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					STATE BAR LITIGATION SECTION REPORT

  ADVOC ATE
   DVOCATE
      C
THE




        INSURANCE
       & LITIGATION
                                 ✯
                              VOLUME 37

                               WINTER

                                2006
STATE BAR LITIGATION SECTION REPORT

    ADVOCATE
THE




 EDITORS                                    Ric har d Col quit t                    JUSTICE A LAN WALDROP
                                                                                    THIRD COURT OF AP P EALS
                                                                                                                          COUNCIL MEMBERS
                                            Fulbright & Jaworski
 Edit or in Chief                           1301 Mckinney, Suite 5100               PRICE DANIEL SR. BUILDING             TERMS EXPIRE IN 2009
 Pr of essor Lonny Hof f man                Houston, Tx 77010-3095                  209 WEST 14TH STREET, ROOM 101
 University of Houston Law Center           Rcolquitt@fulbright.com                 AUSTIN, TEXAS 78701                   HON. K AREN GREN JOHNSON
 100 Law Center                                                                                                           DALLAS
 Houston, TX 77204-6060                     Tom Cowar t
 Lhoffman@central.uh.edu                    Windle Turley, P.C.                     2006-2007 LITIGATION                  L INDA MCDONALD
                                                                                                                          SAN A NTONIO
 Edit or Emer it us
                                            1000 Turley Law Center
                                            6440 North Central Exp.
                                                                                    SECTION OFFICERS
                                                                                                                          AUBREY R. WILLIAMS
 J. Pat r ic k Ha zel                       Dallas Texas 75206                      SUSAN I. NELSON, CHAIR                WACO,
 University of Texas School of Law          Tomc@Wturley.com                        P.O. Box 1
                                                                                    Waco, Texas 76703                     HON. CRAIG T. ENOCH
 Assist ant Edit or s                       Al ist air Dawson                       sinelson@nelsonlewis.com              Austin
 Jeffrey m. Benton                          Beck Redden & Secrest
 C/o Chambers Of Judge Andrew Hanen         1221 McKinney, Ste. 4500                A LISTAIR DAWSON., CHAIR-ELECT        Hon Rose G. Reyna
 600 E. Harrison Street                     Houston, TX 77010                       1221 McKinney, Suite 4500             Edinburg
 Brownsville, Texas 78520                   adawson@brsfirm.com                     Houston, Texas 77010
 Jeffreybenton@gmail.com
                                            Russel l Hal l
                                                                                    adawson@brsfirm.com                   TERMS EXPIRE IN 2008
 Cor y Car l yl e                           Russell W. Hall, P.c.                   ELIZABETH M ACK, VICE- CHAIR
 Dallas County District Attorney’s Office   Attorney At Law                                                               Hon. Levi Bent on
                                                                                    2200 Ross Ave., Suite 2200            Houston
 Appellate Division                         6750 West Loop So. Ste. 500             Dallas, Texas 75201-6776
 133 N. Industrial Blvd., Lb-19             Bellaire Tx 77401-4199                  emack@lockelidell.com
 Corycarlyle@yahoo.com                      Rwhall@rwhpc.com                                                              E. Leon Car t er
                                                                                                                          Dallas
                                                                                    FRED BOWERS, SECRETARY
 Gr aphic Desig ner                         Geof f r ey L. Har r ison               P. O. Box 327
 Rebecca Bridges Rice                       Susman Godfrey, L.L.P.                                                        Paul a Hint on
                                                                                    Lubbock, Texas 79408-0327             Houston
 rbr@bridgesart.com                         1000 Louisiana Street, Ste. 5100        fbowers@nts-online.net
                                            Houston, TX 77002-5096                                                        Thomas E. Kur t h
                                            gharrison@susmangodfrey.com             WALKER FRIEDMAN, TREASURER
 EDITORIAL BOARD                                                                    604 East 4th Street #200
                                                                                                                          Dallas
                                            Al l yson Ho                            Fort Worth, Texas 76102               Mic hael C. Smit h
 K IM J. A SKEW                             Baker Botts                             wcf@fsclaw.com                        Marshall
 HUGHES & LUCE, L.L.P.                      2001 Ross Avenue
 1717 M AIN ST., STE. 2800                  Dallas, Texas 75201-2980                DANIEL BISHOP, IMMEDIATE PAST CHAIR
 DALLAS, TX 75201-7342
 ASKEWK @ HUGHESLUCE.COM
                       CO
                                            Allyson.ho@bakerbotts.com               3701 Bee Cave Rd., Suite 200          TERMS EXPIRE IN 2007
                                                                                    Austin, Texas 78746
                                            Hon. Kar en Gr en Johnson               dbishop@bishoplondon.com              Chr ist y Amuny
 DANA T. BLACKMORE                          95th Judicial District Court                                                  Beaumont
 L AW OFFICES OF DANA T. BLACKM ORE         Geo. Allen Courts Building, 3rd Floor
 616 MEM ORIAL HEIGHTS DRIVE, STE. 6108     600 Commerce Street                     PAST CHAIR MEMBERS                    HON. R ICHARD BARAJAS
 HOUSTON, TEXAS 77007                       Dallas, Texas 75202                                                           El Paso
 401 STUDEWOOD, STE. 201                    KarenGrenJohnson@aol.com                Andy Tindel
 HOUSTON, TEXAS 77007                                                               112 East Line Street, Suite 304       HON. ROYAL FURGESON
 DANA.B LACKM ORE@ DTB LACKM ORELAW.COM
                                    CO      Jef f r ey Kapl an                      Fasken Center, Tower Two, Suite 800   San Antonio
                                            Chevron Phillips Chemical Company       Tyler, Texas 75702
 HON. JEFF BROWN                            P. O. Box 4910                          atindel@andytindel.com                K ATHY SNAPKA
 55TH D ISTRICT COURT                       The Woodlands, TX 77387-4910                                                  Corpus Christi
 CIVIL COURTS BUILDING                      kaplaja@cpchem.com                      TALMAGE BOSTON
 301 FANNIN STREET                                                                  1201 Elm Street                       PAT L ONG WEAVER
 HOUSTON, TEXAS 77002                       Tom Kur t h                             5400 Renaissance Tower                Midland
 JEFF_BROWN@JUSTEX.NET                      Haynes and Boone, LLP                   Dallas, Texas 75270

