Texas Insurance Law Newsbrief - January 13, 2025
TEXAS SUPREME COURT FINDS FOLLOW-FORM EXCESS POLICY LEGAL DEFENSE COST ANALYSIS STARTS WITH THE EXCESS POLICY DOCUMENT AND NOT THE UNDERLYING POLICY
In Ohio Cas. Ins. Co. v. Patterson-Uti Energy, Inc. Marsh USA, Inc., No. 23-0006, 2024 Tex. LEXIS 1123* (Tex. 2024), the Texas Supreme Court reversed the Court of Appeals for the Fourteenth District of Texas in an excess insurance coverage dispute which ultimately favored the insurer such that insurer was not obligated to pay the insured’s defense expenses.
The excess policy was a “follow-form”[1] contract and the Texas Supreme Court held that it is the excess policy that governs a dispute about excess coverage, not the underlying policy.
The Texas Supreme Court criticized the Fourteenth Court of Appeals for inverting the process by examining the underlying policy first to determine coverage leading to the wrong result.
The dispute was between Patterson and Ohio Casualty Insurance Company. Patterson bought insurance to protect against costs arising from incidents that may occur during drilling operations on rigs. The “underlying policy” was from Liberty Mutual Insurance Europe, Ltd. The underlying policy provided coverage for defense expenses. There were several layers of excess policies, including the one at issue here from Ohio Casualty. A drilling-rig incident led to multiple lawsuits and multiple settlements. Once various layers of insurance were exhausted to fund the settlements, the Ohio Casualty policy was reached. While Ohio Casualty funded some amounts of the settlements, it would not indemnify Patterson for defense expenses leading to this lawsuit. The trial court sided with Patterson and determined that defense expenses were covered under the Ohio Casualty policy because the primary policy did not clearly and unambiguously exclude coverage for defense costs. Ohio Casualty appealed and the court of appeals affirmed the lower court in Patterson’s favor reasoning that since the underlying policy covered defense expenses and because Ohio Casualty’s policy was a follow-form policy, then the excess policy necessarily covered those expenses. The Texas Supreme Court disagreed and reversed.
The Texas Supreme Court began its analysis by referring to a 1886 opinion:
As early as 1886, this Court recognized the “cardinal principle of … insurance law” that [t]he policy is the contract; and if outside papers are to be imported into it, this must be done in so clear a manner as to leave no doubt of the intention of the parties.”
2024 Tex. LEXIS 1123 at 4 quoting ExxonMobil Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 672 S.W.3d 415, 418 (Tex. 2023) (quoting Goddard v. E. Tex. Fire Ins. Co., 1 S.W. 906, 907 (Tex. 1886)). The Court had also “applied this principle in the context of follow-form excess-insurance policies.” Id. citing RSUI Indem. Co. v. Lynd Co., 466 S.W.3d 113, 118 Tex. 2015). The Texas Supreme Court went on to say that such follow-form policies only “to some degree incorporate the provisions of the underlying policy,” which “is determined by the excess policy’s text.” Id. at 5.
The Ohio Casualty excess policy stated:
“We will pay on behalf of [Patterson] the amount of “loss” covered by this insurance in excess of the “Underlying Limits of Insurance”…Except for the terms, conditions, definitions and exclusions of this policy, the coverage provided by this policy will follow the [underlying policy].
Id. at 6.
The Texas Supreme Court next looked at whether the defense expenses constituted a “loss” for coverage purposes and looked at how loss was defined. The only way Patterson’s legal expenses should be covered is if those expenses count as a “loss” as defined in the excess policy. The excess policy defined “loss” as:
“those sums actually paid in the settlement or satisfaction of a claim which [Patterson is] legally obligated to pay as damages after making proper deductions for all recoveries and salvage.” Id. at 6
Ohio Casualty agreed that settlement amounts were “damages” under the policy and covered but Ohio Casualty argued that Patterson’s legal expenses were not a “loss” because they did not constitute “damages.” The Texas Supreme Court agreed with this argument stating that a party’s own attorney’s fees “are not, and have never been, damages.” In reCorral-Lerma, 451 S.W.3d 385, 387 (Tex. 2014). The parties could have agreed to define “damages” in the contract to include legal expenses as a “loss” but did not in this instance. The Texas Supreme Court pointed out that the excess policy “does not provide any such special definition [of damages] – it does not even define ‘damages’ at all. Accordingly, Patterson could not satisfy its burden to establish coverage.” 2024 Tex. LEXIS 1123 at 8. The Texas Supreme Court reasoned that the “context surrounding the excess policy’s use of ‘damages’ suggests the usual definition – not an expanded one that includes defense expenses-because party paying its own defense expenses would not do so ‘in the settlement or satisfaction of a claim.’” Id. at 8. In other words, attorney’s fees are not damages and thus not a “loss.”
