When is "knowingly" bad conduct still an "occurrence"? Apparently, more frequent than you thought in Texas.

Posted on July 5, 2008 by Chris Martin

Last Monday, a three-judge panel of the Fifth Circuit considered one of the implications of the Texas Supreme Court’s landmark decision last year in Lamar Homes, Inc. v. Mid-Continent Cas. Co., 22 S.W.3d 1 (Tex. 2007), in its decision in National Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp. --- F.3d ----, 2008 WL 2487054 (5th Cir. 2008).  In doing so, the Fifth Circuit considered a deceptively simple question: could an insured’s "knowing" violation of the Texas Deceptive Trade Practices Act still be an “occurrence” under a commercial umbrella policy?  In this case, the panel considered National Union’s claim it had no duty to indemnify its insured after the jury in the underlying tort case awarded the claimant $36 million against the insured after having found a “knowing” violation of the Texas Deceptive Trade Practices Act.  In the subsequent coverage case, National Union argued the insured’s actions, which the jury in the underlying suit found to be “knowing,” could not be an “occurrence” under the general liability policy because it could not constitute an “accident.”  Relying on Lamar Homes, the Fifth Circuit stated the “knowing” finding by the jury in the underlying lawsuit did not control the coverage issue because “knowing” in the context of the DTPA only meant “deliberate.”  And, as applied to the case at bar, the Fifth Circuit interpreted the Texas Supreme Court's recent holding Lamar Homes as holding that a “deliberate” act could still be an “occurrence” unless the injury was "highly probable" or the insured "intended or expected the harm that was suffered."  As such, the Fifth Circuit rejected National Union’s argument that a “knowing” violation of the DTPA could never constitute an “occurrence.”  The panel went on to instruct that the coverage lawsuit should include and seek to resolve issues that were not expressly adjudicated in the underlying lawsuit, such as whether the injury caused by the insured was "highly probable, expected or intended."

 

Lamar Homes was bad enough for the insurance industry, but this is getting ridiculous.  The Texas Supreme Court's treatment of the "occurrence" issue in Lamar Homes was in a totally different context than the one addressed by the Fifth Circuit in this case.  The statutory definition of "knowing" under the Texas DTPA puts the conduct on par with an intentional tort in order for it to be properly characterized as "knowing" conduct under the DTPA.  Under the statute, it's a necessary predicate to recover treble damages (the DTPA's own version of punitive damages.)  So, it's the antithesis of an insurable "occurrence."   The Fifth Circuit's decision further highlights the need of liability carriers in Texas to bring declaratory judgment actions when underlying tort cases involving their insureds generate material coverage questions,   Unfortunately, the Fifth Circuit's recent decision in Puget Plastics means that (at least in the federal courts) the resolution of the underlying tort case is just the beginning of the coverage case even when the underlying jury finds the insured's conduct to have been committed "knowingly."  
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Coverage for Punitive Damages: The Debate Rages

Posted on July 5, 2008 by Chris Martin

The debate over liability insurance coverage for punitive damages has ebbed and flowed for many years, but over the last 4 weeks in Texas it has reached an unprecedented pitch.  In early June, the Fifth Circuit Court of Appeals issued its opinion in American International Specialty Lines Ins. Co. v. Res-Care, Inc.,--- F.3d ----, 2008 WL 2232089 (5th Cir. 2008), and the decision has subsequently received significant attention from the plaintiffs' bar for its potential impact on the availability of liability insurance coverage for punitive damages in Texas.  The debate was fueled by Res-Care because several weeks earlier the Texas Supreme Court ruled in a workers compensation coverage case that in the context of workers comp claims, punitive damages were covered under an EL/WC policy.   The policyholder and carrier "camps" have since engaged in a highly publicized war of words over the last month as to the true state of the law in Texas on this critical issue.   The debate wont be resolved anytime soon.

 

In Res-Care, the Fifth Circuit found that the liability policy at issue did not cover punitive damages under the facts before it as a matter of public policy.  The dispute in that case involved the insurer's right to reimbursement after it settled both covered and uncovered claims against the insured under a non-waiver agreement.  The trial court refused to allow coverage for punitive damages under the primary policy (which was silent as to such coverage for punitive damages).  The excess policy, on the other hand, expressly excluded coverage for punitive damages. 