 C R AIG D. C HERRY
                                            901 Main Street, Suite 3100
                                            Dallas Texas 75202
                                                                                    tboston@winstead.com
                                                                                                                          LIAISONS/ADVISORS
 CHERRY & JORDAN, L.L.P.                    Thomas.Kurth@Haynesboone.com            K IM A SKEW                           JUSTICE H ARRIET O’NEILL,
 1105 WOODED ACRES, SUITE 200                                                       1717 Main Street, Suite 2800
 WACO, TEXAS 76710                          Pr of . Tr ac y McCor mac k             Dallas, Texas 75201-7342              SUPREME COURT L IAISON
                                                                                    askewk@hughesluce.com                 Austin
                                            University Of Texas School Of Law
 GREGORY S. COLEMAN                         727 E. Dean Keeton Street
 WEIL G OTSHAL & M ANGES, L.L.P                                                     JOHN SIMPSON                          TREY M ARTINEZ,
                                            Austin, Tx 78705
 8911 C AP ITAL OF TX HWY., STE. 4140                                               P. O. Box 1376                        TYLA L IAISON
                                            Tmccormack@mail.law.utexas.edu
 AUSTIN, TX 78759                                                                   Lubbock, Texas 79408-1376             Brownsville
 GREG.COLEM AN@ WEIL.COM
                      CO                    Abr aham Wat kins Nic hol s             jsimpson@splawn-simpson.com
                                                                                                                          R ANDALL O. SORRRELS,
                                            Sorrels Matthews & Friend
                                            800 Commerce                                                                  B OARD A DVISOR
                                            Houston, Texas 77002                                                          HOUSTON


