                IN THE SUPREME COURT OF TEXAS
                                         ══════════
                                           No. 14-1007
                                         ══════════

                  GREAT AMERICAN INSURANCE COMPANY AND
           GREAT AMERICAN LLOYDS INSURANCE COMPANY, PETITIONERS,

                                                  v.


                   GLEN HAMEL AND MARSHA HAMEL, RESPONDENTS
            ══════════════════════════════════════════
                         ON PETITION FOR REVIEW FROM THE
                 COURT OF APPEALS FOR THE EIGHTH DISTRICT OF TEXAS
            ══════════════════════════════════════════


                                    Argued February 28, 2017


       JUSTICE LEHRMANN delivered the opinion of the Court.


       In this case, we examine whether a judgment against an insured defendant was the product

of a “fully adversarial trial” and is thus enforceable against the defendant’s insurer. Homeowners

sued their builder for failing to construct their home in a good and workmanlike manner, and the

builder’s commercial general-liability insurer wrongfully refused to defend the builder in that suit.

The case went to trial, resulting in a judgment in the homeowners’ favor. The builder subsequently

assigned most of its claims against its insurer to the homeowners, who now seek to recover the

judgment from the insurer under the applicable insurance policy. We are asked whether the

judgment against the builder is binding on the builder’s insurer in this suit. In the event it is not,

we are also asked whether the deficiencies in the underlying trial were effectively remedied by this
subsequent insurance litigation. The court of appeals answered yes to the first question and

affirmed the trial court’s judgment in the homeowners’ favor. We answer no to the first. As to

the second, we hold that this insurance litigation may serve to determine the insurer’s liability,

although the parties in this case understandably focused on other issues during the trial.

Accordingly, we reverse the court of appeals’ judgment and, in the interest of justice, remand to

the trial court for a new trial.

                                                I. Background

                                             A. The Damage Suit

        Glen and Marsha Hamel own a single-family home in Flower Mound, Texas. The Hamels

hired a contractor, GSM Corporation (the Original Builder), to build the home in the mid-1990s,

but the Original Builder abandoned the project before completion. The Hamels then hired Terry

Mitchell Builders, Inc. (the Builder) to finish the home, which was completed in October 1995.1

Terry Mitchell is the president and sole owner of this company.

        The home’s exterior was finished with an Exterior Insulation and Finish System (Exterior

Stucco), which is a type of synthetic stucco cladding that can cause wood rot and other problems

relating to water damage if installed improperly or if defective materials are used. In August 2000,

the Hamels noticed signs of water damage in the home, including stained walls and warped

baseboards. They sued the Builder in April 2002 for breach of implied warranty, negligence,

Deceptive Trade Practices Act violations, and Residential Construction Liability Act violations,




        1
          The Builder did not directly construct the improvements, but hired subcontractors to complete the work and
supervised their efforts.

                                                         2
alleging that the Builder failed to perform its services in a good and workmanlike manner.2 In

their original petition, the Hamels alleged that the water damage resulted from the improper use or

installation of the Exterior Stucco. They subsequently amended the petition to attribute the water

damage to the home’s improper construction or, alternatively, the use of Exterior Stucco on the

home.

        Great American Insurance Company insured the Builder under commercial

general-liability insurance policies, issued on an annual basis. The first three policies, effective

May 3, 1996, to May 3, 1999, did not exclude damage relating to Exterior Stucco. However, the

fourth and fifth policies, effective May 3, 1999, to May 3, 2001, excluded property damage “arising

out of” Exterior Stucco.

        The Builder notified Great American of the Hamels’ suit (the Damage Suit), but Great

American declined to defend the Builder, citing the fifth policy’s Exterior-Stucco exclusion

(effective May 3, 2000, to May 3, 2001). Great American took the position that this was the

applicable policy because the Hamels’ August 2000 discovery of the damage fell within that

period. See Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 26 (Tex. 2008)

(explaining that some Texas courts had chosen to follow “a ‘manifestation rule’ that imposes a

duty to defend [on insurers] only if the property damage became evident or discoverable during

the policy term”). However, Great American now concedes that this position was erroneous. See

id. at 25 (clarifying that Texas follows the “‘actual injury’ or ‘injury-in-fact’ approach, [under

which] the insurer must defend any claim of physical property damage that occurred during the



        2
           The Hamels also sued the Original Builder and several subcontractors, but went to trial only on the claims
against the Builder.

                                                         3
policy term”). Great American also concedes that, in light of the Hamels’ allegations in the

Damage Suit, Great American wrongfully refused to defend the Builder in that suit. See GuideOne

Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 310 (Tex. 2006) (“A plaintiff’s

factual allegations that potentially support a covered claim is all that is needed to invoke the

insurer’s duty to defend . . . .”).

