Case on insurers' duty to defend heads to Texas Supreme Court
A Texas-based energy company sued their insurer for breach of their insurance contract and for violation of the Texas Insurance Code.
A Liberty Mutual Insurance subsidiary is challenging Houston-based Patterson UTI Energy Inc. after the insurer was found at fault following its refusal to pay defense costs in a lawsuit. The Fourteenth Court of Appeals upheld a Harris County trial court’s dismissal of the case in Patterson’s favor, but the Texas Supreme Court has agreed to hear the case.
According to an amicus curiae letter prepared by a Tollefson Bradley Mitchell & Melendi partner on behalf of the American Property Casualty Insurance Association, the court of appeals ruling, if not vacated, “will have far-reaching consequences for insurers and insured.”
Beth D. Bradley of Tollefson Bradley said the lower court erroneously construed language on the meaning of “following form” insurance—rather than the terms of the contract—to guide its analysis.
“This approach effectively broadens the duty to defend beyond its recognized boundary as an obligation controlled by contract. It also blurs the line between liability coverage for defense costs and coverage for damages an insured is legally obligated to pay,” Bradley said.
The Fourteenth District opinion said Marsh USA Inc., Patterson’s insurance broker, secured a primary policy followed by a series of excess policies, including one from The Ohio Casualty Insurance Co., a Liberty Mutual holding.
Patterson companies provide land drilling and pressure pumping services. Patterson companies were sued for a personal injury/negligence claim that resulted in a large settlement triggering coverage under the primary and applicable excess policies. Ohio Casualty funded a portion of the settlement but refused to indemnify or provide coverage for Patterson’s defense expenses.
Patterson sued for breach of the insurance contract and for violation of the Texas Insurance Code.
The trial court final judgment against Ohio Casualty and Marsh USA was $4.6 million actual damages and $1.4 million in attorney fees.
Ohio Casualty is represented by Kirsten M. Castaneda at Alexander Dubose & Jefferson, and by George S. McCall and Sondra Sylva at Faegre Drinker Biddle & Reath, both Dallas-based offices.
Ohio Casualty is asking the supreme court to recognize a distinction in excess insurance policies. While admitting the policies regularly “follow the form” of the primary, underlying insurance policy, Texas law recognizes a “follow form” policy does not automatically follow the underlying policy in every respect, the company’s brief argues.
“The distinction between coverage and exclusion is significant. The insured bears the initial burden to establish coverage. Only after the insured meets this burden must the insurer establish the loss falls within a coverage exclusion,” Ohio Casualty asserts.
Kelsi White, Daryl Moore and Jane L. Robinson of Ahmad, Zavitsanos & Mensing in Houston represent Patterson.
The issues, as framed by Patterson’s attorneys are these:
- When the excess policy and primary policy are read together, as the follow-form provision requires, does the excess policy cover Patterson’s defense costs incurred in connection with covered lawsuits?
- Because, at minimum, Patterson offered a reasonable interpretation of the excess policy, does Patterson’s interpretation necessarily prevail?
Patterson wants the supreme court to find in the affirmative to both questions.
“Ohio Casualty takes a myopic view of certain language, including dicta, from the court of appeals’ opinion while disregarding other important language. The court of appeals understood Ohio Casualty’s argument that the excess policy never covered defense costs in the first place; the court of appeals simply disagreed,” the appellee brief states.
The supreme court is set to hear oral argument in October.