 

In its well-reasoned treatment of the issues, the Fifth Circuit looked to the Texas Supreme Court’s recent decision in Fairfield Ins. Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653 (Tex.2008) for guidance, noting that the Texas Supreme Court had expressly considered whether public policy precludes insurance coverage of punitive damages in the workers' compensation scheme and also provided guidance for consideration of the issue in other contexts.  Following Fairfield, the Fifth Circuit engaged in a two-step analysis looking at: (1) the plain language of the policy, and (2) legislative policy considerations.  In Res-Care, the Fifth Circuit found that the primary insurance policy, through its silence, arguably provided coverage for punitive damages.  As to the second point, however, the Fifth Circuit concluded the Texas Legislature precluded liability coverage for punitive damages for some health care providers.  The court noted that the type of health care provider in this case -- an intermediate care facility for the mentally retarded -- did not fall within the statute.  So, the Fifth Circuit then had to turn to general public policy considerations, weighing the right to freedom of contract against the punishment and deterrent purposes of punitive damages.

In finding that the purposes of punitive damages (to punish egregious tortfeasors and deter future conduct) outweighed the right to freedom of contract, the Fifth Circuit returned to the Texas Supreme Court's concern in Fairfield for “’[e]xtreme circumstances’ where ‘extreme and avoidable conduct that causes injury” may warrant different considerations… ‘Were the existence of insurance coverage to completely eviscerate the punitive purpose behind awarding exemplary damages, it could defeat not only an explicit legislative policy but also the court's traditional role in deterring conscious indifference.’”  The Fifth Circuit then found that “extreme circumstances” were present in this case given the insured’s documented systemic problems of care and the circumstances of the patient’s death at issue.

Although the Fifth Circuit went to great lengths to properly apply Fairfield (which they did), the ultimate coverage conclusions appear inconsistent to one unfamiliar with the unique insurance issues at issue in Fairfield.   In Fairfield, the high court of Texas went to great lengths to point out that its opinion was limited to the precise coverage before it and it had been guided by the Legislative intent behind Texas' workers compensation scheme which expressly permits injured workers and their families to sue for and recover punitive damages only in situations involving gross negligence and intentional torts by the employer.  Knowing the larger coverage question regarding the insurability of punitive damages under general liability and professional liability policies remained unresolved, the high court of Texas went to great lengths to outline for future courts how the issues should be addressed.  The Fifth Circuit followed this road map to perfection in Res-Care.    There should not be a continuing debate over this issue, but there will be as the policyholder counsel bar continues to argue for an over-expansive reading of Fairfield to permit the coverage of all punitive damage findings under all liability policies.  Those debates will unfortunately cost carriers millions over the next several years because there is not another punitive damage case pending before the Texas Supreme Court at this time.  The interesting political question is whether inevitable changes to the currently all-Republican Texas Supreme Court will result in a very different court the next time this issue gets to the high court in Austin.  

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Frustration Mounts in Texas as Primary Carriers Struggle with How to Deal with Recalcitrant Co-Primary Carriers

Posted on March 16, 2008 by Chris Martin

A Federal District Court Judge from the Southern District of Texas’ Galveston Division recently granted summary judgment against an insurer seeking to enforce identical pro rata sharing provisions contained in multiple primary insurance policies.  In doing so, the court highlighted the lack of options primary carriers now face in Texas when co-primary carriers don't contribute to defense or indemnity benefits to the common insured.  In Nautilus Ins. Co. v. Pacific Employers Ins. Co., No. G-04-619 (S.D. Tex.  February 25, 2008), several insurers were called on to defend and indemnify a seismic testing company which allegedly damaged over 200 buildings in Galveston County while conducting seismic testing.  All of the insurers except Pacific Employers contributed to the settlement and Nautilus Insurance then sought to recover the amounts it overpaid to fund the settlement from Pacific by way of subrogation and enforcement of the policies respective pro rata "other insurance" sharing provisions.  The suit among the co-primary carriers resulted in summary judgment motions being filed on the issue of whether a settling co-primary carrier in Texas can sue a recalcitrant co-primary carrier for not paying it's fair share of the defense costs or the settlement.  Relying on the Texas Supreme Court’s recent decision in Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., 236 S.W.3d 756 (Tex. 2007), the District Court held last week that because the insured had been fully indemnified, the settling insurer had no claim under Texas law against the non-settling insurer because “there is nothing to which Plaintiff can be subrogated.”  This harsh result is the inevitable consequence of the Texas Supreme Court's decision from February in Mid-Continent v. Liberty Mutual. 

