The Supreme Court of Texas ruled that a commercial insured’s legal expenses are not covered “damages” within the meaning of an excess liability policy. The case is Ohio Cas. Ins. Co. v. Patterson-Uti Energy, Inc., Marsh USA, Inc., 703 S.W.3d 790 (Tex. 2024).

The Underlying Claim

Patterson-Uti Energy, Inc. (Patterson) was a company performing oil and gas operations in Texas. Each year, the company’s insurance broker, Marsh USA, Inc. (Marsh) helped create “an insurance tower,” constructed of a variety of general and excess liability policies to cover the risk of bodily injury to those working on the rigs. One day, an incident at one of Patterson’s rigs spawned multiple lawsuits against the company. The ensuing litigation costs and settlements exhausted Patterson’s first-level priority policies, triggering the obligations of the excess insurers, including Ohio Casualty Insurance.

Ohio Casualty indemnified Patterson for parts of the different settlements but denied coverage for defense-related costs. This denial prompted Patterson to file suit against Ohio Casualty for breach and violations of the Texas Insurance Code. Alternatively, Patterson claimed Marsh had been negligent for procuring a policy that did not cover defense expenses.

Each party moved for summary judgment in its favor. The trial court determined that Ohio Casualty was obligated to pay the requested defense costs because its “policy did not clearly and unambiguously exclude coverage for defense costs provided by the underlying primary policy.” This verdict was affirmed upon appeal. According to the appellate court, Ohio Casualty’s excess policy “[was] a ‘follow form’ policy that [did] not unambiguously exclude defense expenses.” Ohio Casualty appealed to the Supreme Court of Texas.

Contours of a “Follow Form” Policy

Patterson pointed to the underlying policy from Liberty Mutual, which stated that an “ultimate net loss” meant “the amount [Patterson] is obligated to pay, by judgement or settlement, as damages resulting from an ‘Occurrence’ to which this Policy applies, including the service of suit, institution of arbitration proceedings and all 'Defence Expenses' in respect of such ‘Occurrence’” (alternate spelling original). The “Defence Expenses” specifically included “defence and appeal costs and expenses.” Since these expenses were considered part of the “ultimate net loss” in the underlying policy, argued Patterson, the excess policy also considered “Defence Expenses” because it was a “follow form” policy.