Litigation Process, Fees & Risk
Will My Business Insurance Cover This Lawsuit?
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Short answer
It depends on which policies you hold and what the petition alleges. A general liability policy rarely covers a breach of contract claim but may cover tort claims pleaded alongside it, such as disparagement or advertising injury. Directors and officers coverage responds to claims against management for wrongful acts, and employment practices coverage to claims by employees. In Texas the duty to defend is decided by comparing the factual allegations in the petition with the policy, the eight-corners rule, and the insurer must defend the whole suit if any claim is potentially covered. Prompt written notice to every carrier that might respond is the first step.
Why this is the first question after being served
Defense costs in a business lawsuit can exceed the amount in dispute. If an insurer is obligated to defend, it pays the lawyers, and the economics of the case change completely. If it is not, the company pays, and the decision whether to fight or settle is made on different numbers. Reading the policies before the answer is filed is therefore not a formality. It is the first strategic step, and it is time-sensitive because every policy requires notice.
Which policy might respond
| Policy | Typically covers | Typically excludes |
|---|---|---|
| Commercial general liability (CGL) | Bodily injury and property damage caused by an occurrence; personal and advertising injury, which includes defamation, disparagement of another's goods or services, and some copyright or slogan infringement in advertising | Liability assumed under a contract; expected or intended injury; knowing violation of another's rights; breach of contract as such; most professional services; employment claims |
| Directors and officers (D&O) | Claims against directors, officers and often the entity for wrongful acts in managing the company: shareholder and investor suits, fiduciary duty claims, misrepresentation claims | Fraud or illegal profit, usually only after a final adjudication; one insured suing another (with exceptions); contract claims; prior known claims |
| Employment practices liability (EPLI) | Discrimination, harassment, retaliation, wrongful termination and related claims by employees and applicants | Wage and hour claims, except a defense sublimit in some forms; non-compete and trade secret claims against former employees; intentional conduct in some forms |
| Professional liability (errors and omissions) | Claims arising from the negligent performance of the professional services the policy describes | Fraud; contractual promises of results; claims outside the described services |
| Commercial crime or fidelity | The company's own loss from employee theft or forgery | Third-party liability; losses discovered after the discovery period |
| Cyber | Data breach response, some third-party privacy claims, some business interruption | Varies widely; read the form |
The pattern that matters for commercial litigation: the typical dispute between businesses, a claim that one did not pay or did not perform, is not covered by any of these. Insurance responds to accidents, torts and management or employment conduct, not to the bargain itself. Coverage enters the picture when the petition pleads something more: a fraud or negligent misrepresentation claim against officers (D&O), a disparagement claim arising from a dispute with a competitor (CGL), or a former executive's wrongful termination claim alongside the company's non-compete suit (EPLI for the former, not the latter).
Duty to defend and duty to indemnify
Liability policies impose two separate duties. The duty to defend is the insurer's obligation to pay for and control the defense of a suit. The duty to indemnify is its obligation to pay a judgment or settlement. The duty to defend is broader: it is triggered by what is alleged, while the duty to indemnify depends on what is actually proven. An insurer may owe a defense to a suit that, in the end, it has no duty to pay.
The eight-corners rule
Texas decides the duty to defend by the eight-corners rule: the court compares the four corners of the petition with the four corners of the policy. The factual allegations in the petition are taken as true, read liberally in favor of the insured, and if any of them potentially states a covered claim, the insurer must defend the entire suit, covered and uncovered claims alike. The insured's actual liability and the truth of the allegations do not matter at this stage. The Supreme Court of Texas confirmed the rule, and its refusal to consider evidence outside the petition and policy, in GuideOne Elite Insurance Co. v. Fielder Road Baptist Church in 2006.
In 2022 the court recognized a limited exception in Monroe Guaranty Insurance Co. v. BITCO General Insurance Corp. Extrinsic evidence may be considered on the duty to defend if it goes solely to an issue of coverage and does not overlap with the merits of liability, does not contradict the facts alleged in the petition, and conclusively establishes the coverage fact to be proven. The usual example is a date: when the alleged damage occurred, which decides which policy year applies, where the petition is silent. The exception does not let an insurer dispute the petition's facts to escape a defense.
