Fall 2005 Insurance Law Update

By Rebecca Raper

Texas Supreme Court
             Excess Underwriters at Lloyds v. Frank’s Casing Crew & Rental Tools, Inc., 2005 Tex. Lexis 418, 48 Tex. Sup. Ct. J. 735 (May 27, 2005).

             A carrier has a right to reimbursement of settlement dollars paid for uncovered claims in certain situations. 

            In Frank’s Casing Crew, the insured was sued after a drilling rig it built in the Gulf of Mexico for a client collapsed. The insured carried a $1 million primary policy and a $10 million excess policy.  Because the claim was in excess of the primary limits, the excess carrier was put on notice and began to participate in settlement negotiations.  In fact, the excess carrier eventually exercised its right to assume the defense.  Because the insured was concerned about an excess judgment, it approached the plaintiff shortly before trial and asked that a demand within policy limits be made.  Accordingly, plaintiff formally demanded $7.5 million and the insured insisted that the primary and excess carrier pay same.  The excess carrier offered to pay its portion of the demand ($7 million after the primary carrier’s contribution of its remaining available limits) if the insured would agree to settle the coverage issues at a later date.  The insured refused and reiterated its demand that the $7.5 million be paid.  

            The excess carrier eventually agreed to pay the settlement, but only did so after informing the insured that it intended to seek reimbursement of any sums found to be attributable to uncovered claims.  On the day it settled the lawsuit against the insured, the carrier filed a coverage suit for reimbursement.  The court in the coverage suit determined that none of the claims were covered.  However, based on a then-new Texas Supreme Court decision, Texas Association of Counties County Government Risk Management Pool v. Matagorda County,52 S.W.3d 128 (Tex. 2000), the trial court determined that because the insured had not agreed to allow the carrier to seek reimbursement, the carrier had no such right.  The appellate court affirmed the trial court’s take-nothing judgment.       

             To the surprise of many, the Texas Supreme Court reached the opposite conclusion, finding grounds on which to distinguishMatagorda County.  In the Frank’s Casing Crew decision, with three concurrences, Justice Owens held that a carrier has a right to be reimbursed if it has: (i) timely asserted its reservation of rights; (ii) notified the insured it intends to seek reimbursement; and, (iii) 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.

Fifth Circuit Court of Appeals

             Minter v. Great American Insurance Company, 2005 U.S. App. LEXIS 17116 (5^th Cir. August 26, 2005)

             An employee who caused an accident while driving a company vehicle while intoxicated was not necessarily outside the scope of permission. 

             The Minter court was asked to decide whether an intoxicated employee was an omnibus insured under the employer’s commercial auto policy.  The carrier argued that intoxication, as a matter of law, placed the employee outside the scope of any permission he may have had to drive the company vehicle.  The court disagreed, noting that a jury could decide, based on the course of conduct between the employee and employer, that there was some implied permission to drive while intoxicated. 

             Ridglea Estate Condominium Association v. Lexington Insurance Company, 2005 U.S. App. LEXIS 16724 (5^th Cir. August 10, 2005).

             A carrier must show prejudice before denying coverage for a first-party claim under a property policy.

             A condo association discovered roof damage in 2001 that experts later attributed to a severe hail storm in 1995.   The carrier on the risk in 1995 sought to avoid coverage by operation of the policy’s prompt notice of claim provision.   The court held that as a matter of law the notice was not prompt, but further held that failure to promptly notify was not fatal to the claim unless the carrier could show the delay caused prejudice.  The court noted that the Texas Supreme Court had not previously spoken on the issue but predicted that if faced with the question the Texas Supreme Court would require prejudice to support a coverage disclaimer. 

FEDERAL DISTRICT COURTS

             Crocker v. National Union Fire Insurance Company, 2005 U.S. Dist. LEXIS 9377 (W.D. Tex. May 12, 2005).

             Even where an insured fails to forward suit papers and request a defense, if the carrier has actual knowledge of the existence of a lawsuit for which there is coverage, the carrier cannot claim that it was prejudiced by the insured’s failure to cooperate and may have to indemnify any judgment entered in the lawsuit. 

             A nursing home and its employee were sued for covered injuries to a resident of the home.   The carrier defended the nursing home owner, but not the employee, who never requested a defense because he was not aware that he was an insured under the subject policy.   The carrier refused to indemnify a default judgment against the employee based on the failure to forward suit papers and failure to request a defense.  In the ensuing coverage action, the court held that the carrier’s actual notice of the suit undermined any prejudice argument the carrier might have had.  The carrier was found to be bound by the $1 million default judgment against the employee.

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