Three’s a Crowd

Recent Insurance Decisions of the Texas Supreme Court

On Aug. 29, 2008, the Texas Supreme Court continued its recent foray into insurance law by issuing three important insurance coverage decisions. Each of these decisions merits consideration and will likely dramatically affect insurance claims in Texas. Let’s look at each of these cases.

Don’s Building Supply

In Don’s Building Supply Inc. v. OneBeacon Insurance Co., Case No. 07-0639 (Tex. Sup. Ct. Aug. 29, 2008), the Texas Supreme Court decided a trigger of coverage case for the first time ever. In a loosely reasoned opinion, the Court rejected long-standing precedent and adopted an injury-in-fact trigger for property damage. This is one of the most important decisions on an insurance coverage issue in many years, given that the Texas Supreme Court has studiously avoided addressing the trigger of coverage issue for literally a generation. There have been literally dozens of trigger of coverage cases submitted to the Texas Supreme Court for review since 1980, and each time the Court has refused to take up the issue. However, in the last year and a half, it has become typical for the Court to address insurance issues it has long refused to review from state appellate courts when the U.S. Fifth Circuit Court of Appeals certifies the question. Certification is merely when the federal court asks the state court its opinion as to an issue.

The case involves Don’s Building Supply Inc., which sold and distributed exterior sidings. The siding system was installed on various homes from Dec. 1, 1993, to Dec. 1, 1996, during which Don’s Building was covered by general liability policies assigned to OneBeacon Insurance Company. From 2003 to 2005, various Texas homeowners filed lawsuits against Don’s Building, alleging the siding was defective and not weather-tight, causing wood rot and other damages. The homeowners argued these injuries “actually began to occur on the occasion of the first penetration of moisture behind” the siding. The alleged result of this ongoing moisture exposure was extensive damage to the homes, reduced property values, and the need to replace the siding. The homeowners sought to avoid the statutes of limitations for their various claims by pleading the discovery rule, arguing the home damage was “hidden from view” by the siding’s undamaged exterior and was “not discoverable or readily apparent to someone looking at that surface until after the policy period ended.”

OneBeacon initially provided a defense but then filed a declaratory judgment action in seeking a ruling that it had no duty to defend and indemnify. The trial court agreed that the duty does not arise until the damage becomes identifiable. Don’s Building appealed to the Fifth Circuit, which certified the issue.

The Court held that property damage under the policy occurred when actual physical damage to the property took place; the Court based this conclusion on its reading of the policy language, which defines property damage as “[p]hysical injury to tangible property,” and states that coverage is available if and only if “‘property damage’ occurs during the policy period.” Here, property damage occurs when a home suffered wood rot or other physical damage. The date that the physical damage was discovered is irrelevant. Thus, the Court adopts an “actual injury” or “injury-in-fact” trigger.

The Court reasoned that despite the practical advantages a manifestation rule offers, the policy language does not provide that the insurer’s duty is triggered only when the injury manifests itself. Similarly, the policy’s language does not support adoption of an exposure rule, at least not where there is “physical injury to tangible property” as alleged in this case. The Court reasoned that the policy does not state that coverage is available if property is exposed to a process, event, or substance that later results in bodily injury or physical injury to tangible property.

Thus, while pinpointing the moment of injury retrospectively is sometimes difficult and litigation-intensive, the Court decided that it would be improper to place ease of proof over “faithfulness” to the policy language. Further, the Court notes that it “do[es] not attempt to fashion a universally applicable ‘rule’ for determining when an insurer’s duty to defend a claim is triggered under an insurance policy, as such determinations should be driven by the contract language — language that obviously may vary from policy to policy.”

Ulico

In the second case, the Court issued a very curious decision in Ulico Cas. Co. v. Allied Pilots Assoc., Case No. 06-0247. The issue was whether a carrier may be precluded from raising a defense of non-coverage by either waiver or estoppel (estoppel is when you are prevented from asserting a right because of your having done something wrong). It has been axiomatic in Texas, and in most jurisdictions, that courts will not use the doctrines of waiver or estoppel to create coverage that does not otherwise exist. However, it has long been the rule, since at least 1980, that if an insurer knows of a defense of non-coverage and fails to provide notice of that defense to the insured while the insurer is defending the case, that the insurer may be precluded from raising the defense for purposes of indemnity. The reason for this rule is that while controlling the defense of the case, the insurer has a conflict of interest as it may attempt to use its control of the defense to develop facts supporting to defeat indemnity. Thus, an insurer should let the insured know of the potential risk through a reservation of rights letter.

Ulico concerned coverage under a claims-made policy. Allied was sued during the policy period, but did not forward the suit papers to the carrier until after the policy expired. Ulico reimbursed Allied for some defense costs, but later filed a declaratory judgment action arguing that its policy did not provide coverage. Allied responded that Ulico had waived or was estopped from asserting its claim of non-coverage because of its participation in the defense.

The Court discussed the prior case law holding that the extent of insurance coverage itself cannot be expanded by waiver or estoppel. It then examined the so-called Wilkinson exception from Farmers Texas County Mut. Ins. Co. v. Wilkinson, 601 S.W.2d 520 (Tex. Civ. App. – Austin 1980, writ ref’d n.r.e.), which held that if an insurer assumes the insured’s defense without obtaining a reservation of rights and with knowledge of the facts indicating non-coverage, the insurer is estopped from raising those issues as a coverage defense. The Court ruled that there is no insurer’s “right” of non-coverage that could be waived because it is the insured’s obligation to establish coverage. However, it then reviewed the history and policy purposes of Wilkinson and determined that an insurer may be estopped from denying coverage where it assumes the insured’s defense when no coverage exists if the insured establishes that the insurer’s actions prejudiced the insured.

NOKIA

The third insurance case was Zurich-American Ins. Co., et al. v. Nokia Inc., Case No. 06-1030. In that case, the Court held that the insurers of a wireless telephone manufacturer have a duty to defend the manufacturer in several potential class action suits in which the plaintiffs alleged that the use of cell phones without headsets caused biological injury to those who used the phones. The complaints asked that all purchasers or lessors of the phones be provided with a headset or be reimbursed for buying a headset. The insurers had argued that there was no duty to defend because the language of the petitions made it clear that the plaintiffs were seeking headphones as a means of preventing biological injury and that the class action allegations (which predicated class membership on purchase of a phone rather than use of a phone) negated any argument that the prospective class members were seeking damages because of bodily injury.

In a 7-2 decision, the Texas Supreme Court ignored the reality that there is no basis for showing commonality between the class claimants for bodily injury. Purchasers who are not users could have no bodily injury, but the Court ignored this pesky fact.

The Nokia decision instead skirted this fact by applying a very rigid construction of the eight-corners rule. Instead of reading the underlying complaints in their entirety, the Court focused only on those terms that supported a duty to defend and ignored any provision to the contrary. The immediate lesson from this case is that the plaintiff’s lawyer, through careful drafting of a petition, has absolute control over whether or not the defendant’s insurer will have a duty to defend its insured.

No Coherent Approach

The Texas Supreme Court, over the last two years, has focused on insurance coverage more than it has in the previous 20 years. Many of these decisions have had dramatic effects on claims handling for both policyholders and carriers. The frustrating aspect of these three decisions is that they do not present a coherent approach to insurance law, and indeed will create further uncertainty among insurers and insureds as to the scope of their rights and obligations.

Topics Lawsuits Carriers Texas Numbers Property