      ✯                                     Bagosto@abrahamwatkins.com

                                            Pr of . Ro c ky Rhodes
                                            South Texas College Of Law
                                                                                                                          DEBORARH BULLION,
                                                                                                                          A LTERNATE A DVISOR
                                                                                                                          SUGARLAND
VOLUME 37                                   1303 San Jacinto Street
                                            Houston, Texas 77002
 WINTER                                     Rrhodes@stcl.edu

  2006
                                      STATE BAR LITIGATION SECTION REPORT                                             1

                                         ADVOCATE




                                      THE
                                          TA BL E OF CO N T EN T S



                                              WINTER 2006
E DITOR ’ S C OMMENTS by Lonny S. Hoffman ................................................................. 2
C H AIRM AN ’ S R EPORT by Susan I. Nelson ..................................................................... 3
S USTAINING M EMBERS OF THE L ITIGATION S ECTION OF THE STATE B AR OF TEX AS ............ 4

                      S Y MP O SIUM ON INS UR A NC E & L I T IG AT ION
P LEADING INTO C OVER AGE —W ILL THE S QUARE P EG FIT INTO THE R OUND H OLE ?
     by Glenn Legge & Karen A. Conticello .............................................................. 7
E VOLVING I SSUES : E XTRINSIC E VIDENCE AND THE D UT Y TO D EFEND
     by Diana L. Faust ........................................................................................ 17
THE I NSURER ’ S D UT Y TO S ETTLE : C URRENT D EVELOPMENTS IN THE L AW
      by Tarra Baldwin Sowers ................................................................................ 21
C ONSIDERING S ETTLEMENT? C URRENT I SSUES R EL ATING TO THE STOWERS D OCTRINE
     by Christopher S. Ayres ................................................................................ 25
STATE FARM V. G ANDY – F ULLY A DVERSARIAL TRIAL by R. Brent Cooper ...................... 36
U NTANGLING THE I NSUR ANCE C OVER AGE R EIMBURSEMENT I SSUES A RISING FROM
     THE TEX AS S UPREME C OURT ’ S D ECISION IN F R ANK ’ S C ASING
     by Robert J. Cunningham & Robert M. (Randy) Roach, Jr. ................................ 44
I NSURING A C IVIL C ONFESSION IN TEX AS : STR ATEGIES FOR A LLEGING AND C H ALLENGING
      A FFIRM ATIVE D EFENSES by Rain Minns-Fink .................................................... 57
N ONSUBSCRIPTION U NDER THE TEX AS WORKERS ’ C OMPENSATION A CT
     by Jay M. Wallace ......................................................................................... 65
D O STATE M EDICAID A GENCIES H AVE THE R IGHT TO F ULL R EIMBURSEMENT F OR
     M EDICAL PAYMENTS M ADE ON B EH ALF OF A M EDICAID R ECIPIENT?
     THE U. S . S UPREME C OURT H AS W EIGHED I N
     By Randall O. Sorrels & Johnny N. Garza, Jr. ................................................. 73
D EAD OR A LIVE : THE C OLL ATER AL S OURCE R ULE A FTER HB4 by Kirk L. Pittard ......... 76
I NSUR ANCE I SSUES FOR TRIAL L AW YERS by Mark L. Kincaid & Zach Wolfe ................. 81
                                       ~ Student Article Competition ~
“C APPING STATUTES AND THEIR C ONSTITUTIONALIT Y ” by Imrana Manzanares .............102

                            E V IDENC E & P RO C EDUR E UP DAT E S
E VIDENCE U PDATE by Luther H. Soules III & Robinson C. Ramsey ............................. 116
P ROCEDURE U PDATE by Luther H. Soules III & Robinson C. Ramsey .......................... 119
2                                           ADVOCATE   ✯ WINTER 2006




                                      THE
                                     EDITOR’S COMMENTS
                                 L   ITTLE NEEDS TO BE SAID by way of introduction for this issue.
                                     The contributions to this symposium, which span a wide range of
                                     subjects dealing with insurance and litigation, speak powerfully for
                                 themselves. I am confident the articles in this issue will serve for years
                                 to come as a valuable resource for litigators on both sides of the bar.

