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Insurance Coverage for Exemplary Damages in Texas Nonsubscriber Cases–Fort Worth, Texas Non Subscriber Attorneys

An issue that has received a great deal of attention over the past few years is whether punitive/exemplary damage awards can be covered by insurance policies under Texas law.

Texas is not one of the eight states which expressly prohibit insurance coverage for exemplary damages. The Texas Supreme Court sets forth a method of analysis which calls for an examination of the insurance policy first. If it is determined that the policy provides coverage for exemplary damages, a determination must be made whether the public policy of Texas allows or prohibits coverage in the circumstances of the underlying suit. Fairfield Ins. Co. v Stephens Martins Paving, 246 S.W.3d 653 (Tex. 2008). The Fairfield matter involved a worker’s compensation policy (which provided both worker’s compensation insurance and employer’s liability insurance) which was approved by the Texas Department of Insurance. The policy in question in the Stephens Martins matter included “all sums” language in the employer’s liability portion of the policy, and the Court points to this as indicative of the Legislature’s intent not to prohibit coverage for claims based on gross negligence (the policy also had language explicitly excluding coverage for intentional acts).

In an extensive survey of the law nationwide, the Texas Supreme Court summarized the public policy of practically every jurisdiction that has addressed the insurability of punitive damages, finding that 45 states’ highest courts or legislatures have spoken to the issue. Of those jurisdictions:

25 states have generally indicated their public policy does not prohibit coverage for punitive damages;
Eight states prohibit coverage for exemplary damages;
Seven states permit coverage for such damages, but only when the insured’s liability is vicarious;
Three states allow insurance coverage of punitive damages in the uninsured motorist context but have not addressed the issue under other circumstances; and
Two states prohibit insurance coverage of punitive damages in the context of uninsured motorists but have not addressed the issue with respect to other forms of coverage.

Of the five remaining jurisdictions, four of them (which until Stephens Martin included Texas) have yet to address the insurability of punitive damages, and one state (Nebraska) prohibits the imposition of punitive damages.

In Stephens Martin, the Texas Supreme Court observed that in light of the foregoing statistics, “the majority of states that have considered whether public policy prohibits insurance coverage of exemplary damages for gross negligence, either by legislation or under the common law, have decided that it does not.”

Given insurers’ ability to exercise freedom of contract by expressly excluding punitive damages, agents should certainly carefully scrutinize liability policies for such exclusions, particularly if their clients have expressed an interest in procuring such coverage, or are in parts of the State where punitive damages are commonly awarded. Employers should verify with their insurance agent exactly what is covered, and excluded, with regard to exemplary damages.

Previous Texas cases had reached varying results as to the insurability of punitive damages. For example, in The Philadelphia Indemnity Insurance Company v. Stebbins Five Companies, No. 3:02-CV-1279-M, 2004 U.S. Dist. LEXIS 6374 (N.D. Tex. Jan. 27, 2004), the United States District Court for the Northern District of Texas held that punitive damages are covered under Commercial General Liability (“CGL”) and Professional Liability policies. The court used a two-prong test to find that punitive damages are covered. First, the court asked whether the policy’s terms provided for, and failed to exclude coverage of, punitive damages. Second, the court inquired whether Texas public policy prohibits coverage for punitive damage awards. As to the first inquiry, the court concluded that because the policy’s terms failed to expressly exclude punitive damages, and the insuring clause provided coverage of “all sums” or “those sums” “that the insured becomes legally obligated to pay,” the liability policy was broad enough to encompass punitive damages. Similarly, the court held that a finding of malice and a determination of grossly negligent conduct against the insured in the underlying case does not automatically trigger the intentional or expected injury exclusion. As to the second inquiry, the court determined that insuring punitive damages was not contrary to the public policy of Texas.

On the other hand, in Comsys Information Technology Services, Inc. v. Twin City Fire Insurance Company, 130 S.W.3d 181 (Tex. App. – Houston [14^th Dist.] 2003, pet. denied), the Houston Appeals Court determined that punitive damages were excluded from an Excess Temporary Employment Contractors Errors or Omissions Liability Policy. The relevant portions of the policy excluded coverage for:
a. Intentional acts, errors or omissions by or at the direction of the insured.
. . .

b. Any injury or damage arising out of willful, dishonest, fraudulent, criminal or malicious acts, errors or omissions by or at the direction of the insured.

