Evanston Ins. Co. v. ATOFINA Petrochem. Inc., # 03-0647 (Tex. February 15, 2008) (See ATOFINA Decision)
Today, the Texas Supreme Court cleared three significant insurance cases, each of which deserves attention. I think the most significant of the three is the ATOFINA ("Atofina") case. I will address the other two in subsequent postings.
This case substantially expands the rights of additional insureds under liability policies. An "additional insured" is typically added to a named insured's policy by virtue of the parties' contract in which the named insured, for example a contractor or commercial tenant, agrees to procure liability insurance and add the general contractor or landlord as an additional insured to the policy for claims that arise from or relate to the contract operations or premises. If the policy contains a provision, usually an "additional-insured endorsement," that adds such contract parties to the policy, then they become "additional insureds" under the policy. (See discussion, Additional-Insured Coverage)
Atofina expands coverage for additional insureds in at least three important respects:
- The additional insured is entitled to insured status under the policy even if the accident or injury was caused by the additional insured itself or some agent other than the named insured;
- "Sole-negligence" exclusions in the additional-insured endorsement will not excuse the insurer from defending additional insureds (even if the additional insured is the only defendant in the lawsuit) if the additional insured alleges that the plaintiff or someone else may also be negligent (this, I think, may have the greatest impact for future cases, as discussed below);
- Insurers, including excess insurers, that wrongfully refuse to defend an insured (including an additional insured) may not dispute the reasonableness of a settlement amount, if the insured was offered an opportunity to defend or participate in settlement negotiations.
Here are the facts: Atofina hired a contractor to perform some construction at Atofina's refinery. The contract required the contractor to indemnify and hold Atofina harmless from claims "except to the extent any loss is attributable to the concurrent or sole negligence . . . of [Atofina]." The contractor also agreed to procure a primary liability insurance policy with certain minimum limits and an excess policy "following form" (having the same terms) to the primary policy. The contractor procured this insurance. The primary policy contained an additional-insured endorsement that excluded the sole negligence of the additional insured.
Contractor's employee fell through a rusted tank and drowned in the fuel oil below. The decedent's family sued the contractor and Atofina for wrongful death (but soon dismissed the contractor leaving Atofina as the sole defendant). The primary insurer tendered its limits, but Evanston, the excess insurer, denied coverage to Atofina primarily on the basis that the policy did not cover additional insureds for their own negligence (i.e., coverage applied only if the contractor caused the accident at least in part). Atofina answered the lawsuit and alleged that the decedent was contributorily negligent. Atofina also sued Evanston for coverage and settled the underlying lawsuit for $6.75 million (all but one million of which it claimed from Evanston).
The trial court granted summary judgment to Evanston, but the intermediate court of appeals reversed in favor of Atofina. The Supreme Court reviewed the case (twice -- it issued an initial decision in May 2006, which it now withdraws). Evanston first argued that the underlying policy covers Atofina "only for liability arising out of [the contractor's] ongoing operations [for Atofina] . . ." The contractor was not hired, argued Evanston, to work on the storage tanks. Therefore, the liability was not sufficiently connected to the insured operations.
On this issue, the high court recognized a split among Texas cases. One case, Granite Contr. Co. v. Bituminous Ins. Co., 832 S.W.2d 427 (Tex. App. - Beaumont 2003) imposed a "fault-based" interpretation that bars coverage for an additional insured unless the named insured's conduct caused the accident. Two other appellate cases, Admiral Ins. Co. v. Trident NGL, Inc., 988 S.W.2d 451 (Tex. App. Houston [1st Dist.] 1999) and McCarthy Bro. Co. v. Continental Lloyds Ins Co., 7 S.W.3d 725 (Tex. App.- Austin 1999) applied a broader theory of causation that allowed coverage for the additional insured as long as the accident occurred more or less within the contract works. For example, if the named insured is a painting contractor whose employee is injured on the work site by a stray truck driven by, say, a plumbing contractor, the injury bears a close enough connection to the painting contractor's operations to trigger coverage. It was on the work site and the employee was within the scope of the contract works. "We do not require proximate cause or legal causation," said the Atofina Court.
This is a significant clarification of Texas law on this point. Many insurers routinely challenge additional-insured coverage because the accident was not caused by the named insured's operations. No more.
Second, and most significant. Evanston argued that the underlying policy excluded the sole negligence of the additional insured, and the Evanston policy, following form, contained the same exclusion. Since Atofina was the only defendant in the underlying suit, only sole-negligent liability was being alleged. The high court disagreed, reasoning:
On the record before us, we are unable to determine as a matter of law whether the accident was the product of Atofina's sole negligence. The Jones family originally sued both Atofina and [the contractor], alleging both parties were negligent. There were allegations in Atofina's pleadings that Jones himself was contributorily negligent. [Emphasis added]
The Court held that, without a determination of liability, it was impossible to say whether the exclusion should apply.
The significance of this reasoning is that arguably an insurer's duty to defend must now be determined not simply by an "8 corner" rule (reading the policy and complaint), but also by reading the defendant's answer and perhaps other pleadings. Courts are not supposed to look at extrinsic evidence (i.e., anything except the 8 corners of the policy and the complaint) See discussion of this rule, 8 Corner Rule in Texas). Up until now, if the complaint fails to allege some fact necessary to trigger coverage, then the insured may be denied an otherwise merited defense. Now it seems the insured is master of its own fate. By answering that the plaintiff contributed to his own death, Atofina provides the allegation necessary to avoid the sole-negligence exclusion. Insureds and additional insureds may provide missing allegations in their answers and expand the strict 8 corner to 12 or more corners, so to speak. The expansion is potentially very significant.
Third, the Atofina Court appears to reaffirm its earlier holding in Employers Cas. Co. v. Block, 744 S.W.2d 940 Tex. 1988), that an insurer that wrongfully refuses to defend may not challenge a subsequent settlement as unreasonable. This is the only portion of the opinion that drew a strong dissent. Justice Hecht agreed that Evanston was obligated to cover the additional insured but would have remanded the case to allow Evanston to challenge the amount of the settlement. The problem that the dissent finds is that Block involved a primary insurer that breached its duty to defend. Evanston, as an excess insurer, had no duty to defend, at least until the primary policy was exhausted. Justice Hecht criticized the majority for applying the Block rule when an excess insurer refuses to accept a demand to participate in settlement negotiations.
However, in this case, the primary insurer had already tendered its policy limits, apparently from the very beginning. While it may be technically true that Evanston's duty to defend was not yet triggered, it may be that both Atofina and the primary insurer were asking Evanston to take over the defense. The facts are not clear. Still, the lesson here for policyholders is to invite excess carriers to the negotiation table. After this decision, they probably will be hard put to refuse, knowing that they may be stuck with whatever settlement is reached in their absence.
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