                                 One special note of congratulations to Imrana Manzanares, winner
                                 of this symposium’s competition for student papers. Mrs. Manzanares
                                 just graduated from the Thurgood Marshall School of Law. Her
                                 area of interest is health law. Her article, Capping Statutes and their
                                 Constitutionality, is the last article in the symposium. The next student
                                 competition will be for the summer 2007 issue, which is on Contracts
       LONNY S. HOFFMAN
                                 and Litigation. Further information about that competition will be
                                 posted soon on the section’s website, www.thetrialbar.com.

    As you may remember, the next issue—Spring 2007—is the “Best Of” issue which reprints some of
    the best articles from the annual Litigation Update. As we have done for the last two years, this issue
    will come to you only electronically so the section can save the considerable printing and mailing
    costs involved with this issue. This also seems to make good sense, given the breadth of the material
    in the issue. Look for an email transmitting this issue around April. It will also be available then
    through a link on the section’s website.

    As always, I welcome your feedback on this symposium issue and on any other subjects related to
    THE ADVOCATE. My email address is LHoffman@central.uh.edu.


                                                       Regards,




                                                       Lonny Hoffman
                                                       Editor in Chief
                                                   ADVOCATE   ✯ WINTER 2006                                                   3




                                             THE
                                                   CHAIR’S REPORT
T  HE LITIGATION SECTION COUNCIL HAD ITS FALL MEETING in Marathon, Texas. While
   we were near the Fort Davis Mountains, we visited the McDonald Observatory. The
   Director of the Observatory, David Lambert and his staff, graciously hosted us at the
Director’s home and gave us a tour before we attended a “Star Party” to view the incredibly
clear west Texas night sky. If you haven’t been to the Fort Davis Mountains and the
Observatory, it is a trip worth taking.

One of the goals of the Litigation Section this year is to increase our commitment to the
delivery of legal services to the poor.
       • Over the past years, we have given thousands of dollars in grants to groups
         providing legal services to the poor. We hope to increase the amount of such grants
         this year.
       • At our Fall meeting, the Council approved funding for three summer internships for             SUSAN I. NELSON
         law students with Legal Service providers beginning the summer of 2007.
       • We are encouraging law firms to negotiate higher rates of interest with the banks
         holding their IOLTA accounts. Interest from these accounts fund legal services to the poor
         through the Texas Equal Access to Justice Foundation.
       • We continue to look for innovative ways to participate in pro bono. If you have ideas that you think the Section
         should consider, contact Elizabeth Mack at emack@lockeliddell.com.

Upcoming Section events include:
     • The Litigation Update is scheduled for January 18-19, 2007, at the San Antonio Westin Riverwalk Hotel. The
       schedule has been changed to a Thursday/Friday format rather than running into the weekend. There is a Social
       scheduled on Thursday evening from 5:00 p.m. – 6:00 p.m. I hope you can join us for the Update and the party.
     • The Fourth Annual Law School Ethics Seminar will be held at Southern Methodist University School of Law
       on Thursday, February 22, 2007. The luncheon speaker, Lamont Jefferson, will be followed by opportunities
       for small groups of law students to discuss ethics hypotheticals with practicing lawyers. If you would like to
                                      (thomas.kurth@haynesboone.co
       participate, contact Tom Kurth (thomas.kurth@haynesboone.com)
     • The Annual Meeting Keynote Debate topic this year is “Striking the Right Balance Between Liberty and Security.”
       Roger Cossack will moderate the debate between Doug Kmiec (Pepperdine Law School professor) and Richard
       Ben-Veniste (a member of the 9-11 Commission). The Debate will take place at the luncheon on Friday, June 22,
       2007, in San Antonio.

The Litigation Section joined as an amicus in Vasilas v. State filed with the Texas Court of Criminal Appeals in November.
The amicus curiae brief was written by Professor Lonny Hoffman in support of Appellant’s Petition for Discretionary
Review, asking that the court reconsider its earlier holding that civil pleadings filed with a court fall within the definition
of a “government record” and that an attorney filing pleadings containing misstatements can be criminally prosecuted for
tampering with a government document. This has the effect of criminalizing advocacy of pleadings and motions and will
have a chilling effect on many types of litigation.




