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AN UPDATE ON RECENT INSURANCE COVERAGE DECISIONSAND THEIR IMPACT ON THE CONSTRUCTION INDUSTRY:THE POLICYHOLDERS’ PERSPECTIVELEE H. SHIDLOFSKYVisser Shidlofsky LLP7200 N. Mopac Expy., Suite 430Austin, Texas 78731lee@vsfirm.com22ND ANNUALCONSTRUCTION LAW CONFERENCEFebruary 26 & 27, 2009The Westin La Cantera ResortSan Antonio, Texas
LEE H. SHIDLOFSKYVISSER SHIDLOFSKY LLPlee@vsfirm.comLee Shidlofsky is a founding partner of Visser Shidlofsky LLP where he heads up the InsuranceLaw Practice Group. The Insurance Law Practice represents corporate policyholders that are indisputes or litigation with their insurance companies, provides advice to plaintiffs in complexlitigation on how to best maximize an insurance recovery, and provides risk-managementconsultation in connection with contractual risk transfer issues. The Insurance Law PracticeGroup has handled a wide variety of first-party and third-party insurance claims (e.g., D&O,E&O, “personal and advertising injury liability,” construction defect, commercial property,business interruption, pollution, and commercial auto) in state and federal courts at both the trialand appellate courts.Lee is Secretary of the Insurance Law Section and holds a council position with the ConstructionLaw Section of the State Bar of Texas. He is the author of numerous articles and seminar papersand is a frequent speaker at insurance law and risk management seminars in Texas and across thecountry.He has been named a “Super Lawyer” by Texas Monthly Magazine since 2004, including aranking as a Top 50 attorney in the Central and West Texas Region for 2007 and 2008, and isranked as a top insurance coverage lawyer by Chambers USA and Who’s Who Legal. Inaddition, Lee was recently elected a Fellow of the Texas Bar Foundation.Lee graduated cum laude from Southern Methodist University School of Law and was anassistant editor on SMU LAW REVIEW.Notable Cases:Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007) (answering certifiedquestions in favor of policyholder on “property damage, and “occurrence” issues as well as the“prompt payment of claims” act)Archon Investments, Inc. v. Great American Ins. Co., 174 S.W.3d 334 (Tex. App.—Houston [1stDist.] Aug 25, 2005, pet denied.) (holding insurer breached the duty to defend against allegationsof defective workmanship)Mt. Hawley Ins. Co. v. Steve Roberts Custom Builders, Inc., 215 F. Supp. 2d 783 (E.D. Tex.2002) (holding insurer breached duty to defend and, in doing so, violated article 21.55 of theTexas Insurance Code)For additional information or access to articles and newsletters, please see www.vsfirm.com.We’ve Got You Covered
TABLE OF CONTENTSI.Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660(Tex. 2008) .1A.Background Facts .1B.Additional Insured v. Contractual Indemnity .2C.A Breaching Insurer Cannot Question the Reasonableness of aSettlement.4D.Article 21.55 Applies only to the Duty to Defend.5Commentary:.6II.Unauthorized Practice of Law Committee v. American Home Assurance Co.,261 S.W.3d 24 (Tex. 2008).6A.Shaping the Issue .6B.Background Facts .7C.Corporations Cannot Practice Law and An Insurer with StaffCounsel Is Not Doing So .8D.The Dissent.12Commentary:.13III.Ulico Casualty Co. v. Allied Pilots Association, 262 S.W.3d 773 (Tex. 2008).13A.Background Facts .13B.Waiver and Estoppel.15C.Concurring Opinion .18Commentary:.19IV.Don’s Building Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20 (Tex. 2008).19A.Background Facts .20B.The Certified Questions.20C.And the Trigger Is . . . Injury-in-Fact .20D.The Aftermath .23Commentary:.25V.Trammell Crow Residential Co. v. Virginia Surety Co., Inc., 2008 WL 5062132(N.D. Tex. Dec. 1, 2008).25A.Background Facts .26B.The Court Finds that Virginia Surety Owed a Defense to TrammellCrow .26C.Virginia Surety Breached Its Contract .27
