Mark L. Kincaid* & Trevor A. Taylor**

I. INTRODUCTION

This article surveys Texas insurance cases decided from mid-1999 to mid-2000. The discussion is divided into first party and third party cases. The article discusses decisions under different types of coverage, theories of recovery, defenses, practice and procedure, and other issues.

II. FIRST PARTY INSURANCE POLICIES & PROVISIONS

A. Automobile

A statute requiring an insurer to seek recovery of the insured’s deductible from a responsible third party, or to repay the deductible to the insured does not apply to county mutuals. Fireman’s Fund County Mut. Ins. Co. v. Hidi, 13 S.W.3d 767 (Tex. 2000). Former article 21.79E required insurers to refund the insured’s deductible, when the insurer paid a claim, and there was a third party who was potentially liable for the claim, and the insurer failed to seek recovery from the third party. The supreme court held that provisions in the Texas Insurance Code apply to county mutuals only if they are specifically enumerated within article 17.22, or if the other statute is made applicable to county mutuals by its specific terms. The general phrase in article 21.79E saying that it applied to “any insurer” was not a specific enough reference to include county mutuals.

An automobile policy provided no coverage for a wreck in Mexico. The coverage was limited to the United States and its territories or possessions, Puerto Rico, and Canada. The insured argued that the policy was ambiguous because it provided coverage for the auto “while being transported between their ports.” The court rejected the argument that this phrase could apply to travel in Mexico if the car left and entered the United States through a “port of entry.” Further, even if the policy could be read this way, the court found no summary judgment evidence to show this happened. Ruiz v. Government Emp. Ins. Co., 4 S.W.3d 838 (Tex. App.–El Paso 1999, no pet.).

An insurer did not breach its contract by tendering a settlement check that included the names of the insured’s current attorney and former attorneys as payees. The former attorneys were asserting a claim, the insurer always said that it was not going to resolve the disagreement, and the settlement check was accepted. In addition, the court found the insured’s current attorney wrongfully forged the endorsement of the former attorneys. Thus, the insurer was not guilty of wrongful conversion by stopping payment on the check, having its bank recoup the funds from the attorney’s account, and paying those funds into the registry of the court so the dispute could be resolved. The court awarded $2,500 as sanctions against the attorney for filing a frivolous appeal. Parker v. State Farm Mut. Auto. Ins. Co., 4 S.W.3d 358 (Tex. App.–Houston [1st Dist.] 1999, no pet.).

In Berry v. State Farm Mut. Auto. Ins. Co., 9 S.W.3d 884 (Tex. App.–Austin, 2000, no pet.), The plaintiff sued the insurance company for allegedly violating article 5.07-1 by refusing to cover the full cost of original manufacturer replacement parts. The court could not conclude that all non-OEM parts are substandard and that insurers must pay for new OEM parts in every claim regardless of the age or condition of the covered vehicle prior to the accident or the quality of the available non-OEM parts. The court held that article 5.07-1 does not abrogate the “like kind and quality” obligation under the Texas automobile insurance policy and does not require new OEM parts in satisfaction of all legitimate claims.

A named insured, who was injured while driving his pickup truck, brought an action against his automobile insurer to recover medical payments under a policy covering his other cars. The court concluded that the exclusion of medical payments coverage while occupying an owned vehicle not covered by the policy was valid. The court further concluded that the insured’s pickup truck was not a “covered auto” under the policy covering his other cars. Layton v. Mid-Century Ins. Co., 18 S.W.3d 308 (Tex. App.–Beaumont 2000, no pet.),

One court held that coverage for a “leased” automobile clearly did not apply to an employee’s personal vehicle, even though the company reimbursed him a fixed rate for mileage while he was using the car for business. The employee relied on the definition of “lease” from Webster’s Dictionary, which defines “lease” as “to grant the temporary possession or use of to another usually for compensation at a fixed rate.” The court rejected this argument, relying instead on several federal cases that hold a vehicle is “leased” only when the employer has the right of exclusive use or control. Griffin v. Travelers Indemnity Co., 4 S.W.3d 915 (Tex. App.–Dallas 1999, pet. denied).

The court got it wrong in Griffin. The fact that the Webster’s Dictionary definition supported the insured’s view shows that is one reasonable interpretation of the language. That federal cases take a different view only shows there is more than one reasonable construction. The same type of dichotomy was presented in Ramsay v. Maryland American Gen. Ins. Co., 533 S.W.2d 344 (Tex. 1976). There, the court had to decide whether an air conditioning repair truck used by the federal government was a “commercial” vehicle. Because the dictionary definition of “commercial” means for profits, and the federal government is not a for profit entity, the court found the policy was ambiguous and therefore provided coverage. The court of appeals erred by not applying the same reasoning in this case.

A car dealer that had sold and delivered a used car to a buyer and received a down payment no longer had insurance on the vehicle when the buyer wrecked it the next day before he obtained coverage. Tyler Car & Truck Center v. Empire Fire & Marine Ins. Co., 2 S.W.3d 482 (Tex. App.–Tyler 1999, pet. denied). The auto dealer’s property insurance applied only to “those autos you own.” The court found that once the buyer took possession of the car and completed all the conditions of the sale the dealer no longer owned it. The court reasoned that to hold otherwise would mean that the insured could expose the insurer to greater risk than the insurer agreed to assume.

After an insured died, the issuance of the policy to his wife was a “renewal” so that the insured’s original rejection of uninsured motorist coverage continued, without the need for a separate rejection by the wife. Poteet v. State & County Mut. Fire Ins. Co., 7 S.W.3d 679 (Tex. App.–Eastland 1999, no pet.).

A governmental employer’s self-insurance fund was not obligated to provide uninsured motorist coverage. Hill v. Texas Council Risk Mgm’t Fund, 20 S.W.3d 209 (Tex. App.–Texarkana 2000, pet denied).

B. Homeowners
In a case involving claim for damage to a foundation caused by plumbing leaks, the court found the policy was ambiguous and construed the policy to provide coverage for losses to the dwelling due to the plumbing leak, relying on the Balandran v. Safeco Ins. Co., 972 S.W.2d 738, 741 (Tex. 1998). Gehl v. State Farm & Cas. Co., 214 F.3d 634 (5th Cir. 2000).

The Sczepaniks filed suit after State Farm refused to pay their claim for damage, which they asserted was caused by water leaking from a broken sewer line. State Farm argued that the policy unambiguously excluded coverage for foundation damage. The Fifth Circuit reviewed the earlier Sharp and Balandran decisions, which concluded that the policy does not excluded losses caused by an accidental discharge of water such as a plumbing leak. Sczepanik v. State Farm Fire & Cas. Co., 211 F.3d 256 (5th Cir. 2000),

The plaintiffs alleged that their home suffered structural damage from foundation movement caused by plumbing leaks. The insurer asserted that the damage was not covered by the policy, claiming that the damage was not caused by plumbing leaks, but was the result of settlement from the draining of moisture beneath the home by an extensive invasion of tree roots. The defendant argued that it was not liable for the damage because the standard homeowners policy in Texas excludes coverage for all loss cause by foundation movement unless the foundation movement was the result of “the accidental discharge, leakage or overflow of water or steam within a plumbing, heating or air conditioning system or household appliance.” Relying upon the Texas supreme court decision in Balandran, the court concluded that the insurer can only be held liable for damage to the Plaintiff’s home to the extent that foundation movement was the result of settlement after soil erosion caused by plumbing leaks. The court rejected the plaintiff’s argument that the insurer must cover damage caused by tree roots. Mays v. State Farm Lloyds, 98 F. Supp. 2d 785 (N.D. Tex. 2000).

Another court of appeals concluded that the policy does not cover foundation damage caused by minor earth movement that is not related to a plumbing leak. The insured argued that the exclusion for “earthquake, land slide, or earth movement” had to be limited to abnormally large movements, not minor earth movement. The court of appeals rejected this argument. Dimotsis v. State Farm Lloyds, 5 S.W.3d 808 (Tex. App.–San Antonio 1999, no pet).

C. Life insurance

An ex-wife was entitled to recover a part of her ex-husband’s life insurance proceeds to pay off creditors, where the secondary beneficiary agreed orally and in writing to this arrangement. The court found this created a contractual right of recovery between the ex-wife and the secondary beneficiary. Copeland v Alsobrook, 3 S.W.3d 598 (Tex.App.–San Antonio 1999, pet. denied). The agreement was supported by consideration in the form of the ex-wife’s mutual promise to cooperate, her actual cooperation in presenting the claim to the insurance company, and her conduct in signing a release demanded by the insurance company as a condition of paying the claim.

In Carson v. Metropolitan Life Ins. Co., 72 F. Supp. 2d 725 (W.D. Tex., 1999), the widow of a detoxification patient sued accident insurer, to recover benefits. The court held that when a patient is hospitalized for a physical or mental illness and dies as a result of any treatment for that illness, there can be no recovery for accidental death benefits, if death as a result of the illness is excluded. The court concluded that because the death could have been reasonably anticipated as a result of treatment, it was not accidental or was otherwise excluded from coverage because it resulted from the treatment of an illness.

D. Title Insurance

A title insurer issued a policy guaranteeing “good and indefeasible title” to the insureds’ residence. It turned out that their seller had never recorded the deed. Ten years later when they tried to sell the house, this defect was discovered. They also discovered that several liens had been filed before their replacement deed was ultimately recorded. The insureds sued the title insurer and the agent that issued the policy. Chicago Title Ins. Co. v. Alford, 3 S.W.3d 164 (Tex. App.–Eastland 1999, pet. denied).

The court held that the title agent could not be liable for negligence in failing to determine whether the deed had been issued. Also, the title insurer’s promise of good and indefeasible title was not a misrepresentation. The title was good as of the date the policy was issued, even though the warranty deed had not been recorded. Finally, the court held that the title insurer did not breach its duty of good faith and fair dealing, because its liability never became reasonably clear.

E. Workers Compensation Insurance

The Texas Property and Casualty Insurance Guaranty Association was liable for a pre-receivership judgment against a workers compensation insurer that was later declared to be impaired. While the association could challenge a judgment by default, consent, or agreement, the judgment in this case was rendered after a and was based on a jury verdict. Texas Property & Cas. Ins. Guar. Ass. v. Johnson, 4 S.W.3d 328 (Tex. App.–Austin 1999, pet. denied).

Employers had cause of action against workers compensation insurers for failing to pay interest on premium rebates prior to the time the Texas Department of Insurance ordered payment of those rebates. Butler Weldments Corp. v. Liberty Mut. Ins. Co., 3 S.W.3d 654 (Tex. App.–Austin 1999, no pet.).

F. Other policies

A custom home builder sued under a builders risk policy to recover for fire loss, asserting claims of breach of contract, bad faith, and state violations. The insurer moved for summary judgment based on failure to comply with the policy’s reporting terms. The court concluded that the policy was not ambiguous. Although reading the policy as a monthly reporting policy required the court to consider to be surplusage, only if the policy was considered to be a monthly reporting policy was there a method of computing a premium. Because there would be no contract for insurance without a method of computing a premium, the court adopted the interpretation of the contract that found a valid contract. Moreover, the court concluded that if the policy were to be considered ambiguous, the extrinsic evidence showed that the parties intended to include the monthly reporting requirements in the contract. Tapatio Springs Builders, Inc. v. Maryland Cas. Ins. Co., 82 F. Supp. 2d 633 (W.D. Tex. 1999).

In Mid-Continent Cas. Co. v. United States Fire Ins. Co., 1 S.W.3d 251 (Tex. App.–Corpus Christi 1999, no pet.), a commercial property “all risk” policy excluded coverage for a loss that was disclosed upon taking an inventory. Betco Scaffolds Co. v. Houston United Cas. Ins. Co., __S.W.3d __, 2000 WL 1509994 (Tex. App.–Houston [14th Dist.], Oct. 12,2000, no pet.). The insured suffered two burglaries, resulting in damages that it thought were too small to justify an insurance claim. When a later inventory showed that the losses were greater, the insured filed a claim. The court held that the insurer properly denied the claim under an exclusion for “loss for shortage disclosed upon taking inventory[.]” The court rejected the insured’s attempt to limit this exclusion only to losses that were solely documented by an inventory. In reaching this conclusion, the court rejected the insured’s argument that the existence of other precedents supporting its interpretation made that interpretation reasonable. The court held that it was the court’s duty to make its own determination as to whether the insured’s interpretation was reasonable.

