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Insurance Defense

Update on Recent Insurance Law

There have been a number of recent court decisions and at least one statutory enactment which are of significance to the practice of insurance law. These include cases dealing with policy appraisal clauses, arbitration agreements, duties of contractors, and healthcare claims, inter alia.

As always, each case involves different facts and law, and accordingly the following must be taken for general information purposes only, rather than for action upon any specific fact situation.

Statutory Tort Reform:  Broad “Loser Pays” proposal not adopted:
 Texas has just enacted, for cases filed on or after September 1, 2011, Revised Senate, House Bill 274, and despite consideration of a broad “loser pays” rule (which would have required a general requirement that losing litigants pay their opponent’s fees), such a rule was not adopted by Texas.  However, a new procedure for a motion to dismiss applicable to cases “that have no basis in law or fact” will be promulgated by our Supreme Court, and this new rule will provide for awarding of costs and attorney’s fees to the prevailing party. 

Appraisal Clauses in Insurance Policies:

 Insurance policy appraisal clauses were the subject of In re: Universal Underwriters of Texas Insurance Company, 10-0238 (Tex. 2011). The Texas Supreme Court held that to establish a waiver of one party’s rights under an appraisal clause, the opposing party must show that (1) an "impasse" was reached in settlement negotiations, and (2) that the failure to timely demand appraisal caused prejudice to the opposing party. The Supreme Court further stated that if a party senses that an impasse has been reached, that party should pursue appraisal before resorting to the courts.

Tort Duties of General Contractor to Motorist:

 In Allen Keller Company v. Foreman, 09-0955 (Tex. 2011), our Supreme Court dealt with whether a general contractor owed a duty to a motorist who was killed as a result of an allegedly dangerous condition created by the contractor's work on a Texas highway. The court held that since the general contractor was working under a contract that required strict adherence to the terms of the contract and since the contractor had no discretion to vary from the contract's terms, the contractor had no duty to rectify the dangerous condition. Moreover, since the premises were not under the general contractor's control at the time of the accident and since the condition was known by the property owner, the general contractor owed no duty to warn either the public or the property owner.

Arbitration under Texas General Arbitration Act:

 In NAFTA Traders, Inc., v. Quinn, 08-0613 (Tex. 2011), the Texas Supreme Court held that allowable arbitration practices under the Texas General Arbitration Act ("TAA") differ from arbitration under the Federal Arbitration Act ("FAA"), and that the parties to an arbitration agreement governed by the TAA may by contractual agreement supplement the provisions of the TAA to limit the authority of the arbitrator and to allow for expanded judicial review of an arbitration award by Texas Courts of Appeals for reversible error under state rules of law.  The Court held that the FAA does not pre-empt enforcement of such contractual agreements under the TAA, but cautioned that a reviewing appeals court must have a sufficient record of the arbitral proceedings, and that appellate complaints must have been preserved just as if the arbitration award were a trial court judgment on appeal.  Conversely, the Court ruled that arbitration parties cannot agree under the TAA to a different standard of judicial review than a Texas appellate court would employ in a judicial proceeding involving the same subject matter.

Healthcare Liability Claims – Slip and Fall:
 In Harris Methodist Fort Worth v. Ollie, 09-0025 (Tex. 2011), our Supreme Court addressed a claim arising from a patient's slip and fall on a wet bathroom floor in a hospital during the patient's post-operative confinement, and held that damages flowing from such a slip and fall constitutes a healthcare liability claim under the Texas Medical Liability Act which requires a plaintiff to serve an expert report in accordance with the Texas Medical Liability Act.  Since the plaintiff had not served an expert report, the Supreme Court held that the plaintiff's claim should be dismissed.
Healthcare Liability Claims – Brown Recluse Spider Bite:

 In Omaha Healthcare Center, LLC v. Johnson, 08-0231 (Tex. 2011), the Supreme Court dealt with injuries to a patient in a nursing home who was bitten by a poisonous brown recluse spider and died.  The court ruled that a failure of a nursing home to have an adequate pest control program is a safety issue directly related to healthcare.  Since the plaintiff was therefore required under the Texas Medical Liability Act to timely serve a statutory expert report, but did not do so, the Supreme Court held that plaintiff's decedent's claim for damages arising from death by spider bite must be dismissed.

