While the Court found that the Insurer
3 State Farm Mut. Auto. Ins. Co, v. Traver, 980 S.W.2d 625 (Tex. 1998).
4 Marquis Acquisitions, Inc. y. Steadfast Ins. Co., 409 8.W.3d 808 (Tex. App—Dallas, 2013).
5 Yaquinto v. Segerstrom, 247 F.3d 218 (5* Cir. 2001).
MUD 400’s Response to Mid-Continent’s MSJs, Page 17was not vicariously liable for the acts of the appointed attorney, the Texas Supreme Court
recognized that an insurer may be liable for its own misconduct including violation of duties it
owed. Id. at 629. Therefore, because the insured had not been given a chance to prove the insurer’s
violation of the insurer’s duties at the trial court level, the Texas Supreme Court remanded the
Insured’s claim for the insurer’s violations back to the trial court. Jd.
39. The U.S. Fifth Circuit Court of Appeals, applying Texas law in its opinion in
Segerstrom specifically addressed an Insurer’s duty to investigate conflicts in the context of an
insurer’s duty to act with reasonable care with respect to the duty to defend the insureds under the
insurance contract. In Segerstrom, an insured contended that the lawyer that the insurer appointed
to represent the insured had an inherent multi-party conflict of interest with respect to other clients
the attomey represented in the same lawsuit. Segerstrom, 247 F.3d at 222. The insured also alleged
that in failing to investigate conflicts, the insurer violated a duty of reasonable care related to the
insurer’s duty to defend the insured under the insurance contract. Jd. at 222 and 228. The Court
stated “Texas requires that insurance companies act with reasonable care in fulfilling their duty to
defend under insurance contracts.” Jd. (citing to Meridian Oil Production, Inc v. Hartford Accident
& Indemn. Co., 27 F.3d 150, 153 (5" Cir. 1994) and Ranger County Mut. Ins. Co. v. Guin, 723
S.W.2d 656, 659 (Tex. 1987)). The Court held that “Therefore, unless [Insurer] disregarded notice
-. ofa conflict, . . . any liability imposed on [Insurer] would be vicarious and hence not recognized
by Texas law.” Id. The Court went on to explain that there was no evidence that the Insurer had
disregarded notice of a potential conflict, but had it done so and breached its duty, that the insured
also failed to link that breach to its damages. /d. In short, an Insurer can be liable for breaching its
duties; Texas law recognizes a duty of reasonable care with respect to the Insurer’s duty to defend
MUD 400’s Response to Mid-Continent’s MSJs, Page 18an insured under an insurance contract; and in that context, Segerstrom recognizes that an Insurer
can be liable for disregarding notice of potential conflicts.
40. The Dallas Court of Appeals, in Marquis Acquisitions, applied the opinion in
Segerstrom to another multi-party conflicts case. In Marquis Acquisitions, Steadfast Insurance
Company defended its insured, Marquis Acquisitions along with other insureds, in a lawsuit
stemming from an apartment fire. Marquis Acquisitions’ independent counsel sent notice to
Steadfast alleging that potential conflicts of interest existed among the insureds requiring that
separate counsel be hired. Marquis Acquisitions, 409 S.W.3d 810-811. Unlike Mid-Continent in
the present case, Steadfast Insurance did not fail to act. Instead, Steadfast investigated the conflict,
asked the appointed counsel to assess the conflicts, and investigated the potential conflicts. /d. at
811. After its investigation, upon finding “potential for a conflict in the future” the insurer hired
separate counsel for the Insured. Jd. at 812. The insured ultimately brought suit against the insurer
“in an effort to recover the attomey’s fees it expended in getting Steadfast to retain separate counsel
for the owner group of insureds.” Jd. Marquis Acquisitions alleged that Steadfast breached its
insurance contract by failing to appoint separate counsel for separate insureds to avoid the conflict
of interest among the insureds. Id. 813. Citing to Segerstrom, the Dallas Court of Appeals
identified that “[A]n insurer may breach its duty of reasonable care if it “disregards” notice of a
conflict from defense counsel.” Jd. at 814. However, the Court went on to say that under the facts
before it, the insurer had not disregarded the notice and instead had actively investigated the notice
of potential conflict, found the potential for conflict and then appointed separate counsel. The
Court said “This evidence conclusively shows that Steadfast did not “disregard” notice of a
potential conflict, but instead responded to it immediately.” /d. at 814. In short, while an insurer
may be liable for failing to investigate notice of potential conflicts, associated with the insurer’s
MUD 400’s Response to Mid-Continent’s MSJs, Page 19duty of reasonable care in fulfilling the duty to defend the insured, the insurance company in
Marquis Acquisitions investigated, found potential conflicts and appointed separate counsel for
the insureds, resulting in no liability for the insurer.
41. However, as shown in Section III(A) below, upon receiving notice of potential
conflicts among the multiple Insureds in this case, Mid-Continent (1) failed to ask its appointed
counsel Britt Harris about those conflicts -- indeed, Mid-Continent failed to even tell Britt Harris
that he would be representing multiple insureds, and also failed to tell him Mid-Continent had been,
informed of potential conflicts among the defendants; and (2) after receiving notice of the potential
conflicts, Mid-Continent “disregarded” the notice and failed to perform any investigation of that
conflict. The summary judgment evidence set forth in Section III(A) shows Mid-Continent’s
liability for breach of its duty relating to conflicts among the multiple insureds. Mid-Continent,
however, not only incorrectly contends that there were not conflicts (and the summary judgment
evidence proves there were) but also misstates the law relating to conflicts by arguing that the
actual defense of the insureds by their independently retained attorneys was at times aligned. As
set forth below, the privilege between separately represented defendants and their counsel to confer
and act on common defense issues, as allowed under the Texas Rules of Evidence, is not proof of
no conflicts or no potential conflicts between them. Indeed, the Texas Rules of Evidence inherently
assumes such conflicts by creating a rule allowing separately represented parties to have joint
privilege over their conferences relating to areas where their interests might align.
(3) The Difference Between the Disciplinary Rule Regarding Conflicts of Interest in
Multi-party representation, and the Texas Rules of Evidence Regarding Privilege on
Common Interest Issues Between Separately Represented Parties.
42. In its Motion for Summary Judgment, Section V.B., Mid-Continent contends that “it
is plain from the pleadings and the attorney’s [sic - attorneys’] fees bills from the underlying suit
MUD 400’s Response to Mid-Continent’s MSJs, Page 20that the defendant insureds had no conflict of interests [sic— conflicts of interest]. All of them were
aligned and in lock step with each other in vigorously defending against Clayton’s challenge to
the election results.” Motion at Section V.B. Mid-Continent continued “Their counsel coordinated
with and assisted each other in settlement negotiations, legal research, and trial strategy.” Jd. In
making this argument, Mid-Continent ignores that the Texas Rules of Evidence expressly allows
separately represented parties to confer on areas of common interest in defense of a case.
TEX.REvID., R. 503(b)(1)(C). See In re XL Specialty Ins., 373 S.W.3d 46, 50 (Tex.
2012)(specifically noting that the privilege applies when parties have separate counsel, but
communications are made regarding common interest in the litigation). The rules of evidence, by
allowing privilege among separately represented parties, expressly recognize that parties can have
common interests within litigation, even if those parties have conflicts between them precluding
joint representation.