III. FIRST PARTY THEORIES OF LIABILITY

A. Breach of Contract

An insured who alleged and offered summary judgment proof that she asked her agent to raise her uninsured limit, but he did not, stated a cause of action for breach of contract. Frazer v. Texas Farm Bur. Mut. Ins. Co., 4 S.W.3d 819 (Tex. App.-Houston [1st Dist.] 1999, no pet.).

B. Unfair Insurance Practices, Deceptive Trade Practices & Unconscionable Conduct

In Griggs v. State Farm Lloyds, 181 F.3d 694 (5th Cir. 1999), the court held that no reasonable trier of fact could find the plaintiff documented losses as required as a condition precedent in the policy. Absent the insured’s compliance with this condition precedent to coverage, the insurance had no duty to provide benefits. Likewise, the court concluded, no reasonable trier of fact could find that State Farm Lloyds handling of the Plaintiff’s claim was characterized by bad faith. The court noted that the insurer repeatedly extended, with reservation of rights, its own deadlines for the plaintiff’s compliance. The court further observed that the plaintiff was still unable to provide comprehensible documentation of the loss. Accordingly, the court concluded the insurer was not liable as a under Texas common law, the Insurance Code, or the DTPA.

After concluding that the plaintiff had failed to comply with the reporting requirements of a builders risk policy, the court granted summary judgment for the insurer on the Plaintiff’s bad faith claim, noting that when an insurer has denied a claim that is in fact not covered there can be no claim of bad faith or violation of the Texas Insurance Code for unfair claimed settlement practices. Moreover, the court concluded that the record did not indicate any conduct on the insurers part in denying coverage that was so extreme as to cause injuries independent of the policy claim. Tapatio Springs Builders, Inc. v. Maryland Cas. Ins. Co., 82 F. Supp. 2d 633 (W.D. Tex., 1999).

Insurance agents were not “consumers” entitled to sue under the DTPA when their agency contracts were terminated by the insurer, because they did not seek goods or services. They could sue as “persons” under article 21.21 for unfair insurance practices. Tweedell v. Hochheim Prarrie Farm Mut. Ins. Ass’n, 1 S.W.3d 304 (Tex. App. 1999, no pet.). Relying on the supreme court’s decision to the same effect in Crown Life Ins. Co. v. Casteel, 22 S.W.3d 378, Tex. 2000), the court of appeals held that the agents also could not sue under any of the incorporated DTPA provisions that referred to consumer status or involved “goods” or “services.” They could, however, sue for violations of sections that did not have these requirements, like §17.46(b)(3), which prohibits causing confusion and misunderstanding as to the connection or association with another; § 17.46(b)(8), which prohibits disparaging the business of another by false or misleading representations of facts; and § 17.46(b)(12), which prohibits representing that an agreement confers or involves rights or obligations it does not have.

A title insurer was not guilty of misrepresentations by promising good and indefeasible title. At the time the policy was issued, the buyers did receive good title even though the seller did not record their warranty deed. Chicago Title Ins. Co. v. Alford, 3 S.W.3d 164 (Tex. App.–Eastland 1999, pet. denied).

In Frazer v. Texas Farm Bur. Mut. Ins. Co., 4 S.W.3d 819 (Tex. App.–Houston [1st Dist.] 1999, no pet.), the court held that an agent’s failure to increase uninsured motorist limits as requested by the insured was a “mere breach of contract” and did not state a cause of action for deceptive trade practices.

The Frazer court clearly erred in its analysis. The court relied on a line of cases that characterized as a “mere breach of contract” a defendant’s failure to do what was stated in a written agreement. In this case, however, the summary judgment proof showed that the agents said – i.e., represented – that he would get increase uninsured motorists limits. When he failed to do so, that was a misrepresentation, and a misrepresentation of insurance benefits does state a cause of action for a deceptive trade practices. See Aetna Cas. & Surety Co. v. Marshall, 724 S.W.2d 770 (Tex. 1987).

In Texas Farmers Ins. Co. v. Cameron, __S.W.3d__, 2000 WL 225887 (Tex. App.–Dallas Feb. 29, 2000, no pet.), the insurer breached its duty of good faith and fair dealing. The insurance investigator never followed up or inquired further into discrepancies between some of the witnesses’ stories. The insurer did not even interview the insured’s alibi witnesses. There was evidence that the fire represented a net financial loss to the insured, and there was no evidence that anyone removed valuables from the house before the fire.

C. Prompt Payment of Claims – Article 21.55

In a case where the insurer failed to defend the insured against a claim involving an advertising injury, the insured brought a claim against the insurer for violations of article 21.55. The insurer argued that the insured was not entitled to statutory damages under the 21.55 definition of “claim.” The court rejected the insurer’s argument that the insured’s request for a defense of the underlying lawsuit was not a “first party” claim. The court described this argument as “ludicrous,” noting that the insured did not submit the claim for reimbursement “for its health.”

The Sentry court next rejected the insurer’s argument that to the extent it sought a defense from the insurer for the underlying lawsuit, the “claim” did not seek payment “by the insurer directly to the insured,” as required by article 21.55. The court held that by failing to pay for the insured’s defense, the insurer was obligated to pay the cost of that defense directly to the insured. As such, the insured’s claim was a “first party” claim falling under article 21.55 by failing to pay the insured’s claim, the court held that the insurer violated article 21.55 and was therefore liable for the statutory penalty of 18% as well as the actual costs incurred by the insured in defending the underlying lawsuit. Sentry Ins. Co. v Greenleaf Software, Inc., 91 F. Supp. 2d 920 (N.D. Tex. 2000).

In Bonner v. Allstate Ins. Co., __S.W.3d__, 2000 WL 12962 (Tex. App.–Austin 2000, no pet.), following a car accident, the insured submitted written notice of her claim to her insurer for personal injury protection (PIP) benefits under her automobile insurance policy. The plaintiff submitted notice of a chiropractic bill, and Allstate reduced that claim and promptly paid a reduced amount. Later, the plaintiff submitted a written notice of claim for uninsured motorist (UM) benefits under the same policy. She attached supporting documents and offered to settle her claim. Allstate denied plaintiff’s claim for UM benefits. Plaintiff then filed suit against Allstate seeking to recover the UM benefits under her policy. Plaintiff alleged that Allstate failed to comply with the prompt payment provision of article 21.55 because it did not acknowledge her UM claim within fifteen days of receipt. The court concluded that each time an insured files a claim seeking payment of benefits under any of the coverages, the insurer must comply with the procedure prescribed in article 21.55. Allstate was liable to pay the insured $1000 in UM benefits. Simply because Allstate was entitled to an offset of the UM damages by the amount of the PIP coverage payment, did not excuse Allstate from complying with article 21.55. Accordingly, the court held that plaintiff was entitled to recover her attorney’s fees under article 21.55.

An insured brought an action against automobile insurer to recover uninsured motorist (UM) benefits and penalties and fees for failing to timely notify the insured of the inability to accept or reject the claim within the statutory time period. The insured later accepted the insurer’s offer to settle her bodily injury claims, excluding attorney’s fees and statutory penalties. The Court held that in settling UM claim, the insured could reserve for later determination that she was entitled to penalties and fees. Northwestern Nat. County Mut. Ins. Co. v. Rodriguez, __S.W.3d__, 2000 WL 800571 (Tex. App.–San Antonio Feb. 9, 2000, no pet.).

In Texas Farmers Ins. Co. v. Cameron, __S.W.3d__, 2000 WL 225887 (Tex. App.–Dallas, 2000, ), the insurer asserted that the court erred in assessing damages pursuant to article 21.55 in the absence of any pleadings and proof that Farmers violated any provision of the article. The insured’s petition stated “in addition, pursuant to the Texas Insurance Code § 21.55(6), [the Camerons] are entitled to eighteen percent (18%) per annum of the amount of damages as well as attorney’s fees.” The court held that this statement with the specific reference article 21.55, sufficed to give the insurer fair notice of the plaintiff’s claims for damages.

The court also found the proof sufficient to support the insured’s claim under article 21.55. The insurer testified that the plaintiff’s proof of claim was dated May 1, 1995. Under the statute, the insurer had forty-five days to either accept or reject the claim. Thus, the insurer’s failure to reject the claim until September 18, 1995, was impermissibly late.

Next, the insured raised a question as to whether the prejudgment interest is recoverable on the 18% penalty assessed under article 21.55. The court concluded that the court erred in awarding prejudgment interest on the article 21.55-penalty damages.

Finally, the insurer asserted that the court incorrectly calculated the amount of article 21.55 damages. It argued that the penalties should be computed as 18% of the policy coverage, arguing that the insurer should not be penalized for the plaintiff’s delay in getting to trail. The insureds were entitled to receive 18% of the policy coverage, calculated on a yearly basis, from the date all information was received by the insurer to the date of judgment. The court agreed with the insured’s method of calculation, noting that because Farmers had rejected the claim for more than three years, it had to pay the statutory penalty of 18% per annum for the full three years plus.

D. Breach of the Duty of Good Faith and Fair Dealing

An insured’s loss was excluded by the “inventory exclusions provision” of its commercial policy. Because the loss was excluded the court held that the insurer also was not liable for breaching its duty of good faith and fair dealing. Betco Scaffolds Co. v. Houston United Cas. Ins. Co., __S.W.__, 2000 WL 1509994 (Tex App.–Hou. [14th Dist.]), no pet. h.). The court recognized that even without coverage, an insurer, in denying a claim, still may commit an act so extreme as to cause independent injury. In this case, there is no evidence of such conduct.

A title insurer that did not breach its contract by failing to discover that a warranty deed had not been recorded also did not breach its duty of good faith and fair dealing, because its liability never became reasonably clear. Chicago Title Ins. Co. v. Alford, 3 S.W.3d 164 (Tex. App.–Eastland 1999, pet. denied).

E. Unfair discrimination

McNeil v. Time Ins. Co., 205 F.3d 179 (5th Cir., Feb 24, 2000), The insured, a Texas optometrist, sought to insure himself and his employee in his optometry practice under a general health insurance plan. After acquiring the policy, the insured was diagnosed with AIDS. Before his death, the insured brought suit asserting various statutory violations. The Fifth Circuit affirmed the dismissal of the insured’s claim under article 21.21-3 of the Texas Insurance Code, which prohibits discrimination against handicapped persons. The court discussed, without deciding whether AIDS is a handicap as defined by the statute. The court assumed that AIDS is a handicap. The court noted that the article focuses on the conduct of the insurer. The phrase “because of the handicap” indicates the insurer must know that the applicant is handicapped and the insurer must limit coverage to that individual for that reason. The court observed that the insured was not handicapped when the insurer issued the policy to him, or at least the insurer did not know he was. Thus, the limitation by the insurer could not have been “because of the handicap.”

Moreover, the statute specifies that the insurer may not limit the amount or extent of the coverage available “to an individual.” In this case, the insurer offered the general policy without distinguishing between individual applicants based on whether they had AIDS. Thus, the court concluded that the insurer did not violate article 21.21-3 by placing a limit of $10,000 on health care costs for persons with AIDS.

Next, the court addressed the plaintiff’s charge that the insurer violated article 21.21, section 4(7)(b) by unfairly discriminating against the insured. The court noted that plaintiff did not attempt to define the class to which the insured belonged at the time the insurer issued the policy. Moreover, the plaintiff had not alleged that any other individuals of any defined class were charged rates or provided benefits different from those charged and provided to the insured. Thus, the court found plaintiff failed to state a claim under this section of article 21.21.

F. Negligence

Summary judgment proof showing that the insured asked the agent to raise her uninsured motorist coverage limits but that he failed to do so, stated a cause of action for negligence against the agent. The court stated that an agent has a duty to use reasonable diligence in attempting to place the requested insurance and to inform the client promptly if unable to do so. Frazer v. Texas Farm Bur. Mut. Ins. Co., 4 S.W.3d 819 (Tex. App.–Houston [1st Dist.] 1999, no pet.).

