LEGAL TRENDS

Texas Supreme Court Addresses Multiple Insurance Coverage Issues

By James L. Cornell and Reagan D. Pratt

A trio of insurance opinions issued by the Supreme Court of Texas on August 29, 2008, resolved two long-standing coverage issues and strongly re-affirmed the liberal application of the “eight corners” rule for determining the duty to defend. In Don’s Building Supply, the court rejected the “manifestation” and “exposure” theories for determining the date of occurrence for property damage claims, holding that coverage is triggered when the actual injury occurs. In Ulico Casualty, the court rejected the Wilkinson exception to the general rule that coverage cannot be created by waiver or estoppel. And in Nokia the court held that the duty to defend is triggered by pleadings that would support a claim for covered damages, no matter how unlikely it is that the plaintiff will actually seek such damages.

Don’s Building Supply, Inc., v. OneBeacon Ins. Co.,
267 S.W.3d 20 (Tex. Aug. 28, 2008):

Coverage for Property Damage is Triggered at the Time of Injury in Fact

In Don’s Building Supply, Inc., v. OneBeacon Ins. Co., the court considered the rule to apply for determining the time at which “property damage” occurs, for purposes of an occurrence-based commercial general liability (“CGL”) insurance policy. The majority of lower courts had adopted variants of the “manifestation” rule, under which property damage was deemed to “occur” – and trigger coverage during an applicable policy period – when the damage became evident or discoverable. Others had adopted variants of the “exposure” rule, under which coverage was triggered according to the date of the activity which ultimately resulted in property damage. The court rejected both of these rules in favor of the “injury in fact” or “actual injury” rule, under which the liability is covered by the policy in force when the property is actually damaged.

The question arose when Don’s Building Supply was sued for distributing synthetic stucco for use as home siding. This product allegedly allowed moisture to seep into wall cavities behind the siding, causing the underlying wood to rot and grow mold. The plaintiffs pled that actual injury occurred within six to twelve months of installation, but was not discoverable until much later. The issue was which of Don’s policies covered the claims. Was it the policy in force when the property damage manifested itself, or when the actual injury occurred, or at some other time? Answering questions certified to it by the Fifth Circuit, the Supreme Court held that “property damage” under this policy “occurred” when actual physical damage to the property occurred, reasoning that:

The policy says as much, defining property damage as “[p]hysical injury to tangible property,” and explicitly stating that coverage is available if and only if “‘property damage’ occurs during the policy period.” So in this case, property damage occurred when a home that is the subject of an underlying suit suffered wood rot or other physical damage. The date that the physical damage is or could have been discovered is irrelevant under the policy.

Based on this rule, the court further held that duty to defend the underlying suit was owed by the plaintiff insurer, because the pleadings alleged that the “actual injury” occurred during that insurer’s policy period.

Ulico Cas. Co. v. Allied Pilots Ass’n,
262 S.W.3d 773 (Tex. 2008):

Waiver and Estoppel Cannot Expand Coverage, But An Insurer Is Liable When Its Actions Prejudice the Insured

Ulico considered what has come to be known as the “Wilkinson exception” to the general rule that coverage cannot be created by estoppel or waiver. The Wilkinson exception stated that, if a carrier assumed the defense of an insured without a reservation of rights or non-waiver agreement, with knowledge of the facts indicating noncoverage, then the carrier had waived its policy defenses and was estopped from denying coverage.

In Ulico, the insured reported a claim after the claims-made-and-reported policy had expired. The carrier, Ulico, mistakenly agreed to defend the insured, subject to its reservation of rights to deny coverage. Ulico sent litigation management forms and attorney evaluation forms to the insured’s counsel. Over a year later, the attorneys submitted their invoice for $635,000.

Both the trial and appeals courts rejected Ulico’s attempt to avoid paying those defense costs, based on jury findings of waiver and estoppel under the Wilkinson standard. The Texas Supreme Court reversed, based on the “well-established” rule that “the doctrines of waiver and estoppel may operate to avoid conditions that would cause a forfeiture of an insurance policy, [but] they will not operate to change, re-write or enlarge the risks covered by the policy.”

The court rejected the Wilkinson exception because it did not require the insured to prove actual prejudice caused by the insurer’s actions. Rather, the Wilkinson exception was based on the “apparent” conflict of interest that “might arise” when insurers represent insureds in underlying lawsuits while those insurers simultaneously formulate defenses of noncoverage. The Ulico court reasoned that the “possibility” of a conflict of interest was an insufficient justification for “judicially rewriting the parties’ agreement.”

The court nonetheless recognized that a showing of prejudice could result in carrier liability, stating:

Under some circumstances, insurers who take control of their insured’s defense without a valid reservation of rights or non-waiver agreement can and should be prevented from denying benefits that would have been payable had the claim been covered because the insured is actually prejudiced by the insurer’s actions.

The court further held that Ulico was not bound by its post-loss letter agreement to pay defense costs. The court found that the agreement lacked consideration, and did not comply with the policy’s requirement that any modification must be in a written endorsement signed by an authorized representative of the carrier.

Justice Jefferson, in concurrence, noted his understanding that if the insured demonstrates prejudice, then the appropriate measure of damages remains the benefits that would have been paid had the insurer not denied coverage. He noted that, under this rule, “it matters little whether court says coverage was created or that the benefits are those that would have been payable had there been coverage; a rose by any other name would smell as sweet.”

Zurich American Ins. Co. et al v. Nokia, Inc.,
268 S.W.3d 487 (Tex. 2008):

Allegations of Unspecified Damages Because of Biological Injury Trigger a Duty to Defend

Nokia addressed several insurers’ duty to defend, under standard CGL policies, a series of class actions alleging that purchasers of cell phones suffered “biological injury” from radio frequency radiation. After holding that the alleged “biological injury” at the cellular level was a “bodily injury” within the meaning of the policies, the court addressed whether the damages sought by the plaintiffs fell within the policies’ coverage for claims seeking “damages because of bodily injury.”