The court determined that because the policy excluded intentional acts, damages for actions committed with malice were excluded under section I.2.a of the policy, and that punitive damages supported by a finding of malice were excluded by section I.2.c. The court also concluded coverage for DTPA violations was similarly excluded as dishonest, fraudulent, or criminal acts under Section I.2.c of the policy.

This Supreme Court decision in Fairfield Ins. Co. v Stephens Martins Paving has substantial impact for nonsubscriber employers with insurance. For example, one employer’s liability plan obtained by one of our Texas nonsubscriber employer clients provides for coverage for “Bodily Injury Damages” which includes “all reasonable amounts paid to obtain a release of liability, settle a claim or pay a judgment based on an action for workplace injury brought against you by an employee.” The policy also excludes coverage for intentional acts. This language is similar to or virtually the same as much of the policy language we see.

Texas courts tend to interpret such a policy to include coverage for gross negligence including any exemplary damages which could be assessed. If you are a nonsubscriber Texas employer and would like us to take a look at your non-subscriber insurance policy, it would probably be useful to your risk management and risk forecasting model for us to do so.

If in our preliminary determination, if we conclude that coverage for exemplary damages is available under the policy, we would then proceed to an analysis of the facts and circumstances in a specific case, on a case by case basis, to determine whether provision of coverage in each particular instance would run afoul of public policy concerns, which will be an important consideration in determining the likelihood of punitive damages coverage. We will be pleased to discuss with you any matters which have prompted concern regarding potential exposure for punitive damages, in order that we may help you complete your nonsubscriber company’s risk management analysis.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas nonsubscriber defense attorneys in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Feb 17th, 2014 Employment Law Defense, Insurance Defense Litigation, Nonsubscriber Law

Insurance Policies and the Texas Stowers Doctrine–Texas Insurance Defense Attorneys

As lawyers retained by insurance companies to defend against Texas personal injury lawsuits brought against their insureds, we frequently encounter situations where the so called Stowers Doctrine is invoked. It is a doctrine that we have seen put forward against our clients, or have put forward ourselves on their behalf. We have used it both offensively and defensively. The Stowers doctrine in Texas imposes a duty on insurance companies to settle third party claims that have been brought against their insured under circumstances that would cause a reasonably prudent uninsured to settle.

But what exactly is the Stowers Doctrine according to the actual decision of the early 20^th century court that famously gave the doctrine life? It seems no one ever goes back to look at the nuanced language of that old case.

The doctrine is based on a court decision that goes way back to 1929. In Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544 (Tex. Comm’n App. 1929) the court held that that a defending third party insurance company that fails to defend a third-party case in the way it would if its liability were not limited by contract will be liable for any damages in excess of the policy limits for which the policyholder ultimately becomes liable. The court considered an automobile liability coverage case where the insurance company asserted the absolute right to conduct defense of lawsuits against its insured and then rejected a settlement offer of what amounted to 80 percent of the limit of liability. The insurance company took the position that it had little to lose by going to trial because its liability was limited by the terms of the policy. Unfortunately, and predictably, the automobile insurance policyholder was held to be liable to the underlying plaintiff for nearly 300 percent of the policy limits in the underlying trial.

The policyholder then brought the coverage action against the insurance company. The court rejected the insurer’s argument and held that: Wherein an insurance company makes such a contract [giving it the exclusive right to defend]; it, by the very terms of the contract, assumed the responsibility to act as the exclusive and absolute agent of the insured in all matters pertaining to the questions in litigation, and as such agent, it ought to be held to that degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business.

As a result, the court held that the insurer was liable to Stowers for the policy limits and further duties consistent with exercising the “degree of care and diligence which a man of ordinary care and prudence would exercise in the management of his own business.”

The Stowers court further held that: It is the duty of the court to give effect to all of the provisions of the policy, and it would certainly be a harsh rule to say that the indemnity company, in a case such this, owed no duty whatever to the insured further than the face of the policy, regardless of whether it was negligent in discharging its duties as the sole and exclusive agent of the insured, in full and complete control. Such exclusive authority to act in a case of this kind does not carry with it the right to act arbitrarily.