        Without the benefit of insurance coverage, the Builder had limited assets to fund its

defense. In fact, shortly before trial, the Builder terminated its counsel, Robert Hudnall, for

financial reasons, and Hudnall prepared a motion to withdraw. However, the trial court apparently

never heard that motion, and Hudnall continued to represent the Builder during and after trial.

        In May 2005, a week before trial, the Hamels entered into a Rule 11 agreement with the

Builder. The Hamels agreed that, in the event they obtained a judgment against the Builder, they

would not attempt to pierce the corporate veil and enforce the judgment against the Builder’s

owner, Mitchell, individually. They essentially agreed to enforce any judgment only against assets

in the company’s name, excepting any “personal tools of the trade and truck,” which the Hamels

agreed not to pursue “even if in [the company’s] name.” Mitchell would later testify that, at the

time the agreement was executed, the company had no assets beyond the excepted “tools of the

trade and truck.” For his part, Mitchell agreed to appear at the scheduled trial and not to seek a

continuance, and the Hamels contend that securing Mitchell’s trial appearance was the reason they

entered into this agreement.

        The day before trial, the Builder executed stipulations of fact in lieu of responding to the

Hamels’ outstanding requests for admissions. The stipulations included, inter alia:




                                                 4
          Because the Builder stepped in to substitute for the Original Builder after construction

           began, the Builder had a duty to inspect the Original Builder’s work and ensure that it

           was performed in a good and workmanlike manner.

          The Builder had a duty to inspect its own subcontractors’ work and ensure it was

           performed in a good and workmanlike manner.

          Several construction-related defects resulted in water entering the residence.

          The Builder did not discover these defects during its inspection of the home, and this

           failure was an “honest mistake.”

          Had the Builder inspected the home more closely and noticed the problems, it could

           have fixed them and prevented the resulting damages. “Because this problem was

           present, the Residence was not built in a good and workmanlike manner.”

          The construction defects identified as the cause of the water damage were not related

           to Exterior Stucco.

These stipulations demonstrate a shift from the position the Builder took in discovery responses

served earlier in the suit, in which the Builder had asserted that the Hamels’ claims “relate to areas

or matters for which [the Builder] was not paid . . . by [the Hamels] and for which [the Builder]

had no responsibility or control.”

       The Damage Suit proceeded to a bench trial on May 26, 2005. Neither the stipulations nor

the Builder’s written construction contract with the Hamels was offered as an exhibit. The Hamels

called Mitchell, who testified consistently with the stipulations that the Builder “agreed to make

sure the house was finished in a good and workmanlike manner,” which included an “obligation

to inspect all of [the Original Builder’s] work and make sure there weren’t any problems.” He


                                                  5
also testified that, in inspecting and completing the home, he did not notice the “issues that the

Hamels have had with their house,” including steel nails in the roofing system, a short roof deck,

lack of a drip edge, inadequate securing of a fascia board to the framing, improper framing of the

roof ridge and second-floor window opening, improper roof sloping and drainage, and shower

leaks. He testified that these were “honest mistake[s]” and that the failure to discover such

problems would amount to a failure to complete the home in a good and workmanlike manner. He

further testified that these problems had nothing to do with the Exterior Stucco.

       Donald Yeandle, a contractor whom the Hamels hired in 2002 to inspect the home and

evaluate the extent of the water damage, testified about the existence of the various problems laid

out during Mitchell’s questioning and the resulting water damage. He also testified that these

problems were unrelated to Exterior Stucco or its components and opined that the Builder should

have noticed the problems or at least performed a more thorough inspection. He concluded that

the Builder did not complete the home in a good and workmanlike manner. Both Yeandle and

Glen Hamel testified about damages. The Builder presented no witnesses.

       The trial court accepted the Hamels’ attorney’s suggestion that the parties submit proposed

findings of fact and conclusions of law in lieu of closing arguments; however, only the Hamels

submitted proposed findings. The trial court rendered judgment in the Hamels’ favor and adopted

their proposed findings without modification, awarding them $365,089 in damages—composed of

$169,089 in repair costs, $100,000 in loss of market value due to stigma, $50,000 in mental-

anguish damages, $15,000 in costs to repair landscaping that would be damaged during the home

repair, $24,000 in temporary housing costs, and $7,000 in moving costs—plus prejudgment




                                                 6
interest and court costs. The Builder subsequently assigned most of its rights against Great

American to the Hamels.

                                            B. The Insurance Suit

         The Hamels, as the Builder’s assignees and judgment creditors, brought the current suit

(Insurance Suit) against Great American for breach of contract and declaratory relief, seeking to

recover the judgment from the Damage Suit under the Builder’s insurance policy.3 They also

initially asserted claims for Texas Insurance Code violations, but abandoned those claims before

trial. The Insurance Suit was tried to the bench. The entire record from the Damage Suit was

introduced into evidence, as were the stipulations, the Rule 11 agreement, and the contract between

the Builder and the Hamels. Excerpts from the depositions of Mitchell, Glen Hamel, and their

respective attorneys were also admitted. The trial court heard live testimony from both the

Hamels’ and Great American’s expert witnesses.

