Insurance Update

Over the past several months, the Texas Supreme Court has handed down several important decisions pertaining to the insurance industry.

Insurer Must Show Prejudice in Late Notice Cases: In PAJ, Inc. v. The Hanover Insurance Co., 05-0849 (Tex., Jan 11, 2008), the Supreme Court dealt with whether an insured’s failure to timely notify its insurer of a copyright infringement claim defeated coverage under a CGL policy providing coverage for “advertising injury.” The insured failed to notify the insurer until four to six months after litigation commenced. Noting that “an immaterial breach does not deprive the insurer of the benefit of the bargain and thus cannot relieve the insurer of the contractual coverage obligation,”the Court held that an insured’s failure to timely notify the insurer of an alleged “occurrence” or “offense” as soon as practicable” as required by the Policy did not defeat coverage in the absence of prejudice to the insurer. Thus, the Supreme Court has arguably overruled, in broad fashion, long standing precedent in Texas, and held that insurance policies which are subject to Texas law require prejudice to the insurer before the insured’s breach of policy terms and/or conditions will preclude coverage.

Insurer’s Subrogation Rights and the “Made Whole” Doctrine: In Fortis Benefits v. Cantu, 05-0791 (Tex. 2007), a case involving subrogation to recover medical benefits paid by an insurer, our Supreme Court discussed the “made whole” doctrine which is an equitable rule that an insurer is not entitled to subrogation unless the insured had been “made whole,” and held that the “made whole” doctrine does not prevail over an insurer’s contract-based right of  subrogation. The Court noted that there are three varieties of subrogation – equitable, contractual, and statutory – and held that, while related, these three theories are independent of each other, and not co-equal. The legal maxim that “equity follows the law” requires equitable doctrines to conform to contractual choices and statutory mandates, and not the other way around.

Where a valid contract prescribes particular remedies or imposes particular obligations, equity generally must yield unless the contract violates positive law or offends public policy. Neither subrogation nor reimbursement clauses violate Texas public policy, e.g., the Texas workers compensation statute specifically embraces an insurer’s firstmoney right of subrogation. Thus, replacing equitable protections with specific contract language is proper in Texas law, and parties are free to contractually negate the “made whole” doctrine and to do so before an event occurs that triggers medical benefits under a policy of insurance.

Third Party Administrators – Fiduciary Duties or Lack Thereof: In National Plan Administrators, Inc. v. National Health Insurance Company, 05-0006, (Tex. 2007), the Texas Supreme Court discussed the relationship between a third party administrator (“TPA”) and an insurer with whom the TPA had a contract to administer cancer insurance policies, and held that the Texas Insurance Code does not impose a general fiduciary duty upon insurance agents or upon third party administrators. Rather, the duty of an agent such as a third party administrator must be analyzed in conjunction with various factors to determine not only the scope of the TPA’s duties in general, but also as to the TPA’s fiduciary duties, if any, and such duties are defined by not only the nature and purpose of the agency relationship, but also by the contractual agreements in effect between the TPA and its principal insurer. Although some tasks, such as the holding of funds on behalf of insurance companies, are normally looked upon as a fiduciary relationship, other duties are not. In this particular case, where the TPA represented other insurers and its contract with the insurer specified that the TPA was to be an “independent contractor” whose activities in administering and marketing insurance products were not exclusive to the principal in question, the Court held that the TPA did not owe a fiduciary duty to the particular insurer.

Medical malpractice – Two year statute of limitations: In Yancy v. United Surgical Partners Internat’l, et al., 05-0925 (Tex. 2007), the Texas Supreme Court held that an adult incapacitated plaintiff who was represented by a guardian who timely filed suit against some defendants but not others, was barred from suing additional defendants by the absolute two year statute of limitations applicable to medical malpractice cases. The court left the door open for other cases involving other incapacitated plaintiffs under other circumstances, where the same result might not occur.

Co-Insurance Clauses – No Rights of Contribution Between Co-Insurers: In Mid-Continent Ins. Co. v. Liberty Mutual Ins. Co., 05-0261 (Tex. 2007), the Supreme Court dealt with two insurers which provided primary liability insurance coverage to the same insured under two CGL policies containing “other insurance” clauses providing for equal or “prorata” sharing between coinsurers. One of the two insurers also provided excess insurance through a separate excess policy. The claims of the injured plaintiffs against the common insured were settled by unequal payments from the two co- insurers. The co-insurer which paid the most (probably because of greater coverage at risk under its primary and excess policies), then sought contribution from the under-paying co-insurer which had issued only a primary policy, but which had refused to pay a full pro-rata share of the settlement.

The Supreme Court held that under these circumstances, the over-paying insurer was not entitled to recover from the under-paying co-insurer, because there was no actionable duty owed (either directly or by way of subrogation to the insured’s rights) by the underpaying insurer to the overpaying insurer which would require reimbursement of the latter by the former. The Court reaffirmed its earlier decision that there was no direct right of contribution available to the over-paying co-insurer because of the existence of the “pro-rata” clauses in the CGL policies. The Supreme Court then held that there was no right of subrogation available to the over-paying insurer because subrogation requires an insurer to stand in the shoes of the insured, and the joint settlement had made the insured whole. Therefore, the  insured had no claim remaining against the under-paying insurer, to which the over-paying insurer could be subrogated. Finally, the Supreme Court declined to expand the Texas Stowers doctrine to create a common law “duty to act reasonably when handling an insured’s defense – including reasonable negotiation and participation in settlement” which an over-paying insurer could utilize against a co-insurer which paid less than a pro-rata share.

By H. Norman Kinzy

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