According to Patterson, “the excess policy is bound by the underlying policy’s coverage choice unless the excess policy repudiates that choice rather than simply providing a different kind of coverage. This argument’s essence amounts to the approach we emphatically reject: starting with the underlying rather than the excess policy.” Id. at 10.
The flaw in the court of appeals decision and the trial court decision was that they started from the ground up by looking at the underlying policy and then the excess policy. The Texas Supreme Court said that was the wrong order. Another take-away from this opinion is that Patterson’s defense expenses would have been covered if the excess policy gave “loss” a special meaning (not its usually meaning) by defining “damages” in the contract to include legal expenses. Patterson’s excess policy language simply did not do that, and in reality, it did not follow form.
[1] A “follow-form” contract is one that can be shorter and simpler than the underlying policy because it envelops many of the underlying policy’s terms.
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INSURED MUST RESIDE IN PREMISES TO MEET RESIDENCE REQUIREMENT IN HOMEOWNERS’ POLICY
The U.S. District Court of Appeals for the Fifth Circuit recently affirmed a district court’s dismissal of an insured’s breach of contract claim against his insurer.
In Villalobos v. Clear Blue Ins. Co., No. 24-20125, 2024 U.S. App. LEXIS 31307 (5th Cir. 2024), the insured, Villalobos, made a claim under a homeowner’s policy issued by Clear Blue Insurance Company (“Clear Blue”) for wind and hail damage to his property. Clear Blue denied coverage after Villalobos admitted that he lived in Colorado and had never resided at the insured property. Villalobos then sued Clear Blue, alleging breach of contract, breach of the duty of good faith and fair dealing, violations of the Texas Deceptive Trade Practices Act and the Texas Insurance Code, fraud, and ongoing conspiracy to commit illegal acts. Clear Blue moved for summary judgment, and was granted such relief, based on the argument that there was no coverage for the property damage because the “resident premises” requirement under the policy was not satisfied since Villalobos did not reside on the property. Villalobos appealed the dismissal of his breach of contract claim only.
The U.S. District Court of Appeals for the Fifth Circuit looked to our sister state, Louisiana, which has previously determined that an identical residence requirement in a homeowner’s policy required “more than purchasing a home or intending to move into it.” The Court here found that Villalobos did not offer a compelling reason why Louisiana’s interpretation should not apply. As such, applying Louisiana law, the Court agreed with the district court’s finding that the insured property did not satisfy the policy’s residence requirement because it was not a covered “residence premises” since Villalobos did not reside on the property at the inception of the policy, and his only argument was that he intended to move onto the property. As such, the Court found that there was no coverage under the policy and Villalobos’ breach of contract claim failed.
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ADJUSTER LIABILITY ANALYZED BY THE U.S. DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS
The U.S. District Court for the Northern District of Texas recently ruled on insurance adjusters’ liability under the Texas Insurance Code.
In TNT Gaming Ctr. LLC v. Am. Specialty Ins., Civil Action No. 3:24-CV-1995-K, 2024 U.S. Dist. LEXIS 222882 (N.D. Tex. 2024), the insureds filed claims with their insurers, St. Paul Fire and Marine Insurance Company (“St. Paul”) and Arch Specialty Insurance Company (“Arch”) for fire losses. St. Paul and Arch both assigned adjusters to adjust and investigate the claims. The insureds then filed suit against St. Paul and its adjusters, Arch and its adjusters, and a third-party administrator for Arch. The insureds alleged vicarious liability and agency, breach of contract, violations of the Texas Insurance Code and violations of the Deceptive Trade Practices Act. The defendants removed the case to federal court, and alleged that certain adjusters were improperly joined to defeat diversity jurisdiction.
The Court’s analysis focused on whether the insureds failed to state a claim against the adjusters. The Court found that although the Texas Insurance Code authorizes actions against insurance adjusters in their individual capacity, the individual adjuster must have committed some act that is prohibited by the Texas Insurance Code § 541, “not just be connected to an insurance company’s denial of coverage.” Here, the insureds failed to allege facts specifically attributable to the St. Paul adjuster and distinct from the insurers. The Court further found that Plaintiffs failed to allege facts specific to the Arch adjusters to support any cause of action under the Texas Insurance Code. Additionally, the Court found that the insureds’ claims under the DTPA failed because they were derivative of their Texas Insurance Code claims, which did not survive the Court’s analysis for improper joinder. The Court therefore dismissed the adjuster defendants and denied the insureds’ motion to remand.
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