         The trial court rendered judgment for the Hamels and entered findings of fact and

conclusions of law, including, in pertinent part:

            The Builder had a contractual and common-law duty to inspect the construction

             performed by the Original Builder and its subcontractors, and to identify any defects in

             the home’s construction by subcontractors of the Builder or the Original Builder.

            The Builder had a contractual and common-law duty to finish construction and

             complete improvements in a good and workmanlike manner.




         3
            The named defendants are Great American Insurance Company and Great American Lloyds Insurance
Company. According to the trial court’s findings, the parties have agreed throughout the proceedings that both
defendants be treated as the insurer and held jointly and severally liable for any judgment rendered against them. We
refer to the defendants collectively as Great American.

                                                         7
          The Original Builder, the Builder, and their respective subcontractors did not perform

           their work in a good and workmanlike manner.

          The Builder breached its duties to the Hamels by failing to adequately inspect the

           Original Builder’s work, failing to discover construction defects, and failing to

           complete the home in a good and workmanlike manner.

          The Builder was negligent.

          Great American waived its right to control the Builder’s defense.

          The evidence and testimony admitted at the Damage Trial were truthful.

          The Builder defended itself at the Damage Trial in good faith.

          The Builder’s and the Hamels’ trial strategies and actions were reasonable and were

           not collusive or fraudulent.

          The Damage Trial “was a genuine contest of issues resulting in an adversarial

           proceeding.”

          The Damage Judgment and findings were supported by the evidence adduced at trial

           and were binding on Great American.

          Great American breached its duties to defend the Builder in the Damage Suit and to

           indemnify the Builder from the judgment.

The judgment in the Insurance Suit awarded the Hamels covered damages in the underlying

Damage Judgment of $355,838, plus interest, court costs, and attorney’s fees.

       Great American appealed. It argued in pertinent part that the Damage Judgment was not

binding on Great American under this Court’s holding in State Farm Fire & Casualty Co. v. Gandy

prohibiting enforcement of such judgments, if rendered without a fully adversarial trial, in an

                                               8
action by the plaintiff as the insured’s assignee. 925 S.W.2d 696, 714 (Tex. 1996). The court of

appeals affirmed the trial court’s judgment in most respects, holding that Great American breached

its duty to defend the Builder from the Hamels’ suit,4 the Damage Judgment was the result of a

fully adversarial trial, and the Builder’s assignment of its claims against Great American to the

Hamels was valid. 444 S.W.3d 780 (Tex. App.—El Paso 2014). However, the court of appeals

reversed the portion of the judgment awarding mental-anguish damages, holding they were not

compensable as a matter of law. Id. at 812.5 We granted Great American’s petition for review.

                                                    II. Discussion

         We have said that, generally, an insurer that wrongfully refuses to defend its insured is

barred from collaterally attacking a judgment or settlement between the insured and the plaintiff.

Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660, 671 (Tex. 2008); Emp’rs

Cas. Co. v. Block, 744 S.W.2d 940, 943 (Tex. 1988). However, as discussed below, in Gandy we

narrowed the scope of that rule under certain circumstances in which the plaintiff seeks to enforce

the judgment against the insurer as the insured’s assignee. 925 S.W.2d at 714. Great American

argues that the circumstances of this case preclude enforcement of the Damage Judgment against

it.

                                                      A. Gandy

         Because the resolution of the issues hinges on the proper reach and application of Gandy,

we begin with a discussion of that case. Gandy sued her stepfather for damages relating to sexual



         4
             As noted, Great American no longer disputes that it wrongfully refused to defend the Builder.
         5
           The court of appeals also held that the Exterior-Stucco exclusion did not apply and that the trial court did
not abuse its discretion in admitting expert testimony. 444 S.W.3d at 807–09. Those holdings, as well as the reversal
of the award of mental-anguish damages, have not been challenged here.

                                                           9
abuse. Id. at 697. State Farm, which had previously issued the stepfather a homeowner’s policy,

was notified of the suit and agreed to provide a defense under a reservation of rights. Id. at 698–

99. Despite State Farm’s participation, the stepfather settled the case without notice to State Farm.

Id. at 698. As part of the settlement, the stepfather assigned his claims against State Farm to

Gandy, who agreed that she would not attempt to collect the agreed judgment from the stepfather.

Id. The plaintiff then sued State Farm to collect the judgment and for breach of the duty to defend.

Id.

