Firm News

Texas Supreme Court Set to Hear Oral Arguments in Case that May Broaden Duty to Defend

The Texas Supreme Court recently granted review of an insurance dispute that could have far reaching, broadening impacts on the current state of the law in Texas as it relates to duty to defend.    The ruling from the trial court and the Court of Appeals blurs the distinction between defense and indemnity, as well as the distinction between expenses owed to or on behalf of the insured and those that are damages owed by the insured.  Ultimately, the lower courts arguably failed to follow the established rules of contract construction and expanded the current scope of the insurers duty to defend liability insurance underlying litigation. 

In 2020, Patterson sued Ohio Casualty and Marsh to recover its legal defense costs under its fifth-level excess policy. Patterson-UTI Energy, Inc. and its affiliates (the Patterson Companies) obtained multiple layers of general liability insurance that covered defense costs through Marsh USA, as well as an excess policy from Ohio Casualty that Patterson argues follows the primary policy’s terms unless explicitly stated otherwise. Since the primary policy’s terms covered defense costs, Patterson argues that the excess policy provides the same coverage. Ohio Casualty, however, refused to cover defense costs, stating the excess policy does not provide such coverage and should be read separate from the primary policy.

All parties moved for summary judgment based on the threshold issue of whether the excess policy does, in fact, cover Patterson’s defense costs. The trial court granted Patterson’s motion for summary judgment, siding with Patterson and Marsh. Ohio Casualty appealed the denial of its Motion for Summary Judgment to the Fourteenth Court of Appeals in Houston, Texas. 

Ohio Casualty argued on appeal that Patterson incorrectly attempts to shift the burden to Ohio Casualty, when it is Patterson’s burden to show its entitlement to defense costs. Specifically, Ohio Casualty states that the excess policy has its own definitions and exclusions and, thus, is separate from the primary policy.

In The Ohio Casualty Insurance Company v. Patterson-UTI Energy, Inc., the Fourteenth Court of Appeals agreed with the trial court and Patterson, concluding that defense costs were covered under its excess insurance policy. 656 S.W.3d 729 (Tex. App.—Houston [14th Dist.] 2022, pet. filed). The appellate court stated that the excess policy must explicitly state any deviations from the primary policy and, since the policy did not clearly exclude defense costs, Ohio Casualty was required to provide coverage for defense costs. 

Ohio Casualty filed a petition for review to the Texas Supreme Court, reasserting its arguments on appeal and contending that the excess policy only covers certain types of loss, excluding defense costs. Specifically, Ohio Casualty argues that Texas courts cannot presume that a follow-form policy follows the underlying policy’s coverage in all respects. The insured has the burden to establish coverage and, to determine whether a follow-form policy diverges and the metric for any divergence in coverage, courts must examine the follow-form policy’s language.

In the case at hand, the excess policy’s follow-form provision states: “Except for the terms, conditions, definitions and exclusions of this policy, the coverage provided by this policy will follow the ‘first underlying insurance.’” Ohio Casualty argues that the excess policy does not follow the underlying policy’s coverage of defense costs, as the excess policy’s follow-form provision provides for different coverage than the underlying policy. Thus, by presuming identical coverage, the court of appeals improperly shifted the coverage burden from Patterson to Ohio Casualty and, unlike the underlying policy, the excess policy does not add defense costs to the “damages” it covers as “loss.” Ohio Casualty concludes that, as a matter of law, Patterson cannot establish that the excess policy covers defense costs. 

In its Response, Patterson argues that, when the excess policy and primary policy are read together, as the follow-form provision requires, the excess policy covers Patterson’s defense costs incurred. Further, well-settled principles of Texas law instruct the courts to accept reasonable interpretation when offered. Patterson explains that excess policies generally “follow form” to, or incorporate by reference, the terms and conditions of a policy in a lower layer. As a result, follow-form excess policies are shorter than stand-alone policies that need to set out all their own terms. Since the excess policy involved in this case is consistent with general practice of being shorter than the primary policy, and Ohio Casualty did not specify that they do not cover defense costs in the excess policy, the reasonable interpretation is that Ohio Casualty is required to cover defense costs. Patterson requests that the Texas Supreme Court affirm the judgment of the court of appeals and the trial court.

The American Property Casualty Insurance Association (“APCIA”) submitted a letter as amicus curiae. In the letter APCIA argued that “the Court of Appeals erroneously construes that language of the excess policy and allows a conception of the meaning of ‘following form’ insurance – rather than the terms of the contract—to guides its analysis. In doing so, it skews the rules of construction, upon which insurers and insureds rely,” effectively broadening the duty to defend beyond established Texas law – the policy is a contract and should be construed as such. E.g., Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118, 126 (Tex. 2010); Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994)

The Texas Supreme Court will hear oral arguments on October 1, 2024. Oral arguments are webcast live and can be viewed here: https://www.texasbarcle.com/CLE/sc.asp

Mary-Ellen King and Samantha McCoy are in the insurance section of Lucosky Brookman LLP. Lucosky Brookman has offices in Texas (Austin and Houston), New York, New Jersey, Philadelphia, Seattle, South Florida and represents both domestic and international clients in sophisticated corporate and securities transactions, mergers and acquisitions, secured and unsecured lending transactions, PIPEs, commercial and securities litigation, intellectual property, insurance coverage and defense, real estate, general litigation, banking & finance, public finance, white collar defense litigation, and general corporate matters.