43. Although the “joint defense privilege” provides privilege protection for separately
represented parties who confer on common interests, nothing about such privileged acts determines
whether or not there are conflicts between the parties under Texas Disciplinary Rules of
Professional Conduct, Rule 1.06. As the common saying “the enemy of my enemy is my friend”
suggests, even parties in conflict may be able to come together on issues of common interest to
defeat a common opponent. Coordinating on negotiations, research and trial strategy to defeat the
parties’ common opponent, Edgar Clayton, does not prove the absence of conflicts of interest
between the Defendants.
44. Mid-Continent, in its motion, failed to assess or address the requirements of the
conflicts rule, Rule 1.06. The summary judgment evidence in Section HI(A) below shows the
testimony of two attorneys who assessed and addressed the requirements of the conflicts rule. Both
MUD 400’s Response to Mid-Continent’s MSJs, Page 21concluded that the three insureds who were sued in the underlying case had conflicts that precluded
them from being represented by the same single counsel. Mid-Continent never investigated these
facts, never asked its appointed counsel about the potential conflicts, never even told its appointed
counsel he would be representing multiple parties, and instead, Mid-Continent simply disregarded
the notice of potential conflicts provided to it. Mid-Continent’s after-the-fact references to areas
where the separate counsel were able to work together on common issues, is no-evidence of the
absence of conflicts of interest necessitating separate counsel. Mid-Continent failed to address the
appropriate standard, and the Texas Rules of Evidence relating to joint-privilege is entirely
different than the standard for determining conflicts under the Texas Disciplinary Rules of
Professional Conduct, Rule 1.06.
45. Mid-Continent’s misstatements in this area of its Motion were not its only
misstatements. Mid-Continent also misstated the holdings of cases related to coverage conflicts,
as addressed in the next section, below.
(B) The Duty to Defend; and Law Regarding Control of the Defense of a Lawsuit when there
is_ an Actual Conflict Between the Insurer’s Reservation of Rights and Facts Being
Adjudicated in the Underlying Lawsuit: Northern County Mutual Ins. Co. v. Davalos, 140
S.W.3d 685 (Tex. 2004).
46. In 2016, the Houston 14" Court of Appeals provided a good background
description of an insurer’s duty to defend imposed by an insurance policy, and also a good
explanation of the Texas Supreme Court’s opinion in Davalos -- setting forth when an insured
may control the defense of a lawsuit based on an actual conflict between an insurer’s reservation
of rights and the actual facts being adjudicated in the lawsuit in issue. The 14" Court of Appeals’
opinion in Allstate County Mut. Ins. Co. v. Wootton, 494 8.W.3d 825, 830-31 (T ex.App. — Hou.
[14 Dist] 2016) explained an Insurer’s contractual duty of defense, stating:
MUD 400’s Response to Mid-Continent’s MSJs, Page 22In the Policy, Allstate promised to defend and indemnify the Woottons. The
duty to defend is distinct from, and broader than, the duty to indemnify. An insurer
must defend its insured if a plaintiffs factual allegations potentially support a
covered claim, while the facts actually established in the underlying suit
determine whether the insurer must indemnify its insured. ... In determining
whether an insurer has a duty to defend its insured, Texas courts follow the eight-
corners rule, also known as the complaint-allegation rule, which the Supreme Court
of Texas has described as follows: "[A]n insurer's duty to defend is determined by
the third-party plaintiffs pleadings, considered in light of the policy provisions,
without regard to the truth or falsity of those allegations.” ... In making the duty-
to-defend determination, we resolve all doubts regarding the duty to defend in favor
of the existence of a duty, and we construe the pleadings liberally. ... [T]he general
tule is that the insurer is obligated to defend if the petition potentially includes a
claim that falls within the coverage of the policy. ... We conclude that, if the eight-
comers rule applies to the determination of Allstate's duty to defend, the summary-
judgment evidence proves as a matter of law that Gonzalez, Sr.'s petition potentially
includes a claim that falls within the Policy's coverage and that Allstate has a duty
to defend the Woottons in the Underlying Suit.
Allstate County Mut. Ins. Co. v. Wootton, 494 8.W.3d 825, 830-31 (Tex.App. — Hou. [14" Dist]
2016) (internal citations omitted).
47, Ordinarily, in addition to having to pay for the defense of the suit, the insurance
policy also gives the insurance company the right to control the defense. That includes the selection
of counsel to provide the defense of the insured, and the right to make decisions about the handling
of the case. The Wootton opinion explained:
The Policy language imposes on Allstate a duty to defend the Woottons and gives
Allstate the right to conduct the Woottons' defense. See N. Cnty. Mut, Ins. Co. y.
Davalos, 140 §.W.3d 685, 688 (Tex. 2004). The right to conduct the defense
includes the authority to select the attorney who will defend the claim and the
authority to make other decisions that normally would be vested in the insured as
the named party in the case. See id.
Allstate County Mut. Ins. Co. v. Wootton, 494 S.W.3d 825, 837 (Tex.App. — Hou. [14" Dist] 2016).
48. In the present case, following a May 2018 election for the Board of Directors of
MUD 400, one of the losing candidates, Edgar Clayton, brought a lawsuit contesting the election
and suing MUD 400 and the two winning directors — Cheryl Smith and Ann Marie Wright. MUD
400 and the Directors (the “Insureds”) submitted the lawsuit to its Insurer, Mid-Continent. Mid-
MUD 400’s Response to Mid-Continent’s MSJs, Page 23Continent concluded that the insurance policy in issue imposed on Mid-Continent a duty to defend
MUD 400, and its Directors, Chery! Smith and Ann Marie Wright, in the lawsuit brought against
them by Edgar Clayton (the “Underlying Lawsuit.”), See Exhibit 5 to Mid-Continent’s Motion for
Summary Judgment (Mid-Continent’s Reservation of Right’s letter, reserving its rights and
offering a single attorney to defend all three Insureds).
49. However, in addition to acknowledging its duty of defense, Mid-Continent’s
reservation of rights letter also reserved Mid-Continent’s right to deny the claim based on an
exclusion found in the policy. Id.
50. Specifically, Mid-Continent stated that “HII. Exclusions, B. (4) indicates [that Mid-
Continent] shall not be liable to pay [defense or indemnity] resulting from any [lawsuit] based
upon or attributable to any of the Insureds gaining in fact any ... advantage to which such Insured
was not legally entitled .. .”. Jd.