A title agent and insurer could not be liable for negligently failing to make sure that the insureds’ warranty deed from the seller was properly recorded. The court held that neither the title insurer nor the agent had any duty to make certain the deed was filed. The policy was a contract of indemnity, not a representation about the status of the title. Chicago Title Ins. Co. v. Alford, 3 S.W.3d 164 (Tex. App.–Eastland 1999, pet. denied).

An insurer could not be liable for negligent misrepresentation or fraud in selling an automobile policy that excluded travel in Mexico to an insured who lived near the border. The court found that the policy clearly excluded travel in Mexico, and the insured had a duty to read that language. Ruiz v. Government Employees Ins. Co., 4 S.W. 3d 838 (Tex. App.–El Paso 1999, no pet.).

G. ERISA

In Clift v. Clift, 210 F.3d 268 (5th Cir. 2000), an interpleader action was brought to determine the proper beneficiary under a life insurance policy governed by ERISA. The Fifth Circuit held that the language in the divorce decree providing that the ex-wife was divested “of all right, title, interest, and claim in and to any and all policies of life insurance . . . insuring [her ex-husbands] life,” was sufficiently explicit to prevent her from collecting proceeds under her ex-husbands policy.

In Pegram v. Herdrich, 120 S. Ct. 2143 (2000), the insured was covered by an HMO through her husband’s employer. After the insurer required her to wait eight days for an ultrasound of her inflamed abdomen, her appendix ruptured, causing peritonitis. The insured sued the HMO for fraud, and the HMRO responded that ERISA preempted the fraud counts and removed the case to federal court.

The Supreme Court held that mixed treatment and eligibility decisions by an HMO and HMO physicians are not fiduciary decisions under ERISA. The Court rejected the insured’s argument that the incentive scheme at issue with this particular HMO was different from inducements offered by other HMOs. The Court further stated that an ERISA fiduciary may have financial interests adverse to its beneficiaries.

The threshold question becomes whether or not the person providing services under the plan was performing a fiduciary function when taking the action subject to complaint. Finally, the Court concluded that Congress did not intend for an HMO to be treated as a fiduciary to the extent that it makes mixed eligibility decisions acting through its agents. The Court analogized to the common law governing trustees, noting that the defining concern is the payment of money in the beneficiaries interest. Mixed eligibility decisions have only a limited resemblance to that concern. The Court noted that Congress has promoted the formation of HMOs for twenty-seven years, and that the judiciary would be acting contrary to congressional policy if it were to entertain an ERISA fiduciary claim that threatened a wholesale attack on the existing structure of HMOs.

In Corporate Health Insurance, Inc. v. Texas Dept. of Ins., 215 F.3d 526, (5th Cir. 2000), insurers challenged Texas Senate Bill 386, which created a statutory cause of action against managed care entities that fail to meet an ordinary care standard for health care treatment decisions. The Act also established procedures for independent review of health care determinations to decide whether they were appropriate and medically necessary. Finally, the Act protects physicians from HMO-imposed indemnity clauses and from retaliation by HMOs for advocating medically necessary care for their patients.

In evaluating the liability provisions of the Act, the Fifth Circuit found that the provisions did not encompass claims based on a managed care entity’s denial of coverage. Rather, the Act would allow for suits involving claims that a treating physician was negligent in delivering medical services, thus imposing vicarious liability on managed care entities for that negligence. Such vicarious liability does not “relate to” the managed care provider’s role as an ERISA plan administrator or affect the structure of the plans themselves so as to require preemption. The court observed that a suit for medical malpractice against a doctor is not preempted by ERISA simply because of services were arranged by an HMO and paid for by an ERISA plan.

The court reviewed the anti-retaliation and anti-indemnification provisions of the Act, concluding that these provisions govern managed care entities as health care providers and thus are to preempted by ERISA.

Finally, the court reviewed the independent review determination provision of the Act. While the language of the Act limited independent review only of claims that the patient brought under the liability provisions of the Act, the court noted that various sections of the Insurance Code did not so limit independent reviews. The court noted that “adverse determinations” by managed care entities may be reviewed, which includes coverage decisions. The court found that such a review is squarely within the ambit of ERISA’s preemptive reach.

The court further held that the independent review provision is not saved by ERISA’s savings clause. The independent review mechanism through which plan members may seek benefits due under the terms of the plan is identical to relief offered under section 1132(a)(1)(B) of ERISA. As such, the independent review provisions conflict with ERISA’s exclusive remedies and cannot be saved by the savings clause. The court ultimately severed the preempted provisions from the remaining parts of the Act.

In Silva v. Kaiser Permanente, 59 F. Supp. 2d 597 (N.D. Tex. 1999), the insureds sued Kaiser and several doctors alleging claims for medical malpractice and negligence. The court noted that the insured’s medical negligence claim against the health plan based on respondeat superior would not be preempted by ERISA. However, any claim that the insured’s death resulted from Kaiser’s decisions and restrictions concerning planned benefits would be preempted by ERISA.

A state court could not enjoin an ERISA suit against an insurance company that was in receivership. Bodine v. Webb, 992 S.W.2d 672, 675-78 (Tex. App.–Austin, 1999, no pet.). Employer’s Casualty was placed in receivership. This resulted in an injunction in any lawsuit brought outside the receivership proceedings. Some former employees filed a separate suit in federal court under ERISA alleging mismanagement of their employee benefit plan, breach of fiduciary duties, and other claims relating to the amount of their retirement benefits. The state court granted an injunction against prosecution of the federal court suit. The court of appeals held this was an abuse of discretion. The court of appeals concluded that the federal court suit under ERISA was an action in personam, which meant one court could not enjoin the other. Further, ERISA provided exclusive federal court jurisdiction over this claim. Finally, this was not the kind of claim where McCarran-Ferguson provided that the state law would preempt federal law.

The estate of deceased participant in an employee benefit plans sued for a determination that the plan’s designation of the participant’s ex-spouse as beneficiary was not controlling, following the party’s divorce. The court first found that the claim on behalf of the estate was preempted, to the extent that it relied upon the Texas beneficiary re-designation statute. The court noted that almost every circuit to consider the issue, including the Fifth Circuit, has determined that a state law governing the designation of an ERISA beneficiary “relates to” the ERISA plan, and is therefore preempted. Manning v. Hayes, 212 F.3d 866 (5th Cir. 2000).

While ERISA required the conclusion that state law was preempted, the court nonetheless held that the traditional deference given to state law in these areas supports the court’s decision to borrow from state law when determining the federal common law that should control such claims. The rule of federal common law for this dispute holds that a named ERISA beneficiary may waive his or her entitlement to the proceeds of an ERISA plan providing life insurance benefits, provided that the waiver is explicit, voluntary, and made in good faith. The court found no waiver in this case, holding that the prenuptial agreement was executed prior to the time that the ex-spouse was designated as beneficiary under the policy. Moreover, the court found that the prenuptial agreement was not incorporated into the divorce decree, such that the terms of the agreement were revived and applied to the parties then-existing interests.

In McNeil v. Time Ins. Co., 205 F.3d 179 (5th Cir. 2000), the court concluded that the insured’s plan was an ERISA plan. The insured filled out an employee application. The partnership then paid the first premium for both the insured and another employee. Because the partnership contributed to the plan, the plan did not fall within ERISA’s safe harbor provision. The court next rejected the insured’s argument that the partnership’s involvement in interstate commerce was not sufficient to implicate ERISA under 29 U.S.C. section 1003(A)(1). The insured conceded that partnership purchased glasses from other states they were then shipped to the office in Texas. Moreover, because the insurer was not in Texas, even setting up the insurance policy constituted interstate commerce. The court concluded that the partnership was involved in interstate commerce, at least for the purposes of ERISA. Finally, noting that ERISA’s preemption of state law claims is extensive, the court found that all the insured’s state law claims were preempted by ERISA.

In a case involving the denial of health benefits to a business owner’s wife, the court first concluded that the owner’s plan was an ERISA plan because it covers other employees in addition to the owners. Vega v. National Life Ins. Services, Inc., 188 F.3d 287 (5th Cir. 1999). The court then determined that the administrator abused its discretion in denying benefits, noting that the administrator failed to conduct a reasonable investigation of the facts surrounding the claim.

In Carson v. Metropolitan Life Ins. Co., 72 F. Supp. 2d 725 (W.D. Tex. 1999), the insured argued that the insurer’s initial decision to deny coverage was arbitrary because it was based solely upon a review of the death certificate. In rejecting the insured’s argument, the court concluded that there is no general duty to investigate in ERISA claims. The court noted that the administrator must support its denial with substantial evidence. Even assuming that the certificate alone did not provide such evidence, the court found that any investigative deficiency was cured through the review process. The court noted that in the review process the insurer considered all the medical documentation contained in the decedent’s file.

In Dew v. Metropolitan Life Ins. Co., 69 F. Supp. 2d 898 (S.D. Tex. 1999), A plan participant who allegedly suffered from chronic fatigue syndrome brought suit alleging that the administrator improperly denied her claim for long term disability. The court concluded that the administrative record in the case contained sufficient evidence to support the denial. The court noted that MetLife requested medical records from both of the insured’s physicians. MetLife further obtained an independent medical review that concluded that the chronic fatigue syndrome diagnosis was not supported by the medical evidence in the record. When the insured’s physician was given an opportunity to respond to this conclusion, the doctor wrote a conclusory letter restating the original diagnosis. The plaintiff’s physician did not provide any additional medical records. The court concluded that MetLife’s decision was supported by substantial evidence.

H. Americans with Disabilities Act

In McNeil v. Time Ins. Co., 205 F.3d 179 (5th Cir. Feb 24, 2000, the Court concluded that insurer did not violate Title 3 of the ADA by offering a policy that limits the amount of coverage for AIDS to $10,000 over the first two years of the policy.

I. Other Theories

In Transitional Learning Community at Galveston, Inc. v. United States Office of Personnel Mgm’t. 220 F.3d 427 (5th Cir. 2000) an outpatient rehabilitation facility, which had provided services to Retired United States District Court Judge Hugh Gibson after he suffered a stroke, sought review of Office of Personnel Management (OPM) ruling that denied the facility’s claims for payment under government employees health insurance policy. The court held that the bill submitted by TLC for services rendered to Judge Gibson was not covered because TLC is “a non-covered facility.”

IV. AGENTS, AGENCY, AND VICARIOUS LIABILITY

A. Individual liability of agents, adjusters, and others

An insured sued his homeowners insurer and independent agent, seeking to recover for the loss of sports memorabilia in burglaries. Griggs v. State Farm Lloyds, 181 F.3d 694 (5th Cir. 1999). The Fifth Circuit held that the insured alleged no actionable facts specific to the agent, noting that the insured’s factual allegations focused solely upon State Farm Lloyds’ conduct and denial of his claim. The court dismissed the agent’s pre-purchase statement that State Farm Lloyds would handle the insured’s claims professionally, as well as post-claim assurances that she would monitor the progress of the insured’s claim, as non-actionable puffery rather than actionable representations of a specific material fact.

The insureds brought suit against an engineering firm to recover for its role in the insurer’s denial of its claim for hail losses. Dagley v. Haag Engineering Co., 18 S.W.3d 787 (Tex. App.–Houston [14th Dist.] 2000, no pet.). The court held that absent privity of contract with the insured, an insurance carrier’s agents or contractors owe no duty of good faith and fairdealing to the insured. The court rejected the insured’s DTPA claims, concluding that none of the alleged misrepresentations were directly communicated to the insureds. The court dismissed the insureds’ Insurance Code claims, concluding that the engineering firm was not engaged in the business of insurance.

In Reyna v. Safeway Managing General Agency, 27 S.W.3d 7 (Tex. App.–San Antonio 2000, pet granted, judgm’t vacated w.r.m), the court considered the individual liability of one agent who was doing business as the insurance agency that failed to forward suit papers, resulting in a default judgment against its insured. The defendants contended that the evidence was insufficient to impose liability on one individual agent based on a unity or blurring of identity between him, the agency, and another agent. The court found sufficient evidence to support liability. The agent had filed an assumed named certificate for the business. He was the local recoding agent on the insured’s policy and had a producer agreement with the insurer at the time of the events giving rise to the lawsuit. The agency used the same letterhead, whether the conduct was by this agent or the other one. The agent’s subsequent transfer of ownership to the other agent did not change the result.