                                                                  Susan I. Nelson
                                                                  Chair, Litigation Section
4                                                                   ADVOCATE          ✯ WINTER 2006




                                                              THE
                                S USTAINING M EMBERS OF THE L ITIGATION S ECTION OF THE S TATE B AR OF T EXAS
                                                                       (As of December 2006)

    BROCK C. A KERS                         TURNER WILLIAMSON BRANCH                     M ARTHA S. DICKIE,                          FLOYD F. HONEA, II
    PHILLIP S & A KERS                      BRANCH L AW FIRM                             A KIN AND A LM ANZA                         THE L AW OFFICES OF
    3200 SOUTHWEST FWY., STE. 3200          2025 R IO GRANDE BLVD., N.W.                 2301 C AP . OF TX HWY., BLDG. H             FRANKLIN HONEA
    HOUSTON, TX 77027-7526                  A LB UQUERQUE, NM 87104-2525                 AUSTIN, TX 78746                            5949 SHERRY L N STE 1700
                                                                                                                                     DALLAS, TX 75225
    CHRISTY A MUNY                          BURTON DEAN BRILLHART                        FREDRICK D. DREILING
    JENKINS & M ARTIN, L.L.P.               DRIVE FINANCIAL SERVICES                     N. BANK OF A M ERICA TOWER                  MICHELLE ELIZABETH HUNTER
    2615 C ALDER, STE. 500                  8585 N STEM M ONS FWY #1100-NORTH            500 N. SHORELINE, STE. 714                  P.O. BOX 12487
    B EAUM ONT, TX 77702                    DALLAS, TX 75247                             CORP US CHRISTI, TX 78471                   AUSTIN, TX 78711

