Law and Insurance

Policyholder Fails To Show That Insurer Wrongly Relied On Hired-Gun Expert To Deny Ike Claim

Lee v. Catlin Specialty Ins. Co., No. H-09-2792 (S.D. Tex. Feb. 27, 2011), see Decision

Insurance bad faith law has had its ups and downs in Texas.  When I started practicing law in the late 1980's, skewering insurance companies under the recently adopted tort of bad faith was a popular blood sport.  With a shift in the political winds, however, it appeared by the mid-1990's to be impossible to win a bad faith case, at least on appeal, until a Texas Supreme court case opened the door a crack.  In State Farm Lloyds v. Nicolau, 951 S.W.2d 444 (Tex. 1997), the court upheld a verdict that the insurer breached its duty of good faith and fair dealing by relying exclusively on a disputed engineering report of foundation water damage from the insurer's "hired-gun" expert, an engineering firm that the insurer used routinely because it almost never opined that foundation damage could be the result of plumbing leaks (which was covered).  The policyholder in Nicolau had introduced abundant evidence to support the covered claim and to show the expert's bias. The jury found that the insurer unreasonably failed to consider the policyholder's evidence, relied only on its expert, and so committed bad faith. 

So it is no longer impossible to win a bad faith case in Texas, but, as the present decision illustrates, the policyholder must build a careful and substantial record to do so.  Lee's commercial property in Houston was hit by Hurricane Ike in 2008, sustaining roof damage.  Lee submitted the claim, and Catlin put the investigation in the hands of Engle Martin (EM), a company that Catlin had hired to adjust all Ike damage claims in the region.  Lee hired his own representative, Mike Bass, to investigate the damage.  EM reported evidence of previous damage and hired another company to perform an infrared scan to identify which damages were attributable to Ike winds, and which to faulty prior repairs or natural deterioration.  More reports.  More inspections.  At the end of the day, EM submitted its final report that none of the damage was caused by wind, and the roof could be repaired for $22,864.77.  Mike Bass put the cost at $871,187.50 for the roof and $3.1 million for the entire building.  Litigation ensued.

On just a cursory look, the policyholder's case looks pretty good:  a "hired gun" expert with an exclusive contract with the insurer to do all the Ike work, disputed engineering evidence, only EM's part of which Catlin relied on, even a piece of correspondence seeming to show that EM was working to build a one-sided case against coverage.  The plaintiff's attorney had good reason to expect at least high settlement value.  The judge, however, gave more than a cursory look at the evidence and granted summary judgment for the insurer.

The criterion for bad faith is whether Catlin knew or should have known that the damage was covered when it denied the claim.  The judge considered this standard in light of Nicolau and found that the policyholder had failed to introduce anything near the kind of evidence presented in Nicolau, which included detailed reports from a foundation-repair contractor, a structural engineer, and a licensed civil engineer, all of whom concluded that the foundation damage was attributable to a significant leak in the plumbing system.

Lee's evidence, by contrast, was limited to an estimate of the cost of repairing the roof and the building.  The judge observed, "the record does not contain a report with conclusions that contradict those formulated by [EM].  . . .  [or] any statements or conclusions relating to the cause of the damage."  The judge also found nothing in the record indicating that Catlin's adjusters were unqualified, anything showing what percentage of EM's business comes from insurance companies (or even that EM in fact investigated other Ike claims), or any evidence showing that EM's conclusions were biased.  The one piece of correspondence, showing that EM was working to support arguments against coverage, was written after EM had completed its reports, and so did not prove bias. "The evidence shows no more than a bona fide dispute between Catlin and Lee as to whether the damages to the roof were covered by Lee's policy." 

With a little more sweat work, time and attention, the policyholder should have been able to build the kind of record that could have survived summary judgment.  The huge discrepancy in the two estimates screams that one side or the other was really off base.  A Houston jury would probably have found it hard to believe that a storm like Ike did not cause some damage to Lee's roof and that a large shopping center roof could be repaired for just over $22K.  But before you get to a jury, you have show that there are genuine issues of material fact.  That wasn't done here.

