INSURANCE LAW

SPRING 2008

PAJ v. Hanover Ins. Co, 243 S.W.3d 630 (Tex. 2008)

Commercial General Liability Policy; Notice; Prejudice: The Texas Supreme Court had to decide whether an insured's failure to timely notify its insurer of a claim defeated coverage under the policy if the insurer was not prejudiced by the delay. Held: An immaterial breach did not deprive the insurer of the benefit of the bargain and thus could not relieve the insurer of the contractual coverage obligation. The Hanover policies issued to PAJ provided coverage for "advertising injury," which the policy defined to include injury arising out of copyright infringement. The policy contained a prompt-notice provision that required PAJ to notify Hanover of an occurrence or an offense that may result in a claim "as soon as practicable." The parties disputed whether the policy's prompt-notice requirement constituted a condition precedent or merely a covenant. Hanover contended the policy language created a condition precedent, the failure of which defeated coverage under the policy irrespective of prejudice to the insurer. PAJ contended that the prompt-notice language created a covenant, the breach of which excused Hanover’s performance only if the breach was "material." PAJ also contended that that even if the policy language created a condition precedent to coverage, Texas law nonetheless required an insurer to demonstrate prejudice before it could avoid coverage based on untimely notice. The Court agreed with PAJ that only a material breach of the timely notice provision would excuse Hanover's performance under the policy. Note: The Court distinguished its decision in Members Mut. Ins. Co. v. Cutaia, 476 S.W.2d 278 (Tex. 1972), which held that prejudice was not required, indicating that that the Texas Department of Insurance changed the relevant provision in CGL policies in Board Order 23080, which required a mandatory endorsement to all Texas CGL policies that required a showing of prejudice when the insured fails to comply with the prompt-notice provision.

Fairfield Ins. Co v. Stephens Martin Paving, W.L. 400397; LEXIS 123 (Tex. 2008)

Punitive Damages (Insurability of); Public Policy: The Texas Supreme Court considered a certified question from the United States Court of Appeals for the Fifth Circuit, which asked whether Texas public policy prohibited a liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence. More specifically, an employee died as a result of work-related injuries; his employer had a workers' compensation and employer's liability insurance policy in effect at that time. The insurance company paid workers' compensation benefits to the surviving family members and then the survivors sued the employer for gross negligence, seeking exemplary damages. Held: “Determining whether exemplary damages for gross negligence are insurable requires a two-step analysis. First, the court decided whether the plain language of the policy covered the exemplary damages sought in the underlying suit against the insured. Second, if the court concluded that the policy provided coverage, the court determined whether the public policy of Texas allowed or prohibited coverage in the circumstances of the underlying suit. This involved looking (first) to express statutory provisions regarding the insurability of exemplary damages to determine whether the Legislature had made a policy decision. “If the Legislature has not made an explicit policy decision [the court] then consider[s] the general public policies of Texas.” The Court held: “The Legislature authorized the Texas Department of Insurance to create a policy that provides insurance coverage for exemplary damages in workers' compensation cases. Thus, we decline to invalidate the parties' workers' compensation contract to enforce a public policy urged by Fairfield but not adopted by the Legislature. In response to the certified question, we answer that the public policy of Texas does not prohibit insurance coverage of exemplary damages for gross negligence in the workers' compensation context. However, without clear legislative intent to generally prohibit or allow the insurance of exemplary damages arising from gross negligence, we decline to make a broad proclamation of public policy here but instead offer some considerations applicable to the analysis in other cases. Of course, how our answer is applied in the case before the Fifth Circuit is solely the province of that certifying court.” Note: This case sets out, in detail, a discussion of the punitive damages / public policy issue and the reader is encouraged to read the court’s opinion in its entirety.

National Union fire Insurance Co. v. Crocker, W.L. 400398; LEXIS 119 (Tex. 2008)

General Liability Policy; Additional Insured; Forwarding Suit Papers (and Requesting Defense); Prejudice: An insurer issued a commercial general liability policy to a nursing home. A resident brought a personal injury suit against the nursing home and one of its employees. As the employee was acting within the course and scope of his employment when the accident occurred, he qualified as an additional insured under the policy; however, he was unaware of the policy. The insurance company successfully defended the nursing home but did not inform the employee that he was an insured or offer a defense to the employee, even though the claims against him were covered by the policy and the insurance company knew he was a named defendant who had been served. A default judgment was entered against the employee. Thereafter, the resident sued the insurance company to collect the judgment against the employee, asserting that she was a third-party beneficiary to the policy. The Fifth Circuit certified three questions to the Texas Supreme Court, two of which were answered “No” by the Court, as follows: (1) Where an additional insured does not and cannot be presumed to know of coverage under an insurer's liability policy, does an insurer that has knowledge that a suit implicating policy coverage has been filed against its additional insured have a duty to inform the additional insured of the available coverage? (2) Does proof of an insurer's actual knowledge of service of process in a suit against its additional insured, when such knowledge is obtained in sufficient time to provide a defense for the insured, establish as a matter of law the absence of prejudice to the insurer from the additional insured's failure to comply with the notice-of-suit provisions of the policy? According to the Court, an insurance company’s knowledge that suit had been filed did not require an insurer to “gratuitously subject itself to liability”; “simply put, there was no duty to provide a defense absent a request for coverage.” Note: According to the Court, “an insurer that is aware an additional insured has been sued may, and perhaps should, choose to inform the insured that a defense is available; in this case, had National Union done so, a judgment against Morris and years of subsequent litigation would have been avoided. But an insurer that has not been notified that a defense is expected bears no extra-contractual duty to provide notice that a defense is available to an additional insured who has not requested one.” The Court’s succinct “conclusion,” as set forth in its opinion, read as follows: “Insurers owe no duty to provide an unsought, uninvited, unrequested, unsolicited defense. Consistent with our decision in Weaver, we decline to impose an extra-contractual duty on liability insurers 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. Accordingly, because insurers need not provide coverage to additional insureds who never seek it, National Union had no duty either to inform Morris of available coverage or to voluntarily undertake a defense for him, and its actual knowledge did not establish lack of prejudice as a matter of law.”

