In S&B Engineers & Constructors, Ltd. v Scallon Controls, Inc.

On 13 March 2026, the Supreme Court of Texas issued its opinion in S&B Engineers & Constructors, Ltd. v Scallon Controls, Inc., 734 S.W.3d 869 (Texas 2026) (“S&B Engineers”). The primary issue in S&B Engineers was whether a party may settle one lawsuit, sue a different party based on contractual indemnity, and then recover damages based upon the settlement in the primary lawsuit. The court split 5–4 in favour of permitting recovery under those circumstances, with each side issuing an opinion.

Background facts

The primary parties were:

• Sunoco – the employer of the plaintiffs and owner of the premises;
• S&B Engineers (“S&B”) – the entity that Sunoco hired to install a safety system in its refinery;
• Scallon Controls, Inc. (“Scallon”) – the entity that S&B subcontracted with to install the system;
• the plaintiffs in the first suit (the “Plaintiffs”) – the employees of Sunoco who alleged injuries based on an event when the safety system failed; and
• Zurich American Insurance Company (“Zurich”) – Sunoco’s insurer which covered Sunoco’s settlement of the suit against the Plaintiffs. S&B Engineers, 734 S.W.3d at 873.

In S&B Engineers, 734 S.W.3d at 873, the Plaintiffs sued Sunoco and S&B, but did not sue Scallon. However, Sunoco and S&B maintained that Scallon bore the responsibility for the incident and denied any responsibility on their part. Sunoco and S&B then filed a third-party petition against Scallon for breach of contract. After four years of litigation, Sunoco and S&B settled with the Plaintiffs, with S&B paying USD2.35 million, and Zurich paying USD400,000 on Sunoco’s behalf. Scallon did not participate in the settlement.

After that settlement, Sunoco non-suited its claims against Scallon, and Zurich intervened to assert claims for subrogation. Zurich and S&B then continued to pursue their claims against Scallon based on contractual indemnity. In the post-settlement litigation, S&B and Zurich claimed that Scallon owed them its proportional share of the settlement amount, equal to its share of liability for the accident.

The indemnity agreement in question provided, as follows:

“To the maximum extent permitted by applicable law, [Scallon] shall defend, indemnify and hold harmless S&B, and its ... clients from and against any and all loss, damage, claim, suit, liability, strict liability, product liability, judgment and expense (including attorney’s fees and other costs of litigation) and any fines, penalties and assessments, arising out of ... bodily injury, disease or death to persons other than employees of [Scallon], its agents or subcontractors resulting from or in connection with the execution of this purchase order to the extent of [Scallon]’s negligence or willful misconduct. In case of comparative, concurrent and/or contributing negligence, fault or strict liability of [Scallon] or [S&B], whether through its employees and/or representatives, [Scallon]’s duty to indemnify and hold harmless referred to in the previous sentence shall be [Scallon]’s allocable share of comparative, concurrent and/or contributing negligence, fault or strict liability.”

In the litigation over the indemnity agreement, the parties filed competing motions for summary judgment. The trial court ruled in favour of Scallon, and the court of appeals affirmed.

The majority opinion

The majority identified the key issue in the appeal as “whether S&B and Zurich may ask a factfinder to allocate any portion of the settlement amount to Scallon’s negligence, or whether, as the court of appeals and Scallon contend, it covered only their own as a matter of law.”

This question required the majority to review its precedent in a case known as “Jinkins” (Beech Aircraft Corp. v Jinkins, 739 S.W.2d 19, 19–22 (Texas 1987)). Since we have relied on Jinkins heavily in our motions and responses in the Webber matter, a brief review of Jinkins – as the majority summarised it – is warranted.

The latter view relies on our decision in Jinkins, which examined “the contribution rights of a settling party under both statutory and common law contribution schemes” when an alleged joint tortfeasor does not participate in the settlement. We acknowledged, “the general rule that a cause of action for damages for personal injuries may be sold or assigned” but held that, “a defendant can settle only his proportionate share of a common liability and cannot preserve contribution rights under either the common law or the comparative negligence statute by attempting to settle the plaintiff’s entire claim.”

Jinkins was open about its limited scope: common-law and statutory avenues for a settling party to impose contribution obligations on a non-settling party. We did not address or even mention a very different source of legal authority: voluntarily formed contracts providing for indemnification. In other words, public policy led the court to refuse to find or create rights of contribution in certain situations, but we said nothing to suggest that parties could not create rights to indemnification if they deemed it in their interest to do so.

With the limitation on a party only being able to settle its portion of liability no longer applying, the majority next addressed what requirements applied for recovering against a third party for some or all of the amount that a party paid in settlement.

