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SPRING 2008 NEWSLETTER

INSURANCE LAW UPDATE
by Leslie Echols Pitts and Rebecca Raper

TEXAS SUPREME COURT - RECENT OPINIONS

Unauthorized Practice of Law Committee v. American Home Assurance Co., Inc., ___ Tex. Sup. Ct. J.___ (Tex. March 28, 2008).

An insurer may use captive counsel or staff attorneys to defend a claim against an insured if the insurer’s interest and the insured’s interest are congruent and if the affiliation is fully disclosed to the insured.

In reaching this decision, the Court recognized that: “Liability insurance policies commonly provide that the insurer must indemnify the insured from liability for covered claims and give the insurer the duty, and also the right, to defend such claims. The right to defend in many policies gives the insurer complete, exclusive control of the defense. Insurance companies retain attorneys in private practice to represent insureds in defending claims against them, but for decades, in Texas and other states, insurers have also used staff attorneys – salaried company employees – to save costs.”

Nationwide Ins. Co. v. Elchemimi, ___ Tex. Sup. Ct. J.___ (Tex. March 28, 2008).

For purposes of a UM policy, a collision between the covered vehicle and an axle-wheel assembly separated from an unidentified semi-trailer truck did not involve the requisite “actual physical contact” with a “motor vehicle” to invoke coverage.

In Elchemimi, the insured claimants sought coverage under the UM portion of their personal auto policy after their vehicle was struck by an axle-wheel assembly and attached tandem wheels that separated from a semi-trailer. The semi-trailer did not stop. The court determined that for purposes of the UM statute and related coverage, the axle-wheel assembly did not constitute a “motor vehicle”

National Union Fire Insurance Company v. Crocker, 51 Tex. Sup. Ct. J. 518 (Tex. February 15, 2008).

There is no duty to provide a defense absent a request for coverage.

In Crocker, the Texas Supreme Court was asked to answer certified questions from the Fifth Circuit Court of Appeals regarding a carrier’s obligations when it knows that one who qualifies as an insured under its policy has been sued and served but has not requested a defense. The Court held that the purpose of the “delivery-of-suit-papers provisions in insurance policies” is twofold: (1) to facilitate a timely and effective defense of the claim and (2) to trigger the insurer’s duty to defend. The Court went on to say that mere awareness by the carrier that an additional insured has been sued and/or served does not trigger a defense obligation, that “there is no unilateral duty to act unless and until the additional insured first requests a defense.” Finally, the Court explained that the carrier had no duty to notify the additional insured of coverage, though doing so may be wise from a business perspective.

Fairfield Insurance Company v. Stephens Martin Paving, LP., 51 Tex. Sup. Ct. J.. 491 (Tex. February 15, 2008).

There is no public-policy prohibition for coverage for a punitive damages award based on a gross negligence finding in the context of a workers’ compensation claim.

In Fairfield, the Texas Supreme Court responded to another certified question from the Fifth Circuit, namely whether Texas public policy prohibits a liability insurer from indemnifying an award of punitive damages imposed on its insured for gross negligence. The Fairfield case involved the claims of the estate of an employee who was killed while in the course and scope of his employment. The carrier argued that it was not obligated to pay any punitive damages award against the insured employer under the theory that Texas public policy prohibits coverage for punitive damages. The Fairfield Court first addressed the question in a very limited manner, under the terms of the relevant policy before it, which contained two kinds of coverage: worker’s compensation and employer’s liability. Noting that the policy form was promulgated by the Texas Department of Insurance and is the only form approved to comply with the Texas Workers’ Compensation statute, the Court determined that the statutory scheme and TDI’s promulgation of that form “reveal an intent to provide additional insurance coverage – coverage for an employer’s gross negligence.” The court further concluded that the “Legislature’s expressed intent is that Texas public policy does not prohibit insurance coverage for claims of gross negligence in this context.”

Having determined that there is no public-policy prohibition for coverage for a punitive damages award based on a gross negligence finding in the context of workers’ compensations claims, the Court turned to the broader question of coverage for punitive damages outside the context of the policy before it. The Fairfield Court engaged in a thorough review of other jurisdictions’ views on the question, then outlined a potential tension between the public policy favoring the preservation of the freedom to contract and the underlying purpose of punitive damages, i.e., to punish the wrongdoer. After a very lengthy discussion of considerations it deemed critical to the question, the Fairfield Court refused to make a bright-line finding, suggesting instead that the public policy questions must be weighed as to the particular circumstances of each claim.

Evanston Insurance Company v. Atofina Petrochemicals, Inc., 51 Tex. Sup. Ct. J. 460 (Tex. February 15, 2008).