51. As Mid-Continent’s adjuster, Robert Bryant, testified, the Underlying Lawsuit
alleged tha
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Received and E-Filed for Record 2/26/2021 11:30 AM Melisa Miller, District Clerk Montgomery County, Texas Deputy Clerk, Kayla Adams CAUSE NO. 19-10-13793 HARRIS COUNTY MUNICIPAL IN THE DISTRICT COURT UTILITY DISTRICT NO. 400 Plaintiff v. MONTGOMERY COUNTY, TEXAS MID-CONTINENT CASUALTY COMPANY Defendant LLP OR CP LA LP MP 457th JUDICIAL DISTRICT SUBJECT TO ITS MOTION FOR CONTINUANCE OF MID-CONTINENT’S SUMMARY JUDGMENT SETTING: PLAINTIFF MUD 400’S RESPONSE TO MID-CONTINENT CASUALTY COMPANY'S TRADITIONAL AND NO-EVIDENCE MOTIONS FOR SUMMARY JUDGMENT Plaintiff, Harris County Municipal Utility District No. 400 (“MUD 400”) has filed a motion for continuance of Mid-Continent Casualty Company’s (“Mid-Continent”) setting on its Traditional and No-Evidence Motions' for Summary Judgment (“Motion”). The setting is on March 5, 2021, making MUD 400’s Response due on February 26, 2021. The first date that the Court had available for the setting on MUD 400’s motion for continuance is February 26, 2021 - d The sole “No-Evidence” motion raised by Mid-Continent is in Section VI of Mid-Continent’s Motion, claiming that there is “no evidence” that a conflict of interest existed between the insureds (Cheryl Smith, Ann Marie Wright, and MUD 400) requiring them to be represented by separate counsel in the underlying lawsuit. As shown in Section TIICA), below, MUD 400 refutes the “no evidence” motion by providing summary judgment evidence in the form of the testimony of Attorney Bruce Tough (Exhibit 1, hereto at page 62, line 7 through page 70, line 20) and Attomey Kenna Seiler (Exhibit 2, hereto at page 36, line 11 through page 39, line 15; and page 41, line 11 through page 43, line 22; and page 44, line 3 through page 47, line 4) showing that there were actual conflicts between the insureds requiring representation by separate counsel, and that none of the insureds waived the conflicts, As a matter of law, under Texas Disciplinary Rules of Professional Conduct, Rule 1.06, the three insureds could not be represented by a single attorney. With the presentation of summary judgment evidence showing at least a scintilla of evidence of conflicts in this Response (and the evidence here is much greater), the Court must deny Mid-Continent’s no-evidence motion. The remainder of Mid-Continent’s motions are traditional summary judgment motions, and as shown in this response, there is a genuine issue of material fact about each of Mid-Continent’s traditional motions, requiring the Court to deny each motion. MUD 400’s Response to Mid-Continent’s MSJs, Page 1the same date that this Response was due (and the Court’s current backlog on rulings means that it is unlikely that MUD 400 will receive a ruling on its motion on February 26, 2021). Because MUD 400 is stuck between a rock (the need for additional discovery in order to fully respond to the Traditional and No-Evidence Motions for Summary Judgment) and a hard place (inability to get a court ruling prior to the date its MSJ response is due) MUD 400 is filing this Response subject to its Motion for Continuance and respectfully reserves and Tequests the right to file a supplement to this Response after the additional discovery needed (as outlined in its Motion for Continuance which is incorporated herein by reference) is completed. Therefore, subject to its Motion for Continuance, MUD 400 responds to Mid-Continent’s Traditional and No-Evidence Motions for Summary Judgment as set forth below. Qutline of Response 1. In Section I of this Response, MUD 400 initially provides background information, based on its summary judgment evidence, to provide the Court with an understanding of its claims. In addition to Exhibits filed by Mid-Continent, MUD 400 includes the following summary judgment evidence, by and through the following Exhibits filed with this Response and incorporated herein by reference: Exhibit 1: Deposition Testimony of Bruce Tough (Counsel for Ann Marie Wright); Exhibit 2: Deposition Testimony of Kenna Seiler (Counsel for Cheryl Smith); Exhibit 3: Affidavit of Chris Skinner, Outside General Counsel for MUD 400; Exhibit 4: Deposition Testimony of Britt Harris (Mid-Continent’s Proposed Atty); Exhibit 5: Deposition Testimony of Mid-Continent Adjuster Robert Bryant; Exhibit 6: Deposition Testimony of Mid-Continent’s Elections Expert, Jared Najvar; Exhibit 7: Deposition Testimony of Mid-Continent Adjuster Supervisor, Roderick Evans; Exhibit 8: 3/21/19 letter to Mid-Continent from Chris Skinner, conveying invoices; MUD 400’s Response to Mid-Continent’s MSJs, Page 2Exhibit 9: Affidavit of James Stilwell with fees chart and fees invoices attached. 2 First, MUD 400 uses the summary judgment evidence in Section I to set forth the necessary fact background to this Response. 3. Next, in Section I, MUD 400 sets forth the pertinent law relating to the motions, including: (A) law related to conflicts of interest in the representation of multiple parties; insurer liability for failure to investigate once on notice of conflicts; as well as the difference between the Texas Disciplinary Rule regarding conflicts of interest in the Tepresentation of multiple parties, and the Texas Rules of Evidence relating to privilege on issues of common interest between separately represented parties, (B) law related to the control of the defense of a lawsuit when there is an actual conflict between an insurer’s reservation of rights letter and the facts being adjudicated in the underlying case, (C) law and elements of breach of an insurance policy/contract; (D) law regarding extra-contractual insurance claims, if a breach of contract exists; and (E) law regarding bad-faith insurance denials. 4. Further, in Section IIT, MUD 400 responds to Mid-Continent’s motions, applying summary judgment evidence to the law set forth in Section II, showing: (A) There were actual conflicts between the three defendants/insureds in the underlying suit which were not waived, requiring separate counsel to represent each of the three insureds (meaning the Court must deny Mid-Continent’s sole “no-evidence” motion); (B) By failing to investigate whether there were conflicts that required separate counsel for each insured, Mid-Continent committed bad faith; MUD 400’s Response to Mid-Continent’s MSJs, Page 3(C)There was an actual conflict between Mid-Continent’s coverage position in its reservation of rights letter, and the actual facts being adjudicated in the underlying case, meaning the Insureds had the right to control the defense and Mid-Continent was still required to pay for ti; (D)By failing to investigate whether there were actual conflicts between Mid-Continent’s reservation of rights letter and the actual facts being adjudicated in the underlying case, Mid-Continent committed bad-faith; (E) By denying the claim for the Insureds’ attorneys’ fees, when Mid-Continent was required to pay for that defense, Mid-Continent breached the insurance policy and contract with MUD 400; {F) By denying the claim for the Insureds’ attorneys’ fees when coverage was reasonably clear, Mid-Continent committed bad faith; (G)By failing to timely pay MUD 400’s claim, Mid-Continent breached the insurance policy and violated provisions of the Texas Insurance Code requiring timely payment of claims. 5. Finally, in Section TV, MUD 400 summarizes its response showing the Court that it should deny Mid-Continent’s traditional and no-evidence motions for summary judgment. 6. Bearing that outline in mind, MUD 400 begins by providing background information, based on its summary judgment evidence, to provide the Court with an understanding of its claims. MUD 400’s Response to Mid-Continent’s MSJs, Page 4SECTION I- BACKGROUND AND SUMMARY JUDGMENT EVIDENCE 7. In May 2018, MUD 400 held an election for two seats on its board of directors. Candidates Ann Marie Wright (“Wright”) and Cheryl Smith (“Smith”) (candidates who ran on opposite tickets) received the two highest vote totals. The incumbent President, Edgar Clayton, (“Clayton”) who had recruited Wright to run, lost the election by 7 votes. There were numerous problems with the handling of the election and Clayton asked MUD 400 to hold a new election; however, MUD 400 certified the election and declared Wright and Smith the winners. See generally, Exhibit 2 to Mid-Continent’s Motion for Summary Judgment, Edgar Clayton’s Petition. 