        We held that the assignment violated public policy and was void, noting two principal

defining characteristics of the overall settlement: (1) it served to prolong the litigation rather than

end it; and (2) it distorted the litigation, causing the parties to take “positions that appeared contrary

to their natural interests for no other reason than to obtain a judgment against State Farm.” Id. at

712. We outlined the following general rule:

        [A] defendant’s assignment of his claims against his insurer to a plaintiff is invalid
        if (1) it is made prior to an adjudication of plaintiff’s claim against defendant in a
        fully adversarial trial, (2) defendant’s insurer has tendered a defense, and (3) either
        (a) defendant’s insurer has accepted coverage, or (b) defendant’s insurer has made
        a good faith effort to adjudicate coverage issues prior to the adjudication of
        plaintiff’s claim.

Id. at 714. We expressly declined to address “whether an assignment is also invalid if one or more

of these elements is lacking.” Id. But we independently concluded: “In no event, however, is a

judgment for plaintiff against defendant, rendered without a fully adversarial trial, binding on

defendant’s insurer or admissible as evidence of damages in an action against defendant’s insurer

by plaintiff as defendant’s assignee.” Id.

        Great American contends that the Damage Judgment was not the product of a fully

adversarial trial and that Gandy therefore precludes the judgment’s enforcement against Great

                                                   10
American by the Hamels as the Builder’s assignees. Specifically, Great American argues that the

pretrial agreement and stipulations entered into by the Hamels and the Builder—which were not

presented to the trial court in the Damage Suit—ensured that the Builder had no real stake in the

trial’s outcome. According to Great American, this resulted in a sham trial shaped entirely by the

Hamels and designed to aid in the prosecution of the subsequent insurance litigation. The Hamels

respond that no evidence of fraud or collusion exists with respect to the Damage Trial and that

Great American improperly seeks to extend Gandy’s holding beyond its intended scope. With

these arguments in mind, we examine Gandy’s impact on this case.

               B. Enforceability of Damage Judgment against Great American

       As an initial matter, we note that the validity of the Builder’s assignment of its claims

against Great American to the Hamels is not at issue here.6 As Great American recognizes, the

circumstances underlying our invalidation of the assignment in Gandy are lacking in this case.

First, the Builder assigned its claims following, not preceding, a trial and judgment. Second, unlike

the insurer in Gandy, Great American breached its duty to defend. Third, Great American neither

accepted coverage nor made a good-faith effort to adjudicate coverage before the Hamels’ claims

against the Builder were resolved. We have stated that Gandy’s holding “was explicit and narrow,

applying only to a specific set of assignments with special attributes.” ATOFINA, 256 S.W.3d at

673. Although in Gandy we declined to address whether an assignment that lacked one or more

of Gandy’s characteristics could be invalid, we see no reason to invalidate an assignment when

none of those characteristics are present. Great American took a significant risk by refusing to


       6
           The Hamels sued Great American both as judgment creditors and as the Builder’s assignees. We
nevertheless address the assignment in an effort to provide further clarity on this issue.



                                                  11
defend, or at least litigate its duty to the Builder. See Gandy, 925 S.W.2d at 714 (noting that

“[d]isputes between [the insurer] and [insured defendant] can often be expeditiously resolved in

an action for declaratory judgment while [the plaintiff’s] claim is pending,” and that insurers often

“will assume the burden of having the issues resolved” to prevent undue burden on the insured).

We therefore confirm that the Builder’s assignment of its claims against Great American to the

Hamels was valid.

       But that does not end the inquiry. Great American argues that, separate and apart from the

assignment’s validity and regardless of Great American’s failure to defend, Gandy precludes the

Hamels from enforcing the Damage Judgment against Great American in the Insurance Suit. Great

American relies on our statement in Gandy that “[i]n no event . . . is a judgment for plaintiff against

defendant, rendered without a fully adversarial trial, binding on defendant’s insurer or admissible

as evidence of damages in an action against defendant’s insurer by plaintiff as defendant’s

assignee.” Id. In so holding, we “disapprove[d] the contrary suggestion” in Block. Id. (citing

Block, 744 S.W.2d at 943).

       In Block, as in this case, the defendant’s insurer wrongfully refused to defend in the

underlying suit. 744 S.W.2d at 942. The parties settled, and the trial court rendered an agreed

judgment. Id. The defendant sued its insurer for failure to defend under the policy, and the

plaintiffs intervened as judgment creditors and assignees seeking recovery of the judgment. Id.

We held that, in light of its failure to defend, the insurer “was barred from collaterally attacking

the agreed judgment by litigating the reasonableness of the damages recited therein.” Id. at 943.

We revisited this issue in ATOFINA, another case in which the insurer breached its duty to defend

in the underlying suit and then sought to challenge the parties’ settlement as unreasonable. 256


                                                  12
S.W.3d at 670–74. We applied the Block rule notwithstanding Gandy’s pronouncement that

plaintiffs may not enforce an underlying judgment against the defendant’s insurer absent a fully

adversarial trial, explaining that “Gandy’s key factual predicate [was] missing” because the insured

defendant in ATOFINA had not assigned its claims but had sued the insurer directly. Id. at 673.