D.Virginia Surety Violated the Prompt Payment of Claims Act .28Commentary:.29VI.Mid-Continent Casualty Co. v. JHP Development, Inc., 2009 WL 189886 (5thCir. Jan. 28, 2009).29A.Background Facts .30B.The Exclusions .31C.1.Exclusion J(5) .312.Exclusion J(6) .32Fully Adversarial Proceeding.34Commentary:.34VII.Pine Oak Builders, Inc. v. Great American Lloyds Insurance Co., No. 06-0867(Tex. Feb. 13, 2009) .35A.The Background Facts.35B.Lamar Homes Applies .35C.Don’s Building Supply Applies .36D.GuideOne, Extrinsic Evidence and the “Eight Corners” Rule .36E.Different Case, Same Result .37Commentary:.38
AN UPDATE ON RECENT INSURANCE COVERAGE DECISIONSINDUSTRY: THE POLICYHOLDERS’ PERSPECTIVEAND THEIRIMPACTON THECONSTRUCTIONthe course of the contract, “except to theextend that any such loss is attributable tothe concurrent or sole .” ATOFINA, 256 S.W.3d at662. In addition, Triple S agreed to carryprimary and excess CGL insurance, namingATOFINA as an additional insured on eachpolicy. In complying with that requirement,Triple S procured a primary policy in theamount of 1 million from AdmiralInsurance Company (“Admiral”) and anexcess policy in the amount of 9 millionfrom EvanstonInsuranceCompany(“Evanston”).AN UPDATE ON RECENTINSURANCE COVERAGE DECISIONSAND THEIR IMPACT ON THECONSTRUCTION INDUSTRY:THE POLICYHOLDERS’PERSPECTIVEI. Evanston Insurance Co. v. ATOFINAPetrochemicals, Inc., 256 S.W.3d 660(Tex. 2008)On June 13, 2008, on rehearing, theSupreme Court of Texas handed downanother significant insurance decision inEvanston Insurance Co. v. ATOFINAPetrochemicals, Inc., 256 S.W.3d 660 (Tex.2008). Among other things, the Court’sopinion addressed the relationship betweenan “additional insured” provision and a“contractual indemnity” provision in asubcontract. Moreover, the Court tackled aninsurer’sabilitytocontestthereasonableness of a settlement offer once itwrongfully denies coverage for a claim.And, in doing so, the Court significantlyretreated from its prior landmark decision inState Farm Fire & Casualty Co. v. Gandy,925 S.W.2d 696 (Tex. 1996). Finally,following on the heels of Lamar Homes v.Mid-Continent Casualty Company, theCourt made clear that—in the context ofliability policies—Article 21.55 of the TexasInsurance Code applies only to the duty todefend and does not apply to a breach of theduty to indemnify.While performing the contract, MatthewTodd Jones (“Jones”), a Triple S employee,died when he drowned in a storage tank offuel oil after falling through a corroded roofat the ATOFINA refinery. Jones’ survivorssued both Triple S and ATOFINA, allegingclaims of wrongful death. Admiral tenderedits 1 million limits, and ATOFINA thensought additional insured coverage fromEvanston under the umbrella policy. WhenEvanston denied coverage for the claim,ATOFINA brought the insurer into thelawsuit as a third-party, seeking adeclaration that it owed ATOFINAcoverage. ATOFINA later severed itslawsuit against Evanston, and both partiesmoved for partial summary judgment. Whilethose motions were pending, the underlyinglawsuit settled for 6.75 million, andATOFINA sought recovery of 5.75 millionfrom Evanston, which represented theamount remaining after Admiral paid itslimits.A. Background FactsATOFINAPetrochemicals,Inc.(“ATOFINA”) entered into a contract withTriple S Industrial Corporation (“Triple S”),wherein the latter agreed to performmaintenance and construction work atATOFINA’s Port Arthur refinery. Under theterms of the contract, Triple S agreed toindemnify ATOFINA for all personalinjuries and property losses sustained duringAt the trial court level, summary judgmentwas granted in favor of Evanston. The courtof appeals reversed, finding that ATOFINAwas an additional insured under theEvanston policy and remanding the case tothe trial court for determination of statutorypenalties and attorneys’ fees. See ATOFINA1