Evanston Ins. Co. v. Atofina Petrochemicals, Inc., W.L. 400394; LEXIS 122 (Tex. 2008)

Indemnity Agreement; Scope of (Liability) Coverage; Additional Insured: The Texas Supreme Court considered three issues: (1) “whether a commercial umbrella insurance policy that was purchased to secure the insured's indemnity obligation in a service contract with a third party also provides direct liability coverage for the third party; (2) “whether the insurer is bound to pay the amount of an underlying settlement between the additional insured;” and, (3) “whether article 21.55 (now Chapter 542) of the Texas Insurance Code, the “Prompt Payment of Claims” statute, authorized the imposition of penalties and attorney's fees for the insurer's failure to pay the claim timely.” An excess insurance company issued a commercial umbrella policy to a contractor that performed maintenance and construction work at a refinery. “The policy named the refinery as an additional insured. Coverage was provided only with respect to liability arising out of the contractor's operations and not for the refinery's sole negligence. An employee of the contractor was killed in an accident while working at the refinery.” The primary insurance company tendered its policy limits, the excess insurance company denied coverage, and the refinery settled the wrongful death action for an amount in excess of its primary policy. Held: The injury respected operations performed by the contractor because the employee was at the refinery to perform operations for the contractor. Thus, even if the refinery was negligent, the respecting operations clause provided coverage to the refinery. A catchall clause did not restrict the coverage available. The insurer's denial of coverage barred it from challenging the reasonableness of the settlement. The refinery could not recover statutory attorney fees and damages because its claim was not a first party claim.

Excess Underwriters at Lloyds v. Frank’s Casing,, W.L. 274878; LEXIS 92 (Tex. 2008)

Liability Insurance; Excess Insurer; Reimbursement: “In Texas, an insurer that settles a claim against its insured when coverage is disputed may seek 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." Tex. Ass'n of Counties County Gov't Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128, 135 (Tex. 2000). In this case, which involved excess coverage, the insured consented to the settlement but not to the excess insurer's asserted reimbursement right.” The Court had to decide whether to recognize an exception to the rule in Matagorda County and imply a reimbursement obligation when the policy involved excess coverage, the insurer had no duty to defend under the policy, and the insured acknowledged that the claimant's settlement offer was reasonable and demanded that the insurer accept it. “Because none of these distinctions alleviates the concerns that drove the Court's analysis in Matagorda County, we decline to recognize such an exception.” Note: This opinion was issued on rehearing, the Court withdrawing its three year old opinion, and clearly indicates a very divided Court in view of the two separately authored dissents.

National Family Care Life Ins. Co. v. Vann, W.L. 339686; LEXIS 918 (Tex. App.—Houston [1^st Dist.] 2008)

Health Insurance; Claim; Notice; Prejudice: The insured bought a “heart attack and cancer supplement” policy, nor did the insurance company send statements (regarding he policy). After being hospitalized and diagnosed with cancer, the insured was unable to communicate, and then died, and the insurance company continued to collect premiums (on the policy). When a claim was filed, the insurance company denied the claim due to late notice (which was given almost 3 years after the fact). Held: Citing PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630 (Tex. 2008), the Court noted “an insured’s failure to timely notify its insurer of a claim or suit does not defeat coverage if the insurer was not prejudiced by the delay.” According to the court, the type of the insurance policy, whether occurrence or claims-made, was important in determining whether prejudice must be shown to deny a claim due to untimely notice. “By requiring notification of the claim upon the occurrence of hospitalization for cancer, this is an occurrence policy. Because the notice section appeared under the section purporting to be matters required by law, nothing in the policy suggests that the notice provision was an essential part of the bargained-for exchange. Although National disputed that it was required to show prejudice, it did not claim that it suffered prejudice from the delayed claim, and the record undisputedly showed that it continued to take automatic premium deductions from Thomas's bank account until it received notice of the claim. We hold that the trial court did not err by concluding that Leila was entitled to payment under the policy, even assuming that notice of the claim was late under the policy, because National did not present any evidence of prejudice due to the late notice.”

Unauthorized Practice of Law Counseller v. American Home Assurance Co., Inc., W.L. 821034; LEXIS 233 (Tex. 2008)

May Staff Attorneys of the Insurer Be Utilized to Defend Claims On Behalf of an Insured?: The Court held that an insurer may use staff attorneys to defend a claim against an insured if the insurer’s interest and the insured’s interest are congruent, but not otherwise. Their interests are congruent when they are aligned in defeating the claim and there is no conflict of interest between the insurer and the insured. In addition, the staff attorney must fully disclose to an insured his or her affiliation with the insurer.