Insurance Defense

Recent Texas Supreme Court Insurance Decisions of Note

Over the past several months, the Texas Supreme Court has been quite active in the tort and insurance fields, handing down several important decisions which are hereinafter detailed.

As always, each case involves different facts, which may be case determinative. Accordingly, the following summaries of cases are law only as to that case, and further review and analysis of the facts and law of other cases must be conducted before relying upon the rules set out hereinafter.

Insurability of Exemplary Damages:

In Fairfield Insurance Company v. Stephens Martin Paving, LP, 04-0728, (Tex. 2008), the Texas Supreme Court held that Texas public policy does not prohibit the insuring of, and coverage for, exemplary damages under the specific type of workers' compensation and employer's liability insurance policy which was at issue in that case. In an opinion narrowly limited to the facts of that case; i.e., (1) where a corporation is held liable for conduct of its "viceprincipals," (2) where the conduct was done without the participation or knowledge of the officers or shareholders of the corporation, (3) where the insurance contract covered "all sums" and was an arms-length transaction between the insurance company and the corporation, and (4) where the policy distinguished between conduct done by employees and conduct done by the corporate entity, its shareholders and its officers, the Supreme Court held that allowing insurance coverage for exemplary damages under such limited circumstances did not violate the public policy of Texas regarding to the imposition of exemplary damages as punishment for a wrongdoer.

In partial support of its ruling, the Texas Supreme Court noted that the legislature was aware that commercial general liability insurers were also providing insurance coverage for exemplary damages and were making payments for coverage of exemplary damages, and that the legislature had not seen fit to prohibit payments by such insurers for punitive damages, thereby giving a glimpse into what the Texas Supreme Court might ultimately hold if this issue were presented as to CGL policies. Nevertheless, in Texas, the issue of insurability of punitive damages remains an open question as to other forms of insurance policies to be analyzed in light of the aforesaid criteria and applicable Texas statutes setting forth public policy.

Insurer's Right to Reimbursement From Insured – New Opinion Upon Rehearing:

In Excess Underwriters at Lloyd's, London v. Frank's Casing Crew & Rental Tools, Inc., 02-0730 (Tex. 2008), a case involving excess insurance coverage, the Texas Supreme Court withdrew its prior opinion issued May 27, 2005, and adhered to its earlier decision in Tex. Ass'n of Counties County Gov't Risk Mgmt. Pool v. Matagorda County on the issue of an insurer's right to reimbursement from an insured. Accordingly, in Texas, even in excess coverage cases where the excess carrier has no duty to defend, an insurer that settles a claim against its insured when coverage is disputed may only seek a reimbursement from the insured (should coverage later be determined not to exist) if the insurer "obtains the insured's clear and unequivocal consent to the settlement and the insurer's right to seek reimbursement." In so holding, the Texas Supreme Court refused to imply a reimbursement obligation on the part of the insured with respect to excess insurors, absent the insured's clear and unequivocal consent to both the settlement and the insurer's right to seek reimbursement.

Lack of Duty of Insuror to Notify an Additional Insured of Available Liability Coverage:

In National Union Fire Insurance Co. of Pittsburgh, PA v. Crocker, 06-0868 (Tex. 2008), the plaintiff sued a nursing home and its employee for damages. Although the insurer defended the nursing home, it did not inform the employee that he was an insured, nor did the insuror offer a defense, and the employee though served, neither forwarded suit papers to the insuror, nor requested a defense from either the insuror or his employer.

The Supreme Court held that, upon the facts presented, insurers owe "no duty to provide an unsought, uninvited, unrequested, unsolicited defense," and declined to impose an extra-contractual duty on liability insurors that would force them to keep track of potential litigants who may or may not be additional insureds, may or may not be entitled to coverage, and may or may not expect a defense to a claim. Thus, insurors need not provide coverage to additional insureds who never seek it, and an insurer has no duty to either inform an additional insured of available coverage or to voluntarily undertake a defense for the additional insured. Moreover, the insurer's actual knowledge of such a situation does not establish a lack of prejudice as a matter of law, where the additional insured provides late notice of a claim for coverage. Put simply, there is no duty to provide a defense absent a request for coverage, despite the fact that the insuror knows of the suit against the additional insured and the additional insured is ignorant
of the terms of the insuror's policy which would otherwise provide coverage for the additional insured.

