INSURANCE LAW UPDATE
By Rebecca Raper – Associate

Texas Supreme Court

American Manufacturers Mutual Insurance Co. v. Schaefer, 2003 W.L. 22417186 (Tex. October 17, 2003).

Insurer on personal auto policy is not required to cover diminished value of adequately repaired auto.

Class action lawsuit argued that diminished value of automobiles after repair was a direct loss for which insurers were responsible.   The Texas Supreme Court held that the plain language of the personal auto policy allowed insurer to pay either the cost to adequately repair the vehicle or the vehicle’s actual cash value.  As such, the court found no obligation pay to diminished value damages in the first-party context.  The court did note, however, that diminished value damages are available to a third-party claimant, as the standard personal auto policy provides different coverage under its liability section. (See Class Action Update for more details concerning this case.)

Utica National Ins. Co. of Tex. v. American Indemnity Co., et al., 46 Tex. Sup. Ct. J 866 (June 26, 2003)

“Professional Services” exclusion in commercial general liability policy is inapplicable to claims involving a combination of professional and non-professional activities.

Based on the professional services exclusion in its policy, Utica denied coverage for a lawsuit that alleged that the insured’s patients had been given anesthetics contaminated with Hepatitis C.   The lawsuit alleged that a drug addicted scrub technician at a surgery center had contaminated the drug ampules with dirty syringes. 

Finding that the underlying lawsuit allegations included both professional and non-professional negligence, the Texas Supreme Court focused on the exclusion’s “due to” language, which it determined to require a “direct type of causation” between the insured’s liability and manner in which the subject medical services were performed.   Thus, based on Utica’s supposed concession that the association’s alleged negligence in failing to properly secure the subject narcotics was a general rather than a professional duty of care, coverage for same was found to have existed for purposes of Utica’s defense obligations in the suit.

Texas Federal District Court

Hamm v. Allstate Insurance Co., 286 F.Supp.2d 790 (N.D. Tex. September 17, 2003).

Pollution exclusion in commercial general liability policy applies to claims involving non-environmental pollution.

Insured building owners sought coverage after tenants sued for physical injuries attributable to exposure in the office to fumes from the chemical toluene, which had been used in a bathroom remodel.   Allstate denied coverage based on its policies’ pollution exclusions.  Hamm argued that the pollution exclusion was inapplicable because most people would not consider the chemical fumes in question to be pollutants.  Rather, Hamm took the position that the term pollutants should be interpreted to encompass only environmental type pollutants.  The court found for Allstate, holding that chemical fumes were unquestionably pollutants given the unambiguous definition of the term in the relevant policies. 

Texas Court of Appeals

Westchester Fire Ins. Co. v. Admiral Ins. Co., 2003 W.L. 21475423 (Tex. App. ‑ Fort Worth June 26, 2003, no pet.).

Insurance coverage for punitive damages is not necessarily void as against public policy.

Insurer sought a declaration that its policy did not cover a punitive damage award against its insured, a for-profit nursing home.   The nursing home had been found negligent and grossly negligent in the care of a patient, resulting in a large damage award that was eventually settled.  The appellate court was asked to determine whether the trial court erred when it held that any portion of the settlement attributable to punitive damages was not insurable as against public policy. 

The Westchester court noted that neither the Texas Legislature not the Supreme Court of Texas has addressed the general question of whether insurance coverage for punitive damages violates the public policy of Texas. The court further noted that recent changes to the insurance code make it clear that a for‑profit nursing home cannot obtain insurance coverage for punitive damage awards under a professional medical liability insurance policy unless the nursing home specifically obtains an endorsement providing such coverage.  But, because the policy and injury at issue in Westchester both predated those changes to the insurance code, the court found the code provision inapplicable.  As such, the court held that “on the specific facts of this case, insurance coverage for punitive damages under Admiral’s policy was not void as against public policy.”

Allstate Texas Lloyds v. Mason, 2003 W.L. 22805319 (Tex. App. – Fort Worth November 26, 2003, no pet.).

$3.5 million punitive damage award against insurer on bad faith claim was not supported by the evidence.

Homeowner sued insurer after insurer declined coverage for a foundation damage claim.   At trial, both parties presented expert testimony regarding causation.  The homeowner’s expert testified that the damage was caused by a plumbing leak while the insurer’s expert attributed the damage to soil movement.  The jury determined that the damage resulted from a covered plumbing leak and awarded $163,159.76 in contractual damages.  It further found that the insurer had denied the claim in bad faith and awarded $3.5 million in punitive damages.

The court of appeals held that the jury was free to believe the homeowner’s expert over the insurers expert and find for the homeowner on the contractual claims.   However, the court reversed the extra-contractual award on the basis that a disagreement among experts on causation alone does not support a bad faith finding.  Rather, the court held that an insurer can rely upon its expert’s report for a coverage denial as long as the report was objectively prepared and the insurer’s reliance thereon is reasonable.  Because there was evidence that the insurer’s expert conducted an adequate investigation, the court determined that the insurer was reasonable in relying on the report and, thus, did not act in bad faith when it denied the claim.

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