We further noted that the “risk of distorting litigation or settlement motives” present in Gandy did

not exist in ATOFINA because the insured defendant “settled without knowing whether or not it

would be covered by the policy, leaving in place its motive to minimize the settlement amount in

case it became solely responsible for payment.” Id. at 674.

        This case gives us the opportunity to clarify how our holdings in Block, Gandy, and

ATOFINA apply in cases that do not match their exact factual circumstances. Block indicated that

the insurer’s breach of its duty to defend necessarily renders any covered judgment binding on the

breaching insurer. 744 S.W.2d at 942–43. Since Gandy, however, an insurer’s wrongful failure

to defend is no longer dispositive. In holding that a plaintiff may not enforce an underlying

judgment against the defendant’s insurer absent a “fully adversarial trial,” we shifted focus toward

whether the underlying judgment accurately reflects the plaintiff’s damages and thus the insured’s

covered loss. 925 S.W.2d at 714; see also ATOFINA, 256 S.W.3d at 673–74 (binding the insurer

to a judgment arising from a settlement agreement, rather than a trial, primarily because the

defendant retained a stake in the litigation even upon settlement).7




        7
          We note that Gandy, like Block and ATOFINA, involved an agreed judgment rather than a trial. Further,
our holding in Gandy that the plaintiff could not enforce the judgment against the insurer was based solely on the
assignment’s invalidity. As a result, we did not have the opportunity to expound on the meaning of the phrase “fully
adversarial trial.”

                                                        13
        One way to ensure that a judgment accurately reflects the plaintiff’s damages is to require

that the loss be determined through a proceeding in which the parties “fully”—or at least actually

and effectively—oppose and contest each other’s positions. The difficulty with this approach,

however, is in determining just how effective each party’s trial performance must be. In this case,

for example, the parties present diametrically opposed positions on whether the Damage Judgment

resulted from a fully adversarial trial. In arguing that the underlying trial was not fully adversarial,

Great American relies on the pretrial agreement allegedly removing the Builder’s incentive to

defend and subsequent conduct purportedly conforming to that state of affairs, including the

Builder’s abandonment of earlier-asserted defenses, stipulations as to liability, and minimal trial

participation. Great American accuses the parties of secrecy and collusion, noting that the pretrial

agreement and stipulations were not put into evidence, nor was the trial court advised of their

existence. Great American also engages in a lengthy and detailed critique of the Builder’s trial

strategies, accusing the Builder of presenting a sham defense. The Hamels respond that the Builder

“presented the best defense it could in light of the undeniable facts,” noting that the Builder

participated in the trial and was represented by an attorney who engaged with the court and the

witnesses.

        The court of appeals rejected Great American’s arguments and concluded:

                The record shows the [Damage Suit] was fully tried in a bench trial in which
        the trial court was well-engaged. Mitchell testified that he did not discuss the
        substance of his testimony with the Hamels and that his testimony was not
        influenced by his agreement with them. Although Mitchell’s testimony was candid
        and forthright about the existence of [the Builder’s] duties in relation to the
        inspection of the home, [the Builder’s] oversight of the subcontractors’ work, and
        [the Builder’s] failure to meet those obligations, he also presented evidence that the
        Hamels’ home was more than half-way constructed before he accepted those duties.



                                                  14
                  Although Great American complains of the pretrial stipulations made
        between the parties, it does not demonstrate that the complained-of stipulations
        were ever used in the trial of the [Damage Suit]. We note that many, and perhaps
        all, of the facts set forth in the stipulation were adduced by witnesses who testified
        at trial.

444 S.W.3d at 803. The court of appeals’ approach necessarily requires courts to retroactively

evaluate and thus second-guess trial strategies and tactics, which—as we have noted in other

circumstances—often produces an inaccurate and unreliable result. C.f., e.g., Cantey Hanger LLP

v. Byrd, 467 S.W.3d 477, 481 (Tex. 2015) (noting the general rule that “attorneys are immune

from civil liability to non-clients for actions taken in connection with representing a client in

litigation” (citations and internal quotation marks omitted)); In re JFC, 96 S.W.3d 256, 283 (Tex.

2002) (noting the difficulty of overcoming the presumption that trial counsel’s acts and omissions

are based on strategy in claims of ineffective assistance of counsel). Every trial presents unique

challenges, requiring subjective judgment calls that may seem in hindsight to have been ill-

advised. But determining whether and when those calls destroy the “adversarial” nature of the

proceeding is simply not possible. Great American’s criticism of the Builder’s trial strategy here

is particularly troubling given that it had the opportunity to control the defense in the first instance

and wrongfully refused to do so.

