Texas court tackles consequential vs. direct damage in energy firms’ insurance spat
A key issue raised had to do with whether damages were consequential or direct — something not well defined in Texas caselaw.
A Houston appeals court remanded a case for reconsideration of damages involving a dispute over insurance coverage that arose from a workplace death.
A key issue raised had to do with refereeing claims over whether damages were consequential or direct—something the Fourteenth District Court of Appeals recognized in its opinion is not well defined in Texas caselaw.
In Total Petrochemicals & Refining USA v. Kinder Morgan Petcoke, the plaintiff sued Kinder Morgan after both companies settled a wrongful death claim with the family of Gary Counts, a Kinder Morgan employee killed in 2015 at a Total refinery.
Total and its insurer claimed Kinder Morgan breached its contractual promise to insure Total and its employees. Had Total been covered, that policy would have paid part of its legal defense and settlement costs, Total alleged.
The trial court resolved all claims on summary judgment, granting Total some relief. It rendered a judgment of $1 million for Total and its insurer.
All parties appealed.
Kinder Morgan’s appeal included a request for reversal on the basis that the damages were consequential, which if so would reduce its liability.
The appeals court, however, affirmed the trial court finding that the damages were direct.
In the opinion Justice Kevin Jewell delivered Thursday, he noted that consequential damages are those that result naturally, but not necessarily, from the defendant’s breach. Direct damages are those the breaching party is conclusively presumed to have foreseen as a result of its breach.
“Kinder Morgan suggests that Total’s damages are consequential because they ‘would not have resulted if Counts had not been killed while working at Total’s facility,’” Jewell stated. “Appellants emphasize that the alleged damages in today’s case … are more accurately characterized as directly linked to Kinder Morgan’s failure to secure the requisite insurance coverages. We agree with appellants.”
Jewell recited from a recent Supreme Court of Texas case, James Constr. Grp. v. Westlake Chem. Corp. (May 20, 2022) that “the line between direct and consequential damages often is not a bright one.”
“Appellants aptly note that insurance protects against contingencies, so the damages arising from the failure to procure required insurance coverage will never arise until that contingency occurs. Classifying such damages as consequential rather than direct ignores that, in such a situation, they are quintessentially the ‘usual result of the wrong,’” he stated.
Alexander Dubose & Jefferson attorneys, arguing for Total, were more focused on Kinder Morgan’s actual coverage, which was limited to $6 million. The trial court sided with Kinder Morgan on that point, but Total claimed actual damages of $9 million and hoped to overcome the limit.
Kinder Morgan argued it can’t be liable for failing to obtain more coverage for Total than the contract required.
Here, the appeals court recognized that Kinder Morgan breached the contract by not adding Total “as an additional insured to voluntarily procured insurance such as the Lloyd’s Policy.” The trial court, therefore, erred in its reasoning, but this was not enough for Total to prevail, the opinion states.
“If a summary judgment may be affirmed on an alternate ground preserved in the record, we must do so,” Jewell stated.
The cases Total presented in its favor involved a party’s right to benefits from an insurance policy as an insured party, the court said. But Total and its employees were not so insured.
Total said damages are not limited to $6 million because the Lloyd’s Policy would have covered all of their costs “but for the fact that Kinder Morgan improperly limited the scope of coverage.”
“This theory, however, is based on the language of a hypothetical policy to which Kinder Morgan and Lloyd’s have not agreed. Based on the current record, we simply do not know what the Lloyd’s Policy may have said if it were written in a way that complied with Kinder Morgan’s contractual additional insured obligations,” the opinion states.
The court concluded that Total’s damages, if any, resulting from the breaches of contract remain for resolution on remand.
The court order reversed and rendered judgment that Kinder Morgan additionally breached the contract by failing to ensure Total and employees qualified as additional insureds, and by failing to provide written notice of a material change to its insurance policies that affected Total’s status.
Total is represented by Wallace B. Jefferson and Rachel A. Ekery of Alexander Dubose & Jefferson, and by Jack Carnegie of Clark Hills. It’s insurer, Ace Property and Casualty Insurance Co., is represented by Sarah R. Smith and Allison Griswold at Lewis Brisbois Bisgaard & Smith.
Kinder Morgan is represented by Thomas R. Phillips and Michael Cotton at Baker Botts, and by James M. Bettis Jr., D. Mitchell McFarland, Justin Ratley and Carrie Schadle at Munsch Hard Kopf & Harr.