AN UPDATE ON RECENT INSURANCE COVERAGE DECISIONSINDUSTRY: THE POLICYHOLDERS’ PERSPECTIVEAND THEIRIMPACTON THECONSTRUCTIONyou or on your behalf, or facilitiesowned or used by you.Petrochemicals, Inc. v. Evanston Ins. Co.,104 S.W.3d 247, 251–52 (Tex. App.—Beaumont 2003, pet. granted) (per curiam).On appeal to the Supreme Court of Texas,Evanston argued the following points: (1)ATOFINA is not covered for lossesresulting from its sole negligence; (2)ATOFINA is barred under Texas law fromobtaining a judgment for insurance proceedsbased on losses arising from its ownnegligence; and (3) the settlement amountwas unreasonable and thus unenforceable.Id. at 664. Evanston argued that ATOFINAdid not qualify as an additional insuredbecause the language does not coveradditional insureds for their own negligence.Despite the lack of an apportionment ofresponsibility in the underlying lawsuit,Evanston urged that because Jones’ deathwas caused solely by ATOFINA’snegligence, the death did not “respect . . .operations performed by [Triple S].” Id.B. Additional Insured v. ContractualIndemnityThe Court recognized a split of authority inthe Texas courts of appeals ns. In Granite Constr. Co. v.Bituminous Insurance Cos., 832 S.W.2d427, 428 (Tex. App.—Amarillo 1992, nopet.), the court adopted a fault-basedinterpretation of “arising out of operations”and found that claim before it did not“aris[e] out of operations performed by” theinsured because only the additional insuredcompany was responsible for the injury.ATOFINA, 256 S.W.3d at 665. Two othercourts, on the other hand, adopted a moreliberal causation theory of additional insuredprovisions, finding that such provisionscreate coverage only “with respect toliability arising out of” the named insured’soperations. In Admiral Insurance Co. v.Trident NGL, Inc., 988 S.W.2d 451 (Tex.App.—Houston [1st Dist.] 1999, pet.denied), the court found that because theaccident caused injury to an insured’semployee while he was on the premises forthe purposes of working on a compressorthat exploded, the alleged liability for hisinjuries “arose out of [the insured’s]operations” and was covered under theadditional insured provision. Similarly, inMcCarthy Brothers Co. v. ContinentalLloyds Insurance Co., 7 S.W.3d 725, (Tex.App.—Austin 1999, no pet.), the court heldthat a worker’s injury that occurred whenAt the outset, the Court addressed thedistinction between ATOFINA as acontractual indemnitee under the contractwith Triple S and its status as an additionalinsured under the Evanston policy. TheCourt acknowledged that ATOFINA wasnot entitled to be indemnified under theparties’ contract if the Jones’ loss wasattributable in any way to ATOFINA.Nevertheless, the Court said: “ButATOFINA does not seek indemnity fromTriple S; it claims instead that it is entitledto indemnification from Evanston by virtueof its status as an additional insured on theumbrella policy.” ATOFINA, 256 S.W.3d at663–64. Thus, the Court refused to look atthe indemnity agreement in the subcontractand looked instead at the terms of theinsurance policy itself.Under the terms of the policy, whichincluded several independent grants ofadditional insured status, an insuredincluded:A person or organization for whomyou have agreed to provideinsurance as is afforded by thispolicy; but that person ororganization is an insured only withrespect to operations performed by2
AN UPDATE ON RECENT INSURANCE COVERAGE DECISIONSINDUSTRY: THE POLICYHOLDERS’ PERSPECTIVEAND THEIRIMPACTON THECONSTRUCTIONId. (citations omitted). Under thatinterpretation, the Evanston insurance policyprovided direct coverage to ATOFINA. Inparticular, since Jones was present atATOFINA’s facility for purposes of TripleS’s operations when the accident occurred,the requisite causal nexus had been satisfied.Id. at 667.retrieving tools at the job site “arose out of”the insured’s operation, even though thenegligence claim was against the additionalinsured premises owner.Having reviewed that case law, the Court inATOFINA sided with the Houston andAustin courts of appeals because the court inGranite relied upon extrinsic evidence whenit looked to the terms of the service contract,which made the additional insured companyresponsible for the specific injury-causingact. ATOFINA, 256 S.W.3d at 665. And, theCourt said, even if it considered the contractbefore it in this case, it was distinguishablefrom that in Granite. In particular, theresponsibility for maintaining the storagetank at the refinery was not assigned to anyparticular party in the service contract. TheCourt said: “Far from shifting anyresponsibility to ATOFINA, the