        This misplaced focus on trial details likely results from a misinterpretation of the phrase

“fully adversarial” as it was used in Gandy. Fundamentally, proceedings are “adversarial” when

the parties oppose each other. See Adversarial, WEBSTER’S NEW WORLD COLLEGE DICTIONARY

(5th ed. 2014) (defining “adversarial” as “of or characterized by opposition, disagreement,

hostility, etc., as between adversaries”). Today we clarify that the controlling factor is whether, at

the time of the underlying trial or settlement, the insured bore an actual risk of liability for the


                                                  15
damages awarded or agreed upon, or had some other meaningful incentive to ensure that the

judgment or settlement accurately reflects the plaintiff’s damages and thus the defendant–insured’s

covered liability loss.

        Our holding in ATOFINA is consistent with this standard. In ATOFINA, the insurer

wrongfully refused to defend the underlying claims, and the insured settled without assigning his

rights against the insurer to the plaintiff. 256 S.W.3d at 673. More importantly, the insured

retained the risk that he would be liable for the damages if the policy did not cover them. Id. at

674. That incentive to contest the plaintiffs’ alleged damages was sufficient to ensure that the

settlements accurately reflected the insured’s covered loss, even without a trial. By contrast, in

Gandy, the insurer agreed to provide a defense, and the insured assigned his claims against the

insurer to the plaintiff before the case was resolved. 925 S.W.2d at 698. Further, the insured

retained no financial risk or other incentive to oppose the plaintiff’s damages. See id. In the

absence of any such incentive, we explained, the insurer should not be bound by the damages

determination. Id. at 714.

        In this case, the parties’ pretrial agreement eliminated any meaningful incentive the Builder

had to contest the judgment. Specifically, before trial, the Hamels agreed not to enforce any

resulting judgment against Mitchell’s personal assets.8 They also agreed not to pursue Mitchell’s

truck or “personal tools of the trade . . . even if in the name of [the company].” While the agreement

technically did not foreclose the Hamels from pursuing other assets of the Builder, Mitchell

himself testified that the company had no other assets except the insurance policy.


        8
          We recognize that the Hamels did not sue Mitchell individually and that the record is devoid of evidence
regarding whether the Hamels could have successfully sought to pierce the corporate veil and recover against
Mitchell’s personal assets. But the fact remains that the agreement removed any possibility of such recovery.

                                                       16
        When the parties reach an agreement before trial or settlement that deprives one of the

parties of its incentive to oppose the other, the proceeding is no longer adversarial. Stated another

way, proceedings lose their adversarial nature when, by agreement, one party has no stake in the

outcome and thus no meaningful incentive to defend itself. When a plaintiff agrees to forgo

execution of a judgment against a defendant’s assets, whether in conjunction with a settlement or

before trial, the defendant no longer has a financial stake in the outcome and thus likely has no

interest in either avoiding liability altogether or minimizing the amount of damages. We believe

adversity turns on the insured defendant’s incentive to defend (or lack thereof), and an after-the-

fact evaluation of the parties’ trial strategies therefore has no place in the analysis.

        Here, as noted and despite the Hamels’ protestations, the pretrial agreement effectively

removed any financial stake the Builder had in the outcome of the Damage Suit, thereby

eliminating any incentive the Builder had to oppose the Hamels’ claims. This turned the Damage

Suit into a mere formality—a pass-through trial aimed not at obtaining a judgment reflective of

the Hamels’ loss, but instead at obtaining a potentially inflated judgment to enforce against Great

American. Again, the Builder’s only assets (other than the insurance policy) were “a pickup truck

and some tools,” and these were the assets the Hamels specifically agreed not to pursue. They also

agreed not to attempt to pierce the corporate veil, ensuring that Mitchell’s personal assets were

protected. This left only the Builder’s insurance policy as a potential source to satisfy any

judgment obtained. Mitchell’s testimony reflected the effect of this agreement on the Builder’s

incentive to defend itself:

               Q.      Were you aware that your lawyer in the Hamel case did not make
        any effort to get a credit for that $25,000 that the Hamels got from STO [another
        defendant] in the Hamel case?


                                                  17
               A.     I never -- I’ve never heard anything about a credit or 25,000 from
       STO.

              Q.      After you entered into the [pretrial agreement], did you really even
       care about that?

               ....

               A.     No, sir.

               Q.      Okay. You wouldn’t have cared because your assets were not at risk
       as of the time you entered into that agreement; is that correct?

               ....

               A.     Yeah. I don’t care.

               ....

               Q.      At the trial, were you concerned at all about -- were you concerned
       that the stipulations might be detrimental to Terry Mitchell Builder?

               A.     No.

               Q.     Because you understood at that time that your individual personal
       assets were not at risk, correct?

               ....

               A.     Yes.

       In sum, the parties’ pretrial agreement removed the Builder’s stake in the outcome and any

corresponding incentive to defend itself. After the agreement was executed, the Damage Suit no

longer involved opposing parties, and the trial that followed was not fully adversarial.

Accordingly, under Gandy, the Damage Judgment is not binding against Great American in the

present suit brought by the Hamels as judgment creditors and assignees. See 925 S.W.2d at 714.