(1) The language of the additional insured endorsement and not the agreement between the insured and additional insured determine the extent of coverage afforded to the additional insured. (2) A carrier who opts to forego involvement in settlement negotiations also gives up the right to challenge the product of those negotiations. (3) The “Prompt Payment of Claims” statute does not apply to indemnity obligations in the context of a liability policy.

With regards to the additional insured question before it, the Evanston Court determined that the language of the additional insured endorsement controlled. In particular, while the contract between the named insured and the additional insured did not require the named insured to indemnify the additional insured for the additional insured’s own sole negligence, the additional insured endorsement in the policy did not reflect any “sole negligence” limitations. Accordingly, the additional insured was insured for all purposes under the relevant policy.

With regards to whether an insurer can challenge the reasonableness of a settlement after that insurer wrongfully denied coverage, the Evanston Court unequivocally found that the insurer before it lost the ability to challenge the reasonableness of the amount of the settlement. In particular, the Evanston Court explained that a carrier who opts to forego involvement in settlement negotiations also gives up the right to challenge the product of those negotiations.

Finally, the Evanston Court examined whether the Texas “Prompt Payment of Claims” statute and its 18% penalty applied to the $5.75 million in covered indemnity obligations. The Court held that such costs were classic “third party” damages not covered by the relevant statute, which applies only to first-party costs, which has previously been interpreted to be “the insured’s own loss.”

Excess Underwriters at Lloyds v. Frank’s Casing Crew & Rental Tools, Inc., 51 Tex. Sup. Ct. J. 397 (Tex. February 15, 2008).

In a complete reversal of its earlier opinion in the case, the Frank’s Casing Court held that an insurer has no right to seek reimbursement from an insured if the insurer later prevails in a coverage suit unless the insured has specifically agreed to reimbursement in those circumstances.

When initially decided, the Frank’s Casing decision stood for the proposition that an insurer can seek reimbursement from an insured of settlement dollars paid, at least in certain situations. In particular, the original opinion held that a carrier has a right to be reimbursed if it has: (1) timely asserted its reservation of rights; (2) notified the insured it intends to seek reimbursement; and, (3) paid to settle claims that were not covered. The Court ruled that once an insured asserts that a settlement offer has triggered a Stowers duty, and the insurer accepts the settlement offer or a lower one, the insured is estopped from asserting that the settlement is too much of a financial burden for the insured to bear if it turns out that the claim is not covered.

On rehearing, the Court reversed its position, holding that an insurer has no right to seek reimbursement from an insured if the insurer later prevails in a coverage suit unless the insured has specifically agreed to reimbursement in those circumstances. The new Frank’s Casing decisions affirms a previous Texas Supreme Court case involving an insurer’s reimbursement rights, Texas Association of Counties County Government Risk Management Pool v. Matagorda County, 52 S.W.2d 128 (Tex. 2000). In Matagorda County, the Texas Supreme Court held that an insurer could seek reimbursement from its insured only if the insured clearly and unequivocally consented to both the settlement and the insurer’s right to seek reimbursement. In the new Frank’s Casing decision, the Court declined to overrule or create an exception to Matagorda County.

PAJ v. The Hanover Ins. Co., 243 S.W.3d 630 (Tex. January 11, 2008).

Insured’s failure to timely notify insurer of claim or suit does not defeat coverage under the policy if the insurer is not prejudiced by the delay.

The PAJ Court extended application of the prejudice requirement beyond the “bodily injury” and “property damage” liability context, broadly holding that unless material, breaches of an occurrence-based liability policies’ notice provisions will not defeat coverage except where the insurer can demonstrate some resulting harm. Specifically, the Court was asked to decide whether an insured's failure to timely notify its insurer of a claim defeated coverage under a liability policy where the insurer was not prejudiced by the delay. The court held that immaterial breaches of the policy’s notice conditions could not relieve the insurer of its contractual coverage obligations.

Mid-Continent Ins. Co. v. Liberty Mutual Ins. Co. , 236 S.W.3d 765 (Tex. October 12, 2007).

When carriers insure on the same level and in the same amount, they have no common law or contractual right to compel the proportionate contribution of a co-insurer unless properly subrogated to a recognized right of recovery on the insured’s part.

An overpaying co-insurer has no direct right of reimbursement or contribution against the underpaying co-insurer. When carriers insure on the same level and in the same amount, they have no common law or contractual right to compel the proportionate contribution of a co-insurer unless properly subrogated to a recognized right of recovery on the insured's part. Where the insured has no common law cause of action against the underpaying co-insurer and, having been fully indemnified, no contractual rights remaining against the same, the insured has no rights to which the overpaying co-insurer may in turn be subrogated and an action against the underpaying co-insurer maintained. Thus, when two or more carriers insure on an equal basis, any carrier who pays more than its proportionate share does so at its own peril.