8. Edgar Clayton brought an election contest (the “Underlying Lawsuit”), Jd. He sued MUD 400, Wright and Smith. Jd. His petition raised many different allegations of wrongdoing related to the election (essentially pleading everything but the kitchen sink). Id, However, among those allegations and bases for his election contest were claims that Wright and Smith had received the advantage of illegal and improper votes to which they were not legally entitled, and that MUD 400 received the advantage of not holding and paying for a new election when the May 2018 election was fundamentally flawed. Jd. 9. MUD 400, for itself and on behalf of Wright and Smith, tendered the lawsuit to its insurance carrier, Mid-Continent for defense and indemnity. However, prior to Mid-Continent responding regarding whether it would tender a defense, the lawsuit answers were due. After discussing the suit at a board meeting and determining that there were material conflicts among the three defendants; that the three defendants would not waive those conflicts; and that the defendants requested separate counsel, MUD 400 hired its own counsel and began paying for the defense of Wright and Smith pursuant to a board policy on indemnification of directors. Exhibit 3, Affidavit of Chris Skinner. Also see Exhibit 1, Deposition testimony of Bruce Tough (Counsel MUD 400’s Response to Mid-Continent’s MSJs, Page 5for Ann Marie Wright) at page 62, line 7 through page 70, line 20 (specifying that the three defendants had material, adverse conflicts and that one lawyer could not represent all three defendants); and Bxhibit 2, Deposition testimony of Kenna Seiler (Counsel for Cheryl Smith) at page 36, line 11 through page 39, line 15; and page 41, line 11 through page 43, line 22; and page 44, line 3 through page 47, line 4) (specifying that the three defendants had material, adverse conilicts and that one lawyer could not represent all three defendants). 10. After the three Defendants’ separate counsel had filed separate answers (See Exhibits 15, 16, and 17 to Mid-Continent’s Motion for Summary Judgment — the three answers to the Edgar Clayton Lawsuit), on or around July 24, 2018, Mid-Continent notified MUD 400 it would defend all three defendants with a single appointed attorney (Britt Harris). See Mid- Continent’s Reservation of Rights Letter dated July 24, 2018, Exhibit 5 to Mid-Continent’s Motion for Summary Judgment. 11. Additionally, Mid-Continent also informed the Insureds that Mid-Continent was reserving its right to deny coverage for the lawsuit. Jd. 12. However, Mid-Continent: A. had not informed Britt Harris that he would be defending three different defendants. Exhibit 4, Deposition testimony of Britt Harris, page 30, line 7 through page 31, line 19 and page 36, line 9 through page 37, line 1 and page 47, line 5 through page 47, line 22; B. selected counsel with no election contest experience. Britt Harris had never defended an election contest. Jd. at page 16, line 11 through page 17, line 14; and C. did not run any conflict analysis related to the proposed joint representation of the three Insureds. Because Britt Harris did not know he was being asked to defend multiple defendants, he did not perform any conflict analysis to determine if he could represent Wright, Smith and MUD MUD 400’s Response to Mid-Continent’s MSJs, Page 6400. Id. at page 30, line 7 through page 31, line 19; and page 36, line 9 through page 37, line 1; and page 47, line 5 through page 47, line 22. 13. Further, Mid-Continent’s reservation of rights letter raised an exclusion under the policy specifying that Mid-Continent would not pay for any loss relating to any of the three defendants having received an advantage to which they were not legally entitled. See Mid- Continent’s Reservation of Rights Letter dated July 24, 2018, Exhibit 5 to the Motion for Summary Judgment. Mid-Continent raised this exclusion due to Edgar Clayton’s allegations that both Wright and Smith had received the advantage of illegal votes (and no one is entitled to illegal votes). See Exhibit 5, Deposition testimony of Mid-Continent Adjuster, Robert Bryant at page 39, line 11 through page 40, line 4; and page 74, line 21 through page 75, line 14; and page 82, lines 19-25; and page 83, line 19 through page 85, line 2; and page 86, lines 11-21; and page 87, line 25 through page 90, line 1; and page 213, line 6 through page 214, line 17. The lawsuit also alleged that MUD 400 had received the advantage of not holding and paying for a new election (when it was not entitled to certify the prior election due to illegal votes). Id. at page 79, line 14 through page 80, line 24; and page 100, lines 13-18; and page 101, lines 4-13; and page 214, lines 18-24, 14. Election contests are bench trials, and the pleadings frame the facts to be adjudicated by the Judge as the trier of fact. See Exhibit 6, Deposition testimony of Jared Najvar ({Mid-Continent’s designated Elections Expert) at page 12, line 23 through page 13, line 4; and page 31, line 8 through page 32, line 11; and Exhibit 4, page 18, line 3-20 and page 19, line 15 though page 20, line 5, Deposition testimony of Britt Harris. 15. With allegations of illegal votes having been pled, Election Code, Section 212.011 specifies that the Judge is to determine if there are any illegal votes, and if the votes were for a MUD 400’s Response to Mid-Continent’s MSJs, Page 7particular candidate, to then subtract them from that candidate’s total. TEx. ELECTION CODE, §212.011. Exhibit 6, Deposition testimony of Jared Najvar (Mid-Continent’s designated Elections Expert) at page 14, lines 10-22 and page 42 line 18 through page 43, line 6 and page 43, line 16 through page 44, line 13; and Exhibit 4, Deposition testimony of Britt Harris, page 21, lines 2-15; and page 22, lines 7-16. Further, the Judge is to determine whether to void the prior election. If the Judge orders a new election, MUD 400 would have to pay for the new election. TEX. ELECTION Cops, §221.014. Also, see Exhibit 6, Deposition testimony of Jared Najvar (Mid-Continent’s designated Elections Expert) at page 29, line 3 through page 30, line 5. 16. With allegations of Wright and Smith having received illegal votes, and Edgar Clayton seeking to cause MUD 400 to hold a new election, the actual facts being adjudicated in the underlying suit were the same facts necessary to determine whether or not Mid-Continent’s exclusion was applicable. See Exhibit 1, Deposition testimony of Bruce Tough (Counsel for Ann Marie Wright) at Page 75, line 5 through page 81, line 22; and Exhibit 2, Deposition testimony of Kenna Seiler (Counsel for Cheryl Smith) at page 49, lines 13-23; and page 52, line 17 through page 56, line 24. Further, see Exhibit 5, Deposition of Adjuster Robert Bryant, at page 113, line 16 through page 114, line 3. Also see Exhibit 6, Deposition testimony of Jared Najvar (Mid- Continent’s designated Elections Expert) at page 29, line 3 through page 30, line 5; and page 37, line 7 through page 38, line 3; and page 43, line 16 through page 44, line 13; and page 47, lines 12-16; and page 61, lines 6-23; and page 71, lines 16 through page 72, line 3; and page 72, line 16 through page 73, line 18. Finally, see Exhibit 7, Deposition of Roderick Evans (Mid- Continent’s adjuster Supervisor on this claim) at page 66, line 9 -23; and page 67, lines 9-20; and page 70, line 9 through page 71, line 7; and page 73, lines 8-15; and page 78, lines 1-22; and page MUD 400’s Response to Mid-Continent’s MSJs, Page 898, lines 2-9; and page 98, line 17 through page 99, line 1; and page 99, line 24 through page 100, line 3; and page 115, line 4 though page 117, line 14. 