    A RTURO M ANUEL AVILES                  M ARYANN SARRIS BROUSSEAU                    PATRICIA K AY DUBE,                         JASON JAMES IRVIN
    SEGAL MCC AM B RIDGE SINGER             BROUSSEAU GRAHAM & DOOLEY                    PATRICIA K AY D UB E, P.C.                  SEGAL MCC AM B RIDGE SINGER
    & M AHONEY, LTD.                        300 K NOX PLACE                              3949 WEST M AIN STREET                      & M AHONEY, LTD.
    100 CONGRESS AVE., STE. 700             4645 N C ENTRAL E XP WY                      HOUSTON, TX 77027-6347                      100 CONGRESS AVE., STE. 700
    AUSTIN, TX 78701                        DALLAS, TX 75205-4022                                                                    AUSTIN, TX 78701
                                                                                         TAMRA J. WILKINSON ENGLISH
    JUDGE R ICHARD BARAJAS                  G ABBIE SHAMAE C ANALES                      EUB ANK & BYROM                             E. A LLEN JACOBS, PH.D.
    1309 N. STANTON STREET                  L AW OFFICE OF G AB RIELLA S. C ANALES,      221 W. SIXTH ST.                            2911 TURTLE CREEK STE 300
    EL PASO, TX 79902                       P.L.L.C.                                     AUSTIN, TX 78701                            DALLAS, TX 75219
                                            14134 PALO SECO
    MISTI L ACHELLE BEANLAND                CORP US CHRISTI, TX 78418                    C ATHERINE JANE FAUBION                     M ARY A NN JOERRES
    M ATHEWS STEIN SHIELS PEARCE K NOTT                                                  THOM P SON COE COUSINS & IRONS              D IAM OND MCCURTHY TAYLOR
    EDEN & DAVIS, LLP                       K ATHLEEN A NN COLLINS                       7325 DALEWOOD L N                           & FINLEY
    8131 LBJ FRWY STE 700                   THE FASSLER BUILDING                         DALLAS, TX 75214-1816                       1201 ELM ST STE 3400
    DALLAS, TX 75251                        1004 BROADWAY                                                                            DALLAS, TX
                                            G ALVESTON, TX 77550                         A MY GIBSON
    DANIEL W. BISHOP                                                                     R AY, CHO, WILEY, VAN BRAUM AN              DON P. JONES
    BISHOP L ONDON BROP HY DODDS, P.C.      WILLIAM JOSEPH COLLINS III                   & GIB SON, PLLC                             STATE BAR OF TEXAS
    106 E. SIXTH ST., STE. 700              SHEEHY, SERP E & WARE, PC                    4820 SYCAM ORE STREET                       P.O. BOX 12487
    AUSTIN, TX 78701                        2500 TWO HOUSTON C ENTER                     DALLAS, TX 75204                            AUSTIN, TX 78711-2487
                                            909 FANNIN STREET
    DAVID K ENT BISSINGER                   HOUSTON, TX 77010                            JOHN R ALPH GILBERT                         MICHAEL A NDREW JOSEPHSON
    SIEGM YER OSHM AN & BISSINGER LLP                                                    GILB ERT & GILB ERT                         FIB ICH, H AM P TON, L EEB RON &
    2777 A LLEN PARKWAY, TENTH FLOOR        PAUL J. COSELLI                              P.O. BOX 1819                               G ARTH, LLP
    HOUSTON, TX 77019                       702 IVY WALL COURT                           A NGLETON, TX 77516-1819                    FIVE HOUSTON C ENTER
                                            HOUSTON, TX 77079                                                                        1401 MCK INNEY, STE. 1800
    ROBERT A. BLACK                                                                      DOUGLAS D. H ALOFTIS                        HOUSTON, TX 77010
    BANK OF A M ERICA                       JOHN T. COX, III                             G ARDERE WY NNE SEWELL LLP
    2615 C ALDER STE 800                    LY NN TILLOTSON & P INKER, LLP               1601 ELM ST., STE. 3000                     DAVID E. K ELTNER
    B EAUM ONT, TX,77704-0000               50 N. ST. PAUL STREET, STE. 1400             DALLAS, TX 75201-4757                       THE KELTNER L AW FIRM
                                            DALLAS, TX 75201                                                                         201 M AIN STREET, SUITE 2410
    JEFF BLACKBURN                                                                       C. VERNON H ARTLINE, JR .                   FORT WORTH, TX 76102
    1304 TEXAS AVE                          TANYA M ARIE CUSHMAN                         H ARTLINE, DACUS, BARGER DREYER
    LUB B OCK , TX 79401                                                                 & KERN, L.L.P.                              PATRICIA J. K ERRIGAN
                                            BRACEWELL & GIULIANI, LLP
                                                                                         6688 N. CENTRAL E XP Y., STE. 1000          WERNER & KERRIGAN LLP
                                            711 L OUISIANA ST, STE 2300
    TALMAGE BOSTON                          HOUSTON, TX 77002-2770                       DALLAS, TX 75206-9000                       SUITE 1550
    WINSTEAD, SECHREST & MINICK                                                                                                      2000 WEST L OOP SOUTH
    1201 ELM ST., STE. 5400                 BILL & VARA DANIEL                           K ELLY H ARVEY                              HOUSTON, TX 77027
    DALLAS, TX 75270                        C ENTER FOR L EGAL HISTORY                   1308 CROCKER
                                                                                         HOUSTON, TX 77019                           THOMAS E. KURTH
                                            P.O. BOX 12487
    GLEN M. BOUDREAUX                       AUSTIN, TX 78711-2487
                                                                                                                                     H AY NES & BOONE LLP
    BOUDREAUX, L EONARD, H AM M OND                                                      A LEX H ERNANDEZ, JR .                      901 M AIN ST STE 3100
    & CURCIO, P.C.                          A LISTAIR B. DAWSON                          L AW OFFICES OF A LEX HERNANDEZ, JR. PLLC   DALLAS, TX 75202
    TWO HOUSTON C ENTER                     B ECK , R EDDEN & SECREST, LLP               117 W. M AIN
    909 FANNIN, STE. 2350                                                                PORT L AVACA, TX 77979
                                                                                                                                     JOHN A NDREW L ABOON
                                            O NE HOUSTON C ENTER
    HOUSTON, TX 77010                                                                                                                SEGAL MCC AM B RIDGE SINGER
                                            1221 MCK INNEY, STE. 4500
                                                                                         PAULA WEEMS HINTON                          & M AHONEY, LTD.
    FRED BOWERS II                          HOUSTON, TX 77010-2010                                                                   1920 C ETONA COURT
                                                                                         VINSON & ELKINS, L.L.P.
    BOWERS L AW OFFICE                                                                   1001 FANNIN ST., STE. 2300                  AUSTIN, TX 78746
                                            JAMES R. DENNIS
    P.O. BOX 327                                                                         HOUSTON, TX 77002
                                            SCOTT, HULSE, M ARSHALL, FEUILLE, FINGER &
    LUB B OCK , TX 79408-0327                                                                                                        M ARILYN L AHR
                                            THURM OND, PC
                                                                                         ROBERT H. HOLMES                            L AW OFFICES OF M ARILY N L AHR
                                            1020 NE L OOP 410, STE 270
                                                                                         THE HOLM ES L AW FIRM                       3514 C EDAR SP RINGS RD.
                                            SAN A NTONIO, TX 78209
                                                                                         2616 THOM AS AVE                            DALLAS, TX 75219
                                                                                         DALLAS, TX 75204
                                                            ADVOCATE        ✯ WINTER 2006                                                                      5