The court remanded the case for a new trial . It did not award extra-contractual damages.

The doctrine that was put forth by the court is Stowers has been held to only apply to third-party cases in which the insurance company has defended or otherwise tendered coverage to its policyholder, and the policyholder argues that such defense or coverage has been inadequate. Southstar Corp. v. St. Paul Surplus Lines Ins. Co., 42 S.W.3d. 187 (Tex. App. 2001). The court in that case held that, When and insurance policyholder alleges only that the insurance company wrongfully failed to defend, the policyholder is limited to bringing claims for damages under the insurance contract and for extracontractual damages to make itself whole under the Stowers doctrine. The policyholder also may, however, in addition to its Stowers claims, bring claims for breach of the duty of good faith and fair dealing, but only when the policyholder makes allegations that the insurance company breached duties implicating public policy that arise independent of the contract itself. As the Stowers doctrine has evolved over the years it has had the effect essentially of holding insurance companies to an ordinary negligence standard as it has related to the handling of the claim by the insurer.

The duty of an insurance carrier to settle under Stowers is not absolute. The insurance company does not have to settle if a reasonable uninsured would not do so. Such language is fertile ground for subjectivity, which is often the great seed of much flowering litigation later. So while Stowers may be old, it is certainly not forgotten, and seems poised to survive the next millennium.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas insurance attorneys in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Feb 17th, 2014 Insurance Defense Litigation

Prompt Notice Provisions in Texas Insurance Policies– Fort Worth, Texas Insurance Defense Attorneys

In PAJ, Inc. vs. The Hanover Ins. Co. 243 S.W.3d 630 (Tex. 2008) the Texas Supreme Court held that an insured’s failure to comply with a prompt notice provision in a CGL policy does not defeat coverage unless the insurer was prejudiced by the delay.

There, the insurance carrier, Hanover, provided commercial general liability insurance (CGL) coverage to PAJ, a jewelry manufacturer, who was sued for copyright infringement by a third party. While the CGL policy covered certain advertising injury, the terms of the policy required PAJ to notify it’s insurer of any claim or suit brought against it “as soon as practicable.” PAJ claimed to be initially unaware that the Hanover CGL policy provided coverage for a dispute over copyright infringement. Consequently, PAJ did not notify Hanover until several (4 to 6) months after the lawsuit was filed. The parties stipulated that PAJ did not notify Hanover “as soon as practicable” and that Hanover was not prejudiced by the delay. The trial court granted summary judgment in favor of Hanover, and the court of appeals affirmed, holding that Hanover was not required to show prejudice before it could deny coverage.

The insurer took the position that the prompt notice provision was a condition precedent to providing insurance coverage under the CGL policy. The court saw the case otherwise, noting that “when a condition would impose an absurd or impossible result, the agreement will be interpreted as creating a covenant rather than a condition.” The court concluded that a denial of coverage without a showing of prejudice would be such a result. The court stated that imposing “draconian consequences for even de minimis deviations from the duties the policy places on the insureds.” was unreasonable.

The court stated that “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.” The court distinguished a 1972 case (Members Mutual Insurance Co. v. Cutaia, 476, S.W. 2d 278 (Tex.1972) which held that prejudice was not required, by stating that the Department of Insurance changed the provision in CGL policies in Board Order 23080, which mandates an endorsement to all CGL policies that requires a prejudice showing when the insured does not comply with the prompt notice provision.

The Court stated that that 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. The Court felt that the failure to give notice of a claim poses a lesser risk of prejudice than the failure to obtain consent to a settlement. The Court rendered judgment that the insurer could not deny coverage because of untimely notice, and remanded the remaining issues to the trial court.

The sequelae of the Supreme Court’s PAJ decision is that PAJ has consistently made it more difficult for insurers to deny insurance coverage based on late notice in the absence of substantially convincing indications of prejudice. This interpretation has had a fairly profound impact on coverage determinations, particularly as may have related to occurrence-based policies. While the prejudice implicit in delay is not completely gone, it may well have been forgotten.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas insurance defense attorneys in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Feb 17th, 2014 Insurance Defense Litigation

Subrogation Insurer’s Rights Limited By New Texas Law–Fort Worth, Texas Subrogation Attorneys

Governor Rick Perry signed Texas House Bill 1869 back on May 25, 2013. This ground shaking bill, which took effect on January 1, 2014, affects the contractual subrogation rights of certain health and disability insurers. It is known as the Subrogation Reform Bill. It places a limit on the amount a health insurer (such as Blue Cross Blue Shield, Aetna, Humana, etc.) can recover out of a personal injury settlement in Texas.