For a defendant, the rule has a practical consequence: the way the plaintiff pleads the case can decide whether there is coverage. A petition that alleges negligence as well as breach of contract may trigger a defense that a contract-only petition would not. Plaintiffs' lawyers who want a collectible defendant know this, and defense counsel should read the petition with coverage in mind on day one.
Notice, and what late notice costs
Every liability policy conditions coverage on notice. Occurrence-based policies, which most CGL forms are, require notice of a claim or suit as soon as practicable, and Texas courts generally require the insurer to show it was prejudiced before late notice defeats coverage. Claims-made policies, which most D&O, EPLI and professional liability forms are, are stricter: the claim must be made against the insured and, in claims-made-and-reported forms, reported to the insurer within the policy period or any extended reporting period. A claim first made in one year and reported after renewal can fall into a gap.
The safe course is to give written notice promptly to every carrier whose policy could conceivably respond, including the agent or broker, attaching the petition or demand letter, and to keep proof of when and how it was sent. Notice to a carrier that turns out not to owe coverage costs nothing. Failure to notify one that did can cost the defense.
Reservation of rights, and your own counsel
An insurer that agrees to defend while questioning coverage sends a reservation of rights letter. It will defend the suit but reserves the right to deny indemnity if the facts proven at trial fall outside the policy. The letter is routine and is not a denial, but it should be read carefully, because it tells you what the insurer thinks is not covered and what it may later refuse to pay.
A reservation of rights can create a conflict. If the facts to be decided in the lawsuit are the same facts that will decide coverage, the insurer-appointed lawyer has an interest in how they come out. Texas law in that situation can give the insured the right to select its own independent counsel at the insurer's expense. Whether the conflict is real enough to trigger that right depends on the specific reservation and the specific allegations, and is one of the first things coverage counsel examines.
In every case the insurer controls the defense it pays for, subject to the duty to act in the insured's interest. The insured must cooperate: provide documents, attend depositions, and refrain from admitting liability or settling without the insurer's consent.
The Stowers duty: settlement within limits
Texas imposes what lawyers call the Stowers duty on liability insurers. When a claimant makes a settlement demand within policy limits, for a covered claim, on terms such that an ordinarily prudent insurer would accept it given the likelihood and degree of the insured's potential exposure, the insurer that refuses and then loses a judgment above the limits is liable for the excess. The duty protects the insured from an insurer gambling with the insured's money. It also shapes litigation: a plaintiff who wants to pressure the insurer will make a careful within-limits demand, and a defendant who fears an excess judgment should make sure the insurer has received and evaluated it.
If coverage is denied
A denial is a position, not a verdict. The insured can demand reconsideration, bring a declaratory judgment action under Chapter 37 of the Civil Practice and Remedies Code to establish the duty to defend, and in appropriate cases pursue claims under the Insurance Code for an unfair settlement practice or for the prompt payment of claims. Chapter 542 of the Insurance Code imposes deadlines on insurers and statutory interest and fees for delayed payment of covered claims. Coverage disputes are often litigated alongside the underlying suit, which adds cost but can be the difference between a defended case and an undefended one.
Insurance as a plaintiff's question
If your business is the plaintiff, the defendant's insurance is what makes a judgment collectible and brings a disciplined negotiator to the table. Under Texas Rule of Civil Procedure 194.2 the defendant must disclose any insurance agreement that may satisfy part or all of a judgment in its initial disclosures, so the question can be answered early. Pleading decisions then matter: a claim framed as negligence or misrepresentation may be covered where the same facts framed only as breach of contract would not be. That is a reason to let a litigator draft the petition with the defendant's coverage in view, consistent with the facts.
Example
Suppose a Dallas distributor is sued by a former supplier for breach of the distribution agreement and, in the same petition, for disparaging the supplier's products to customers after the relationship ended. The contract claim falls outside the CGL policy. The disparagement claim is within personal and advertising injury coverage. Under the eight-corners rule the insurer must defend the whole suit, including the contract claim, because one claim is potentially covered; it will reserve its rights on indemnity for the contract claim. Had the supplier pleaded breach of contract alone, the distributor would be paying for its own defense.
