The Saga Continues as Texas Supreme Court Explores Insurance Law

After years of avoiding key insurance issues, the Texas Supreme Court began issuing opinion after opinion on fundamental insurance principles in late 2007. Lamar Homes, Frank’s Casing and other important decisions appeared with an uncanny frequency. Recent “Legal Beat” columns have addressed many of these insurance decisions. The saga continues with the Court’s Feb. 15, 2008, ruling in Evanston Ins. Co. v. ATOFINA Petrochemicals Inc.

In Evanston, the Texas Supreme Court holds that (1) a commercial umbrella insurance policy that was purchased to secure an indemnity obligation provides direct liability coverage for the indemnified party, (2) an insurer that denies coverage may not dispute the reasonableness of a subsequent settlement between the insured and the claimant, and (3) article 21.55 of the Texas Insurance Code, the “Prompt Payment of Claims” statute, does not authorize the imposition of penalties and attorney’s fees for an insurer’s failure to pay an indemnity claim timely.

The Background

ATOFINA Petrochemicals Inc. contracted for Triple S Industrial Corporation to perform maintenance and construction at ATOFINA’s refinery. The service contract contained an indemnity provision and a requirement that Triple S carry certain minimum levels of liability insurance coverage. Triple S agreed to indemnify ATOFINA from all personal injuries and property losses sustained during the performance of the contract, “except to the extent that any such loss is attributable to the concurrent or sole negligence, misconduct, or strict liability of [ATOFINA].”

Triple S also agreed to carry at least $500,000 of primary comprehensive general liability (CGL) insurance, “[i]ncluding coverage for contractual liability insuring the indemnity agreement,” and an excess (or “umbrella”) liability policy “following form for [the CGL policy]” of at least $500,000. Triple S complied with its contract obligations by purchasing a $1 million CGL policy from Admiral Insurance Company and a $9 million commercial umbrella policy from Evanston Insurance Company.

Matthew Todd Jones, a Triple S employee working at the ATOFINA facility under the Triple S contract with ATOFINA, was killed in an accident. His survivors sued Triple S and ATOFINA. Admiral tendered its $1 million policy limits. ATOFINA then demanded coverage from Evanston as an additional insured under the umbrella policy. Evanston denied the claim, and ATOFINA sued Evanston as a third-party defendant for a coverage declaration. ATOFINA severed its suit against Evanston from the remainder of the Jones litigation. Both ATOFINA and Evanston moved for partial summary judgment in the severed action. While the motions were pending, the Jones case settled for $6.75 million. ATOFINA sought to recover from Evanston the $5.75 million not covered by Admiral.

The trial court granted summary judgment for Evanston, but the court of appeals reversed, holding that the Evanston policy covered ATOFINA and remanding the case for determination of statutory penalties and attorney’s fees.

The Ruling

In support of its insured status, ATOFINA cited part III of the Evanston policy, which defined who was an insured.

Section III.B.6 stated that an insured included:

“A person or organization for whom you have agreed to provide insurance as is afforded by this policy; but that person or organization is an insured only with respect to operations performed by you or on your behalf, or facilities owned or used by you.”

The Supreme Court acknowledged that Texas Courts of Appeals had confronted these additional insured provisions on several occasions, producing divergent results depending often on the underlying indemnity agreement language, but it noted that its more recent decisions made clear that “the liability insurer is to determine its duty to defend solely from terms of the policy and the pleadings of the third-party claimant,” and, accordingly, that “evidence outside the four corners of these two documents is generally prohibited.” [GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 307-08 (Tex.2006)]

Moreover, the Court differentiated the language of the service contract between Triple S and ATOFINA from those of the earlier court of appeals decisions denying insurance coverage.

Second, the Court found that it would not use a fault-based interpretation of this kind of additional insured endorsement because the Court now interprets “with respect to operations” under a broader theory of causation. Generally, an event “respects” operations if there exists “a causal connection or relation” between the event and the operations; the Court does not require proximate cause or legal causation. [Mid-Century Ins. Co. of Tex. v. Lindsey, 997 S.W.2d 153, 155-56 (Tex. 1999).]

Under section III.B.6 of the Evanston policy, the Jones injury “respect[ed] operations performed by [Triple S]” because Triple S employed Jones, who was performing the operation at the time and place of the injury for which the Evanston policy provided.

Evanston argued that ATOFINA also qualified as an insured under section III.B.5, which included an exclusion that would limit coverage. Section III.B.5 said “insured” includes:

“Any other person or organization who is insured under a policy of ‘underlying insurance.’ The coverage afforded such insureds under this policy will be no broader than the ‘underlying insurance’ except for this policy’s Limit of Insurance.”

Reading paragraph III.B as a whole, the Court concluded that each “who-is-an-insured” clause operates to grant coverage independently. Nothing in paragraph III.B suggested that the limitations of one section granting coverage should be read into another separate section granting coverage. The Court refused to read section III.B.5’s exclusion of coverage beyond the scope of the Admiral policy into section III.B.6.

Because ATOFINA was entitled to coverage under more than one “who-is-an-insured” clause in paragraph III.B, the Court held that the Evanston policy provided coverage under the more expansive coverage provision.

The Court then addressed ATOFINA’s contention that Evanston’s denial of coverage barred it from challenging the reasonableness of the settlement. The Court applied its previous opinion in Employers Casualty Co. v. Block, 744 S.W.2d 940, 943 (Tex. 1988), in which it held that if an insurer wrongfully denies coverage and its insured then enters into an agreed judgment, the insurer is barred from challenging the reasonableness of the settlement amount. Although this case presents some different facts, the Court in ATOFINA held that Block‘s rule should apply nonetheless. The Court determined that the fact that Evanston did not wrongfully deny a defense did not sufficiently distinguish this case from Block (although two Justices strongly disagreed in a partial dissent).

The Court held that Block‘s position was clear:

“While we agree with the court of appeals’ conclusion that [the insurer] was barred from collaterally attacking the agreed judgment by litigating the reasonableness of the damages recited therein, we do not agree with its conclusion that the recitation in the agreed judgment that the damage resulted from an occurrence on August 6, 1980 is binding and conclusive against [the insurer] in the present suit. Id.”

In this case, the plaintiffs sued ATOFINA, ATOFINA requested coverage from Evanston, and Evanston wrongfully denied coverage, citing the policy terms. ATOFINA brought Evanston into the case as a third-party defendant for a declaration of coverage, and Evanston continued to deny coverage in its pleadings. ATOFINA then settled with the underlying plaintiffs and litigated the remaining coverage issues against Evanston.

Though this case differs from Block in several respects, the Court held that none of the differences justify departing from the holding in Block.

The Best of the Rest

The last few columns have explored many of the more important recent opinions, but more are coming. In February, the Court heard argument in a case on trigger of coverage in a long-tail property damage case. This is a sharp break with the Court’s previous sidestepping of the issue in literally over a dozen cases.

Stay tuned as the opinions keep coming.