                                                      THE
JAMES RUSSELL L EAHY                JOHN F. NICHOLS                            JUDGE GUADALUPE R IVERA                   K ENNETH R. VALKA
12326 BROKEN A RROW                 NICHOLS L AW, P.L.L.C.                     168TH D ISTRICT COURT                     BAIRD, CREWS, SCHILLER AND
HOUSTON, TX 77024                   1301 MCK INNEY AVE., STE. 2900             500 E. SAN A NTONIO AVE., STE. 602        WHITAKER, P.C
                                    HOUSTON, TX 77010                          EL PASO, TX 79901-2423                    15 N. M AIN ST.
STEPHEN T. L EAS                                                                                                         TEM P LE, TX 76501-7629
L AW OFFICE OF STEP HEN T. L EAS    NICK C. NICHOLS                            EDWARD MICHAEL RODRIGUEZ
P.O. BOX 2257                       AB RAHAM , WATKINS, NICHOLS, SORRELS,      RODRIGUEZ & NICOLAS, LLP                  L ARRY R. VESELKA
MCA LLEN, TX 78502                  M ATTHEWS & FRIEND
                                      ATT                                      319 E. ELIZAB ETH ST.                     SM YSER, K AP LAN & VESELKA, L.L.P.
                                    800 COM M ERCE ST                          BROWNSVILLE, TX 78520                     700 L OUISIANA ST., STE. 2300
JEFFREY THOMAS LUCKY                HOUSTON, TX 77002-1707                                                               HOUSTON, TX 77002-2728
HICKS & LUCKY                                                                  EDUARDO ROBERTO RODRIGUEZ
5812 CROM O DRIVE                   PATRICK GREGORY O’BRIEN                    RODRIGUEZ, COLVIN, CHANEY                 L IET CONG VUONG
EL PASO, TX 79912                   A KIN GUM P STRAUSS H AUER                 & SAENZ, L.L.P.                           L AW OFFICES OF DAVID C. VUONG &
                                    & FELD LLP                                 P.O. BOX 2155                             A SSOCIATES
JEFFREY SCOTT LYNCH                 1700 PACIFIC AVE, SUITE 4100               BROWNSVILLE, TX 78522-2155                11205 B ELLAIRE BLVD. STE. B25
THE LY NCH L AW FIRM                DALLAS, TX 75204                                                                     HOUSTON, TX 77072
13740 MIDWAY RD STE 702                                                        JIMMY ROBERT ROSS
DALLAS, TX 75244                    NILS OLSSON                                WEITZ & LUXENB ERG, P.C.                  DAN GIBSON WALTON,
                                    STATE BAR OF TEXAS                         100 E. 15TH STREET, SUITE 400             VINSON & ELKINS LLP,
ELIZABETH E. M ACK                  R ESEARCH & A NALYSIS DEP T                FORT WORTH, TX 76102                      1001 FANNIN ST STE 2300
L OCKE, L IDDELL & SAP P , L.L.P.   P.O. BOX 12487                                                                       HOUSTON, TX 77002-6760
2200 ROSS AVE., STE. 2200                                                      SCOTT JAY R YSKOSKI
                                    AUSTIN, TX 78711-2487                      L ARSON K ING, L.L.P.
DALLAS, TX 75201                                                                                                         PATRICIA L ONG WEAVER
                                    JOHN ROSS O WEN                            1460 M AIN STREET, STE. 235               STUB B EM AN MCR AE L AW FIRM
D. NEVILL M ANNING                  O WEN & FAZIO, P.C.                        SOUTHLAKE, TX 76092                       P.O. BOX 1540
FIELD, M ANNING, STONE,             7557 R AM B LER RD., STE. 1465                                                       MIDLAND, TX 79702-1540
H AWTHORNE & AYCOCK                                                            GEORGE THOMAS SHIPLEY
                                    DALLAS, TX 75231-2321                      SHIP LEY SNELL MONTGOM ERY LLP
2112 INDIANA AVE.                                                                                                        DAVID K. WILLIAMS
LUB B OCK , TX 79410-1444           A NDREW L EE PAY NE                        1001 FANNIN, STE. 4400                    G ARCIA-WILLIAM S L AW FIRM
                                    PAY NE L AW GROUP                          HOUSTON, TX 77002                         201 E. UNIVERSITY DRIVE
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6
                         STATE BAR LITIGATION SECTION REPORT