17. Upon receipt of the reservation of rights letter, MUD 400 sent a response to Mid- Continent identifying that conflicts between the three defendants in the Edgar Clayton lawsuit precluded representation by a single attorney (the “multi-party conflict”), and that there was an actual conflict between exclusion raised in the reservation of rights letter and the facts being adjudicated in the lawsuit (the “coverage conflict”), precluding Mid-Continent from controlling the defense. Exhibit 6 to the Motion for Summary Judgment. With the Insureds having told Mid- Continent about both the multi-party conflict, and the coverage conflict, Mid-Continent knew or should have known about these issues. Jd. 18, It was reasonably clear in July 2018 that the multi-party conflict prevented a single attorney from representing all three defendants. See Exhibit 1, Deposition testimony of Bruce Tough (Counsel for Ann Marie Wright) at page 62, line 7 through page 70, line 20; and Exhibit 2, Deposition testimony of Kenna Seiler (Counsel for Cheryl Smith) at page 45, line 17 through page 47, line 4. 19. It was also reasonably clear in July 2018 that the facts being adjudicated in the lawsuit were the same facts involved in determining if the exclusion was applicable. See Exhibit 1, Deposition testimony of Bruce Tough (Counsel for Ann Marie Wright) at Page 75, line 5 through page 81, line 22; and Exhibit 2, Deposition testimony of Kenna Seiler (Counsel for Cheryl Smith) at page 49, lines 13-23; and page 52, line 17 through page 56, line 24. 20. Despite being told of the multi-party conflict, Mid-Continent did nothing to investigate it. See Exhibit 5, Deposition testimony of Mid-Continent Adjuster, Robert Bryant at page 49, lines 19-23; and page 53, lines 22-25; and page 54, line 2 through page 55, line 7. Further, MUD 400’s Response to Mid-Continent’s MSJs, Page 9Adjuster Bryant contended he would have counted on Britt Harris to tell him if there were any conflicts (See Adjuster Bryant’s testimony at Exhibit 5, at page 54, lines 2-10); however, Adjuster Bryant never told Britt Harris he would be representing three defendants, and Britt Harris never performed any multi-party conflict analysis for the Edgar Clayton lawsuit. Exhibit 4, Deposition testimony of Britt Harris, at page 30, line 7 through page 31, line 19; and page 36, line 9 through page 37, line 1; and page 47, line 5 through page 47, line 22. 21. Worse, despite being told of the coverage conflict, Mid-Continent did nothing to investigate the facts being adjudicated. It did not contact any of the three lawyers for the three defendants. It did not contact the general counsel for MUD 400. It did not inquire of the lawyers for Edgar Clayton. It did not require statements or additional information from the three insureds. It did not get all of the documents from the court file (and did not get the exhibits to Edgar Clayton’s petition — only the petition without exhibits). See Exhibit 5, Deposition testimony of Mid-Continent Adjuster, Robert Bryant at page 55, line 23 through page 56, line 14; and page 58, line 16 through page 65, line 17; and See Exhibit 7, Deposition testimony of Mid-Continent’s Supervisor, Roderick Evans at page 81, lines 13-17, and page 102, line 3 through page 106, line 7 and page 119, line 18 through page 120, line 1. The only thing that Mid-Continent did was hire Dallas Attorney, Brent Cooper. See Exhibit 5, Deposition testimony of Mid-Continent Adjuster, Robert Bryant at page 64, line 23 through page 65, line 17. Brent Cooper made an unsupported, conclusory allegation that there were no conflicts between the insureds, and an unsupported, conclusory allegation that there was no coverage conflict. See Exhibit 11 to the Motion for Summary Judgment. However, it was reasonably clear at that time that there were multi-party conilicts, and that there was a coverage conflict precluding Mid-Continent from controlling the defense (which Mid-Continent still legally had to pay for). See Exhibit 1, Deposition testimony of MUD 400’s Response to Mid-Continent’s MSJs, Page 10Bruce Tough (Counsel for Ann Marie Wright) at Page 71, line 18 through page 73, line 7 and page 79, line 15 through page 81, line 22; and Exhibit 2, Deposition testimony of Kenna Seiler (Counsel for Cheryl Smith) at page 45, line 17 through page 47, line 4; and page 55, line 3 through page 56, line 24). 22. Based on the coverage conflict, MUD 400, Cheryl Smith and Ann Marie Wright defended the Edgar Clayton lawsuit with their own, independent counsel. The case went to trial in January 2019 — 8 months after the election. Part way through the trial, counsel for Edgar Clayton threw in the towel/raised the surrender flag and non-suited the election contest. See Exhibit 1, Deposition testimony of Bruce Tough (Counsel for Ann Marie Wright) at Page 99, line 22 through page 100, line 22; and Exhibit 2, Deposition testimony of Kenna Seiler (Counsel for Cheryl Smith) at Page 70, lines 9-17. 23. After the completion of the suit, Mid-Continent was informed of the trial victory and that invoices would be sent. Exhibit 10 to the Motion for Summary Judgment. The invoices were sent. Exhibit 8, a 3/21/19 letter to Mid-Continent from Chris Skinner, sending the invoices from the underlying suit; and_Exhibit 3, Affidavit of Chris Skinner. The invoices were for the reasonable and necessary fees for the defense of the Edgar Clayton lawsuit. See Exhibit 1, Deposition testimony of Bruce Tough (Counsel for Ann Marie Wright) at Page 83, line 8 through page 98, line 5; and Exhibit 2, Deposition testimony of Kenna Seiler (Counsel for Cheryl Smith) at page 57, line 14 through page 70, line 8 (proving up the fee bills for Wright and Smith as the tespective lawyer’s business records and that the fees were reasonably and necessary); and Exhibit 9, Affidavit of James Stilwell (proving up the fee bills for MUD 400 as his firm’s business records and that the fees were reasonably and necessary). MUD 400’s Response to Mid-Continent’s MSJs, Page 1124. After receipt of the fees, Mid-Continent denied the claim and refused to pay the fee bills. Exhibit 11 to the Motion for Summary Judgment. Mid-Continent made self-serving conclusory statements that: (1) the payments were voluntary, (2) there were no conflicts between the three defendants (arguing separate counsel were not necessary); and (3) there was no coverage conflict (arguing that the Insureds could not control the defense of the Edgar Clayton lawsuit), and the attorneys were not attorneys selected by Mid-Continent. Id. 25. Despite Mid-Continent’s denial and refusal to pay the reasonable and necessary fees for the successful defense of the Edgar Clayton lawsuit, it was reasonably clear at the time of the denial that the fees were covered. See Exhibit 1, Deposition testimony of Bruce Tough (Counsel for Ann Marie Wright) at page 79, line 15 through page 81, line 22. 26. Mid-Continent’s denial and refusal to pay breached the insurance policy and contract. See Exhibit 1, Deposition testimony of Bruce Tough (Counsel for Ann Marie Wright) at Page 81, line 23 through page 83, line 6; and Exhibit 2, Deposition testimony of Kenna Seiler (Counsel for Cheryl Smith) at page 56 line 25 through page 57, line 13. 27. After Mid-Continent’s May 2019 denial and breach, MUD 400 sent a demand letter for payment outlining the issues and law for Mid-Continent including as to the multi-party conflict, the coverage conflict, Mid-Continent’s breach of the contract, and the extra-contractual torts and insurance code violations committed by Mid-Continent. See Exhibit 13 to Mid-Continent’s Motion for Summary Judgment. 28. When Mid-Continent still did not pay, MUD 400 brought this lawsuit. 