B. Insurer’s vicarious liability for agent’s conduct

An agency agreement between an insurer and its agent did not require the insurer to indemnify the agent for the agent’s knowing misrepresentations. Gulf Ins. Co. v. Burns Motor, Inc., 22 S.W.3d 417 (Tex. 2000). An agent was sued by an insured for failing to obtain proper liability coverage. The insured and agent entered into an agreed judgment by which the agent admitted to knowing representations, and the insured was awarded treble damages under the DTPA. The supreme court construed this agreed judgment to be an admission by the agent that he “knowingly” made misrepresentation – i.e., with actual awareness of the falsity, deception, or unfairness of the representations. Based on this construction of the agreed judgment, the supreme court concluded that the insurer had no obligation to indemnify the agent for his liability. The agreement between the insurer and agent provided there was no indemnification “to the extent [the] Agent has caused, contributed to or compounded such error.”

In Amoco Production Co. v Hydro Blast Corp., 90 F. Supp. 2d 727 (N.D. Tex. 1999), the insured sued the insurer’s agent on the grounds that necessary pollution coverage was not included in the policy. The court found that the insured was completely aware of what it was buying and had every opportunity either to refuse the policy containing the pollution exclusion or purchase pollution coverage.

V. THIRD PARTY INSURANCE POLICIES & PROVISIONS

A. Automobile liability insurance

An insurer’s maximum liability was $100,000, whether it was paid under the uninsured motorists coverage or the liability coverage. Payment of that amount under either coverage would mean the insurer did not owe any additional coverage under the other. Hanson v. Republic Ins. Co., 5 S.W.3d 324 (Tex. App.–Houston [1st Dist.] 1999, pet. denied). The court also held that the family member exclusion in the policy was not void as against public policy, to the extent it limited coverage beyond the statutorily-mandated $20,000. Finally, the court of appeals held that the insurer could offset the $2,500 paid under the personal injury protection coverage against the amount of liability coverage.

In Villegas v. Nationwide Mutual Ins. Co., 10 S.W.3d 380 (Tex. App.–Austin, 1999, pet. denied), the passengers of a rental car inured in an automobile accident sued the driver’s insurer for breach of contract for refusing to provide coverage. Specifically, the plaintiffs sought underinsured motorist coverage from Nationwide as persons occupying “a covered auto.” The court concluded there was no evidence that the rental car was rented as a temporary substitute for the insured’s vehicle.

In Struna v. Concord Insurance Services, Inc., 11 S.W.3d 355 (Tex. App.–Houston [1st Dist.] Jan. 6, 2000, no pet.), a driver was injured when her vehicle was struck by the insured’s vehicle. The plaintiff then took a default judgment against the insured, and filed suit against the insurer when the insurer failed to pay the default judgment. The court concluded that the amount of the insured’s obligation had been finally determined by judgment after a at which evidence had been presented. Moreover, the insured’s failure to notify the insurer did not absolve the insurer from the underlying judgment, unless the lack of notice prejudiced the insurer. Finding no prejudice, the court enforced the judgment against the insurer. The court also held that the insurer was not prejudiced by the insured’s failure to cooperate, noting the availability of other witnesses, which would allow the insurer to conduct an investigation.

In Texas Farmers Ins. Co. v. Fruge, 8 S.W.3d 464 (Tex. App.–Beaumont Jan. 27, 2000, no pet.), the plaintiff alleged that the insurer improperly named medical providers, Medicare, or both as co-payees with the plaintiff in settling her PIP claim. The court rejected the insurer’s argument that it was obligated to honor the plaintiff’s assignments to medical providers. The court concluded that according to the terms of the policy the stamped notations “benefits assigned” was not an assignment. As for naming Medicare as a co payee, the court found that the insurer may have been correct in not making an unconditional payment to the plaintiff. However, the record reflect that the insurer appeared to have named Medicare as a payee on check totaling $1,352, but the record only shows a Medicare payment of $168.50. Accordingly, it appeared that the insurer wrongfully named Medicare as a co-payee on part of the PIP benefits.

A Texas resident was driving a Hertz rent car in Florida and was at fault in a wreck. Her insurer paid the claim and then tried to recover from Hertz, relying on the “other insurance” clause in the policy, which provided that the driver’s liability insurance would be excess over any other applicable liability insurance. The court held that the liability insurer was not entitled to recover from Hertz. Under Florida law, the driver signed a valid agreement making her insurance primary. Under Texas law, Hertz’s self insurance was not “other applicable liability insurance.” Hertz Corp. v. Robineau, 6 S.W.3d 332 (Tex. App.–Austin 1999, no pet.).

A commercial automobile insurer was only obligated to pay $100,000 under a commercial vehicle liability insurance policy, despite a regulation that took effect during the policy term requiring $500,000 worth of coverage. The insured was involved in a wreck leading to liability significantly in excess of either policy limit. The insured argued that the contract providing for only $100,000 was void because it was in conflict with the regulation requiring a higher amount. The insured analogized this to the cases that struck down the family member exclusion, to the extent that exclusion limited coverage to less than the statutorily-mandated minimum. The court of appeals rejected this argument and held that the $100,000 limit applied. The court reasoned that the obligation to obtain $500,000 in coverage was on the insured, not the insurer. In part, the court reasoned that the amount of coverage was “totally within the control of the insured.” Tri-State Pipe & Equip., Inc. v. Southern County Mut. Ins. Co., 8 S.W.3d 394 (Tex. App.–Texarkana 1999, no pet.).

The reasoning of the court of appeals is flawed. If the Legislature, or a properly authorized agency, has determined that protecting the public requires a certain level of coverage, it is much more consistent with that purpose to require both the insured and insurer to obtain it. It is hardly an onerous burden to require insurers to insist on collecting more on premiums so they may provide more coverage to meet the statutory minimum. The result reached by the court encourages cheap, dishonest employers to buy less coverage than is required, and allows insurers to condone that with impunity, while injured members of the public suffer. If the insured is sufficiently solvent, the injured parties can collect anyway. It is in those cases where a less well-funded defendant is involved that the issue matters, and that is precisely the kind of insured most likely to pay for less coverage.

B. Homeowners liability insurance

A foster child who was molested by her foster parent was a “resident” of the foster home, so that insurance coverage was excluded by policy language that denied liability coverage to “insureds,” including residents of the household. Easter v. Providence Lloyds Ins. Co., 17 S.W.3d 788 (Tex. App.–Austin 2000, pet. denied). The court found the child was a resident of the foster home because for at least five months she lived there, ate her meals there, and shared a bedroom with other foster children. The court also concluded that she could be a resident of the foster home, even though she could still be considered a resident of her mother’s home. The court held that a person can have more than one residence, especially when that person is a minor.

The insurer, which had issued homeowners policy and business policies to the insured, sought a declaration of its rights and responsibilities toward the insured, who was a defendant in a state court action brought by parents seeking damages for the death of their young child in a house fire. State Farm Lloyds v. Goss, 109 F.Supp.2d 574 (E.D. Tex. 2000). The court found no duty to defend under the homeowner policy, rejecting the insured’s argument that she was not the owner of the property because she simply had “naked legal title” to the property at the time of the occurrence.

Homeowner’s insurer brought suit seeking declaration that “household exclusion” negated any duty to defend or indemnify. State Farm Cas. Ins. Co. v. Keegan, 209 F.3d 767 (5th Cir. 2000). The Fifth Circuit found that as a matter of law the policy language was ambiguous, and accordingly adopted to construction of the policy that afforded coverage to the insured. In construing the policy favorably to the insured, the court found that the severability clause treats each named insured separately. Under this interpretation, when the severebility clause is read in conjunction with the household exclusion, the policy provides coverage to the insured.

C. Comprehensive general liability insurance

The pollution exclusion excluded coverage for claims against a municipal utility district for contaminated drinking water. Mid-Continent Cas. v. United States Fire Ins. Co., 1 S.W.3d 251 (Tex. App.–Corpus Christi 1999, no pet.).

In Mid-Continent Cas. Co. v. Safe Tire Disposal Corp., 16 S.W.3d 418 (Tex. App.–Waco 2000, pet. denied), a waste tire processing facility brought an action against its (CGL) insurer claiming that the policy covered liability to its neighbors for a fire. The court concluded that the interpretation of the “hostile fire” exception to an exclusion was ambiguous, and thus construed the exclusion against the insurer. The court next concluded that the rubber chips and wire from which the fire originated did not constitute “waste” under the policy, and therefore the exclusion did not apply.

In American Motorists Ins. Co. v. Occidental Chemical Corp., 16 S.W.3d 140 (Tex. App.–Houston [1st Dist.] 2000, pet. denied), a property owner brought an action against the contractor’s umbrella liability insurer because the contractor failed to list the owner as an additional insured on the (CGL) policy. The court held that because the contractor was obligated to provide insurance to the property owner, the property owner was an insured under the policy and therefore, was entitled to file a claim with the insurer.

An electrician who was employed by a subcontractor was injured when he fell on an incline at the general contractor’s job site. He sued the general contractor, arguing that the general contractor’s negligence in allowing this incline to be muddy and slippery was the cause of his injuries. The contractor was named as an additional insured on the subcontractor’s policy, but only for liability “arising out of” the subcontractor’s work for the general contractor. The court of appeals held that the general contractor’s liability did “arise out of” the subcontractor’s work. The pleadings alleged a connection between the injury and the subcontractor’s work. The court adopted what it considered the majority view from federal courts, holding that it is not necessary for the named insured’s acts to have caused the accident, and that it is enough that the employee was injured while present at the scene in connection with performing the subcontractor’s business, even if the cause of injury was the negligence of the additional insured. McCarthy Brothers Co. v. Continental Lloyds Ins. Co., 7 S.W.3d 725 (Tex. App.–Austin 1999, no pet.).

The owner of a gas loading terminal was not an additional insured under the trucking company’s policy. An employee of the trucking company was severely burned while loading gasoline into a truck at the facility. He sued the facility owner for negligence in maintaining the facility. The policy included as insureds anyone using a covered auto, but not “while moving property to or from a covered auto.” The court found this exclusion applied. Coastal Transport Co. v. Crown Central Petroleum Corp., 20 S.W.3d 119 (Tex. App.–Houston [14th Dist.] 2000, no pet.).

The court also found that the facility owner was not an insured under language providing coverage to “anyone liable for the conduct of an insured described above but only to the extent of that liability.” The insured trucking company and the facility owner were alleged to be jointly and severally liable for the employee’s injuries. The facility owner argued that this meant it was “liable for the conduct of an insured,” because it could be jointly and severally liable for the trucking company’s conduct. The court rejected this argument, finding a distinction between being liable for someone else’s conduct, and being jointly and severally liable to pay a judgment.

A comprehensive general liability insurer for a company that provided financing and referrals to doctors who perform elective surgeries brought suit seeking declaratory judgment that it had no duty to defend its insureds in suits alleging negligent referrals. Potomac Ins. Co. v. Jay Hawk Medical Acceptance Corp., 198 F.3d 548 (5th Cir. 2000). The Fifth Circuit concluded that the mere act of referring a person to a doctor was not a “professional service” as the phrase is defined in Texas.

The insurer sued for declaratory judgment as to whether it had a duty to defend asbestos-related property and personal injury claims asserted against its insured. Guarantee National Ins. Co. v. Azrock Industries Inc., 211 F.3d 239 (5th Cir. 2000). The court held that in the progressive disease context, a Texas court would likely adopt the “exposure” theory to determine when coverage was triggered under the policy. The court observed that it had adopted a similar rule for cases brought under Louisiana law and concluded that there was no reason to apply a different rule for Texas law.

In State Farm Lloyds v. Goss, 109 F. Supp. 2d 574 (E.D. Tex. 2000), the court found that the insured did not have a duty to defend under a business policy, concluding that the endorsement clearly and unambiguously made liability under the policy applicable only if damages arose out of the insured’s real estate operation.