Insuror's Use Of Staff Attorneys:

In Unauthorized Practice Of Law Committee v. American Home Assurance Company, Inc., et al., 04-0138 (Tex. 2008), the Supreme Court held that "an insuror may use staff attorneys to defend a claim against an insured if the insuror's interests are congruent, but not otherwise," and stated that "their interests are congruent when they are aligned in defeating the claim and there is no conflict of interest between the insuror and the insured.” In the course of the opinion, the Supreme Court noted that where insuror acquires confidential information that it cannot be permitted to use against its insured, or where an insuror attempts to compromise a staff attorney's independent, professional judgment, or in some other way the interests of the insuror and the insured diverge, then staff attorneys may not be used to defend the claim. Where staff attorneys are proper, however, their use does not constitute the unauthorized practice of law by an insuror.

Uninsured Motorist Coverage Does Not Extend To Damages Caused By Impact Of A Vehicle's Component Parts:

In Nationwide Insurance Company v. Elchehemi, 06-0106 (Tex. 2008), the Supreme Court held that where an axle-wheel assembly separated from an unidentified semitrailer truck and crashed into the insured's automobile causing damage, there was no coverage under the insured's uninsured motorist coverage for the reason that a vehicle's separated component, such as an axle-wheel assembly, does not constitute a "motor vehicle" under the Texas uninsured motorist statute, and thus does not constitute the "actual physical contact" with a motor vehicle required by the statute for coverage to exist.

Product Liability – Duty of Manufacturer to Defend or Indemnify Innocent Sellers:

In Owens & Minor, Inc. v. Ansell Health Products, Inc., 06-0322 (Tex. 2008), the Supreme Court concluded that a manufacturer that offers to defend or indemnify a distributor for claims relating to a sale or alleged sale of that specific manufacturer's product fulfills its obligation under Texas' product liability statute. In other words, an indemnifying manufacturer must hold harmless an innocent seller "only for the portion of the defense associated with that manufacturer's own products."

Product Liability – Federal Preemption of Design Defect Claims:

In Bic Pen Corporation v. Carter, 05-0835 (Tex. 2008), the Supreme Court held that Texas statutory and common law was preempted by Federal design regulations relating to cigarette lighters and that where a product design was approved by the Federal Consumer Product Safety Commission, a plaintiff's design defect claim must be dismissed. However, the Court remanded the case for consideration of whether "a manufacturing defect" existed, since such manufacturing defects are not preempted by Federal design regulations.

Products Liability – Auctioneers:

In New Texas Auto Auction Services, L.P. v Gomez, 06-0550 (Tex. 2008), the Supreme Court held that product liability law requires only those who place products in the stream of commerce to stand behind them; it does not require everyone who facilitates the stream of commerce to do the same. Accordingly, auctioneers who usually are neither buyers nor sellers, but agents for both, are not liable in strict liability, despite the fact that they are engaged in sales.

Texas Dram Shop Act:

In 20801, Inc. v. Parker, 06-0574 (Tex. 2008), the Supreme Court dealt with the "safe harbor" provisions of the Texas Dram Shop Act which provide that employers are not liable for the acts of their employees in selling alcoholic beverages to intoxicated persons, provided that: (1) the employer requires its employee to attend certain training classes, (2) the employee actually attended those classes, and (3) the employer did not "directly or indirectly encourage" the employee to violate the law. In regard to the third requirement, the Supreme Court held that a plaintiff has the burden of proof to establish "direct or indirect encouragement" and that the plaintiff's burden in that respect may be satisfied, at the minimum, by evidence of negligence on the part of the provider. The Court further held that a provider/ employer would be liable for the acts, including the negligence of the provider/ employer's vice principals and managers."

By H. Norman Kinzy

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