29. In Section II, below, MUD 400 sets forth the pertinent law relating to the motion and this Response, including: MUD 400’s Response to Mid-Continent’s MSJs, Page 12(A) law related to conflicts of interest in the representation of multiple parties; insurer liability for failure to investigate once on notice of conflicts; as well as the difference between the Texas Disciplinary Rule regarding conflicts of interest in the representation of multiple parties, and the Texas Rules of Evidence relating to privilege on issues of common interest between separately represented parties, (B) law related to the control of the defense of a lawsuit when there is an actual conflict between an insurer’s reservation of rights letter and the facts being adjudicated in the underlying case, (C) law and elements of breach of an insurance policy/contract; (D) law regarding extra-contractual insurance claims, if a breach of contract exists; and (E) law regarding bad-faith insurance denials. SECTION Il —- LAW RELATING TO THE MSJ RESPONSE 1) Law of Conflicts of Interest Necessitating Separate Counsel: Texas Discipli Rules of Professional Conduct, Rule 1.06; (2) Case Law on Insurer Liability for Failure to Investigate Multi-party Conflicts After Notice of Same; and (3) the Difference Between the Disciplinary Rule Regarding Conflicts of Interest in Multi-party representation, and the Texas Rules of Evidence Regarding Privilege on Common Interest Issues Between Separately Represented Parties 30. Three areas of law are important to the discussion of “multi-party conflicts” in this Response to Mid-Continent’s Motion for Summary. First, Mid-Continent contends that there were no conflicts among the three Insureds (Cheryl Smith, Ann Marie Wright and MUD 400) who were sued in the Underlying Lawsuit. Accordingly, this Section (Section II (A)(1)) discusses the Disciplinary Rules which set the standard for when one attorney can represent multiple parties in a single matter (and conversely, when conflicts necessitate separate counsel for the different parties). Next, this Section (Section JI (A)(2)) addresses caselaw regarding Mid-Continent’s duty to investigate the multi-party conflict after notice and Mid-Continent’s liability for failure to do MUD 400’s Response to Mid-Continent’s MSIJs, Page 13so. Finally, because Mid-Continent’s MSJ misstates the standard and attempts to conflate the privilege rules relating to issues of common interest among separately represented parties, with the Disciplinary Rules regarding when separate counsel are needed to represent separate parties with conflicts in a lawsuit, this Section (Section II(A)(3)) addresses the difference between the Disciplinary Rules (which sets the standard for when separate counsel are needed) and the Rules of Evidence (which identifies when separately represented parties may confer with attomey-client privilege protection on common interest issues).? Section III (A) looks at the summary judgment evidence regarding Mid-Continent’s attempt to name a single attorney (who had never handled an election contest) to represent the three Insureds ~ without telling the appointed lawyer he was representing three parties; the summary judgment evidence regarding notice given to Mid- Continent about the need for separate counsel; and Mid-Continent’s complete disregard of the notice and total failure to conduct any investigation of the multi-party conflict. With respect to the first issue, MUD 400 now addresses the Disciplinary Rule identifying when conflicts require separate counsel for multiple parties involved in the same lawsuit: (1) Law of Conflicts of Interest Necessitating Separate Counsel: Texas Disciplinary Rules of Professional Conduct, Rule 1.06. 31. The Texas Disciplinary Rules of Professional Conduct, Rule 1.06, sets forth the standard on when conflicts of interest among multiple parties necessitates their representation by separate counsel. Said differently, it specifies when a single counsel can, and cannot, represent multiple parties in the same lawsuit. The text of Rule 1.06 states: ? Section IT addresses the law related to the Summary Judgment issues, and Section II applies the summary judgment and evidence related to those issues. Therefore, with respect to the evidence related to the multi-party conflict issues, Section IMI (A) applies the summary judgment evidence regarding Mid-Continent’s attempt to name a single attomey (who had never handled an election contest) to represent the three Insureds; the summary judgment evidence regarding notice given to Mid-Continent about the need for separate counsel; and Mid-Continent’s complete disregard of the notice and total failure to conduct any investigation of the multi-party conflict. MUD 400’s Response to Mid-Continent’s MSJs, Page 14Texas Disciplinary Rules of Professional Conduct Rule 1.06 Conflict of Interest: General Rule (a) A lawyer shall not represent opposing parties to the same litigation. (b) In other situations and except to the extent permitted by paragraph (c), a lawyer shall not represent a person if the representation of that person: (1) involves a substantially related matter in which that person’s interests are materially and directly adverse to the interests of another client of the lawyer or the lawyer's firm; or (2) reasonably appears to be or become adversely limited by the lawyer's or law firm's responsibilities to another client or to a third person or by the lawyer's or law firms own interests. c) A lawyer may represent a client in the circumstances described in (b) if: wy! rep! (1) the lawyer reasonably believes the representation of each client will not be materially affected; and (2) each_affected or potentially affected _client_consents_to such representation after full disclosure of the existence, nature, implications, and possible adverse consequences of the common representation and the advantages involved, if any. TEX, Disc. R. PROF. CONDUCT, R. 1.06 (emphasis added). 32. With respect to this case, 1.06(a) is not in issue. Mid-Continent did not insure Plaintiff Edgar Clayton. Instead, it only insured all three defendants in the Underlying Lawsuit - Cheryl Smith, Ann Marie Wright, and MUD 400. Therefore, the pertinent conflict sections are Rule 1.06(b) and (c). Section 1.06(b) only allows representation of multiple clients in the same lawsuit (a “substantially related matter”) if (per section 1.06(c)(1)) the lawyer believes the representation of each client will not be materially affected. If the representation would be materially affected, the multi-party representation cannot occur. As set forth in Section III(A), below, the summary judgment evidence (testimony of two different attorneys) proves that the representation of the three Insureds/Defendants would have been materially affected by joint representation. MUD 400’s Response to Mid-Continent’s MSJs, Page 1533. Additionally, Rule 1.06(b)(1) specifies that if the joint representation in the suit would involve matters in which the multiple clients’ interests are materially and directly adverse to one another, the multi-party representation cannot occur, As set forth in Section IIIA), below, the summary judgment evidence (testimony of two different attorneys) proves that the representation of the three Insureds/Defendants would have involved matters in which their interests were materially and directly adverse. 34. Next, Rule 1.06(b)(2) specifies that a multi-party representation in the same suit cannot occur if the representation of each person reasonably appears to be or become adversely limited by the lawyer’s responsibilities to another client. A lawyer has a duty to zealously advocate for his client. As set forth in Section HI(A), below, the summary judgment evidence (testimony of two different attorneys) proves that the representation of each of the three Insureds/Defendants would have been adversely limited by a single lawyer’s duty to zealously advocate for each of the other clients in the multi-party representation. 35. Finally, Rule 1.06(c)(2) specifies that in the instance that the interests are not adverse, will not be adversely limited, and will not be materially affected, the multi-party Tepresentation can only occur if each of the multiple clients consents to joint representation after full disclosure of the information required in the Rule. As set forth in Section TII(A), below, the summary judgment evidence (testimony of two different attorneys and the affidavit of Chris Skinner) proves that had multi-party representation been possible under the Rule, none of the three Insureds consented to multi-party representation upon the necessary disclosure— meaning conflicts precluded joint representation of the three insureds/defendants by a single counsel. 