Lamar Homes Inc. v. Mid-Continent Casualty Co., 239 S.W.3d 236 (August 31, 2007).

(1) Allegations of unintended construction defects that cause damage to the structure itself can constitute and accidental “occurrence” of “property damage” for purposes of defense under a CGL policy. (2) The penalties available under the state's “Prompt Payment of Claims” statute can be applied where an insurer wrongfully refuses to defend its insured.

A homebuilder sought coverage for claims asserted against it by homebuyers for alleged construction defects. The carrier refused to defend the builder, arguing the claims were not covered under the policy because there was no “occurrence” of “property damage.” The builder, in turn, claimed that the carrier had a duty to defend and its failure to do so was a violation of article 21.55. The Texas Supreme Court finally held that where the underlying complaint asserts that an insured's defective construction unintentionally caused damage to the structure itself, an accidental “occurrence” of “property damage” is sufficiently under a CGL Policy, at least for purposes of determining an insurer's defense obligations. It is irrelevant that the damage was limited to the insured’s own work/product (the house) because (1) the policy “does not define ‘occurrence’ in terms of the ownership or character of the property damaged” and (2) the face of the “property damage” definition “does not eliminate the general contractor’s work.” Where an insurer wrongfully refuses to defend its insured, the penalties available under Texas's prompt-payment of claims statute may apply to those defense costs.

Fortis Benefits v. Cantu, 234 S.W.3d 642 (June 29, 2007).

The equitable “made whole” doctrine - the rule that an insurer is not entitled to subrogation of medical benefits unless the insured has been “made whole” - must yield to an insurer’s contract-based right of subrogation.

Cantu suffered severe injuries in an auto accident and later sued the driver of the vehicle in which she was riding, his employer, the vehicle seller, and the vehicle manufacturer. Fortis intervened and asserted contractual subrogation and reimbursement rights to recoup from Cantu's tort recovery the amount of medical benefits it had paid under the policy. After Cantu settled her claims, she and Fortis disputed what portion of the settlement proceeds, if any, should go to Fortis, and Cantu moved for summary judgment, arguing she had not been “made whole” by the settlement and thus Fortis's contractual claims of subrogation and reimbursement unlawful. The Fortis Court held that the equitable “made whole” doctrine is inapplicable when the parties’ agreed contract provides a clear and specific right of subrogation.

TEXAS SUPREME COURT - PENDING ISSUES

OneBeacon Ins. Co. v. Don’s Bldg. Supply, Inc., 496 F.3d 361 (5th Cir. Tex. 2007).

Currently before the Texas Supreme Court on certified question:

When not specified by the relevant policy, what is the proper rule under Texas law for determining the time at which property damage occurs for purposes of an occurrence-based commercial general liability insurance policy?

Under the rule identified in the answer to the first question, have the pleadings in lawsuits against an insured alleged that property damage occurred within the policy period of an occurrence-based commercial general liability insurance policy, such that the insurer's duty to defend and indemnify the insured is triggered, when the pleadings allege that actual damage was continuing and progressing during the policy period, but remained undiscoverable and not readily apparent for purposes of the discovery rule until after the policy period ended because the internal damage was hidden from view by an undamaged exterior surface?

Trinity Universal Ins. Co. v. Cellular One Group, 2007 Tex. App. Lexis 96 (Tex. App. Dallas Jan. 9, 2007), pet. granted, Nov. 30, 2007.
Samsung Elecs. Am. v. Fed. Ins. Co., 2006 Tex. App. Lexis 9407 (Tex. App. Dallas Oct. 18, 2006), pet. granted, Nov. 30, 2007.
Nokia, Inc. v. Zurich Am. Ins. Co., 2006 Tex. App. Lexis 9375 (Tex. App. Dallas Oct. 18, 2006), pet. granted, Nov. 30, 2007.

On appeal from the Fifth District Dallas Court of Appeals:

Whether allegations that radiation may cause adverse health effects on the human body constitute claims for “bodily injury” under liability policies?

Johnson v. State Farm Lloyds, 204 S.W.3d 897, 2006 Tex. App. Lexis 9336 (Tex. App. Dallas 2006), pet. granted, September 28, 2007.

On appeal from the Fifth District Dallas Court of Appeals:

Whether an appraiser selected under the appraisal clause of a homeowners’ policy has the authority to decide questions of causation ore merely the dollar amount of the claimed damages?

Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 2006 Tex. App. Lexis 5950 (Tex. App. Houston (14th Dist) July 6, 2006), pet. granted, Aug. 31, 2007.

On appeal from the Fourteenth Houston District Court of Appeals:

Whether extrinsic evidence is admissible to establish a duty to defend when the plaintiff's petition is silent on a particular coverage issue?

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