Basic Energy Services, Inc. v. Liberty Mutual Ins. Co., #08-CV-78 (W.D. Tex. September 18, 2009)
This case resolves a liability insurer's duty pay defense costs when the policy imposes no "duty to defend" but instead requires the insurer to "reimburse" what the policy describes as the "Allocated Loss Adjustment Expense." I think this decision is a potentially significant harbinger of how courts might interpret well-worn CGL concepts, like "occurrence," eight-corners," and "that particular part" of an insured's work, under an "indemnification" or "reimbursement" policy, rather than the more common "duty-to-defend" policy. I say significant because, more and more, we are seeing reimbursement policies replacing duty-to-defend policies.
Basic Energy Services was hired to replace a pump on an oil well. In the process, Basic pressure tested the well casing and unfortunately dropped the casing into the well damaging the well bore and the casing itself. This was not a small dollar deal. The lawsuit against Basic alleged that the damage forced the operator to abandon the well and risk losing the entire value of the well due to loss of production. So Basic turned to its insurer to cover the damage, including costs of defending the lawsuit. Liberty challenged coverage.
In many ways, Basic's policy was like most standard CGL policies, covering basically bodily injury or property damages caused by an occurrence. Most of the exclusions were also typical, including one for property damage to "that particular part" of property Basic worked on. But the policy explicitly revoked the insurer's duty to defend and included an "Allocated Loss Adjustment Expenses (ALAE)" Endorsement requiring the insurer to reimburse Basic for any ALAE incurred by the insured for any "occurrence." So, Liberty Mutual has no duty to defend but must reimburse Basic's defense costs. What's the difference between this arrangement and the "duty to defend"?
First, argues Liberty, note the word, "Allocated." This policy does not require the insurer to reimburse all of the defense costs, only that portion allocable to covered loss. And because this allocation cannot be made until after a trial has sorted out what is covered and what is not, the insurer has no obligation to reimburse ALAE until the lawsuit is over. Indeed, Liberty is correct that a number of courts have held that pure indemnity policies that impose no duty to defend require indemnity only after the insured has incurred the loss (a judgment or settlement), and, in the absence of an advancement clause, this includes defense costs.
The court, however, disagreed. The policy is silent both on when reimbursement must be made and on any allocation of ALAE (despite the title). The court held that the insurer must reimburse defense costs as they are incurred.
Second, Liberty had obtained some depositions that arguably proved that a significant portion of the damages were not covered. Again. note the allocation idea. Basic countered by asserting that most
Texas of insurance rules, the "eight-corners" rule, that a court may consider only the pleading and policy and not consider any extrinsic evidence, like affidavits or depositions.
This issue put the court in a pickle. On the one hand, Texas courts have almost universally discussed the eight-corner rule in connection with the duty to defend. Much of the rationale for requiring insurers liberally to defend allegations that might fall within coverage without resort to actual facts that might clarify murky or spotty allegations emanates from the distinction between the duty to defend and the duty to indemnify, a distinction that the court acknowledges.
On the other hand, having held that Liberty is obligated to reimburse defense costs as soon as they are incurred, the court must hold either that all defense costs must be paid, or reverse itself and hold that a trier of fact must first resolve which claims are covered and which are not. "The Court agrees with [Basic] that this reimbursement of defense costs obligation is most analogous to a duty to defend, even which the duty to defend is explicitly disclaimed."
Liberty also challenged coverage arguing that the alleged conduct was not an "occurrence," and that the exclusion for damage to "that particular part" of the insured's work was excluded. However, once the court has started down the path of ruling by analogy to duty-to-defend cases, Liberty's arguments are doomed. Under the Lamar Homes line of cases (see my discussion Lamar Homes Decision), arguments that a contractor's defective work can't be a covered occurrence have been rejected -- but these are duty-to-defend cases. Likewise, Liberty's argument that the whole well, including casing, bore, and subsurface space, should be considered Basic's "work" has been rejected by a number of state and federal cases. Only the casing and the pump comprised Basic's particular work. Damage to the bore and the loss of well itself is not excluded.
Liberty cannot be blamed for arguing that the analogy should go in the opposite direction, away from duty-to-defend cases and toward pure-indemnity cases. Arguably, this decision could have gone either way. If other courts follow suit, this decision may be seen in hindsight as a significant precedent expanding duty-to-defend doctrines to other types of policies.
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