The majority reaffirmed the “express negligence doctrine” from Ethyl Corp. v Daniel Const. Co., 725 S.W.2d 705, 708 (Texas 1987). Under the express negligence doctrine, quoting Ethyl, “a party [can] be indemnified for its own negligence, as long as such an agreement ‘express[es] that intent in specific terms.’” One way to avoid violating the express negligence doctrine is “by affirmatively disclaiming any entitlement to indemnification for one’s own negligence.” Id. at 876.

The majority held that the indemnity agreement did not violate the express negligence doctrine. Id. “The contract here avoids any express-negligence problem both with its unambiguous disclaimer and by textually limiting Scallon’s indemnification to only its own ‘allocable share’ rather than seeking some way to force it to bear the burden of S&B’s or Sunoco’s negligence.”

The majority recognised other burdens on the party seeking indemnification from a settlement. The party seeking indemnity must prove (i) the settlement was made in good faith and for a reasonable amount to discharge liability; and (ii) the allocable share attributable to the indemnitor.

But even when there is no doubt that a contract applies and provides for proportional indemnification, settlement generates a series of burdens for the settling party. First, we have always upheld the right to settle and then sue, but to succeed, the settling party must establish that the settlement was made in good faith and for a reasonable amount to discharge the potential liability. See, for example, Fireman’s Fund, 490 S.W.2d at 823. Second, even if the settlement was wholly proper and for a reasonable amount, the settling party bears the burden to show (using this contract’s phrasing) the “allocable share” of the indemnitor’s negligence. So if the settlement is deemed to have been unreasonably high, for example, then the non-settling party will be responsible only for its proportional share of the amount, if any, that would have been reasonable. A settling party unable to establish that any amount of negligence is attributable to the non-settling party cannot recover at all.

The majority believes there are benefits to this approach of settling and seeking indemnification for some portion of the settlement amount. “Settling before suing for indemnification may well bring certain benefits – not least to the injured workers, who might still be without relief today if their presence were essential before Scallon’s ‘allocable share’ could be determined.” Likewise, the majority concluded that its holding would not spur a wave of satellite litigation. “At worst, the comparatively streamlined trial to enforce the indemnity agreement would replace a far more complex trial, the focus of which would primarily be on the underlying facts and circumstances of the workers’ personal injuries and the extent of their damages.”

The court also reversed the Court of Appeal’s holding that Zurich’s subrogation claim is untimely. The court reasoned that parties have four years to bring claims arising from written contracts and breach of warranty, and indemnity claims begin to run when “the indemnitee’s liability becomes fixed and certain” through settlement or judgment. The court held that Zurich intervened less than three years after the settlement and Zurich’s claim was not time-barred.

The dissenting opinion

Justice Bland, joined by Justices Lehrmann, Devine and Huddle, dissented in an opinion arguing the majority misread the indemnity provision at issue and failed to follow established precedent. The dissent argued that the language of the indemnity provision did not grant S&B the right to settle claims made against Scallon on Scallon’s behalf. Notably, the injured workers had sued S&B for S&B’s own negligence and had made no claim against Scallon. Further, the dissent explained that the settlement was purely a payment to settle S&B’s own negligence, and that every dollar S&B paid was to settle S&B’s negligence, not Scallon’s. The dissent also explained the word “allocable” did not transform a payment of S&B’s own liability into a payment of Scallon’s.

Scallon filed a motion for reconsideration with the Texas Supreme Court. The court issued an order on 5 June 2026 denying Scallon’s motion for reconsideration.

Conclusion

The S&B Engineers decision clarified the law surrounding settlements and so-called “pay-and-chase” litigation. The decision will also influence how indemnity agreements are drafted going forward. While agreements for comparative indemnity must be drafted so as to comply with Ethyl and, under applicable circumstances, the Texas Construction Anti-Indemnity Act and/or the Texas Oilfield Anti-Indemnity Act, if they do so, the courts will enforce them. Presumably, the decision will also influence whether and to what extent the indemnitor and its insurers may be willing to participate in settlement discussions with the indemnitees to avoid post-settlement satellite litigation.

In Re Ace Appraisal Changes

On 8 May 2026, the Texas Supreme Court led by Justice Lehrmann issued an opinion In Re Ace American Insurance Company, involving an insured’s attempt to avoid an insurer’s invocation of appraisal by characterising the dispute as coverage dispute (734 S.W.3d 887 (2026)).

In the opinion, the court determined that the trial court abused its discretion by denying the insurers’ motion to compel appraisal. The case involved a dispute over water damage to a commercial warehouse where there was a disagreement about the “amount of loss” which fell within the policy’s appraisal provision.