In a dispute between the insurance carrier for a truck owner and the insurance carrier for the lessee of a truck, the Fifth Circuit held that the carrier for the lessee was not obligated to provide coverage because of a “business use” exclusion. Empire Fire & Marine Ins. Co. v. Brantley Trucking, Inc., 220 F.3d 697 (5th Cir. 2000).

D. Personal injury & advertising injury liability insurance

In Sentry Ins. Co. v. Greenleaf Software, Inc., 91 F. Supp. 2d 920 (N.D. Tex. 2000), the insurer sought a declaratory judgment that it owed no duty to defend or indemnify the insured software developer against a trade dress infringement action. In a suit alleging advertising injuring and violations of the Lanham Act, the insurer argued that the professional exclusions clause barred coverage. The court rejected the insurer’s argument, noting that an act is not professional service merely because it is performed by a professional. Rather, the court found, it is necessary that the professional uses specialized knowledge or training. While the court noted that in some manner all of the insured’s actions could be traced back to computer professionals, the court found that the trade dress infringement allegation did not require a professional service. The court further concluded that no computer expertise was required to produce the advertisements that formed the basis of this suit.

E. Professional liability insurance – Errors & omissions

In Jarvis Christian College v. National Union Fire Ins. Co., 197 F.3d 742 (5th Cir. 1999), community college pursuant to a “school leaders errors and omission” policy, a loss caused by actions of a member of the board of trustees in recommending that endowment funds be invested in a business he had an owned. The court held that coverage was barred by the “personal profit or advantage” exclusion. The board member gained a personal profit or advantage when he caused the transfer of the endowment funds to the company, without disclosing his conflict. The board member further gained measurable personal advantages from a financial and business prospective, including continuation of a steady monthly salary and the opportunity to make a handsome profit.

VI. DUTIES OF LIABILITY INSURERS

A. Duty to defend

A title insurer had no duty to defend its insureds against a claim of adverse possession by an adjoining property owner whose claim fell within the policy exception for “rights of parties in possession.” The title insurer was obligated to defend the insureds against adverse claims, except the “rights of parties in possession.” The court reasoned that this exception from coverage was based on the theory that the possession of the land should put the insured on notice of the adverse interest. In this case, the court found the exception applied because the boundary line between the property had been marked for years by a fence. When the fence was removed, the posts were sawed to the ground but were painted white, and the insureds had erected a lattice along that line, and the adjoining owners had landscaped up to that line. Zimmerman v. Chicago Title Ins. Co.,__S.W.3d__, 1999 WL 1243115 (Tex. App.–Austin, June 17, 1999, no pet.).

In Mid-Continent Cas. Co. v. Chevron Pipe Line Co., 205 F.3d 222 (5th Cir. 2000), the insurer of a contractor brought suit seeking declaratory judgment that the policy did not cover a judgment for the contractor’s employee against the owner of the premises on which the employee was injured. The dispute turned on the interpretation of the “arising out of” language defining who is an additional insured. The contractor’s insurer argued that the premises owner is entitled to coverage only for liability arising out of the contractor’s work. Because liability was imposed against the premises owner because of a faulty facility design, the contractor’s insurer contended that the injury to the employee did not “arise out of “ the contractor’s conduct.

The court rejected this argument. The court found that the definition in the policy of “work” indicated that broader coverage may exist. The court noted that the underlying service contract did not divide responsibilities between the premises owner and the contractor’s work. Finally, based on the finding that the contractor controlled the employee’s work at the site, the employee’s injury arose at least in part out of the contractor’s work for the premises owner.

An insured excavation subcontractor filed a third party complaint against its (CGL) insurer alleging breach of contract and seeking declaratory judgment that the insurer had a duty to defend. Federated Mut. Ins. Co. v. Grapevine Excavation, Inc., 197 F.3d 720 (5th Cir. 1999). The Fifth Circuit observed that both state and federal courts in Texas have interpreted “accident” and “occurrence” to include damage that is the “unexpected, unforeseen, or undersigned happening or consequence” of an insured’s negligent behavior. Because the amended petition in the underlying action alleged that the insured acted negligently, the insurer had a duty to defend absent any applicable policy exclusion. The Fifth Circuit then rejected the insurer’s argument that the contractual liability exclusion applied, noting that the insured is not being sued as a contractual indemnitor of a third party’s conduct, but rather for its own conduct. Finally, the court dismissed the insurer’s impaired property exclusion argument, holding that the asphalt paving at issue could not be “restored to use” by “the repair, replacement, adjustment or removal” of the insured’s underlying defective fill.

A liability insurer had a duty to defend the Texas Department of Transportation as an additional insured under a contractor’s policy, in a suit alleging negligent design and supervision that led to flooding of property owners adjacent to a roadway. St. Paul Ins. Co v. Texas Dept. of Transp., 999 S.W.2d 881 (Tex. App.–Austin 1999, pet. denied). The court restated the various rules relating to determining the duty to defend, including the eight corners rule, the rule that factual allegations are liberally construed, and the rule that once coverage has been found for any portion of a suit, an insurer must defend the entire suit. The “additional insured” language extended coverage to TXDOT for damage that resulted from the contractor’s work for TXDOT, or TXDOT’s general supervision of that work. The court found the factual allegations in the pleadings were broad enough to potentially invoke this coverage for claims relating to the contractor’s design of the roadway, and TXDOT’s supervision of that design.

The court rejected the insurer’s argument that the “professional services” exclusion negated the duty to defend. The court reasoned that the additional insured endorsement was intended to broaden coverage to include supervision, so the court could not accept the insurer’s argument that the professional services exclusion negated any coverage for supervision.

The court also rejected the insurer’s reliance on the intentional acts exclusion. Although the plaintiffs had alleged gross negligence and some intentional acts, they also alleged negligence. The fact that coverage might not be available for some of the causes of action did not relieve the insurer of the duty to defend TXDOT.

In Mid-Century Ins. Co. v. Childs, 15 S.W.3d 187 (Tex. App.–Texarkana 2000, no pet.), an automobile liability insurer sought a declaratory judgment that it owed no duty to defend the insured against a claim by one victim after the insurer paid the policy limits to other victims. The court concluded that the insurer acted properly in settling claims that, if taken to , would probably have resulted in excess judgment against the insured. Because the insurer had the right to take action to avoid a Stowers claim, the court concluded that it acted reasonably in exhausting the policy limits. With the policy limits exhausted, the court concluded that the insurer’s obligation to defend the insured terminated.

A subrogee of the city sued the city’s general liability insurer for breach of contract for failing to defend and indemnify the city when it was sued by a detainee that was sexually assaulted in the city jail. City of Waco v. St. Paul Fire & Marine Ins. Co., 16 S.W.3d 101 (Tex. App. Hou. [1st Dist.] 2000, no pet.). The court of appeals concluded that the law enforcement exclusion applied to the operation of the Waco jail and, thus, St. Paul owed no duty to defend.

In Mid-Continent Cas. Co. v. Swift Energy Co., 206 F.3d 487 (5th Cir. 2000), an insurer for a contractor hired by an oil driller brought suit seeking a declaratory judgment that it was not required to indemnify or defend the well operator in a suit filed by the injured employee of the contractor. Fifth Circuit found that the operator was an additional insured under the policy

In Amoco Production Co. v. Hydro Blast Corp., 90 F. Supp. 2d 727 (N.D. Tex. 1999), two employees of the insured sued Amoco for personal injuries due to exposure when performing tests at the corporation’s carbon dioxide recovery plant. The insured filed third party claims against its insurer. The insurer defended on the grounds that the event was not covered by operation of a pollution-exclusion endorsement. The court found that the pollution exclusion was clear, unambiguous, and applied to workplace accidents. The court found that the insurer had neither a duty to defend nor a duty to indemnify.

B. Settlements, assignments & covenants not to execute

An insured was sued over a car wreck. He turned the suit papers over to his insurance agent who assured him they were forwarded to the insurer. They were not, and a default judgment was rendered against the insured. Ultimately, the insurer, and the insured, and the injured claimants settled, resulting in a covenant not to execute by the claimants in favor of the insured, and payment by the insurer. They all then sued the agency, which filed various cross -claims and counterclaims. After a jury found the agency guilty under various contract, tort, and statutory theories, they appealed, and the court of appeals resolved a number of issues. Reyna v. Safeway Managing General Agency, 27 S.W.3d 7 (Tex. App.–San Antonio 2000, pet. granted, judgm’t vacated w.r.m).

First, the court considered whether the court’s judgment against the insured violated public policy based on the supreme court decision in State Farm & Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996). The court of appeals held that it did not. Unlike the judgment in Gandy, this was a default judgment, not an agreed judgment. Also, there was nothing to challenge the recital in the judgment that stated it was based on good and sufficient evidence, unlike the judgment in Gandy. Finally, the judgment was being enforced against the insurance agency, which failed to cooperate in producing information necessary to set aside the default judgment.

The second issue is Reyna was whether the agents could be liable for the face amount of the default judgment in addition to the damages the jury found resulted from the judgment. The face amount of the default judgment was $350,000, plus interest. The jury awarded only $65,000 to the insured as damages resulting from the judgment, despite his argument that the damages should be the face amount of the judgment. The court of appeals held that the jury was entitled to take into account all of the evidence and did so in awarding only $65,000. One thing the jury could consider was the fact that the insured had a covenant not to execute, which protected him from the judgment. Under these circumstances, the amount of damages caused to the insured by the default judgment was a fact question and could not be determined as a matter of law from the face amount of the judgment, even though the judgment was some evidence of damage caused by the default. The court of appeals reformed the judgment to allow the insured to recover the $65,000, but not the face amount of the judgment.

The Reyna court also allowed the insurer to recover from the agency the $75,000 it had to pay to the insured. The agency had a contract with the insurance company that required the agency to forward suit papers and to indemnify the insurer if it did not. The court rejected the agency’s argument that the settlement agreement was a void Mary Carter agreement. There was no evidence that the claimants and the insured agreed that the insurer would recoup any of its payment.

The Reyna court considered the agency’s argument that the failure to forward suit papers was not the producing cause of damages but instead the default judgment was caused by collusive conduct between the insured and the claimants. The court found that the jury was properly charged with the definition of “producing cause,” and evidence that the default judgment was rendered after the agency failed to forward the suit papers to the insurer was sufficient to support the issue and the jury’s finding.

After a mediation resulted in the settlement of a personal injury action, the liability insurer sued the insured, alleging that it was entitled to reimbursement for non-covered punitive damages included in the settlement. The district court entered summary judgment for the insured. The Fifth Circuit affirmed the district court, noting that in certain cases the IRS or an insurer maybe permitted to impeach a settlement. Such exceptions are not implicated in this case because the insurer fully participated in the settlement of the case. Certain Underwriters at Lloyds, v. Oryx Energy Co., 203 F.3d 898 (5th Cir. 2000).

VII. THIRD PARTY THEORIES OF LIABILITY

A. Stowers duty & negligent failure to settle

In St. Paul Fire & Marine Ins. Co. v. Convalescent Services, Inc., 193 F.3d 340 (5th Cir. 1999), a patient at a nursing home owned by the insured brought suit against the insured for serious personal injury and near death. The insured was found liable for negligence and gross negligence, with the jury awarding actual and punitive damages in excess of the policy limits.

On appeal, the insured argued that the Stowers duty to settle within the policy limits was triggered because St. Paul knew that the insured was willing to pay its share of any demand for non-covered damages in order to avoid exposure to a large award of punitive damages. The court rejected this argument, concluding that St. Paul had no duty to take into consideration the insured’s potential exposure to punitive damages during the settlement negotiations regarding the covered claims.

The Fifth Circuit further noted that the Texas Supreme Court has expressly held that an insurer does not owe its insured an duty of good faith and fair dealing to investigate and defend claims by a third party against its insured. The court concluded that the Stowers duty is the only tort duty the insurer must comply with, and that the duty of good faith in handling insurance claims does not apply.