Because of the proliferation of suits involving construction defects, intellectual property violations, toxic torts, premise liability and other significant torts, it is now extremely common for insured defendants to have two or more primary liability carriers whom they turn to for defense and indemnity benefits.  The unwillingness of the Texas Supreme Court to allow one carrier to sue another for reimbursement, contribution or subrogation puts Texas in an extreme minority on this issue and forces carriers in that state to become very creative when settling liability suits when one or more other primary carriers have not or will not contribute to defense or settlement costs.  Carriers in such a situation must consider formal assignments from insureds and other creative alternatives before allowing the underlying liability to be settled and dismissed.   Otherwise, they will find themselves in the same position as Nautilus having overpaid a claim they did not fully owe with no avenues for reimbursement against the carrier who refused to pay timely.  

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Late Notice: Is Prejudice as a Matter of Law Dead in Texas?

Posted on March 3, 2008 by Chris Martin

In Nejati v. Royal Indemnity Co., 2008 WL 483496 (N.D. Tex., February 19, 2008), Royal was sued by Nejati to enforce a $1.4 million default judgment obtained against Royal’s insured under a commercial auto policy.  Nejati obtained a default judgment because the insured failed to forward suit papers to Royal and repeatedly refused to communicate with Royal about the lawsuit.  Royal received actual notice of the suit from Plaintiff's counsel but it did not file an answer on its insured’s behalf because the insured never made a claim, never asked for a defense, and refused to cooperate with his insurer's efforts to try to protect him.  Royal also never issued a reservation of rights or submitted a non-waiver agreement.  It did, however, engage in limited discussions with Nejati’s attorneys once it was notified of the suit including asking for an extension of the answer date to enable to it contact the insured and including trying to settle the lawsuit before a default judgment was entered. On February 19th, Federal District Court Judge Barbara M.G. Lynn from the Northern District of Texas ruled on cross motions for summary judgment filed by Nejati and Royal. 

The court denied summary judgment determining two fact issues existed: (1) whether Royal was prejudiced by its insured’s breach of the cooperation clause; and (2) whether Royal waived the cooperation clause as a condition precedent to coverage through its conduct.  Consistent with the actions of other Texas courts in recent months, this court implicitly rejected the concept of “prejudice as a matter of law” in finding the referenced fact issues despite the insured’s gross failure to cooperate or to even demand defense or indemnity benefits from his liability insurer.  While there is nothing uniquely significant about this decision, it does illustrate an unfortunate trend among Texas courts (both state and federal) in the last 12 months to refuse to recognize "prejudice per se" when an insured refuses to make a claim, refuses to cooperate, and allows a default judgment to be entered.   While these decisions seem superficially beneficial to policyholders, they are actually harmful to policyholders over the long run.  For example, the efforts of the insurer to try to repeatedly contact the insured, to ask for an extension of time to answer, and to ask opposing counsel how much he wanted to settle the case are obviously good things for the insured.  But, as this case illustrates, if such "good efforts" are going to actually increase the insurer's exposure by creating a fact issue as to its actual prejudice, then the obvious lesson is for insurers to not try to help their insureds and simply wait for actual notice from their insured and wait for a demand for a defense before lifting a finger.  That is a very, very dangerous precedent, but it is the unfortunate implication of the refusal of Texas courts' to recognize prejudice per se or prejudice as a matter of law following late notice.   

