Insurance Defense

Recent Texas Supreme Court Insurance Decisions of Note

The Texas Supreme Court has just handed down several new rulings on Texas insurance law which are of interest to the

As always, each different 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.

Coverage cannot be created by waiver or estoppel but prejudice may create liability for the insurer to the insured:

In Ulico Casualty Co. v. Allied Pilots Association, 06-0247 (Tex., August 29, 2008), the Supreme Court dealt with the issue of whether coverage under a claims-made policy can be expanded by the doctrines of waiver and estoppel and in doing so, revisited Texas’ “Wilkinson Doctrine.” The Court adhered to earlier precedent that the doctrines of waiver and estoppel cannot be used to re-write a contract of insurance and provide coverage for risks not expressly assumed in the insurance contract. Accordingly, an insurer does not waive its coverage defenses merely by its assuming the insured’s defense without a reservation of rights.

However, the Court further stated that when an insurer takes control of its insured’s defense without a valid waiver of rights or non-waiver agreement, the insurer can be prevented from denying benefits that would have been payable had the claim been covered where the insured has been actually prejudiced by the insurer’s actions.

The Supreme Court stated that “in sum, if an insurer defends its insured when no coverage for the risk exists, the insurer’s policy is not expanded to cover the risk simply because the insurer assumes control of the lawsuit defense. But, if the insurer’s actions prejudice the insured, the lack of coverage [under the policy] does not preclude the insured from asserting an estoppel theory to recover any damages it sustains because of the insurer’s actions.” (bracketed material added).

Duty to Defend – Trigger for “Occurrence” of Property Damage Under CGL Policy:

In Don’s Building Supply, Inc. v. OneBeacon Insurance Co., 07-0639 (Tex. Aug. 29, 2008), the Supreme Court dealt with certified questions from the United States Court of Appeals for the Fifth Circuit asking: (1) When does property damage ‘occur’ under Texas law for purposes of an occurrencebased commercial general liability insurance policy? and (2) Is an insurer’s duty to defend triggered when damage is alleged to have occurred during the policy period, but was inherently undiscoverable until after the policy expired? The Supreme Court interpreted frequently-utilized CGL insurance provisions, stated that an insurer’s duty to defend is triggered under Texas law “when injury happens, not when someone happens upon it,” and held that “property damage under this policy occurred when the actual physical damage to the property occurred.”

Thus, the Court has now for the first time adopted an “actual injury” or “injury-infact” approach. Where a CGL policy makes no express provision for any particular kind of occurrence, other than to require the property damage to have occurred within the policy period, the “injury-infact” rule applies in Texas courts, rather than a “manifestation” rule, or an “exposure” rule, or a rule which looks “to the date of the alleged negligent conduct.”

The court noted the difficulties sometimes involved in “pinpointing the moment of injury retrospectively,” but declined “to exalt ease of proof or administrative convenience over faithfulness to the policy language.”

Finally, our Supreme Court stated that its ruling in this case is not an attempt to fashion a “universally applicable rule or determine when an insurer’s duty to defend a claim is triggered” since such determination should be driven by contract language, which may vary from policy to policy.

Duty to Defend – “Biological Damages” May Constitute “Bodily Injury” – Economic Damages Do Not Constitute Property Damage Under CGL Policy:

In Zurich American Ins. Co., et al. v. Nokia, Inc., No. 06-1030 (Tex., August 29, 2008), the Supreme Court dealt with whether claims against a wireless telephone manufacturer seeking alleged damages for “biological injury” constituted “bodily injury,” so as to require a duty to defend the manufacturer. Although the class action cases at bar generally alleged that cell phone radiation causes “biological injury,” they sought primarily to require the manufacturer to pay economic compensation “for the cost of head sets.”

The Court discussed its prior rulings that the term ‘bodily injury’. . . unambiguously requires an injury to the physical structure of the human body,” noted that injury at the cellular level was sufficient to constitute “bodily injury,” and held that an allegation of “biological injury” fell within those definitions and rulings. The Court further held that where the pleadings under examination alleged that damages were being sought “because of” the alleged bodily or biological injury, the duty to defend was triggered.

