Insurance Defense

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

Insurance Defense

Insurance Update

The Texas Supreme Court has recently written on a number of significant issues of interest to the insurance industry, and
the following is a brief synopsis of several of those cases.

CGL Coverage For Construction Defects – Penalty For Wrongful Failure To Defend:

In Lamar Homes, Inc. v. Mid-Continent Casualty Company, Cause No. 05-0832 (Texas, Aug. 31, 2007), the Texas Supreme Court ruled that allegations of “unintended construction defects” may constitute an “accident” or “occurrence” under a CGL policy, and that allegations of damage solely to, or loss of use solely of, the home itself may also constitute “property damage” sufficient to trigger the duty to defend under a CGL policy.

The Supreme Court did not rule upon the duty to indemnify, as that duty is not triggered by allegations but rather by proof at trial.

The Court adhered to its earlier decisions that intentional torts are not accidents and are thus not “occurrences” within the scope of a CGL policy. Thus, with reference to a CGL policy, a claim does not involve an accident or occurrence “when either direct allegations purport that the insured intended the injury (which is presumed in cases of intentional tort) or circumstances confirm that the resulting damage was the natural and expected result of the insured’s actions; that is, was highly probable whether the insured was negligent or not.”

That said, and central to the Lamar Homes decision, the Supreme Court reiterated other of its prior holdings that “a deliberate act, performed negligently, is an accident if the effect is not the intended or expected result; that is, the result would have been different had the deliberate act been performed correctly,” and held that in such cases, a duty to defend may arise under a CGL policy.

Within the context of whether or not an “occurrence” had taken place, the Court refused to attach significance to the fact that a case may involve claims for (i) damage to the insured general contractor’s work or product, and/or (ii) faulty workmanship that damage a third party’s property, on the grounds that the CGL policy does not define “occurrence” in terms of the ownership or character of the property damaged by the act or event, but rather defines “occurrence” in terms of “accident” which under Texas law depends upon “whether the injury was intended or fortuitous.” The Court noted that the determination of whether an insured’s faulty workmanship was intended or accidental is dependent upon the facts and circumstances of the particular case, whereas for the purposes of the “duty to defend,” those facts and circumstances must be gleaned from comparing the allegations of the plaintiff’s pleading with the actual policy language, under the “eightcorners” rule.

Turning to the exclusions of the CGL policy, the Court noted that in many cases, some acts of faulty workmanship will not fall within coverage, either because they are not an occurrence, or property damage, or because they are excluded from coverage by specific exclusions; e.g., faulty workmanship which is intentional from the insured’s standpoint, or which merely diminishes the value of the home without causing physical injury or loss of use does not involve “property damage.”

The Supreme Court dismissed the insuror’s argument that such an interpretation of a CGL policy would turn the CGL insurance into a performance bond, stating that any such similarities between CGL insurance and performance bonds are irrelevant since the CGL policy “covers what it covers.”

With respect to the insuror’s contention that the “economic – loss rule” should be applied in the insurance coverage context, the Supreme Court noted that said doctrine was generally reserved to preclude recovery in tort for economic losses resulting from the failure of a party to perform under a contract, and stated that “the economic – loss rule, . . . is not a useful tool for determining insurance coverage . . . it is a liability defense or remedies doctrine, not a test for insurance coverage.”

The Court further noted that the “CGL policy makes no distinction between tort and contract damages. . . . Therefore, any preconceived notion that a CGL policy is only for tort liability must yield to the policy’s actual language.”

Finally, the Supreme Court held that an insured’s claim for a defense under a liability policy is a “first-party claim” under the Texas Prompt Payment Of Claims Act, since it seeks recovery for the insured’s own loss of cost of defense, and hence falls within the purview of the Statute, entitling the insured to recovery of 18% per annum interest plus reasonable attorneys fees in the event an insurer fails to provide a defense where a defense is required.

These holdings were given in response to certified questions from the United States Court of Appeals for the Fifth Circuit and, accordingly, both Texas State and Federal Courts should from this point forward be consistent on these issues. Questions remain, of course, as to what effect this decision will have upon future premiums for CGL coverage, and/or future changes to CGL exclusionary language.

•Hospital May Not Recover Discounted Portion Of Medical Expenses By Filing A Lien Against A Patient’s Tort Recovery:

In Daughters of Charity Health Services of Waco v. Linnstaedter, 50 TSCJ 819 (Texas, June 1, 2007), the Supreme Court faced the issue whether a hospital paid by a workers compensation carrier could recover the discount from its full charges by filing a lien against a patient’s tort recovery. The TEXAS LABOR CODE sets limits upon charges of hospitals that may be recovered from Workers Compensation insurors, and a hospital that treats workers compensation patients is bound by the LABOR CODE’S provisions. Noting that hospitals cannot sue such patients for the discount, the Supreme Court held that the hospital could not accomplish indirectly (by filing a lien) what it could not do directly (by filing suit). The Supreme Court addressed the hospital’s argument that the injured worker had sought recovery of full medical charges billed by the hospital from a third party tortfeasor, but nevertheless held the hospital not entitled to recover. In so holding, the Supreme Court stated that “we agree that a recovery of medical expenses in that amount would be a windfall; as the hospital had no claim for these amounts against the patients, they in turn had no claim for them against Jones [the third party tortfeasor].”

Further analysis of this case supports the contention that the Supreme Court has for the first time expressed an opinion on the interpretation of TEX. CIV. PRAC. & REM. CODE, § 41.0105. This is of particular significance in many other personal injury cases and not just those arising under the Workers Compensation Statute, because this Statute effectively limits a plaintiff’s right to recover past medical damages to the amount that was actually paid by a third party or insurer, and not the amount billed to the plaintiff by the medical provider in situations where the medical provider has, by law or contract, discounted the amount charged for medical services rendered.