       We do not suggest that a formal, written pretrial agreement that eliminates the insured’s

financial risk will always be either necessary or sufficient to disprove adversity. We hold instead

                                                18
that the presence of such an agreement creates a strong presumption that the judgment did not

result from an adversarial proceeding, while the absence of such an agreement creates a strong

presumption that it did. On the one hand, the insurer may overcome the presumption by

demonstrating that, even though the plaintiff and insured defendant did not enter into any formal,

written agreement, the evidence nonetheless establishes that the defendant had no meaningful stake

in the outcome of the underlying litigation.9 Conversely, the plaintiff (acting as the defendant’s

assignee) may overcome the presumption by submitting evidence demonstrating that the defendant

retained a meaningful incentive to defend the underlying suit despite an agreement that eliminated

the defendant’s financial risk.

        In this case, as Mitchell expressly confirmed, the parties’ pretrial agreement eliminated any

incentive the Builder had to defend against the Hamels’ claims.                      Without second-guessing

subjective trial tactics and strategy decisions, we conclude that, in the absence of any such

incentive, the Damage Trial was not fully adversarial and the resulting judgment is not binding on

Great American.

      C. Whether the Insurance Trial Cured the Lack of Adversity in the Damage Trial

        The Hamels contend that, in the event we find a lack of adversity in the Damage Trial, any

associated problems were cured by the Insurance Trial, at which Great American “had the

opportunity to make its coverage arguments, examine witnesses, put on witnesses of its own and

evaluate the damages.” Great American responds that the problems associated with the Damage

Trial are incurable, arguing, the “entire rationale of Gandy is that once adversity is destroyed and



        9
           We do not mean to imply that a presumption of adversity may be overcome solely by evidence that a
defendant has minimal assets. Something more is required to demonstrate a lack of incentive to defend in the absence
of an agreement affirmatively removing such incentive.

                                                        19
the defendant no longer has any incentive to oppose the plaintiff, it is impossible to go back and

determine what might have been.” Great American thus contends that it is entitled to rendition of

judgment in its favor.

         We acknowledged in Gandy that, in the context of attempting to assess a defendant’s

liability after settlement, “it is very difficult to determine what might have been” once the parties

have changed positions. 925 S.W.2d at 719. We explained that “this inquiry should ordinarily be

avoided, absent compelling reasons to the contrary.” Id. (emphasis added). We believe an

insurer’s wrongful refusal to defend presents a compelling reason to engage in this endeavor

despite its difficulty.

         An insurer’s refusal to defend or to even attempt to litigate its duties while the underlying

suit is pending carries significant risks, and for good reason. See id. at 714. It places the burden

on the insured to defend itself, often without adequate resources to do so. See id. It can also leave

the plaintiff in an untenable position. The defendant’s insurer is often the plaintiff’s only real

source of recovery, but without the insurer’s involvement in the lawsuit the likelihood of a fully

adversarial trial diminishes substantially. Those concerns were manifested in this case. To some

degree, the parties’ conduct is simply an attempt to make the best of a situation that Great American

created by refusing to defend.

         Accordingly, while we will not hold an insurer to a judgment that was not the result of an

adversarial proceeding, we will not preclude the parties from properly litigating the underlying

liability issues in a subsequent coverage suit.10 Although in Gandy we identified the difficulties


         10
            We recognize that, under the collateral-estoppel doctrine, “prior adjudication of an issue will be given
estoppel effect . . . if it was adequately deliberated and firm.” Mower v. Boyer, 811 S.W.2d 560, 562 (Tex. 1991).
Further, collateral estoppel bars a third party insofar as privity exists with a party to the original suit. Block, 744

                                                         20
inherent in this undertaking, we also emphasized the importance of determining an insurer’s

obligations before its insured incurs liability. Id. By declining to defend or litigate its duties early,

an insurer plays a key role in making such a complicated endeavor necessary. Certainly,

relitigation of underlying liability and damages issues is not a perfect solution, but it is necessitated

by the circumstances. The insurer should not benefit from the problem that it helped create, as

Great American’s proposed solution—rendition of judgment in its favor—would allow. Rather,

under the approach we adopt today, the insurer will have the opportunity to challenge its insured’s

underlying liability and the resulting damages, the abandoned insured is protected, and the burden

on the plaintiff is fair. And of course, the insurer has every incentive to assert a strong defense

during the Insurance Trial.