However, where one class action unambiguously sought only damages unrelated to personal injury damages, the Supreme Court held that no duty to defend existed since “the policies exclude coverage for these claims because the only damages sought are economic ones relating to the allegedly defective product.” In other words, the business risk exclusions of the CGL policies at issue, though inapplicable personal injury claims, did eliminate coverage for economic loss claims and, accordingly, there was no duty to defend those cases.”

By H. Norman Kinzy

Firm News

Texas Monthly selects Allen Smith as a 2008 Texas Super Lawyer

For the second straight year, Allen Smith was selected by the publishers of Texas Monthly magazine as one of its Super Lawyers. The selection process began many months ago, when over 60,000 Texas lawyers were invited to participate in the nomination process. Lawyers were asked to nominate the best attorney they’ve personally observed in action.

Once all of the nominations were in, a specialized research department examined the background and experience of the candidates, evaluating indicators of peer recognition and professional achievement. Allen’s name can be found on pages 66 and 106 of the 2008 Texas Super Lawyers magazine, and on page 66 of the Texas Super Lawyer supplement to the October issue of Texas Monthly magazine, which have recently hit the newsstands. Allen Smith is a shareholder at SettlePou and Chair of its Commercial Litigation practice group. He has been practicing law for 24 years, and has been Board Certified in Commercial Trial Law by the Texas Board of Legal Specialization for over 16 of those years.

Commercial Litigation

The “Alternative” to the Courthouse

Over the past 20 years, the number of civil lawsuits filed in Texas district and county courts has increased by 31%, including an almost 4% average increase per year since 1999. While the number of lawsuits filed is steadily rising, the number of civil cases that go to trial is steadily decreasing. The United States Department of Justice found a 47% decrease in the number of civil trials in the nation’s 75 largest counties from 1992 to 2001.

So how can the number of lawsuits continue to increase while the number of trials continues to decrease? The main reason is settlement, as between 88 and 90% of all cases settle before going to trial. And cases most often settle through alternative dispute resolution (“ADR”). In fact, approximately threequarters of cases that go through ADR are resolved.

It is all but guaranteed that a party to litigation will have to participate in ADR. The State of Texas law strongly advocates the use of ADR, and the Texas Legislature passed the ADR Act in 1987 to carry out that policy. The ADR Act sets out procedures to facilitate non-adversarial negotiation, such as ensuring that the process is confidential, and encourages all Texas courts to refer matters to ADR. For example, the Travis County District Courts automatically refer all cases to pre-trial mediation. This is the predomipredominent policy in many Texas courts. For instance, Bexar County District Courts presume that all cases should be ordered to mediation and require that parties participate in an ADR hearing four months before trial.

Mediation is a confidential process during which a mediator facilitates settlement negotiations and discussions between the parties. The mediator is an impartial party that is typically an attorney who has completed required training for the mediation process. The mediation often starts with an opening caucus or joint session when the parties, their attorneys, and the mediator meet in the same room to discuss the case and their respective positions. The parties then split into separate rooms, and the mediator spends the rest of the time going back and forth to listen to the parties, clarify issues, and facilitate settlement negotiation. Mediations usually last a half day or a full day. If an agreement is reached at the end and reduced to writing signed by the parties, it is usually an enforceable contract. If an agreement is not reached, the parties may decide to continue settlement discussions, with or without the mediator, or the parties will proceed with litigating their cases at the courthouse.

The advantages of mediation are that it is flexible, voluntary, more economical, fast, and confidential. Allen Smith, the Chairman of our Commercial Litigation Section, describes mediation as an opportunity that allows his clients to “control their world” versus litigation where so many variables are left in the hands of opposing counsel and the court and out of the client’s control. Smith is an advocate of consideration of mediation prior to any lawsuit to address disputes efficiently and economically in a strategy that he calls as he calls “Litigation Mitigation”.

A soon to be published study in the Journal of Empirical Legal Studies concludes that settling can frequently be more beneficial than going to trial. “In just 15 percent of cases, both sides were right to go to trial – meaning that the defendant paid less than the plaintiff had wanted or that the plaintiff got more than the defendant had offered.” Given this finding and the very high likelihood that a court will order a case to mediation, it behooves all businesses to be familiar with the ADR process.

By J. Allen Smith and Daniel P. Tobin