A primary insurer that mishandled settlement negotiations still could not be liable to a third layer excess insurer for breaching its Stowers duty to settle when there never was a demand within the primary limits. Westchester Fire Ins. Co. v American Contractors Ins. Co. Risk Retention Group, 1 S.W.3d 872 (Tex. App.–Houston [1st Dist.] 1999, no pet.).

B. Unfair insurance practices

An insurance agency failed to forward to the insurer suit papers that had been served on its insured. As a result, the claimants took a default judgment against the insured. The jury found the agency knowingly committed deceptive and unfair insurance practices and was guilty of unconscionable conduct. Reyna v. Safeway Managing General Agency, 27 S.W.3d 7 (Tex. App.–San Antonio 2000, pet. granted, judgm’t vacated w.r.m). The court of appeals held that the jury finding was supported by evidence showed the insurance agents altered documents and attempted to claim that the suit papers had been sent. The court reasoned that evidence of the agency’s conduct in an effort to conceal its failure to forward the suit paper supported the jury’s finding that the agency violated the DTPA and the Insurance Code. The court also held that the agency’s assurance to the insured the suit papers had been sent, and its later efforts to add documents to the file and find a way to escape liability was unconscionable.

When the only evidence showed a written indemnity agreement between the parties, there was no basis for a claim that the defendant violated DTPA section 17.46(b)(12) by representing that an agreement conferred or involved rights, remedies, or obligations which it did not have. Under the rationale of Crawford v. Ace Sign, Inc., 917 S.W.2d 12 (Tex. 1996), this proof would just support a claim for breach of contract. The unenforceability of that contract because it was against public policy, standing alone, would not constitute a violation of the DTPA. The court held there must be something more. The court found a potential DTPA claim was stated based on a certificate of insurance that one party sent to the other in response to an inquiry about the amount of insurance the party had. Ken Petroleum Corp. v. Questor Drilling Corp., 24 S.W.3d 344, 356-57 (Tex. 2000).

C. Prompt Payment of Claims – Art. 21.55

VIII. SUITS BY INSURERS

A. Declaratory relief

When an insurer and an insured sought declaratory relief determining the insurers’ duty to defend and indemnify a claim of patent infringement, the court of appeals erred by failing to consider the coverage issues first, instead of reversing and remanding based on a venue ruling. Bradleys’ Electric, Inc. v. Cigna Lloyd’s Ins. Co., 995 S.W.2d 675 (Tex. 1999).

The settlement of the underlying tort suit mooted a court’s judgment declaring that an insurer was obligated to defend the insured in that suit. Mid-Continent Cas. Co. v. Safe Tire Disposal Corp., 2 S.W.3d 393, 395 (Tex. App.–San Antonio 1999, no pet.). In addition, the court held that because the insurer had tried to relitigate the same duty to defend issue that had already been decided in another case, the insurer was collaterally estopped, and the court properly awarded attorney’s fees. Furthermore, the court of appeals awarded $5,000 in attorney’s fees for the insurer’s frivolous appeal of the court’s summary judgment.

B. Interpleader

When an insurer maintained it only owed $100,000, and the insured argued that the amount was $500,000, the insurer properly interplead the amount it believed it owed. The insurer had paid $5,000 to settle one claim and paid the remaining $95, 0000 into the registry of the court to be paid to the remaining two claimants. The fact that there was a dispute over the total amount the insurer owed did not make its tender conditional. Tri-Sate Pipe & Equip., Inc. v. Southern County Mut. Ins. Co., 8 S.W.3d 394 (Tex. App.–Texarkana 1999, no pet.).

C. Indemnity & contribution

An insurer had no duty to indemnify an agent, under its agency agreement, for the agent’s knowing misrepresentations. Gulf Ins. Co. v. Burns Motors, Inc., 22 S.W.3d 417 (Tex. 2000).

In Ken Petroleum Corp. v. Questor Drilling Corp., 24 S.W. 3d 344 (Tex. 2000), the court considered the enforceability of mutual indemnity agreements between oil and gas operators and contractors. Theses agreements are governed by statute. The supreme court concluded that these agreements are enforceable to the extent they were supported by liability insurance or self-insurance. If the parties have different amounts of insurance, the mutual indemnity is enforceable only to the extent of any matching insurance.

In Coastal Transport Co. v. Crown Central Petroleum Corp., 20 S.W.3d 119 (Tex. App.–Houston [14th Dist.] 2000, no pet.), the contract between the parties required the trucking company to obtain insurance covering the facility for liability arising out of loading and unloading and to fully defend and protect the facility. The court rejected the trucking company’s argument that this only supported its indemnity agreement. The court held that was separate obligation to provide insurance. Because the trucking company breached this obligation, the trucking company was liable for the defense costs incurred by the facility in a suit that would have been within the scope of coverage.

D. Subrogation

In General Agents Ins. Co. v. Comb Ins. Co., 21 S.W.3d 419 (Tex. App.–San Antonio 2000, no pet.), a liability insurer contributed its policy limits to a tort settlement and then brought a subrogation action against the co-insurer that contributed less than its policy limits. The court held that whether insurer is entitled to subrogation is determined by the reasonableness of the co-insurer’s position and actions, not the reasonableness of the actual settlement amount. The court then noted that the insurer’s decision to tender its policy limits, the timing of the insurer’s decision, and the actions taken by both co-insurers should be taken into consideration.

IX. DAMAGES & OTHER ELEMENTS OF RECOVERY

A. Mental anguish damages

In Texas Farmers Ins. Co. v. Cameron, __S.W.3d__, 2000 WL 225887 (Tex. App.–Dallas 2000, no pet.), the insureds brought an action against the insurer to recover for bad faith denial of their claim on the grounds of arson. The court reviewed the sufficiency of the husband’s testimony, noting that he felt bad when Farmers accused him of being an arsonist. He testified that Farmers’ persistence in accusing him of arson made him mad. The court concluded that his testimony showed no more than that he had suffered vexation, anger, and resentment, and thus would not support an award of mental anguish. In contrast, the wife testified that she was “terrified” at the accusation that she was an arsonist. She felt devastated going to work She walked the floor at night and could not sleep. She took prescription medication for her insomnia. She reduced her participation in church activities. This testimony, the court concluded, showed a high degree of mental pain and distress, and would support an award of mental anguish.

In Reyna v. Safeway Managing General Agency, 27 S.W.3d 7 (Tex. App.–San Antonio 2000, pet. granted, judgm’t vacated w.r.m), discussed supra, the court of appeals considered the sufficiency of the evidence supporting a mental anguish award in favor of the insured who had a default judgment rendered against him because of his insurance agency’s failure to forward suit papers to the insurer.

The jury awarded him $25,000. The court found this award was supported by evidence that after the default judgment was rendered the insured was concerned for his credit and avoided buying anything. He further testified that the constable would periodically visit his house to inquire regarding his assets, and he was concerned that he could be forced into bankruptcy or that his wages would be garnished at any time, which would leave him without necessary funds to pay child support. He further testified that if he was unable to pay child support he would go to jail. Also, the insured had to take time off from work to address the default judgment and was concerned that his job was in jeopardy. The insured did not reach an agreement with the claimants not to execute on the judgment until three years after it was rendered.

B. Exemplary damages

In Texas Farmers Ins. Co. v. Cameron, __S.W.3d__, 2000 WL 225887 (Tex. App.–Dallas 2000), the insurer appealed the award of $1.5 million in punitive damages to the plaintiffs based on a finding that Farmers had acted maliciously. The court disregarded this finding, and refused to enter judgment on that amount. In reviewing the evidence, the court found there was no evidence that Farmers was actually aware that its actions involved in extreme risk. The plaintiffs did not allege any death or grievous physical injury. They argued only financial ruin. The court noted that when Farmers rejected the plaintiffs’ claim, the plaintiffs suffered a financial setback, but if such a setback were all that was necessary to establish malice, an insurer would always be deemed to act maliciously whenever it rejects a claim for whatever reason.

C. Prejudgment & postjudgment interest

In Embrey v. Royal Insurance Co., 22 S.W.3d 414 (Tex. 2000), the court held that a commercial automobile liability insurer does not owe pre-judgment interest on top of its liability policy limits. The court reasoned that the contract language clearly imposed the policy limits as the total amount owed. Further, an amendatory endorsement only made the insurer liable for post-judgment interest. Finally, a board order from the Texas Department of Insurance requiring coverage for pre-judgment interest in addition to the policy limits did not apply to automobile liability insurers.

An insurer was not liable for prejudgment interest when it paid within thirty days after judgment was rendered against the uninsured/underinsured motorist. The supreme court reasoned that until the other driver’s liability and the amount of damages were established, the insurer had no obligation to pay. Once the obligation to pay did arise, the insurer paid promptly. Henson v. Southern Farm Bur. Cas. Ins. Co., 17 S.W.3d 652 (Tex. 2000).

D. Attorney’s fees

In Mid-Continent Cas. Co. v. Chevron Pipe Line Co., 205 F.3d 222 (5th Cir. 2000), the Fifth Circuit upheld the district court award of attorney’s fees, noting that while fees for claims not permitted by statute or contract must be segregated, the agreement at issue permitted recovery of fees and cost related to all of the insured’s claims. Thus, the insured had no duty to segregate. While finding that fees were recoverable, the Fifth Circuit concluded that the district court abused its discretion the amount of fees awarded. The court found that the award of $338,314 in fees and $36,485 in costs was excessive for what was, as the court described, simply a coverage dispute. The Fifth Circuit held that in deciding to use the Johnson factors, the court should have used them more precisely, especially regarding the degree of success achieved for the client. The Fifth Circuit thus remanded the case to the district court advising the court to exclude all time that is excessive, duplicative, or inadequately documented.

In Federated Mut. Ins. Co. v. Grapevine Excavation, Inc., 197 F.3d 720 (5th Cir. 1999), the Fifth Circuit noted that Texas appellate courts have disagreed over the interpretation of Dairyland County that imply that an insurer who falls within the provision of section 38.006 of the Tex. Civ. Prac. & Rem. Code is exempt from the payment of attorney’s fees, and that only those insurers who do not qualify for the exemption are subject to the payment of fees. Some Texas courts recognize that the purpose of the exceptions in section 38.006 is to exclude only those claims against insurance companies where attorney’s fees are already available by virtue of other specific statutes. Given the divergent interpretations of Dairyland County, the Fifth Circuit certified the question to the Texas Supreme Court as to the proper interpretation of Chapter 38 of the Tex. Civ. Prac. & Rem. Code.

The Texas Supreme Court answered this question in Grapevine Excavation Co. v. Maryland Lloyds, ___ S.W.3d ___, 2000 WL 890386 (Tex., July 6, 2000). The court held that in a policyholder's successful suit for breach of contract against an insurer that is subject to the provisions listed in section 38.006, the insurer is liable for reasonable attorney's fees incurred in pursuing the breach-of-contract action under section 38.001 unless the insurer is liable for attorney's fees under another statutory scheme. The court declined to treat section 38.006 as a complete exemption for insurers. First, courts had consistently allowed fees against insurers for breach of contract for nearly twenty years, with legislative acquiescence. Therefore, stare decisis compelled this result.

In reviewing the attorney’s fees awarded in an ERISA action, the Fifth Circuit reviewed the Wegner factors and approved the award of attorney’s fees based on the district court’s finding that the insurer’s position “bordered on being frivolous.” Life Partners, Inc. v. Life Insurance Co. of North America, 203 F.3d 324 (5th Cir. 1999). However, the Fifth Circuit did conclude that the district court abused its discretion in applying the findings to the entire duration of the underlying litigation. Accordingly, the Fifth Circuit affirmed the district court’s award of attorney’s fees but vacated the amount of the award and remanded the case for re-determination of the proper amount.

In Sentry Ins. Co. v. Greenleaf Software, Inc., 91 F. Supp. 2d 920 (N.D. Tex. March 25, 2000), after finding that at least one claim in the underlying suit arises out of an advertising injury and that the advertising injury was covered under the policy, the court found that the insurer was liable to the insured for the costs incurred in defending the underlying lawsuit. The court assessed attorney’s fees and costs from the date that the insurer was notified of the lawsuit. Under the policy, the insured was required to at least seek the insurer’s approval prior to expending funds in its defense. Because the insured failed to provide such notice, it was not entitled to recover its pre-notice costs.

