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Insurance Carriers May Sue Insureds For Reimbursement

By James L. Cornell

In a landmark decision, the Texas Supreme Court held that an insurance carrier may settle an uncovered claim, and then sue its insured for reimbursement. Excess Underwriters v. Frank’s Casing Crew & Rental Tools, Inc., 2005 Tex. LEXIS 418; 48 Tex. Sup. J. 735 (May 27, 2005)
In Frank’s Casing, the insured was sued by Arco Oil & Gas Company after a platform that Frank’s constructed for Arco collapsed. During trial, Arco made a $7.5 million settlement demand, which the Excess Underwriters accepted and paid, after Frank’s refused to contribute anything towards settlement. The $7.5 million settlement demand was within the Excess Underwriters’ policy limits. The Excess Underwriters then brought a declaratory judgment action against Frank’s for reimbursement of the $7.5 million settlement payment. The trial court originally ruled in favor of the Excess Underwriters, but then reversed and held for Frank’s after the Supreme Court of Texas decided Texas Ass’n of Counties County Gov’t Risk Management Pool v. Matagorda County, 52 S.W. 3d 128 (Tex. 2000). In that opinion, the Supreme Court of Texas held that a carrier could only seek reimbursement after obtaining the policyholder’s clear and unequivocal consent to both the settlement and the right to seek reimbursement. On the Frank’s Casing appeal, the Fourteenth Court reluctantly upheld the trial court’s revised judgment, stating that “this is a matter the underwriters must take up with the superior court.”
In the Supreme Court of Texas decision, with three concurrences, Justice Owens held that a carrier has a right to be reimbursed if: (i) it has timely asserted its reservation of rights; (ii) notified the insured it intends to seek reimbursement; and, (iii) paid to settle claims that were not covered. The Court ruled that once an insured asserts that a settlement offer has triggered a Stowers duty, and the insurer accepts the settlement offer or a lower one, the insured is estopped from asserting that the settlement is too much of a financial burden for the insured to bear if it turns out that the claim is not covered.
This opinion sets a new direction for Texas insurance jurisprudence. Before Frank’s Casing, when coverage was questionable, if the carrier was confronted with a Stowers demand, it had two choices. First, the carrier could take the risk of refusing to pay the claim based on its belief that the claim was not covered. If it turned out that the carrier was wrong, the carrier could be sued for insurance code violations and under the Stowers doctrine. Second, the carrier could accept the settlement demand and pay the claim with no right of reimbursement, even if it turned out the claim was not covered. The risk was placed on the carrier under a theory that the carrier is in the business of evaluating and allocating risks, and is therefore able to spread losses through increased premiums and by drafting policies with different language. Now, the risk is placed on the insured. If the carrier is faced with a Stower’s demand, the carrier may pay the demand. If it turns out that the claim is not covered under the policy, the carrier can seek reimbursement from the insured policyholder, hoping that the insured has the solvency to repay the insurer.

James L. Cornell is a partner at Cornell & Pardue. His practice focuses on complex commercial litigation, including representing corporate policyholders in pursuing claims against insurance carriers.

How the Fifth Circuit Reviews Rejected Administrative Claims

By Fred A. Simpson

In a case of first impression, the Fifth Circuit decided against the Commis-sioner of Social Security and in favor of an individual claimant of benefits. Higginbotham v. Barnhart, __ F.3d __ (5th Cir. 2005)[No. 04-10197].
Federal circuits are definitely split on this particularly narrow issue. However, the Fifth Circuit joined the Second, Fourth, Eighth, Ninth, and Tenth Circuits after reviewing the rationale of those other jurisdictions, ignoring the opposed positions of the Third, Sixth, Seventh, and Eleventh Circuits.
The question is: to what extent a federal district court may consider evidence when reviewing underlying administrative procedures within the Social Security Administration for claims of supplementary security income (“SSI”). The Commissioner of Social Security argued that consideration of such evidence should be rather strictly limited.
Charles Higginbotham applied for supplemental SSI in 1999, claiming he was disabled by a mixed bipolar disorder. In 2000, the Social Security Administration denied his application. Higginbotham then appeared before the Administrative Law Judge (“ALJ”) who also denied the claim because Higginbotham showed no evidence of “exertional limitations,” even though he had “non-exertional limitations” that restricted his work to jobs requiring only short, simple instructions and little interaction with other people.
Higginbotham applied to the Appeals Council, the highest level of administrative appeal in the Office of the Commissioner of Social Security. As part of that application, he submitted for the first time a medical source statement from his treating physician that evaluated his “mental abilities critical for performing unskilled work.” This medical evidence showed that Higginbotham suffered a complete loss of ability to perform regular employment activity. The Appeals Council denied a review of the claim, but noted in its written response that the newly-introduced medical source statement was in fact considered as part of the process of deciding whether to review the claim.
When Higginbotham took his claim to federal district court, the magistrate judge recommended reversal of the Commissioner’s decision, but U.S. District Judge McBryde rejected that recommendation, declining consideration of the new evidence (the medical source statement) because that evidence was not offered at levels below the Appeals Council. Higginbotham appeal-ed to the Fifth Circuit.
A court’s review of the denial of SSI benefits requires an examination of all the evidence, but is limited to whether the Commissioner’s decision is supported by substantial evidence in the record and whether proper legal standards were applied. The critical issue in this case was whether the federal district court should consider evidence that was offered after the Administrative Law Judge made his negative determination and before the appeal was rejected by the Appeals Council. The key question concerns interpretation of the Social Security Act which grants district courts the power to review the Commissioner’s “final decision.” The statute doesn’t define a “final decision,” so the Fifth Circuit considered the supporting regulations, finding also that “the regulations are anything but clear.”
The Fifth Circuit looked at and “extrapolated” the regulations carefully and considered how other circuits used them to arrive at their conclusions. After weighing all competing arguments, the court found that the Commissioner’s “final decision” occurs after the Appeals Council denied a request for review. This conclusion was bolstered by the fact that the Appeals Council actually did consider the newly-introduced medical statement when the council refused to review decisions reached by the lower administrative levels.
The judgment of the district court was vacated and the case remanded for further consideration not inconsistent with the Fifth Circuit opinion.

Fred A. Simpson is a litigation partner at Jackson Walker L.L.P. He is an associate editor for The Houston Lawyer.

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