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Texas Supreme Court Holds Public Policy Does Not Prohibit Insurance Coverage for Punitive Damages

Posted on February 18, 2008 by Chris Martin

This past Friday, the Texas Supreme Court issued a important decision on the availability of liability insurance to cover punitive damage awards when it answered the following certified question presented by the Fifth Circuit: “Does Texas public policy prohibit a liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence?” In Fairfield Insurance Co. v. Stephens Martin Paving, L.P., 2008 WL 400397 (Tex. February 15, 2008), the Court in a limited holding found “Texas public policy does not prohibit coverage under the type of workers' compensation and employer's liability insurance policy at issue in this case.” In doing so, the Court provided an extensive and thought-provoking discussion of the law from other jurisdictions, Texas statutory and legislative considerations, Texas case law addressing the issue in other contexts and public policy issues including the “freedom of contract” and the underlying purpose of imposing punitive damages.

In this case, an employee died as a result of on the job injuries and the resulting lawsuit alleged the insured employer “failed to follow and enforce OSHA safety rules and regulations.” The policy at issue provided workers’ compensation and employers’ liability insurance that covered “all sums the insured [Stephens Martin Paving] legally must pay as damages because of bodily injury to [its] employees, provided the bodily injury is covered by this Employers Liability Insurance.”  But, it excluded coverage for damages arising from injuries caused by intentional acts and “punitive or exemplary damages because of bodily injury to an employee employed in violation of law.” However, an endorsement provided “[t]his exclusion does not apply unless the violation of law caused or contributed to the bodily injury.” Because the certified question only focused on the public policy considerations, the court did not address the potential coverage issues and presumed the policy covered the punitive damages sought.

In reaching its decision that coverage for punitive damages was not against Texas public policy, the court focused on the statutory workers’ compensation scheme and accompanying insurance regulations.  The court found because the Texas Workers Compensation Act allowed recovery of exemplary damages caused by the employer’s gross negligence and because the Texas Department of Insurance's execution of that scheme and approval of policy forms reveals an “intent to provide coverage for gross-negligence” while excluding intentional acts, the high court of Texas found the “Legislature’s expressed intent is that Texas public policy does not prohibit insurance coverage for claims of gross negligence in this context.”

The decision was one of the oldest cases on the Court's docket probably indicating the intense internal struggle over the important issues raised by this case.   While the holding is troubling to this author at multiple levels, the obvious and easy solution is for liability insurers to craft expansive punitive damage exclusions in their liability policies.  This decision only deals with the public policy implications of extending coverage to punitive damages when the policy is otherwise silent on such coverage. 

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Texas Supreme Court Limits Claims Between Settling Co-Insurers

Posted on October 16, 2007 by Chris Martin

On October 12th, the Supreme Court of Texas issued a surprising decision of importance to liability carriers doing business in Texas regarding the reimbursement claims available to liability insurers against other insurers in Texas. 

In Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., No. 05-0261 (Tex. October 12, 2007), Mid-Continent provided a $1 million CGL policy which covered a general contractor as an additional insured. The general contractor also had its own $1 million CGL policy with Liberty Mutual and a $10 million excess policy. Neither insurer disputed that both owed a portion of the general contractor’s defense and indemnity expenses and both agreed that a total verdict for the injured parties would fall in the $2 to $3 million range, but they disagreed both on the settlement value of the case and the percentage of liability to be assessed against the general contractor. Mid-Continent would only agree to pay $150,000 to settle. Liberty Mutual then paid the $1.35 million needed to settle sued Mid-Con for the difference.  On appeal, the Texas high court held that Texas does not recognize a direct action by one insurer against another – they can only bring an equitable subrogation claim. Because the only extra-contractual tort claim recognized in Texas for an insured to assert against its liability insurer is a “Stowers” claim for the insurer’s failure to settle a covered claim within policy limits, the high court ruled that a liability insurer asserting an equitable subrogation claim against another carrier could only assert such a claim. 

This decision raises very significant questions for any carrier facing the settlement of tort claims where the insured has multiple primary carriers. If one carrier plays “hard ball,” can they be sued in Texas by the settling carrier who pays more than its “fair share?” Probably not, unless the insured contributes to the settlement and still possesses a claim against the recalcitrant insurer. Such a claim may also exist if the reluctant carrier is subject to a valid Stowers claim for failing to settle within limits. Otherwise, liability carriers may force more cases to trial due to the reluctance of co-carriers to fund tort settlements for their insureds due to this shift in Texas law. 
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