An insurer argued that since the insured failed to identify an expert on attorney’s fees, it was error for the court to consider testimony on attorney’s fees. Northwestern Nat. County Mut. Ins. Co. v. Rodriguez, __S.W.3d__, 2000 WL 101221 (Tex. App.–San Antonio 2000, no pet.). The court held that while the plaintiff did not specifically identify the attorney as an expert witness in the first answers to interrogatories, the circumstances of the case as a whole indicate that the court had good cause to admit the testimony. It has been held that a judge does not abuse his discretion in receiving the attorney’s factual testimony, taking judicial notice of the necessity and reasonableness of the attorney’s fees awarded, and thereby impliedly finding good cause for its admission. The court concluded that even if the court had erred in permitting the attorney, as an undesignated expert witness, to testify, the error was cured in light of the fact that the court took judicial notice of the attorney’s fees.

In Texas Farmers Ins. Co. v. Cameron, __S.W.3d__, 2000 WL 225887 (Tex. App.–Dallas 2000, no pet.), the insurer questioned whether the court properly awarded appellate attorney’s fees regardless of whether the plaintiffs prevailed on appeal. The court noted that the court may not grant a party an unconditional award of appellate attorney’s fees. To the extent that the insurer has been unsuccessful on appeal, however, the court found no reversible error in the court’s award.

An insurer contended that the court committed error in awarding attorney’s fees under section 38.001(a) of the Tex. Civ. Prac. & Rem. Code, arguing this section does not apply in this case due to the exemption for insurers in §38.006. American Motorists Ins. Co. v. Occidental Chemical Corp., 16 S.W.3d 140 (Tex. App.–Houston [1st Dist.] 2000, no pet.). The court rejected this argument, concluding that when the suit against the insurer is an action on the insurance contract, section 38.006 does not prevent an award of attorney’s fees otherwise allowed under section 38.001(a).

In a suit where the insurer and an additional insured both sought declaratory relief, the court initially ruled for the insurer but declined to award it attorney’s fees under the Declaratory Judgment Act. The court of appeals reversed the finding on coverage, but held that the additional insured was not necessarily entitled to recover attorney’s fees. The statute allows the court to award “necessary attorney’s fees as are equitable and just.” The court ordered that each side bear its own fees. The court of appeals held this was not an abuse of discretion. The court could have felt that both the additional insured and the insurer “had legitimate rights to pursue and both should thus bear their own attorney’s fees.” McCarthy Brothers Co. v. Continental Lloyds Ins. Co., 7 S.W.3d 725 (Tex. App.–Austin 1999, no pet.).

When a trucking company breached its obligation to provide insurance coverage for a loading facility, the facility could recover as damages defense costs it incurred in a suit that would have been covered. Coastal Transport Co. v. Crown Central Petroleum Corp., 20 S.W.3d 119 (Tex. App.–Houston [14th Dist.] 2000, no pet.).

X. DEFENSES & COUNTERCLAIMS

A. Misrepresentation or fraud by insured

Under Oklahoma law, false swearing by an insured is a complete defense to a claim. The Austin Court of Appeals applied this rule in Summit Machine Tool Mfg. Corp. v. Great Northern Ins. Co., 997 S.W.2d 840 (Tex. App.–Austin 1999 no pet.). The insureds claimed that certain equipment suffered transit damage and submitted a claim for $20 million. The jury found the insurer breached its contract and breach its duty of good faith and fair dealing and awarded damages of $6.7 million. The jury also found, however, that the insured was guilty of making material false statements in the claim. The court of appeals held this was supported by the evidence, and finding provided a complete defense for the insurer. The jury’s finding was supported by evidence that the insured’s representatives grossly overstated the value of the equipment, grossly overstated labor and parts costs for repairs, and mischaracterized the nature of a payment received by a primary insurer in an attempt to trigger the excess insurer’s coverage. The court rejected the insured’s argument that the overstated value was simply an attempt to negotiate with the insurer.

The evidence supported a criminal conviction for insurance fraud in Obigbo v. State, 6 S.W. 3d 299 (Tex. App.–Dallas 1999, no pet.). The insurer rented a car for two days and then claimed he and his wife suffered the loss of just over $10,000 in clothing stolen from the vehicle. The court found the conviction for insurance fraud was supported by evidence that it was suspicious that he and his wife would pack so much expensive clothing for such a short trip; there was no evidence that anything else was stolen; all the allegedly stolen items had supposedly been bought at two stores and were the only items listed on receipts from those stores; the stores apparently did not sell the listed items; there was a question whether the insured was out of the country at the time he supposedly bought the items at the foreign stores; he was unemployed and had no financial ability to buy such expensive items; his reason for renting a car was implausible; and it wasn’t even clear whether his co-victim was actually his wife.

B. Res judicata & collateral estoppel

A re-insurer filed a declaratory judgment suit in Tarrant County to establish the policy limits for an auto accident. The insurer and the insured were joined as defendants. The insured filed a separate suit in Nueces County, but the court transferred venue to Tarrant County. These cases were decided in favor of the reinsurer and were affirmed on appeal. The insured then filed a second lawsuit in Nueces County raising many of the same issues. The court of appeals held that the final judgment on venue in the first case irrevocably fixed venue in Tarrant County for the second lawsuit as well. Miller v. State & County Mut. Fire Ins. Co., 1 S.W.3d 709 (Tex. App.–Fort Worth 1999, no pet.).

The court also held that the decision in the first case was res judicata in the second case. The court rejected the insured’s argument that the parties were not the same, because in the first case the insurer and insured had been defendants, where in the second case the insured was the plaintiff and the insurer and reinsurer were defendants. Also, the addition of individual defendants in the second suit did not change the result, because they were in privity with the insurer defendants.

Finally, the court also rejected the argument, and the holding by another court of appeals in the related first suit, that the insured’s claims were permissive counterclaims and thus not subject to res judicata. The court of appeals in this case found that the issues had been “drawn between” the parties so that res judicata would apply.

In Ellis v. Amex Life Ins. Co., 211 F.3d 935 (5th Cir. 2000), the plaintiff claimed that she was improperly denied accidental death benefits due under her mother’s insurance policy with life. The plaintiff filed suit against Life in Texas state court in 1992. The case was the removed to the Eastern District of Texas and a stay was entered. Plaintiff later filed a separate suit with similar allegations in another Texas state court, and summary judgment was granted in that suit. Life then moved for summary judgment in the Eastern District suit, alleging that suit was barred by res judicata in light of the dismissal of the later filed suit. The Fifth Circuit held that the first judgment, regardless of when the suits were filed, is given preclusive effect.

In Southern County Mut. Ins. Co. v. Ochoa, 19 S.W.3d 452 (Tex. App.–Corpus Christi 2000, no pet.), an insured’s judgment creditors brought an action against the automobile liability insurer to recover policy limits. The insurer raised a prior Stowers action as a defense to the present lawsuit. The judgment creditors contended both that they were not parties to the earlier Stowers action, and that it did not involve the same claims as the present action. The court rejected their contention, noting that the judgment creditor were the real parties at interest in the prior Stowers action. Turning to the res judicata argument, the court noted that the liability of the insurer under the policy is subsumed within the Stowers action and logically should have been tried along with it as a convenient unit. Thus, the court concluded the insurer has raised, if not conclusively proven, that the present claim on the policy is precluded by the prior Stowers claim.

C. Waiver

An employee’s waiver of claims against an employer that did not subscribe to workers compensation insurance was void, where the employer’s benefit plan provided benefits that were substantially less than workers compensation. Reyes v. Storage & Processors, Inc., 995 S.W.2d 722, 726-28 (Tex. App.–San Antonio 1999, pet. denied). The court reasoned that the waiver was void because it violated public policy. The employer’s plan required the employee to waive more rights than the workers compensation statute and provided less benefits to the worker.

D. Insurer’s waiver of or, or estoppel to assert, defenses

In Tapatio Spring Builders, Inc. v. Maryland Cas. Ins. Co., 82 F. Supp. 2d 633 (W.D. Tex.1999), after having found that the insured failed to comply with the reporting requirements of his builders risk policy, the court noted that no contract for insurance was created because the insured had not paid the premiums. The court concluded that estoppel and waiver will not operate or create coverage where none existed. The court further rejected the insured’s argument that by acceptance of two premiums after the fire that damaged the allegedly insured property, the insurer had waived the reporting and payment requirements of the policy.

XI. PRACTICE & PROCEDURE

A. Choice of law

In Amoco Production Co. v. Hydro Blast Corp., 90 F. Supp. 2d 727 (N.D. Tex. 1999), the insurer argued that insured’s DTPA and Insurance Code claims should be dismissed because all dealings related to the policies in question took place in New Mexico. After reviewing the choice of law rules and the Duncan standard, the court concluded that Texas law did not apply. The court cited several factors in its decision, including the fact that the insured was a New Mexico corporation, the insurer was a New Mexico corporation, and its agent was a resident of New Mexico. The court further found that every operative fact related to the formation of the insurance contract occurred outside of Texas.

Purchasers of “vanishing premium” life insurance policies brought proposed class action against insurer and insurer’s parent. In re. Great Southern Life Ins. Co. Sales Practices Litigation, 192 F.R.D. 212 (N.D. Tex. 2000). Applying the “most significant relationship” test, the court concluded that Texas law applied. The court first noted that the contracts had been entered in Texas, and not the homes of the consumers. The court further held that any injury to the plaintiff occurred in Texas and not the consumer’s home. The policy premiums were payable at Great Southern home office. The policy accountings were done at Great Southern accounting offices, and the alleged decisions to breech the Texas contract must have been made in the home offices of Great Southern in Texas. The court finally noted that Texas had a greater interest in the outcome of the litigation than other states. The court noted that Great Southern is a Texas corporation, and employs a significant number of Texans.

B. Jurisdiction

Out-of-state guaranty associations were not subject to personal jurisdiction in Texas courts. General Electric Co. v. California Ins. Guar. Assn., 997 S.W.2d 923 (Tex. App.–Beaumont 1999, pet. denied). An insured sued several out-of-state guaranty associations that guaranteed the obligations of certain liability insurers for asbestos claims. The evidence showed that none of the guaranty associations did any business in Texas, had any offices in Texas, had any property in Texas, or advertised in Texas. The court found no conduct directed toward Texas that would support personal jurisdiction. Further, the court rejected the idea that the guaranty associations “stood in the shoes of” the insurers they guaranteed, for purposes of personal jurisdiction.

In S.A. Burns v. Federal Emergency Mgm’t. Agency, 84 F. Supp. 2d 839 (S.D. Tex. 2000), the court rejected FEMA’s contention that a failure to comply with the procedural requirements of the flood insurance policy deprived the court of subject matter jurisdiction.

C. Venue

A re-insurer filed a declaratory judgment suit in Tarrant County to establish the policy limits for an auto accident. The insurer and the insured were joined as defendants. The insured filed a separate suit in Nueces County, but the court transferred venue to Tarrant County. These cases were decided in favor of the reinsurer and affirmed on appeal. The insured then filed a second lawsuit in Nueces County raising many of the same issues. The court of appeals held that the final judgment on venue in the first case irrevocably fixed venue in Tarrant County for the second lawsuit as well. Miller v. State & County Mut. Fire Ins. Co., 1 S.W. 3d 709 (Tex. App.–Fort Worth 1999, no pet.).

D. Discovery

One court of appeals held that the court abused its discretion by allowing a workers compensation claimant to get discovery of other medical reports prepared by the doctor whose negative report the insurer relied on to deny his claim. After proving his claim was justified, not withstanding the doctor’s report, the worker sought to get discovery of other financial dealings between the doctor and the insurer, including other reports and related documents. The worker alleged that the insurer and the doctor perpetrated a fraud and engaged in a civil conspiracy to deprive him of workers compensation benefits. The worker argued that the discovery would show a conspiracy between the parties to “low ball” workers compensation claimants. The court of appeals rejected this argument and held that medical records and any other records relating to the medical condition of other claimants, were protected by the physician-patient privilege and the constitutional right to privacy. The court further held that a confidentiality order would not allow discovery of these materials. Finally, the court held that the requests were simply an impermissibly overbroad attempt to fish. In re Xeller 6 S.W.3d 618 (Tex. App.–Houston [14th Dist.] 1999, no pet.).