36. In short, Disciplinary Rule 1.06 is the standard for determining whether conflicts among multiple parties to the same suit precludes joint representation by a single attorney; and as MUD 400’s Response to Mid-Continent’s MSJs, Page 16shown by the summary judgment evidence below (Section III(A)) in the Underlying lawsuit, the three Insureds/Defendants had conflicts precluding multi-party representation by a single attomey. Mid-Continent’s belief otherwise is legally and factually incorrect. And what makes Mid- Continent’s position even more reprehensible is that (as shown in Section III(A)) Mid-Continent attempted to (1) appoint an attomey with absolutely no election contest experience to tepresent all three defendants in an election contest; (2) failed to inform the appointed attorney that he would be representing three different defendants; and (3) upon Mid-Continent receiving notice of potential conflicts among the three Insureds/Defendants, Mid-Continent entirely failed to investigate those conflicts. Accordingly, this Response next addresses the case law on Mid- Continent’s duty to investigate the multi-party conflicts, once it had notice that potential conflicts existed. (2) Case Law on Insurer Liability for Failure to Investigate Multi-party Conflicts After Notice of Same. 37. Three Texas cases address an Insurer’s liability for failure to investigate conflicts among insureds: (1) the Texas Supreme Court in Traver;3 (2) the Dallas Court of Appeals in Marquis Acquisitions;' and (3) The U.S. Fifth Circuit Court of Appeals, applying Texas law, in Segerstrom.° Based on these cases, the rule is that an insurer who has notice of potential conflicts among multiple insureds has a duty to investigate the conflicts and liability for failing to do so. 38. In the Texas Supreme Court’s Opinion in Traver, an insured contended that his Insurer-appointed counsel was negligent, and that the Insurer consciously undermined the Insured’s defense. Traver, 980 S.W.2d at 626-27 and 629, While the Court found that the Insurer 3 State Farm Mut. Auto. Ins. Co, v. Traver, 980 S.W.2d 625 (Tex. 1998). 4 Marquis Acquisitions, Inc. y. Steadfast Ins. Co., 409 8.W.3d 808 (Tex. App—Dallas, 2013). 5 Yaquinto v. Segerstrom, 247 F.3d 218 (5* Cir. 2001). MUD 400’s Response to Mid-Continent’s MSJs, Page 17was not vicariously liable for the acts of the appointed attorney, the Texas Supreme Court recognized that an insurer may be liable for its own misconduct including violation of duties it owed. Id. at 629. Therefore, because the insured had not been given a chance to prove the insurer’s violation of the insurer’s duties at the trial court level, the Texas Supreme Court remanded the Insured’s claim for the insurer’s violations back to the trial court. Jd. 39. The U.S. Fifth Circuit Court of Appeals, applying Texas law in its opinion in Segerstrom specifically addressed an Insurer’s duty to investigate conflicts in the context of an insurer’s duty to act with reasonable care with respect to the duty to defend the insureds under the insurance contract. In Segerstrom, an insured contended that the lawyer that the insurer appointed to represent the insured had an inherent multi-party conflict of interest with respect to other clients the attomey represented in the same lawsuit. Segerstrom, 247 F.3d at 222. The insured also alleged that in failing to investigate conflicts, the insurer violated a duty of reasonable care related to the insurer’s duty to defend the insured under the insurance contract. Jd. at 222 and 228. The Court stated “Texas requires that insurance companies act with reasonable care in fulfilling their duty to defend under insurance contracts.” Jd. (citing to Meridian Oil Production, Inc v. Hartford Accident & Indemn. Co., 27 F.3d 150, 153 (5" Cir. 1994) and Ranger County Mut. Ins. Co. v. Guin, 723 S.W.2d 656, 659 (Tex. 1987)). The Court held that “Therefore, unless [Insurer] disregarded notice -. ofa conflict, . . . any liability imposed on [Insurer] would be vicarious and hence not recognized by Texas law.” Id. The Court went on to explain that there was no evidence that the Insurer had disregarded notice of a potential conflict, but had it done so and breached its duty, that the insured also failed to link that breach to its damages. /d. In short, an Insurer can be liable for breaching its duties; Texas law recognizes a duty of reasonable care with respect to the Insurer’s duty to defend MUD 400’s Response to Mid-Continent’s MSJs, Page 18an insured under an insurance contract; and in that context, Segerstrom recognizes that an Insurer can be liable for disregarding notice of potential conflicts. 40. The Dallas Court of Appeals, in Marquis Acquisitions, applied the opinion in Segerstrom to another multi-party conflicts case. In Marquis Acquisitions, Steadfast Insurance Company defended its insured, Marquis Acquisitions along with other insureds, in a lawsuit stemming from an apartment fire. Marquis Acquisitions’ independent counsel sent notice to Steadfast alleging that potential conflicts of interest existed among the insureds requiring that separate counsel be hired. Marquis Acquisitions, 409 S.W.3d 810-811. Unlike Mid-Continent in the present case, Steadfast Insurance did not fail to act. Instead, Steadfast investigated the conflict, asked the appointed counsel to assess the conflicts, and investigated the potential conflicts. /d. at 811. After its investigation, upon finding “potential for a conflict in the future” the insurer hired separate counsel for the Insured. Jd. at 812. The insured ultimately brought suit against the insurer “in an effort to recover the attomey’s fees it expended in getting Steadfast to retain separate counsel for the owner group of insureds.” Jd. Marquis Acquisitions alleged that Steadfast breached its insurance contract by failing to appoint separate counsel for separate insureds to avoid the conflict of interest among the insureds. Id. 813. Citing to Segerstrom, the Dallas Court of Appeals identified that “[A]n insurer may breach its duty of reasonable care if it “disregards” notice of a conflict from defense counsel.” Jd. at 814. However, the Court went on to say that under the facts before it, the insurer had not disregarded the notice and instead had actively investigated the notice of potential conflict, found the potential for conflict and then appointed separate counsel. The Court said “This evidence conclusively shows that Steadfast did not “disregard” notice of a potential conflict, but instead responded to it immediately.” /d. at 814. In short, while an insurer may be liable for failing to investigate notice of potential conflicts, associated with the insurer’s MUD 400’s Response to Mid-Continent’s MSJs, Page 19duty of reasonable care in fulfilling the duty to defend the insured, the insurance company in Marquis Acquisitions investigated, found potential conflicts and appointed separate counsel for the insureds, resulting in no liability for the insurer. 41. However, as shown in Section III(A) below, upon receiving notice of potential conflicts among the multiple Insureds in this case, Mid-Continent (1) failed to ask its appointed counsel Britt Harris about those conflicts -- indeed, Mid-Continent failed to even tell Britt Harris that he would be representing multiple insureds, and also failed to tell him Mid-Continent had been, informed of potential conflicts among the defendants; and (2) after receiving notice of the potential conflicts, Mid-Continent “disregarded” the notice and failed to perform any investigation of that conflict. The summary judgment evidence set forth in Section III(A) shows Mid-Continent’s liability for breach of its duty relating to conflicts among the multiple insureds. Mid-Continent, however, not only incorrectly contends that there were not conflicts (and the summary judgment evidence proves there were) but also misstates the law relating to conflicts by arguing that the actual defense of the insureds by their independently retained attorneys was at times aligned. As set forth below, the privilege between separately represented defendants and their counsel to confer and act on common defense issues, as allowed under the Texas Rules of Evidence, is not proof of no conflicts or no potential conflicts between them. Indeed, the Texas Rules of Evidence inherently assumes such conflicts by creating a rule allowing separately represented parties to have joint privilege over their conferences relating to areas where their interests might align. (3) The Difference Between the Disciplinary Rule Regarding Conflicts of Interest in Multi-party representation, and the Texas Rules of Evidence Regarding Privilege on Common Interest Issues Between Separately Represented Parties. 