Insurance Company – Premium Pricing Factors:
 In Ojo v. Farmers Group, Inc., 10-0245 (Tex. 2011), our Supreme Court held that Texas law prohibits insurance companies from using race-based credit scoring, per se, to price insurance policies and premiums, but Texas permits insurers to use race-neutral credit scoring even if such use has a racially disparate impact.
Products Liability – Manufacturing Defect – Expert Testimony:

 In Bic Pen Corporation v. Carter, 09-0039 (Tex. 2011), the Texas Supreme Court dealt with evidentiary issues arising from alleged manufacturing defects, and held that evidence which showed only (1) that a component of a product deviated from a manufacturing specification, (2) that an accident occurred, and (3) that the deficient part was involved in the accident, does not constitute sufficient evidence to support a causation finding.  Rather, expert testimony is generally required in a manufacturing defect case to prove that the specific manufacturing defect caused the accident. 

Admissible Evidence of Medical Expenses is Limited to Amount "Actually Paid or Incurred":
 In Haygood v. Escabedo, 09-0377 (Tex. 2011), our Supreme Court dealt with Texas Civil Prac. and Rem. Code, section 41.0105, which limits recovery of medical or healthcare expenses to the amount "actually paid or incurred by or on behalf of the claimant."  The Supreme Court made clear that (1) the undiscounted portion of medical bills which a medical healthcare provider has no right to collect from a plaintiff, because of law or contract, is not recoverable by the plaintiff from a third party defendant, and (2) that evidence of such full and undiscounted amount of medical expenses is irrelevant to a determination of a plaintiff's recoverable damages and is not admissible at trial.  In other words, only the "net" or discounted portion of medical charges which a healthcare provider is in fact entitled to collect (e.g., from Medicare or from an healthcare insurer) should be admitted before the jury in a third party liability trial.  The Supreme Court stated that "since a claimant is not entitled to recover medical charges that a provider is not entitled to be paid, evidence of such charges is irrelevant to the issue of damages."
Business Auto Policy – Coverage Arising from "Use" of Vehicle – Communicable Disease:
 In Lancer Insurance Company v. Garcia Holiday Tours, 10-0096 (Tex. 2011), the Supreme Court held that the transmission of a communicable disease, such as tuberculosis, by the driver of a tour bus to passengers on the bus, was not such a claim which "resulted from" the "use" of the bus, since the bus provided only the "situs" of the injury and was not a cause of the transmission of the disease.  In reaching its decision, the Supreme Court held that there is no appreciable – or legal – difference between policies which use "arising from" language and policies which use "resulting from" language, within the context of this case.  Hence, no coverage existed under the business auto policy for claims based upon negligent infection of passengers.

by:  H. Norman Kinzy

 

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Insurance Defense

NONSUBSCRIPTION IN TEXAS: A PROVEN ALTERNATIVE TO WORKER’S COMPENSATION

Texas is the only state that allows an option to not purchase workers’ compensation coverage, regardless of the number of employees, company size, or type of business. The right to opt out of the workers’ compensation system was included in the first Texas Workers’ Compensation laws written in 1913 and workers’ compensation is still “elective” in Texas today.

 Recent statistics show that approximately 35% of Texas employers are nonsubscribers. The first survey to estimate the percentage of nonsubscribers was conducted in 1983 and showed that 44% of all Texas employers were nonsubscribers and nonsubscribing employers employed 20% of the workforce. Since that time, the percentage of employers who have opted out of the Texas Workers’ Compensation system has declined, but the percentage of employees employed by nonsubscribers has increased. This is a result of larger employers (employers of 500 or more employees) choosing nonsubscription while smaller employers are not opting out of the workers’ compensation system.

 There are a variety of reasons why employers choose nonsubscription. The following is a non-exhaustive list of some of those reasons:

• High cost of workers’ compensation insurance premiums
• Rising medical costs
• Ability to more effectively manage employee injury claims
• Elimination of  fraudulent claims
• Fewer accidents due to an emphasis on safety
• Immediate notice of any on-the-job injuries.
• Requirement that employees arbitrate any dispute related to an on-the-job injury.

Nonsubscription, however, does present some unique legal challenges that are
different from those faced by employers who are subscribers. While companies that subscribe to workers’ compensation insurance can only be sued in limited circumstances, nonsubscribing employers can be sued for any employee injury. While an employee who files suit against a nonsubscriber must establish that the employer was negligent, the nonsubscribing employer does lose certain common law defenses including the negligence of a fellow employee, assumption of the risk, and the contributory negligence of the injured employee. A nonsubscribing employer may still defend on the basis that the employee was intoxicated; was the sole cause of his/her injuries; and that the injury occurred outside the course and/or scope of employment.

As nonsubscription has become more and more popular over the years, insurance companies have developed a broad range of products to insure the risks of nonsubscribers. Over the years, these products have become more comprehensive, offering benefits for medical expenses, disability compensation, and legal liability coverage. The majority of these programs also include binding arbitration agreements. It should also be noted that these plans must comply with the reporting, disclosure, and fiduciary requirements of ERISA.

by Kent D. Williamson and Mark T. Craig

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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