         So did the parties effectively retry the Damage Suit in the Insurance Trial? To that, we

must answer no. Although the trial court in the Insurance Suit made independent findings about

the Builder’s liability and held that the evidence supported the Damage Judgment’s award of cost-

of-repair damages, the fact remains that the arguments, evidence, and witnesses in the Insurance

Trial were understandably geared toward other issues. With respect to coverage, the parties

litigated primarily (1) when the property damage occurred, which affected whether the policies

with Exterior-Stucco exclusions applied, and (2) whether the Hamels segregated covered and

non-covered damages and properly allocated the damages among policy periods. The parties also

presented evidence and testimony bearing on whether the Damage Trial qualified as “fully


S.W.2d at 943. In Block, we held that the insurer was not collaterally estopped from relitigating coverage issues that
had been resolved in the first suit, in part because the insurer’s and insured’s positions were in conflict on that issue.
Id. Similarly, when the plaintiff and insured defendant lack adversity in the underlying suit to determine the insured’s
liability, we cannot say that the insurer’s and insured’s positions are aligned with respect to those issues. See id. For
this reason, the doctrine of collateral estoppel does not preclude adjudication of liability and damages issues in this
Insurance Suit.

                                                           21
adversarial” by focusing on trial strategies and tactics rather than whether the parties were adverse.

These overarching issues encompassed some, but not all, of the liability and damages issues

adjudicated in the Damage Trial.

        For example, in the course of litigating whether the Damage Trial was fully adversarial,

the parties addressed portions of the evidence relating to the Builder’s liability and the Hamels’

damages. Great American introduced the original construction contract into evidence and elicited

testimony about the scope of the Builder’s contractual duties to inspect and remedy work

performed by prior contractors. Great American was thus able to present one of the liability

defenses purportedly ignored during the Damage Trial: that the Builder was not liable for the

Original Builder’s defective work.11 Great American also pursued its contention that the Hamels

failed to mitigate their damages, cross-examining Yeandle on a report he had prepared in 2002

estimating repair costs in an amount significantly lower than he testified to at the Damage Trial.

The trial court considered this evidence and found that “the 2002 report prepared by Mr. Yeandle,

as he confirmed, . . . bears no relation to the full cost to repair estimated, that he testified to at the

[Damage] Trial.”

        However, the parties did not thoroughly relitigate all aspects of the Hamels’ claimed

damages. Great American briefly questioned one expert witness about various deficiencies,

eliciting opinion testimony that the Builder was entitled to a $25,000 settlement credit, that the

damages attributed to landscape repair constituted a double recovery, and that Glen Hamel’s


          11
             As noted, Great American also complained about the Builder’s concession that Exterior Stucco played no
role in the water damage to the Hamels’ home. That issue was ultimately rendered moot when the trial court found in
the Insurance Suit that the property damage occurred at a time when the applicable policy contained no Exterior-
Stucco exclusion. 444 S.W.3d at 808. Likewise, any complaints about the award of $50,000 in mental-anguish
damages are moot, as the court of appeals held that such damages were not compensable and reduced the judgment
accordingly. Id. at 811–12.

                                                        22
testimony was incompetent as to the home’s loss in market value and the Hamels’ temporary

housing and moving costs. But these issues were not pursued at length. The parties did not present

formal motions or legal arguments regarding the potential settlement credit, and Glen Hamel was

not questioned about damages even though he was the sole witness at the Damage Trial with

respect to all damage categories except repair costs. Further, the court did not make specific

findings on these categories of damages in the Insurance Suit.

        In sum, although some of the Damage-Suit issues were indirectly raised in the Insurance

Trial, we cannot say that it “cured” the problem. The scope of the Insurance Trial was simply not

as broad as the Hamels suggest. However, we cannot fault the parties or the trial court for that.

Prior to this opinion, Texas law was not clear as to Gandy’s effect on the Damage Judgment’s

enforceability. Nor was it evident that the Insurance Suit provided a vehicle to remedy the

problems associated with the lack of adversity in the Damage Suit.12 Accordingly, we believe a

remand in the interest of justice is necessary. See USAA Tex. Lloyds Co. v. Menchaca, ___ S.W.3d

___, ___ (Tex. 2017) (remanding in the interest of justice “[i]n light of the parties’ obvious and

understandable confusion over our relevant precedent and the effect of that confusion on their

arguments in this case”).

                                                III. Conclusion

        We hold that the Damage Judgment was not the product of a fully adversarial proceeding

because the parties entered into an agreement that eliminated any meaningful incentive for the

Builder to contest the Hamels’ claims. As a result, the judgment that followed was not enforceable



        12
             The Hamels’ attorney even expressed concern early in the Insurance Trial that Great American would “try
to re-litigate the underlying trial, and I don’t think they have a right to do that in this case.”

                                                        23
or admissible as evidence in the subsequent Insurance Suit against Great American by the Hamels

as judgment creditors and as the Builder’s assignees. However, we also hold that the Insurance

Suit gives the parties the opportunity to litigate any disputed underlying issues with the benefit of

full adversity. Although the parties did not do so here, they should be given the opportunity on

remand. Accordingly, we reverse the court of appeals’ judgment and remand the case to the trial

court for a new trial.



                                                          ________________________________
                                                          Debra H. Lehrmann
                                                          Justice


OPINION DELIVERED: June 16, 2017




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