•Resolution of Tort Actions Arising From Acts of Church Discipline:

In Westbrook v. Penley, 50 TSCJ 949 (Texas, June 29, 2007), the Supreme Court dealt with a tort action filed by a member of a church congregation against her pastor, who was also a licensed professional counselor, where no issues of health or safety were present, and dismissed the case for want of jurisdiction. The Court essentially held that the civil courts had no constitutionally appropriate role in resolving tort actions arising from acts of church discipline. The plaintiff had claimed that her pastor had learned of disclosed information in a secular counseling session, and then disclosed it to the congregation because of his role as pastor. The Supreme Court noted that in the pastor’s dual capacity of pastor and professional counselor, he had conflicting duties. As plaintiff’s counselor, he owed her a duty of confidentiality and as her pastor, he owed the church an obligation to disclose her conduct. However, the Supreme Court held that, where no issue of health or safety was involved, intervention by the civil
courts for determining civil liability would unconstitutionally entangle the court in matters of church governance and impinge on the core religious function of church discipline. Accordingly, the Supreme Court dismissed the plaintiff’s case for want of jurisdiction.

•Waiver of Sovereign Immunity As To Counterclaims:

The Texas Supreme Court continues to adhere to its recent opinion in Reata Construction Corp. v. City of Dallas, which holds that when a governmental entity brings an action against a defendant, the governmental entity waives immunity from suit for counterclaims that are “germane to, connected with, and properly defensive to its action, to the extent of an offset.” Texas v. Precision Solar Controls, Inc., 50 TSCJ 583 (Texas, April 16, 2007).

The State does retain immunity from suit, however, to the extent that a defendant’s counterclaim damages exceed the amounts offsetting the State’s monetary recovery. Texas v. Fidelity & Deposit Company of Maryland, 50 TSCJ 731 (Texas, May 4, 2007).

•Dram Shop not automatically responsible for all damages caused by an intoxicated patron:

In F.F.P. Operating Partners, L.P. v. Duenez, 50 TSCJ 764 (Texas, May 11, 2007), the Texas Supreme Court dealt with a case which involved an intoxicated motorist who had purchased beer from a defendant convenience store and was involved in a motor vehicle collision with a third party who sued the beer vendor. The Supreme Court discussed the history of the Texas Dram Shop Act, affirmed its prior decision in Smith v. Sewell, and held that the Dram Shop Act does not make a dram shop automatically, nor vicariously, responsible for all the damages caused by an intoxicated patron. Rather, pursuant to the Texas Proportionate Responsibility Act, a dram shop is only responsible for “its proportionate share of the damages as determined by a jury.” In that connection, the Texas Supreme Court envisions that an injured plaintiff’s suit would ask the jury to determine the proportionate
responsibility of not only the plaintiff, but also that of the dram shop and the intoxicated patron, and the Supreme Court noted that nothing in the Dram Shop Act prevents a provider of alcoholic beverages from lessening or escaping liability altogether if the jury determined that the intoxicated patron was completely responsible for the damages suffered by a third party. The Supreme Court
thus expressly confirmed that the Court’s earlier decision in Sewell was not limited to first party actions in which the intoxicated patron was suing the dram shop for the patron’s own injuries.

•Medical Malpractice – Failure of Patient To Give Accurate Medical History Constitutes Contributory Negligence:

In Jackson v. Axelrad, 50 TSCJ 628 (Texas, April 20, 2007), the Supreme Court dealt with an unusual malpractice case wherein the plaintiff was a psychiatrist, and the defendant was an internist. In holding that the plaintiff psychiatrist was precluded from recovery by his contributory negligence, the Court ruled that a patient’s failure to give an adequate medical history may constitute negligence. The Court further ruled the standard of care required in a case in which a defendant is a physician (and also required of the plaintiff where the plaintiff is a physician) is not a higher standard of care such as found in strict liability cases or common
carrier cases. Rather, it is the “ordinary-care standard, modified to instruct jurors that ‘under the same or simisimilar circumstances’ they must consider a physician’s training” as well, and that when a party is an expert, the negligence attributed to that party must be judged in light of a standard of care that takes into account that expert’s special skill and training, even though it is, in fact, simply a form of the normal standard of care of “reasonable prudence under the circumstances.”

•Medical Malpractice – Total Lack of Consent Is Not A Lack of Informed Consent:

In Schaub v. Sanchez, 50 TSCJ 919 (Texas, June 27, 2007), the Supreme Court dealt with our cause of action of “informed consent,” which is statutorily defined as a claim based upon a physician’s failure to “disclose or adequately disclose the risks and hazards involved in the medical care of surgical procedures.” The Court held that an action for “total lack of consent” such as where no information at all is given or where the plaintiff is treated while unconscious, is akin to a battery or negligence, and is not the same as the claim of lack of “informed consent.”

•Relevance Has Its Limits In Discovery:

The Supreme Court addressed unbridled discovery requests in the case of In Re All State County Mutual Insurance Company, 50 TSCJ 902 (Texas, June 15, 2007), and stated that “discovery is a tool to make the trial process more focused, not a weapon to make it more expensive.” The Court held that trial courts “must make an effort to impose reasonable discovery limits.” The Court addressed impermissibly overbroad discovery requests, as well as those which seek irrelevant information, and held that “overbroad requests for irrelevant information are improper, whether burdensome or not, and that defendants are not required to detail what such requests might encompass in order to prevail against them. Accordingly, the Supreme Court granted a writ of mandamus directing the trial court to vacate its discovery order.

By H. Norman Kinzy