Tina Wysk defends Dallas businesses in commercial suits and works with coverage counsel and carriers to determine, at the start of a case, who is paying for the defense and what the insurer's reservation means for strategy. What happens after a business is sued for breach of contract covers the first steps, and weighing a lawsuit as a business decision shows where insurance fits in the plaintiff's calculation.
Questions on this topic
Does general liability insurance cover a breach of contract lawsuit?
Almost never for the contract claim itself. CGL policies cover bodily injury, property damage and personal and advertising injury caused by the insured's conduct, and they exclude liability assumed under a contract. Coverage can still arise if the same petition pleads a covered tort, such as disparagement or defamation, because under the Texas eight-corners rule the insurer must then defend the entire suit, including the contract claim, while reserving its rights on what it will ultimately pay.
What is the eight-corners rule?
The Texas test for an insurer's duty to defend. A court compares the factual allegations in the plaintiff's petition with the terms of the policy, nothing else, taking the allegations as true and reading them in the insured's favor. If any allegation potentially falls within coverage, the insurer must defend the whole suit. The Supreme Court of Texas confirmed the rule in GuideOne in 2006 and in Monroe Guaranty in 2022 allowed extrinsic evidence only when it goes solely to coverage, does not contradict the petition and conclusively establishes the coverage fact.
What does a reservation of rights letter mean?
The insurer will pay for the defense but reserves the right to deny payment of a judgment or settlement if the facts proven fall outside coverage. It is not a denial. Read it to learn which claims the insurer considers uncovered. If the facts that decide the lawsuit are the same facts that decide coverage, the insured may have the right under Texas law to choose independent defense counsel paid by the insurer, so the letter should be reviewed by coverage counsel.
How quickly must I notify my insurer after being sued?
Immediately, in writing, to every carrier whose policy might respond. Occurrence policies require notice as soon as practicable, and Texas courts generally require the insurer to show prejudice before late notice defeats coverage. Claims-made policies, which include most D&O and employment practices forms, are stricter: the claim often must be reported within the policy period or an extended reporting period, and a late report can forfeit coverage regardless of prejudice. Keep proof of when notice was sent.
What is the Stowers doctrine?
A Texas rule that holds a liability insurer responsible for a judgment above the policy limits if it unreasonably rejected a settlement demand within the limits. The demand must be for a covered claim, within limits, and on terms an ordinarily prudent insurer would accept given the insured's exposure. The doctrine protects the insured from an insurer that refuses a reasonable settlement and leaves the insured exposed to the excess, and it shapes how plaintiffs frame settlement demands.
Sources
- GuideOne Elite Ins. Co. v. Fielder Road Baptist Church (Tex. 2006), No. 04-0692 (Eight-corners rule; duty to defend decided from the petition and the policy without extrinsic evidence)
- Monroe Guar. Ins. Co. v. BITCO Gen. Ins. Corp. (Tex. 2022), No. 21-0232 (Limited exception allowing extrinsic evidence that goes solely to coverage, does not contradict the petition and conclusively establishes the coverage fact)
- Tex. Ins. Code ch. 542 (Prompt payment of claims: deadlines, interest and attorney's fees for delayed payment)
- Tex. Civ. Prac. & Rem. Code ch. 37 (Declaratory judgment action to establish the duty to defend)
- Tex. R. Civ. P. 194.2 (Initial disclosure of insurance agreements that may satisfy a judgment)
Legal sources last checked November 6, 2026. Statutes and rules change; the date matters.
About the author
Tina Wysk
Shareholder, Hallett & Perrin, P.C.. Tina represents businesses and individuals, as plaintiffs and defendants, in contract, partnership, fiduciary duty, fraud, construction, trade secret and investment disputes in Texas state and federal courts and in arbitration.
About TinaThis guide is general information about Texas and federal law for business owners, not legal advice about your situation. Statutes, rules and court decisions change, and small facts change outcomes. Reading it or contacting Tina Wysk through this site does not create an attorney-client relationship.
