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

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