Insurance Defense

Recent Insurance Decisions of Note

Over the past several months, there have been several decisions which are potentially significant to the practice of insurance law. These decisions involve arbitration, medical malpractice, notice provisions of “claims made” insurance policies, and federal preemption.

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.

No Independent Appeal Available From Arbitration Award Despite Arbitrators’ Manifest Disregard Of  The Law:

In Citigroup Global Markets, Inc. v. Bacon, 07-20670 (5th Cir., March 18, 2009), the United States Fifth Circuit Court of Appeals reviewed the recent United States Supreme Court decision in Hall Street Associates, L.L.C. v Mattel Inc., 128 S. Ct. 1396, 1403 (2008) and ruled that within the Fifth Circuit (which includes Texas Federal Courts), “manifest disregard of the law” by arbitrators in reaching an arbitration award is no longer an independent non-statutory ground for vacating such an award under the Federal Arbitration Act (“FAA”). Although the 5th Circuit left open a narrow possibility that legal errors by arbitrators might be the subject of appeal if they can be framed so as to come within the statutory grounds for appeal under § 10 of the FAA, such is not a foregone conclusion.

This decision will likely be followed by a decision from our Texas Supreme Court which has just agreed to hear an appeal in Quinn v. Nafta Traders, Inc., 257 S.W. 3rd 795 (Tex. App., Dallas 2008) wherein Dallas Court of Appeals ruled that parties may not contractually expand the scope of judicial review of an arbitrator’s decision to include grounds for reversal which are not expressly identified in the Texas General Arbitration Act.

Thus, it is becoming ever more apparent that if one wishes one’s claims to be determined with regard to the predictability flowing from the rule of law, and to have a real and effective right of appeal from an adverse result, then arbitration should be avoided.

Medical Malpractice- Exception:

In Phillips v. Bramlett, Cause No. 07-0522 (Texas March 9, 2009), the Supreme Court dealt with the interplay between the statutory liability cap upon damages in Texas Medical Liability and Insurance Improvement Act as it ex isted prior to September 1, 2003, and the statutory “Stowers exception” contained in the same Act, which provided in part that “This section shall not limit the liability of any insurer….” The court concluded that the Stowers exception of Article 4590i Section 11.02 (c) expressly applied to insurers only and did not waive the liability cap of section 11.02 (a) generally. This means that when insurance coverage is below the statutory damages cap, the “Stowers exception” claim may be shared by the insured physician and the injured party because each will potentially have excess claims when the damage finding exceeds the statutory damage cap. Conversely, when insurance coverage is above the statutory damages cap, the physician is fully protected, and only the injured third party need pursue the statutory “Stowers exception.”

The effect of this decision to other pending and future cases should be fairly limited since Section 74.303(d) of our medical liability statute was amended in Texas’ Tort Reform Act, effective September 1, 2003, to provide that “the liability of any insurer under the common law theory of recovery commonly known in Texas as the ‘Stowers Doctrine’ shall not exceed the liability of the insured.” Thus, the language of the current statute now limits the liability of an insurer to “the liability of the insured,” which arguably limits the liability of an insurer to the amount of the statutory cap on damages in the current statute, which is in keeping with the tort reform purposes of the 2003 amendment. 56 Baylor Law Rev. 423, at p.457.

Notice Provisions-“Claims Made” Policies:

In Prodigy Communications Corporation v. Agricultural Excess and Surplus Insurance Company, 06-0598 (Texas, March 27, 2009), the Texas Supreme Court dealt with whether, under a claims-made policy, an insurer can deny coverage based on an insured’s failure to comply with policy provisions requiring that notice of a claim be given “as soon as practicable” when notice of the claim was provided before the reporting deadline specified in the policy and the insurer was not prejudiced by the delay. Involved was a ninety (90) day notice of claims “condition precedent” provision in a policy which had been extended by a contractual three (3) year discovery period.

The Texas Supreme Court held that in a claims-made policy, when an insured gives notice of a claim within the policy period or other specified reporting time period, the insurer must show that the insured’s non-compliance with the policy’s “as soon as practicable” notice provision prejudiced the insurer before it may deny coverage. The Texas Supreme Court also implied that if the insured  provides notice of claim outside the policy’s date-specific reporting period, that coverage will not be allowed.

In a companion case, Financial Industries Inc. v. XL Specialty Insurance Company, 07-1059 (Texas, 2009), the Supreme Court dealt with slightly different policy language but nonetheless held that the insurer must show prejudice before an insured’s violation of the “as soon as practicable” notice provision would allow an insurer to deny coverage.

Federal Preemption Limited:

In Wyeth v. Levine, 129 S. Ct. 1187 (U.S., March 4, 2009), the United States Supreme Court held that federal approval of labels giving warnings about the effects of drugs does not bar lawsuits under state tort law claiming inadequate warnings of health risks. While supposedly “narrowly drawn,” this decision nonetheless promises to encourage the filing of products liability lawsuits which have been discouraged or precluded by prior court decisions which have given significant preemptive effect to federal approval of various products. In Wyeth, the dissenting opinion heralded this likely effect when it stated that the majority opinion had turned a “common-law tort suit into a ‘frontal assault’ on the FDA’s regulatory regime for drug labeling….”

By H. Norman Kinzy

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

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