David S. White, Thompson & Knight, LLP

www.tklaw.com

"Governmental Authority" In Pollution Exclusion Does Not Include Cities, Says Texas Court

Dallas National Ins. Co. v. Sabic Americas, Inc., No. 01-08-00758-CV (Tex. App.--Houston [First Dist.] March 10, 2011) See Decision

This case is worth a look for two reasons.  First, it shows that it is still possible (maybe I should say, now possible) to obtain some pollution coverage in a commercial general liability policy.  Second, the court held that the term, "governmental authority" was ambiguous.  Policyholder-side lawyers throughout Texas will add this to a list of cases finding ambiguous policy terms.  They can be the silver bullets of coverage litigation.

Sabic was one of scores of defendants sued by cities and municipal water districts alleging that their water supply systems were contaminated by methyl tertiary butyl ether (MTBE) that the defendants had added to their petroleum products since the 1970's.  The plaintiffs alleged that Sabic and others knew or should have known the unique dangers that MTBE would cause to groundwater and sought:(1) removal of contaminants from groundwater, (2) testing and monitoring of groundwater, and (3) recovery of damages, both for testing and monitoring and for damage to water wells and other property.

The insurer, Dallas National, had issued CGL policies to Sabic from 2003-2007, but refused to defend or indemnify on 3 grounds: the suit does not allege "property damage," Sabic knew of the loss well before 2003, and the pollution exclusion barred coverage.  The court curtly dismissed the first two arguments (the suit explicitly alleged property damage, and the plaintiffs alleged both intent and negligence, so voiding a known-loss defense).  The pollution exclusion, however, gave the court pause.  The provision excluded coverage for:

any loss, cost, or expense arising out of any: (a) request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of "pollutants": or

(b) claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of "pollutants."

The court accepted the insurer's premise that there would be no duty to defend if the plaintiffs were "governmental authorities."  Sabic won, however, by persuading the court that the term was ambiguous.  Ok.  Stop here for a minute.  How could the court believe that cities and municipal water districts were not "governmental authorities"?  Before answering, it is important to understand two important rules of policy construction in Texas.  First, the court may not consider any evidence beyond the terms of the policy and the pleading (although the insurer may have missed a step by not asking the court to take judicial notice of state statutes creating the various plaintiffs).  Second, The policyholder wins by persuading the court that its interpretation of the disputed exclusion is merely reasonable, even if the insurer's interpretation is also reasonable, or even more reasonable.

Sabic argued that "governmental authority," in the context of this pollution exclusion, should be limited to a government agency that has some authority to issue and/or enforce environmental cleanup demands or orders.  After noting that the term was undefined in the policy, the court distinguished  several cases offered by the insurer that characterized munipalities as "governmental authorities."  These cases, said the court, were not dealing with CGL interpretation issues.  From there, it was a short step to finding that, all in all, Sabic's interpretation was not unreasonable, so Dallas National is flushed.

Reading between the lines, I think the insurer became overconfident.  How could cities not be governmental authorities?  But I doubt it would have had to look very far to find insurance cases that identify municipalities or water districts as governmental authorities, or at lease as governmental somethings.  Having no insurance cases even in the ball park left the court free to make what seems to be a pretty bold distinction.

In Texas, "governmental authority" in any exclusion is now fair game for policyholders to attack as ambiguous.

David S. White, Thompson & Knight LLP

www.tklaw.com

Court Determines That Insurer Failed To Prove Prejudice, a Tough Standard Under Texas Law

East Texas Medical Center Regional Healthcare System v. Lexington Ins. Co., No. 6:04-cv-165 (E.D. Tex. Feb. 25, 2011).  See Decision

This coverage suit arising from a medical malpractice action is the latest in a series of Texas cases addressing the question: when may an insurer deny coverage under a claims-made policy for a lawsuit on the basis of late notice of the claim?  "Claims-made" refers to the type of liability policy that covers "claims" first asserted against the insured during the policy period, even though the covered event or wrongful act occurred before the policy period (as opposed to "occurrence" policies that cover events or conduct occurring during the policy period, even though the claim or suit is brought after the policy period). 