specificterms of the service contract make Triple Sresponsible for all operations.” Id. at 665–66. In addition, regardless of the terms of theunderlying contract, the Court held that the“fault-based” interpretation of the additionalinsured provision is no longer prevailinglaw. Id. at 666. Rather, a more liberalinterpretation applies:Turning to the scope of coverage affordedunder the policy, the Court recognized thatseveral different grants of coverage existedin the “who is an insured” section. TheCourt found that each granted coverageindependently of the others, and thatlimitations on coverage in one section couldnot be read into another section grantingcoverage. Finding that ATOFINA may beentitled to coverage under more than oneclause, the Court held that “it is notunreasonable to conclude that the policyshould be read to provide the broadermeasure of coverage available under theapplicable clauses.” Id. at 668–69.Accordingly, the Court determined that thescope of coverage did not exclude liabilitiesarising out of ATOFINA’s sole negligence.Id. at 669.In addition, the Court found Evanston’sargument under Fireman’s Fund v.Commercial Standard Insurance Co., 490S.W.2d 818 (Tex. 1972), to be misplaced. Inthat case, the Court explained, GeneralMotors (“GM”) was not entitled toindemnification because the contract at issuedid not specifically extend the indemnityagreement to GM’s own negligence.Notably, that case did not address the issueas to whether GM was entitled to coverageas an additional insured. Accordingly, thecase clearly was distinguishable from thefacts at hand. ATOFINA, 256 S.W.3d at669–70. Instead, the Court found that itsdecision in Getty Oil Co. v. Insurance Co. ofNorth America, 845 S.W.2d 794 (Tex.1992), was more on-point. In that case, theGenerally, an event “respects”operations if there exists “a causalconnection or relation” between theevent and the operations; we do notrequire proximate cause or legalcausation. In cases in which thepremises condition caused apersonal injury, the injury respectsan operation if the operation bringsthe person to the premises forpurposes of that operation. Theparticular attribution of faultbetween insured and additionalinsured does not change theoutcome.3
AN UPDATE ON RECENT INSURANCE COVERAGE DECISIONSINDUSTRY: THE POLICYHOLDERS’ PERSPECTIVEAND THEIRIMPACTON THECONSTRUCTIONbar the insurer from contesting thereasonableness of the settlement; and (2) didthe same agreed judgment bar the insurerfrom contesting the agreed judgment’sfactual recitations regarding coverage?Court ruled that an insurance requirement ina contract was separate and distinct from anindemnity provision, such that the ion for one’s own negligence—was inapplicable. Looking at the facts beforeit, the Court said: “[I]t is unmistakable thatthe agreement in this case to extend directinsured status to ATOFINA as an additionalinsured is separate and independent fromATOFINA’sagreementtoforegocontractual indemnity for its ownnegligence.” ATOFINA, 256 S.W.3d at 670.Thus, the Fireman’s Fund decision did notbar ATOFINA from receiving insuranceproceeds for losses arising out of its ownnegligence. Id.Block’s answer was clear:While we agree with the courtof appeals’ conclusion that[the insurer] was barred fromcollaterallyattackingtheagreed judgment by litigatingthe reasonableness of thedamages recited therein, we donot agree with its conclusionthat the recitation in the agreedjudgment that the damageresulted from an occurrence onAugust 6, 1980 is binding andconclusive against [the insurer]in the present suit.C. A Breaching Insurer Cannot Questionthe Reasonableness of a SettlementHaving determined that ATOFINA wascovered under Evanston’s insurance policy,the Court next addressed Evanston’sargument that ATOFINA failed to prove thereasonableness of the 6.75 millionsettlement. In particular, Evanston arguedthat it w
AN UPDATE ON RECENT INSURANCE COVERAGE DECISIONS AND THEIR IMPACT ON THE CONSTRUCTION INDUSTRY: THE POLICYHOLDERS’ PERSPECTIVE LEE H. SHIDLOFSKY Visser Shidlofsky LLP 7200 N. Mopac Expy., Suite 430 Austin, Texas 78731 lee@vsfirm.com 22ND ANNU