The insured in In Re Ace, owned, leased and managed commercial properties across the county. The property at issue in this case was a commercial food-distribution warehouse in Dallas, Texas. On or about 12 June 2022, a water line connected to the warehouse’s fire-suppression system broke below the property’s concrete foundation, which caused significant damage. The insured reported the claim, and the insurers sent an independent adjuster to investigate the claim. Throughout the adjustment of the claim, the insured claims the adjuster’s involvement was “minimal” and the adjuster “made a conscious choice to sit on the sidelines”. Moreover, the insured asserted that no claim manager visited the property until “long after the repair work was completed”.

The underlying insurance policy contained an appraisal provision authorising either party (insured or insurer) to make a “written demand for an appraisal of the loss” should either party “disagree on the amount of loss”.

On 30 January 2023, approximately six months after the loss, the insurer sent a written demand invoking the policy’s appraisal provision because “the parties are at an impasse with respect to the remaining scope of damage and costs related to the Claim”. The insurer decided to invoke the appraisal provision despite making various undisputed payments. The insured responded to the invocation of appraisal claiming it was “premature and unwarranted”. The parties attempted to continue negations until a second impasse was reached and the insurer sent a letter on 14 June 2024  reasserting its previous demand for appraisal. The insured still refused to participate.

The insurer ultimately filed suit and moved to compel appraisal, the insured filed counterclaims, including breach of contract, bad faith, and Insurance Code Violations, among other causes of action. The trial court denied the insurer’s Motion to Compel appraisal. The insurer then filed a petition for writ of mandamus.

Insured’s argument regarding scope of appraisal

The insured presented five different coverage-related arguments. The insured argued:

• the mould issue implicated coverage concerns due to the potential for an unrelated policy providing coverage;
• the mould remediation work should have been paid on time and on a materials basis rather than as a fixed cost;
• the cost increased due to code and ordinance coverage;
• there was disagreement on the scope of the “replacement cost” coverage; and
• appraisers are not appropriately equipped or qualified to address “the use of highly technical engineering and construction issues”. 

The insured first argued that the mould issue implicated coverage concerns because the insurer took the position that further payments for mould damage depended on whether an unrelated policy provided mould coverage for the property. In analysing the insured’s argument, the court looked to the insurer’s payment of USD1.2 million already paid, along with the possibility of other coverage from an unrelated policy, which did not render the dispute to the amount of loss irrelevant.

The insured’s second argument that the mould-remediation work should have been performed on time and on a materials basis rather than at a fixed price provided by the contractor, was accepted by the insurer. The court disregarded this position on the basis that the cost of remediation of the mould caused by the fire-sprinkler system break was squarely an issue for the parties’ appraisers.

The insured’s third argument, asserting a coverage issue claiming increased costs from complying with the code and ordinance was covered, and the insurer did not dispute that the policy provided for this. However, the insurer’s claim codes triggered were caused by the insured’s increased scope of repairs that were not necessary to bring the building back to its pre-loss condition. The court disagreed with the insured again, stating, “to the extent discrete disagreements exist regarding coverage for any particular cost of regulatory compliance, we see no reason an appraisal would foreclose a court from resolving those issues.”

The fourth argument was also shot down by the court. The insured asserted appraisal could not be conducted until the court determined what the replacement cost of damaged property included. The court agreed that the insured may be correct on the basis the parties disagreed over “complex engineering and construction methodologies”, but disagreed on the basis that those issues are still within an appraiser’s role. The court went further and stated, “an appraiser would be well within the ‘amount of loss’ lane in concluding that replacing the damaged property required less extensive techniques and materials than those used by the engineers and contractors” hired by the insured.

The final argument regarding the qualifications of appraisers was presented without support from the insured, and the court determined it had no bearing on whether the dispute revolved around coverage rather than the amount of loss.

Disagreement about the amount of loss

The insured argued that there was no disagreement between the parties as to the amount of loss that would trigger the policy’s appraisal provision. The court disagreed on the basis that the insurer took the position it had paid all that was owed under the policy for the claim, combined with the fact the insurer consistently viewed the amount of loss to be significantly less than the insured claimed. This was all that was needed to invoke the appraisal provision of the policy.

Insured’s bad-faith argument

Lastly, the insured argued that the insurer’s failure to adjust the claim timely and in good faith, failure to pay the amount owed, and assertions of unfounded coverage defences amounted to prior material breaches of the policy. The insured relied on prior fundamental principles of contract law asserting that when one party to a contract commits a material breach, the other party is discharged from further performance. The court disagreed with this argument, claiming there are two exceptions to the enforcement of an appraisal provision, illegality and waiver. The court determined, neither was at issue in this case. The court also claimed that attempting to determine if there was a prior breach by the insurer “puts the case before the horse” because it was “incompatible with mandatory contractual remedy and against strong public policy favoring appraisal clauses” in insurance policies.