Well settled Texas law holds that failure to send the insurer notice of the claim within the policy period excuses the insurer from any obligation under a claims-made policy, even if the late notice caused no prejudice to the insurer.   Moreoever, where, as in this case, the policy also requires that notice be sent "as soon as practicable," the Texas Supreme Court has held that the insurer must prove prejudice if notice was given within the policy period but not as soon as practicable.  See Prodigy Comm. Corp. v. Agricultural Excess & Surplus Ins. Co., 288 S.W.3d 374, 382 (Tex. 2009).  See my earlier discussion of  Prodigy here.  The court in East Texas had to determine what exactly constitutes prejudice to Lexington. 

ETMC's malpractice policy expired on June 8, 2003.  In March 2003, ETMC received a letter alleging serious medical negligence, which ETMC sent to Lexington in April.  This letter constituted a "claim"  that was timely sent to Lexington.  On May 27, the plaintiff filed suit, but ETMC failed to send notice of suit until January 15, 2004.  It had earlier been decided that ETMC had a separate obligation to send notice of the suit, but that Lexington had to prove prejudice to deny coverage on the second notice.

Lexington argued that it was prejudiced by the delay because three treating nurses admitted during depositions in December 2003 that their treatment had been negligent.  By losing the right to participate in the defense of the case, argued Lexington, and particulalrly the depostions, it was prejudiced.  Because of the nurses' admissions, the underlying court entered summary judgment  in August 2004, finding that ETMC's negligence proximately caused the plaintiff's injuries.  Prejudice indeed.

The court held otherwise.  "Prejudice," said the court, was the "loss of a valuable right or benefit," which occurs when the insurer suffers a "material change in position due to the late notice."  Moreover, the insurer must show "the precise manner in which its interests have suffered."  In this case, the insurer would have to prove that its participation at the depositions would have resulted in a different outcome to the case.  What did the insurer show?

Lexington offered expert testimony that the nurses had not been adequately prepared for their depositions.  The nurses themselves testifed that thay didn't feel that they had been prepared, and in fact the medical records revealed that the nurses' conduct had not been negligent.  They simply had not reviewed the records before their depositions.  Also, Lexington produced a memo detailing a plan of action that its adjuster was to follow, stating that the adjuster would have:

investigated and analyzed the facts, assessed opposing counsel, timely engaged experts, determined the value of the case, appointed counsel, assisted ETMC's counsel in preparing witnesses and familiarizing them with the medical records, evaluated early settlement opportunities . . . requested summaries of interviews with ETMC's staff as well as deposition summaries.

 But the court noted "a glaring omission from this memo."  There was no indication that Lexington intended to participate in the depositions themselves (presumably, the court understood the part about preparing witnesses and familiarizing them with medical records meant trial preparation).  The court also found that Lexington produced no evidence that the nurses' deposition testimony would have been different had it participated.  On this point, the judge is playing it very close to the chest, as it seems a fair inference that review of the medical records would have resulted in testimony that their treatment met the standard of care.  Still, it appears that Lexington failed to solicit that precise testimony from the nurses, and the judge was not in an inference-drawing mood.

The nail in the coffin, so to speak, was Lexington's failure, during the 3 months it was involved in the case before the court entered summary judgment, to attempt to clarify the nurses' testimony, submit other evidence, or challenge causation.  The court concluded:

Although the nurses' deposition testimony presented an obstacle for Lexington, it did not rise to the level of a material change in position. . . . Lexington's inability to proceed in the easiest or most preferred manner is not enough to show prejudice.

You might think that this was a tough judge, but the decision is in keeping with other cases  demonstrating that an insurer has a near impossible task to prove prejudice, as long as it received notice before trial.

David S. White, Thompson & Knight LLP

www.tklaw.com