42. In its Motion for Summary Judgment, Section V.B., Mid-Continent contends that “it is plain from the pleadings and the attorney’s [sic - attorneys’] fees bills from the underlying suit MUD 400’s Response to Mid-Continent’s MSJs, Page 20that the defendant insureds had no conflict of interests [sic— conflicts of interest]. All of them were aligned and in lock step with each other in vigorously defending against Clayton’s challenge to the election results.” Motion at Section V.B. Mid-Continent continued “Their counsel coordinated with and assisted each other in settlement negotiations, legal research, and trial strategy.” Jd. In making this argument, Mid-Continent ignores that the Texas Rules of Evidence expressly allows separately represented parties to confer on areas of common interest in defense of a case. TEX.REvID., R. 503(b)(1)(C). See In re XL Specialty Ins., 373 S.W.3d 46, 50 (Tex. 2012)(specifically noting that the privilege applies when parties have separate counsel, but communications are made regarding common interest in the litigation). The rules of evidence, by allowing privilege among separately represented parties, expressly recognize that parties can have common interests within litigation, even if those parties have conflicts between them precluding joint representation. 43. Although the “joint defense privilege” provides privilege protection for separately represented parties who confer on common interests, nothing about such privileged acts determines whether or not there are conflicts between the parties under Texas Disciplinary Rules of Professional Conduct, Rule 1.06. As the common saying “the enemy of my enemy is my friend” suggests, even parties in conflict may be able to come together on issues of common interest to defeat a common opponent. Coordinating on negotiations, research and trial strategy to defeat the parties’ common opponent, Edgar Clayton, does not prove the absence of conflicts of interest between the Defendants. 44. Mid-Continent, in its motion, failed to assess or address the requirements of the conflicts rule, Rule 1.06. The summary judgment evidence in Section HI(A) below shows the testimony of two attorneys who assessed and addressed the requirements of the conflicts rule. Both MUD 400’s Response to Mid-Continent’s MSJs, Page 21concluded that the three insureds who were sued in the underlying case had conflicts that precluded them from being represented by the same single counsel. Mid-Continent never investigated these facts, never asked its appointed counsel about the potential conflicts, never even told its appointed counsel he would be representing multiple parties, and instead, Mid-Continent simply disregarded the notice of potential conflicts provided to it. Mid-Continent’s after-the-fact references to areas where the separate counsel were able to work together on common issues, is no-evidence of the absence of conflicts of interest necessitating separate counsel. Mid-Continent failed to address the appropriate standard, and the Texas Rules of Evidence relating to joint-privilege is entirely different than the standard for determining conflicts under the Texas Disciplinary Rules of Professional Conduct, Rule 1.06. 45. Mid-Continent’s misstatements in this area of its Motion were not its only misstatements. Mid-Continent also misstated the holdings of cases related to coverage conflicts, as addressed in the next section, below. (B) The Duty to Defend; and Law Regarding Control of the Defense of a Lawsuit when there is_ an Actual Conflict Between the Insurer’s Reservation of Rights and Facts Being Adjudicated in the Underlying Lawsuit: Northern County Mutual Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004). 46. In 2016, the Houston 14" Court of Appeals provided a good background description of an insurer’s duty to defend imposed by an insurance policy, and also a good explanation of the Texas Supreme Court’s opinion in Davalos -- setting forth when an insured may control the defense of a lawsuit based on an actual conflict between an insurer’s reservation of rights and the actual facts being adjudicated in the lawsuit in issue. The 14" Court of Appeals’ opinion in Allstate County Mut. Ins. Co. v. Wootton, 494 8.W.3d 825, 830-31 (T ex.App. — Hou. [14 Dist] 2016) explained an Insurer’s contractual duty of defense, stating: MUD 400’s Response to Mid-Continent’s MSJs, Page 22In the Policy, Allstate promised to defend and indemnify the Woottons. The duty to defend is distinct from, and broader than, the duty to indemnify. An insurer must defend its insured if a plaintiffs factual allegations potentially support a covered claim, while the facts actually established in the underlying suit determine whether the insurer must indemnify its insured. ... In determining whether an insurer has a duty to defend its insured, Texas courts follow the eight- corners rule, also known as the complaint-allegation rule, which the Supreme Court of Texas has described as follows: "[A]n insurer's duty to defend is determined by the third-party plaintiffs pleadings, considered in light of the policy provisions, without regard to the truth or falsity of those allegations.” ... In making the duty- to-defend determination, we resolve all doubts regarding the duty to defend in favor of the existence of a duty, and we construe the pleadings liberally. ... [T]he general tule is that the insurer is obligated to defend if the petition potentially includes a claim that falls within the coverage of the policy. ... We conclude that, if the eight- comers rule applies to the determination of Allstate's duty to defend, the summary- judgment evidence proves as a matter of law that Gonzalez, Sr.'s petition potentially includes a claim that falls within the Policy's coverage and that Allstate has a duty to defend the Woottons in the Underlying Suit. Allstate County Mut. Ins. Co. v. Wootton, 494 8.W.3d 825, 830-31 (Tex.App. — Hou. [14" Dist] 2016) (internal citations omitted). 47, Ordinarily, in addition to having to pay for the defense of the suit, the insurance policy also gives the insurance company the right to control the defense. That includes the selection of counsel to provide the defense of the insured, and the right to make decisions about the handling of the case. The Wootton opinion explained: The Policy language imposes on Allstate a duty to defend the Woottons and gives Allstate the right to conduct the Woottons' defense. See N. Cnty. Mut, Ins. Co. y. Davalos, 140 §.W.3d 685, 688 (Tex. 2004). The right to conduct the defense includes the authority to select the attorney who will defend the claim and the authority to make other decisions that normally would be vested in the insured as the named party in the case. See id. Allstate County Mut. Ins. Co. v. Wootton, 494 S.W.3d 825, 837 (Tex.App. — Hou. [14" Dist] 2016). 48. In the present case, following a May 2018 election for the Board of Directors of MUD 400, one of the losing candidates, Edgar Clayton, brought a lawsuit contesting the election and suing MUD 400 and the two winning directors — Cheryl Smith and Ann Marie Wright. MUD 400 and the Directors (the “Insureds”) submitted the lawsuit to its Insurer, Mid-Continent. Mid- MUD 400’s Response to Mid-Continent’s MSJs, Page 23Continent concluded that the insurance policy in issue imposed on Mid-Continent a duty to defend MUD 400, and its Directors, Chery! Smith and Ann Marie Wright, in the lawsuit brought against them by Edgar Clayton (the “Underlying Lawsuit.”), See Exhibit 5 to Mid-Continent’s Motion for Summary Judgment (Mid-Continent’s Reservation of Right’s letter, reserving its rights and offering a single attorney to defend all three Insureds). 49. However, in addition to acknowledging its duty of defense, Mid-Continent’s reservation of rights letter also reserved Mid-Continent’s right to deny the claim based on an exclusion found in the policy. Id. 50. Specifically, Mid-Continent stated that “HII. Exclusions, B. (4) indicates [that Mid- Continent] shall not be liable to pay [defense or indemnity] resulting from any [lawsuit] based upon or attributable to any of the Insureds gaining in fact any ... advantage to which such Insured was not legally entitled .. .”. Jd. 51. As Mid-Continent’s adjuster, Robert Bryant, testified, the Underlying Lawsuit alleged tha