The “cover note” for Diatom's policy identified Diatom and ECS as the insureds, provided a maximum of $500,000 of coverage for any one bodily injury accident or occurrence, and contained a “condition” “Excluding Leased-In Employees/Workers.” The policy also excluded employees, but included independent contractors.

The CGL Insurers were promptly notified of Mr. Seger's death, but he was erroneously referred to as a Diatom employee. The CGL Insurers did not investigate the incident and apparently conducted no inquiry or review of the policy to determine coverage.

Mr. Seger's parents, Roy Seger and Shirley Faye Hoskins (the “Segers”), ultimately brought a wrongful death action against Diatom and its partners in 1993, but the suit sat dormant for years.

In October 1998, the Segers made their first offer to settle the case within policy limits for $500,000. Diatom forwarded the offer to the CGL Insurers and made its first demand that the CGL Insurers provide a defense and settle the case within the policy limits. The CGL Insurers denied that Mr. Seger's death was a covered occurrence, notified Diatom that two of the CGL Insurers had become insolvent and, therefore, that the demand exceeded policy limits, and refused to provide a defense or settle the case.

In June 1999, the Segers made a second settlement offer within coverage limits, offering to accept $368,190 to “resolve all claims and all pending litigation arising out of the death of Randy Seger.”

The CGL Insurers rejected that offer.

With a trial setting looming, Diatom made a second demand for a defense, asking the CGL Insurers to “come in and accept defense and acknowledge coverage on our behalf and settle the case within the policy limits.” In June 2000, Diatom repeated that demand.

The Segers made a third settlement offer prior to the March 2001 trial, offering to accept $250,000 to “resolve all pending litigation between the parties.” The CGL Insurers again declined to accept the settlement offer.

Before trial, the Segers nonsuited Diatom's individual partners, leaving Diatom as the only defendant. Diatom's counsel then withdrew from the case, claiming that Diatom was “unable to pay attorney fees.”

At trial, Diatom appeared only through Ms. Gillman, its general partner, who was not a lawyer and had been subpoenaed to appear as a witness. Diatom did not announce ready when the proceeding was called, presented no opening or closing argument, offered no evidence, and did not cross-examine any witnesses.

Ms. Gillman testified and was excused after her testimony.

The CGL Insurers, despite having notice of the trial, elected not to attend or participate.

The Segers presented evidence to prove both Diatom's liability and damages.

After a full day of hearing evidence, the trial court found Diatom liable for Mr. Seger's death and awarded the Segers $15 million, plus interest.

Following entry of the judgment, Ms. Gillman contacted the CGL Insurers and inquired about what they intended to do. Receiving no answer, Diatom assigned to the Segers “any and all claims and causes of action” against the CGL Insurers, but reserved Diatom's right to recover its attorneys' fees incurred in the underlying suit.

In exchange, the Segers agreed to release Diatom's partners from any personal liability, even though they already had been nonsuited.

The Segers filed an action against the CGL Insurers under G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544, 547-48 (Tex. Comm'n App. 1929), seeking damages for wrongful refusal to defend Diatom and negligent failure to settle the Segers' wrongful death claim within the $500,000 limits of Diatom's CGL policy. Before the Stowers action went to trial, all claims against the insolvent CGL Insurers were settled and dismissed, leaving only claims against Yorkshire and Ocean Marine (together, the “Stowers Insurers”). The Segers filed a nonsuit as to the other CGL Insurers.

The Stowers Insurers filed a third-party claim against Diatom and ECS for declaratory relief or for reformation of the CGL policy, arguing that the policy excluded coverage for Diatom's liabilities to leased-in workers. The Stowers Insurers also sought a declaration that Mr. Seger was a leased-in worker on the date of his death and that the Stowers Insurers had no duty to defend Diatom.

At a pretrial hearing, the trial court denied the Stowers Insurers' motion for summary judgment and granted summary judgment in favor of Diatom and ECS on the issues of “coverage, demand within limits, fully adversarial relationship, and trial.” The trial court then severed the third-party claims from the Segers' Stowers action.

The Stowers action went to trial on the remaining issues of negligence, causation, and damages. The jury returned a verdict in favor of the Segers as to the Stowers Insurers' negligence and causation, and the trial court directed verdict as to damages based on the underlying judgment against Diatom.

In April 2006, the trial court entered a $37,213,592.01 final judgment in favor of the Segers.

The Stowers Insurers appealed, and the court of appeals (in Seger I)held among other things that Diatom's CGL policy excluded claims for bodily injury or property damage brought by or on behalf of persons who performed work for the insured under an agreement with another allowing the temporary use of the worker. The appellate court held that, because there was more than a scintilla of evidence that the Segers' claims were excluded by the CGL policy and the Segers had failed to negate the applicability of the leased-in worker exclusion as a matter of law, the trial court had erred in granting summary judgment on the issue of coverage.

The court of appeals also reversed the trial court's judgment that the Segers' claims against Diatom were covered by Diatom's CGL policy, observing that the record reflected that “all of Diatom's drilling workers were leased in from ECS.” It rendered judgment declaring that the CGL policy “excluded liability for injury or death to leased-in employees/workers.”

The case was remanded to the trial court.

On remand, the case was tried in October 2011. The jury found that (1) the Stowers Insurers had negligently failed to settle the Segers' wrongful death claim against Diatom, proximately causing the underlying judgment against Diatom; (2) Mr. Seger was not an employee or leased-in worker of Diatom; and (3) the Stowers Insurers' wrongful refusal to provide Diatom a defense in the underlying action waived their right to control Diatom's defense.

The trial court entered a judgment that (1) the Segers' claims were covered by Diatom's CGL policy; and (2) the underlying judgment in the wrongful death action was the result of a fully adversarial trial and thus established the Segers' damages as a matter of law.

The trial court awarded damages to the Segers in the amount of the underlying judgment, $71,696,547. The Stowers Insurers appealed.

The court of appeals (in Seger II)reversed the trial court's judgment, holding that the evidence was legally and factually insufficient to establish that Diatom had been damaged by the Stowers Insurers. The court of appeals declined to reach the coverage issue because it held that the damages issue was dispositive.

The dispute reached the Texas Supreme Court.

The Texas Supreme Court's Decision

The Texas Supreme Court affirmed the judgment of the court of appeals, which had reversed the trial court's judgment and rendered judgment that the Segers take nothing, but on different grounds.

In its decision, the court first explained that a Stowers cause of action arose when an insurer negligently failed to settle a claim covered by an applicable policy within policy limits. To prove a Stowers claim, the court continued, the insured must establish that:

- the claim was within the scope of coverage;

- a demand was made that was within policy limits; and

- the demand was such that an ordinary, prudent insurer would have accepted it, considering the likelihood and degree of the insured's potential exposure to an excess judgment.

The court then addressed the coverage element.

The court ruled that the evidence was legally sufficient to support the jury's finding that Mr. Seger was not an employee of Diatom (and was an employee of ECS).

The court, however, then rejected the jury's decision that Mr. Seger was not a leased-in worker, holding that Mr. Seger was a leased-in worker as a matter of law.

The Segers' claimed loss, therefore, was excluded from coverage under the CGL policy and their Stowers action failed as a result, the court concluded.

The case is Seger v. Yorkshire Ins. Co., Ltd., No. 13-0673 (Tex. June 17, 2016).