The Fifth Circuit rejected the insured's argument that under Texas law it had a right to select its own counsel after the insurer agreed to defend, but under a reservation of rights. Navigator v. Nautilus Ins. Co., 2012 U.S. App. LEXIS 13342 (5th Cir. June 20, 2012).

   The insured serviced the oil drilling industry. A oil well operator hired the insured to help redirect an oil well toward a more promising location. The insured developed the plans to conduct the deviation and participated in the deviation process. But the insured allegedly executed the deviation plan in a negligent manner, causing damage to the well. The oil well operator sued.

   The insured tendered under its CGL policy with Nautilus. Pursuant to a reservation of rights, Nautilus agreed to defend. Nautilus reserved its right to decline indemnity coverage if, after further investigation, the underlying suit fell within one of three policy exclusions: (1) the "expected or intended injury" exclusion; (2) the "property damage" exclusion; and (3) the "testing or consulting" exclusion.

  The insured notified Nautilus that it was rejecting the defense, contending that defending under a reservation of rights created a conflict of interest with respect to selection of counsel. The insured added that it expected Nautilus to cover all damages related to the claim, including attorney fees for defending the underlying suit.

   The insured filed suit seeking a declaratory judgment that Nautilus had a duty to defend and cover the cost of independent counsel. The lower court granted summary judgment to Nautilus, establishing that Nautilus was not required to reimburse the insured for the cost of hiring independent counsel to defend the insured.

   The Fifth Circuit affirmed. Under Texas law, only when the facts to be adjudicated in the liability lawsuit were the same facts upon which coverage depended would a conflict of interest prevent the insurer from conducting the defense. The "facts to be adjudicated" in the underlying suit were not the same "facts upon which coverage depended." The underlying litigation concerned whether the insured negligently performed its work. The alleged negligence was not a coverage issue int he litigation between the insured and Nautilus.

   Likewise, the underlying facts would not decide whether the insured's work constituted "testing" or "consulting." Whether the insured provided "professional" or "data processing" services, whether the insured should have expected the damage resulting from its work, or whether the insured was occupying the property while providing its services could be critical issues in the coverage matter, but were irrelevent to whether the insured acted negligently.