Ultimately, this holding was consistent with the Texas Supreme Court’s opinion in State Farm Lloyds v Johnson, where the court held, appraisal is intended to take place before suit because:

“Appraisals require no attorneys, no lawsuits, no pleadings, no subpoenas, and no hearings. It would be a rare case in which appraisal could not be completed with less time and expense than it would take to file motions contesting it. Allowing litigation about the scope of appraisal before the appraisal takes place would mark a dramatic change in Texas insurance practice and surely encourage much more of the same.”

(290 S.W.3d 886, 894 (Texas 2009)). Moreover, this opinion provides clarification on whether appraisal is appropriate for the parties when coverage is at issue. Here, coverage never seemed to be in question. The facts presented and outlined by the court in the opinion clearly exhibit coverage was provided for damage caused by the broken water supply line. The real dispute stemmed from the cost of the repair and how the work was being performed. The scenario in this case was appropriate for the appraisal process.

Texas Department of Insurance’s Proposed Changes in Appraisal

The Texas legislature introduced SB 458 (2025) with its new insurance code Chapter 1812 which requires personal auto and residential property policy to carry a conforming appraisal provision which applies to policies delivered, issued or renewed, on or after 1 September 2026. As an important reminder, commercial policies and policies issued by the Texas Windstorm Insurance Association (TWIA) are excluded from these requirements. So, what does the conforming appraisal provision include? This is still unknown at the time of writing (September 2026). However, the following are the proposed changes:

• Mandatory appraisal without requiring an impasse. With this proposed change, the parties do not need to reach an impasse before either party can invoke the appraisal process. This means an insured or carrier can invoke appraisal at any point after the claims decision and the other party must participate in the appraisal process. 
• When an award is issued, the award is binding upon the parties. This remains consistent with current case law but codifies the ways in which an award can be set aside. The three ways an award can be set aside and not be binding on the parties are: (i) it was made without authority; (ii) it was not made in substantial compliance with the provision; or (iii) there was fraud, an accident, or a material mistake relevant to the appraisal.
• Additionally, when carriers issue a coverage letter accepting or rejecting the claim under Texas Insurance Code 542.056, carriers must include the appraisal provision of the policy, in plain language in ten-point type. By requiring this provision in the coverage letter, it is informing insureds of their option to invoke appraisal should they disagree with the coverage position and/or payment made under the policy for covered damage.
• The most important and biggest proposed change to how appraisal functions are the fixed timelines. The new timelines are designed to promote a faster and more efficient appraisal process, and to avoid potential abuses of the appraisal process.
• The first proposed deadline is a one-year deadline from the date the coverage position letter is sent to the insured. This means that either party has one year to invoke appraisal from the date the coverage determination is communicated. However, there is an exception to this deadline for both parties. The exception stems from when a demand is made involving the claim. If a lawsuit is filed, the responding party has 30 days from the date of filing to demand appraisal, even if one year has passed. 
• If an appraisal demand is made in writing designating an appraiser, the responding party has 20 days from the date of the demand to designate its appraiser. After both parties have designated an appraiser, the appraisers have 15 days after either: (i) the appraiser selection is complete; or (ii) the appraisers fail to agree within 120 days after the appraisal demand was made. 
• Should the parties need to seek a judicially appointed umpire, the parties must seek a judicial appointment in a county or district court where the property is located. This proposed change eliminates the race to the courthouse outside of where the property sits to seek an umpire appointment. There have been instances where a party will race to the Harris County Ancillary Court seeking an umpire appointment for a property that is not in Harris County. This proposed change seeks to eliminate that possibility. On another note, this proposed change also allows for an umpire to be chosen from an independent vendor. For example, the policy may include an umpire who may be chosen from AAA or another vendor that offers umpire services. Now, should an umpire be appointed through the judicial system, the requesting party must give at least ten days’ notice identifying the county and court where the request is being made, and provide a copy of the request.
• The appraisers, as indicated earlier, must attempt to agree with each other within 120 days from the date of the appraisal demand. Should the appraisers not agree within that timeframe and an umpire is needed, the umpire must issue an award no later than 240 days after the date of the demand. Should the umpire fail to issue an award within 240 days of the demand, the umpire’s engagement automatically terminates on that day, and the appraisers are forced to choose a new umpire within 15 days. 

Ultimately, even though these changes have not been enacted, the proposed changes are a step in the right direction and will help residential property insurers and insureds in creating a streamlined appraisal process. Placing deadlines on appraisers and umpires should help to achieve awards in a faster, more effective manner. This proposed change should help to reduce exposure under Texas Insurance Code § 542.060 Prompt Payment of Claims Act and, more importantly, curb the abuses in the appraisal process.