The court’s decision is in conflict with the decision in Aztec Life Ins. Co. v. Dellana, 667 S.W.2d 911 (Tex. App.–Austin 1984, no writ), where the court of appeals held that evidence of other similar claim denials was relevant to show the insurer acted “knowingly” and to show a pattern and practice of any unfair claim denials by the insurer. Further, in Aztec v. Dellana the problem of privacy could be handled by an in camera inspection and, if needed, issuance of a protective order.

E. Experts

In Mays v. State Farm Lloyds, 98 F. Supp. 2d 785 (N.D. Tex. 2000), the insured’s expert witness testified that the structural damage to the insured’s home resulted from foundation movement cause by leaks in the sewer line and not from tree roots. The court held that this testimony was inadmissible because his report failed to provide a basis for this conclusion. The court found it impossible to determine why one theory was more viable than another, and concluded that the expert’s testimony amounted to speculation and thus was of no assistance to the jury.

F. Class actions

The court in In re Great Southern Life Ins. Co. Sales Practices Litigation, 192 F.R.D. 212, (N.D. Tex. 2000) was presented the question of whether to certify a “vanishing premium” life insurance class action. The court restated the requirements of Rule 23a, and noted that consumer protection issues are largely suited for class treatment. The court held that the numerousity requirement was met because Great Southern marketed its policies in forty-six states and the District of Columbia. Great Southern further acknowledged that it sold over 280,000 policies during the proposed class period. The court found that the geographic dispersion and the size of the potential class made class action treatment appropriate.

The court next found that the commonality requirement of rule 23a was satisfied. The court found that alleged wrongs occurred in Great Southern home office and the wrongs consisted of the omissions, not misrepresentations made at the point of sale. It is the alleged omissions that point the basis of the plaintiff’s claim and the “length” the class members together.

The court found that the typicality requirement was met because the claims asserted, if proved, all arise from Great Southerns failure to disclose accurate information to its agents and customers. Therefore, one claimant’s allegations are the same as the next, that they had no opportunity to know the policies realistic return potential. That is to say, that the premium obligations may not “vanish.”

Finally, the court found that the adequacy of representation requirement was satisfied by showing that the plaintiff’s proposed counsel is well versed in the type of litigation at issue, and that the most obvious class members with a conflict, the defendants, their officers, directors and controlling persons, who might own a policy of the type in dispute were excluded from the proposed class. Because no imminent conflict existed, the court found that the plaintiff satisfied the adequacy of representation requirement.

The court then reviewed each of the claims at issue to determine if common questions of law or fact exist. The court first found that Texas law applied to the claims, and then concluded that for each theory of recovery a common question of law or fact existed. Significantly, the court rejected the insurer’s to argument that the reliance requirement necessary in a fraud claim prevented certification of the class. The court relied on case law from other jurisdictions that hold that when representations have been made as to a material matter and action has been taken, in the absence of evidence showing to the contrary, it will be presumed that the representations were relied upon.

G. Arbitration

In A.S.W. Allstate Painting & Const.Co. v. Lexington Ins. Co., 94 F. Supp. 2d 782 (W.D. Tex. 2000), a construction contractor filed a diversity suit against the owner’s fire insurer seeking in determination that it was not bound by its construction contract to arbitrate the subrogation claim of the owner’s insurer for the damage allegedly caused by contractor. The insurer moved to compel arbitration. After reviewing the construction agreement, the court concluded that no rights exist from which the insurer could subrogate, either contractually or equitably, and thus the insurer had no basis on which to assert arbitration rights.

The insureds brought suit seeking de novo review of an arbitration award issued in favor of the Crop insurers in. Duke v. Crop Growers Ins. Inc., 70 F. Supp. 2d 711 (S.D. Tex. 1999). The insureds first argued that because the AAA rules did not mandate that arbitration is final, they should be permitted to file suit on the insurance policy. The court rejected this argument, noting the Fifth Circuit has held that an arbitration proceeding conducted in accordance with AAA rules constitutes binding arbitration. The court noted that the right-to-sue language in the policy does not undermine the binding nature of arbitration.

In In re Certain Underwriters at Lloyd’s, 18 S.W.3d 867 (Tex. App.–Beaumont 2000), the court held that the insurer had not waived arbitration. The court observed that the insurer called for arbitration from the very beginning of the controversy, filed three motions to compel arbitration over the space of five years, removed the case to federal court in an attempt to obtain a favorable ruling on arbitration, and filed two petitions for writ of mandamus. Such action, the court concluded, demonstrated consistency and persistence in pursuit of arbitration, and not an intent to waive arbitration. The court observed that it should resolve any doubts about waiver in favor of arbitration.

H. Appraisal

The standard homeowners policy unambiguously required that the insureds’ lawsuit be abated and that they submit their claim to appraisal, when there was a dispute over the amount of wind and hail damage to their roof. Vanguard Underwriters Ins. Co. v. Smith, 999 S.W.2d 448, 451 (Tex.App.–Amarillo 1999, no pet.).

I. Injunctions

An insurer obtained declaratory relief finding that its policy limits were $100,000, instead of $500,000 as contended by the insured. The court also granted an injunction against any other suits by the insured against the insurer arising out of, or in connection with, the policy or the underlying suit. The court of appeals held this anti-suit injunction was improperly overbroad. There was no evidence that showed any threat of a multiplicity of suits by the insured, and the injunction barred not only the claims. Tri-State Pipe & Equip. Inc. v. Southern County Mut. Ins. Co., 8 S.W.3d 394 (Tex. App.–Texarkana 1999, no pet.).

XII. OTHER ISSUES

A. Excess & primary coverage

An excess insurer was entitled to first recoup its full payment for maintence and cure payments to a seaman, after the employer recovered its deductible and before the primary insurer received any money. The court rejected the primary insurer’s argument for a pro-rata division of the money. The excess insurer’s policy provided that any money received would be repaid to the insurers in reverse order of their payments. The primary insurer’s policy simply provided that it was entitled to recoupment after the insured’s deductible was reimbursed. Royal Ins. Co. v. Sphere Drake Underwriting Mgmt. Ltd., 997 S.W.2d 432 (Tex. App.–Beaumont 1999), on rehearing, 4 S.W.3d 378 (Tex. App.–Beaumont 1999, pet. denied).

In Keck, Mahin & Cate v. National Union Fire Ins. Co., 20 S.W.3d 692 (Tex. 2000), the supreme court considered the duties between a primary insurer, the insured’s defense attorneys, and an excess insurer. The insured had $1 million of primary coverage and $9 million of excess coverage. The insured was sued for damages, and the primary insurer undertook the defense. After the first day of , the primary insurer tendered its policy limits thirty-two days later, the excess insurer settled to suit for $7 million dollars. The excess insurer then sued the primary insurer and the defense lawyers, contending that the settlement value was inflated because of their negligence, gross negligence, and violations of the Texas Insurance Code. The excess sued under the theory of equitable subrogation, asserting the insured’s rights.

The primary insurer sued the lawyers for malpractice. Both the primary insurer and the lawyers asserted that it was the excess insurer’s own negligence that caused the excessive judgment.

The court first held that there could be no negligence by the excess insurer in failing to participate in the defense or otherwise contribute before the primary insurer tendered its policy limits, because before the tender the excess insurer had no duty to defend. On the other hand, the court stated that the excess insurer could not affirmatively disrupt or harm the insured’s defense. The court stated that any evidence that the excess insurer did interfere with or control the defense before the primary insurer’s tender could be relevant to the issue of comparative responsibility. 20 S.W.3d at 701. The court later stated that the court of appeals properly limited the scope of the comparative responsibility defense to the excess insurer’s post-tender conduct. Id. at 703-704.

The supreme court also held that the excess insurer could not be negligent in failing to respond to a settlement demand before the primary insurer had tendered its policy limits. Id. at 701.

A final argument by the defense lawyers was that the excess insurer was not entitled to equitable subrogation because the insurer voluntarily settled the case by paying for a claim that was not really covered. The supreme court held that an insurer that pays a third party claim against its insured is not a volunteer if the payment is made in good faith and under a reasonable belief that the payment is necessary to its protection. Id. at 702. The court then considered the excess insurer’s claim against the defense lawyers. To prevail, the excess insurer would have to show that the settlement was excessive and that the primary insurer or defense lawyers mishandled the defense and that the judgment was in excess of the case’s true value. The court stated that the excess insurer’s entitlement to damages would depend on proof that the true value of the claim was less that $7 million dollars but was inflated because of the defense lawyer’s malpractice.

B. Subrogation

An oil field operator had a valid claim against an oil field contractor for indemnification for damages arising from an injury to the contractor’s employee. This indemnity agreement owed from the contractor to the operator did not prevent the operator’s insurer enforcing its subrogation right against the contractor. The agreement between the operator and contractor would only cause the operator’s insurer to waive its subrogation rights as to any amount the operator owed to the contractor, not visa-versa. Ken Petroleum Corp. v. Questor Drilling Corp, 24 S.W.3d 344, 355-56 (Tex. 2000).

Evidence conclusively negated the “common fund doctrine” so that the insurer did not owe the insured’s attorney any fees for collecting on its subrogation interest in Valle v. State Farm Mut. Auto. Ins. Co., 5 S.W.3d 745 (Tex. App.–San Antonio 1999, pet. denied). The summary judgment proof showed that the attorney’s efforts did not benefit State Farm, because liability and the amount of State Farm’s interest were uncontested.

An insurer’s subrogation suit could not be dismissed as a sanction for the insureds’ failure to appear for a deposition. The court reasoned that the insureds were not parties, so they could not be compelled to appear in the county where the suit was pending. Instead, they were merely witnesses, so the court improperly ordered them to appear. The court further held that the insureds did not become parties by answering interrogatories. Also, the insureds were not parties simply because the insurer initially filed suit in their name and misleadingly failed to disclosed it was the real party in interest. The court stated that the insurer acted improperly in trying to assert DTPA claims and other claims that were not properly part of its subrogation interest, but the remedy for that was to consider Rule 13 sanctions, not to order the insureds to appear for a deposition in the county of suit. The court noted a division in the authorities on the issue of whether an insured’s behavior can justify dismissing the insurers case. The split depends on whether the courts consider the insurer as solely standing in the shoes of the insured, or whether courts consider the insurer a pro tanto owner of the claim. The court did not need to resolve this issue, because the dismissal sanction was improper, but the court did agree with the line of cases that recognized the insurer as pro tanto owner and thus not subject to having its claim dismissed because of the insured’s conduct. Prudential Prop. & Cas. Co. v. Dow Chevrolet-Olds, Inc., 10 S.W.3d 97 (Tex. App.–Texarkana 1999, pet. dism’d).

A self-insured school district had a statutory right of subrogation for benefits paid to a school district employee. Still, this statutory right of subrogation was subject to the general rule that there is no right of subrogation unless the insured has been made whole. Because the employee did not recover enough money to make him whole, the school district was not entitled to reimbursement for the medical expenses it paid. Texas Ass’n of School Boards, Inc. v. Ward, 18 S.W.3d 256 (Tex. App.–Waco 2000, no pet.).

C. Surplus lines & Unauthorized insurance business

Historically, surplus lines insurers have provided coverage that was otherwise difficult to obtain. To qualify as an eligible surplus lines insurer, an unauthorized insurer must meet certain requirements. One requirement is that the insurer, when sued by an insured, post a bond in an amount to be determined by the court as sufficient to secure payment of any final judgment that may be rendered. An eligible surplus lines insurer is exempted from this bond requirement, because they meet certain other requirements. In Mid-American Indem. Ins. Co. v. King 22 S.W.3d 321 (Tex. 1995) , the supreme court considered the requirements for an insured to be exempt from the bonding requirement. The court found that the insurer was not exempt from the bonding requirement, so when the insurer failed to post an adequate bond, its pleadings were struck and a default judgment was rendered against it in favor of the insured. Construing art. 1.36 of the Texas Insurance Code, the supreme court concluded tha