A subrogated insurer’s recovery is now significantly more limited under the new law.

Under the new legislation, a health or disability carrier cannot generally recover from a first party (Uninsured/Underinsured Motorist and/or Medical Payments) coverage.

Additionally, when a covered individual (an insured) is not represented by an attorney, a carrier shall recover the lesser of (1) 50 percent of the gross recovery or (2) the total amount of benefits paid. When an insured is represented by an attorney, a carrier shall recover the lesser of (1) 50 percent of the gross recovery minus attorney’s fees and costs or (2) the total amount of benefits paid minus attorney’s fees and costs.

The Made Whole Doctrine does not apply to a recovery secured under this new law.

When the carrier is not actively represented by counsel, an attorney’s fees shall be apportioned by agreement between the carrier and the insured. The carrier is also to be held responsible for a pro rata share of expenses. If an agreement does not exist, the court shall award fees, not to exceed one third of the carrier’s recovery.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas subrogation attorneys in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Feb 17th, 2014 Insurance Defense Litigation

Texas Venue Rules–Fort Worth, Texas Civil Litigation Attorneys

The “venue” of a lawsuit can potentially have a significant impact on insurance and business litigation. Venue is simply concerned with the proper place (which county) to litigate the lawsuit. In Texas state courts, the proper venue can be established in more than one county based on rules regarding venue. Typically, the plaintiff chooses where to file the lawsuit initially, but a defendant might have reasons to transfer the lawsuit to another venue. In some situations, the convenience of the parties might dictate that venue is proper in one particular county. There may also be a strategic advantage in transferring a lawsuit to another venue because some venues are more favorable to a defendant than others. Texas lays out three rules for determining venue: general venue rules, permissive venue rules, and mandatory venue rules. The mandatory venue rules override the general rules in certain suits while the permissive rules provide more venue options than the general rules.

Unless a mandatory or permissive provision applies, the general rules say that a lawsuit should be brought in either the county in which “all or a substantial part or part of the events or omissions giving rise to the claim occurred,” or the county in which the defendant resides (if the defendant is a “natural born person”), or in the county of the defendant’s principal office in Texas, if the defendant is not a natural person. If none of the options are available, however, a plaintiff may file his suit in the county where he resided when the loss occurred. Thus, there are potentially four different counties where a plaintiff can file his lawsuit under Texas’s general venue rule.

Texas affords more flexibility in venue options to a defendant in certain circumstances through its permissive venue rules. The permissive venue rules allow some defendants the choice of being sued in a particular county. Some examples of permissive provisions include: (i) suits involving property coverages disputes against insurance carriers; (ii) suits against an estate; and (iii) suits alleging breach of warranty by a manufacturer of consumer goods.

Under the mandatory venue rules, there is only one place where a lawsuit can be filed. The Texas Codes provide several mandatory venue provisions. Some examples of lawsuits that have mandatory venue provisions include: (i) suits involving uninsured or underinsured motorist coverage; (ii) suits reviewing a workers’ compensation decision; and (iii) suits for the recovery of damages to real property.

A motion to transfer venue is the most common way to obtain a proper or more favorable venue but the timing is critical when moving to transfer venue. A defendant must file its motion before its answer or risk waiving its venue challenge.
If you need help navigating the intricacies of the Texas venue rules, contact Williams, Lacy, McClure & Parmelee. With over 90 years of combined experience, Williams, Lacy, McClure & Parmelee is prepared to discuss the options available to you.

James L. Williams, Jr.
Williams, Lacy, McClure & Parmelee
May, 2012

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

May 1st, 2012 Collections and Foreign Judgments, Construction Law, Contracts and Commercial Litigation, Employment Law Defense, Insurance Defense Litigation, Nonsubscriber Law, Workers' Compensation Defense