The court found no duty to defend one of the underlying suits, because the pleadings explicitly limited the claimed damages to the amount necessary to purchase headsets. Such claims fall within the business-risk exclusion from coverage for risks relating to the repair or replacement of the insured’s defective products.

The pleadings in the remaining class actions, however, sought damages “including but not limited to” the cost of purchasing headsets. For these, the court liberally applied the “eight corners” rule, under which the duty to defend is determined solely by a review of the policy provisions and the pleadings in the underlying suit. This rule requires the insurer to defend if the pleadings, without regard to their veracity, create a “possibility that any of the claims might be covered.” The court declined to recognize an exception to this rule that would consider the plaintiffs’ post-pleading briefs asserting that no bodily injury claims would be pursued. Since the pleadings “potentially” stated claims for personal injury damages, the insurers were held obligated to provide a defense.

Justice Hecht, in dissent, described this conclusion as “naïve,” and “blind” to the practical realities of class action litigation. He observed that the underlying pleadings meticulously avoided specifying any claims for personal injury damages, because individualized claims for bodily injury would eliminate the possibility of class certification, and hence the value of the cases. While he agreed that the eight-corners rule is to be liberally applied, he opined that it should not be handled “in a way that rewards cute and clever pleading that strains credulity,” and that the court “should not consider that class counsel’s pleadings potentially state a claim that would destroy the case altogether.”

James L. Cornell practices law at Cornell & Pardue. He is a co-founder and former chair of the Insurance Law Section of the State Bar and co-author of Cornell & Martin’s Texas Insurance Law Digest.
Reagan D. Pratt is a member of The Pratt Law Firm. His practice focuses on the trial and appeal of complex commercial disputes, including those concerning insurance coverage.

Mandamus Relief Available to Enforce Only Unambiguous
Forum-Selection Clauses

By Hannah Sibiski

In In re Sterling Chemicals, Inc., 261 S.W.3d 805 (Tex. App.--Houston [14th Dist.] 2008) (orig. proceeding), the Court of Appeals for the Fourteenth District, Houston, Texas, reaffirmed the rule that mandamus relief is available to enforce a forum-selection clause. But, to be enforced in an original proceeding, the forum-selection clause must be unambiguous.

In re Sterling Chemicals arose from the lawsuit concerning Gulf Hydrogen and Energy, L.L.C.’s attempt to acquire Sterling Chemicals, Inc. The two companies entered into a Memorandum of Understanding (“MOU”) in July 2007, under which Gulf Hydrogen would pay three non-refundable deposits into an escrow account and, in exchange, Sterling Chemicals would not solicit other buyers. This agreed exclusivity period would extend until the proposed closing date for the transaction, March 1, 2008.

The contemplated acquisition failed to close. Three days later, Gulf Hydrogen sued Sterling Chemicals, claiming that Sterling Chemicals misrepresented facts, induced Gulf Hydrogen to enter the MOU, breached the terms of the MOU, and failed to complete the acquisition. Sterling Chemicals asked the trial court to dismiss the lawsuit based on the MOU forum-selection clause, which stated that Delaware was the exclusive jurisdiction for “any disputes” concerning “[a]ll documentation in connection with the Proposed Transaction.” The trial court denied the motion, and Sterling Chemicals filed a petition for writ of mandamus.

In its petition to the Fourteenth Court of Appeals, Sterling Chemicals argued that the MOU forum-selection clause encompassed disputes arising from the MOU because “[a]ll documentation” included the MOU itself. Gulf Hydrogen disagreed on two grounds. First, because the parties contemplated later agreements that would supersede the MOU, the MOU’s forum-selection clause only covered future disputes arising after the parties entered those subsequent agreements. Second, the MOU forum-selection clause could not serve as the basis for mandamus because it was ambiguous and could not be interpreted a matter of law.

The Fourteenth District Court of Appeals began its analysis by confirming that “[m]andamus relief is available to enforce forum-selection clauses,” as held by the Texas Supreme Court in In re AutoNation, Inc., 228 S.W.3d 663, 667 (Tex. 2007) (orig. proceeding). But it refused to grant mandamus in this case because it determined that the forum-selection clause in the MOU was ambiguous. And the trial court’s refusal to enforce the clause was not a clear abuse of discretion.

While the MOU forum-selection clause was not patently ambiguous, the court explained that its latent ambiguity became apparent when it was examined alongside the parties’ confidentiality and escrow agreements. The confidentiality agreements stated that each party “irrevocably submits to the non-exclusive personal jurisdiction of any Texas state or federal court sitting in Harris County, Texas, over any claim or dispute arising out of or relating to the Agreement.” The escrow agreements stated that they “shall be governed by and construed in accordance with the laws of New York and . . . [e]ach party shall submit to the non-exclusive jurisdiction of the courts sitting in New York. Because the confidentiality and escrow agreements themselves could fall within the MOU forum-selection clause’s “[a]ll documentation in connection with the Proposed Transaction,” their non-exclusive Texas and New York forums conflicted with the MOU’s exclusive Delaware forum. The “[a]ll documentation in connection with the Proposed Transaction” could not include the MOU, while also excluding the confidentiality and escrow agreements.

Thus, the Fourteenth Court of Appeals denied the petition for writ of mandamus because it could not consider disputed facts, like the meaning of the MOU forum-selection clause, in an original proceeding and Sterling Chemicals failed to show that the trial court clearly abused its discretion.

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