                           A DVOCATE
                         THE
    SYMPOSIUM ON
       INSUR ANCE
     & L I T IG AT ION




                                  INSURANCE
                                 & LITIGATION
                                      ✯
                                                       ADVOCATE   ✯ WINTER 2006                                                       7




                                                 THE
               PLEADING INTO COVERAGE —WILL THE S QUARE PEG
                         FIT INTO THE ROUND HOLE?
                                      GLENN R. LEGGE & KAREN A. CONTICELLO




T   HE PLAINTIFF EVALUATING THE VIABILITY of a prospec-
    tive lawsuit and the defendant seeking insurance coverage
    for a significant claim face a similar initial query: Will the
claim be covered by liability insurance that will provide either
a collectible judgment to a claimant or defense and indemnity
                                                                        Whether Policy Exclusions Apply to the Claims Against
                                                                        the Insured.

                                                                     The challenge of an author writing about various issues for
                                                                     such diverse perspectives is to provide a sufficiently broad
to an insured? The question as to whether a pleading trig-           presentation that is neither superficial nor bogged down with
gers insurance coverage is a significant issue for a variety of      unessential detail. The intent of this article is to hit that mark
parties, including:                                                  by providing an overview of some of the significant issues
                                                                     that Texas courts routinely face in determining whether a
   The insurer attempting to determine whether a claim               pleading triggers coverage under a liability policy.
   triggers a duty to defend and/or indemnify.
                                                                     1. The Basics—Does Texas Law Apply to the Policy?
   The individual or institutional claimant asserting                The threshold issue in any coverage analysis is determining
   claims for damages that it hopes will be insured and              what law will be applied to interpret the policy. Although
   collectible.                                                      this may not be a challenging concept in a simple bodily
                                                                     injury/property damage claim alleged against an individual
   The institutional defendant seeking additional insured            or institutional Texas resident, it can be a significant
   status under a contractor’s liability policy.                     issue in more complex cases involving damages that
                                                                     arguably occur out of state or involve policies issued
   The individual or institutional defendant determining             to insureds who are not incorporated in Texas. Article
   whether the claim asserted against it will trigger a duty         21.42 of the Texas Insurance Code states that Texas law
   to defend and the duty to indemnify under its policy              applies to an insurance contract when: (1) the insurance
   of insurance.                                                     proceeds are payable to a Texas citizen or inhabitant;
                                                                     (2) the policy is issued by an insurer doing business in
In the current judicial setting in Texas, the analysis of whether    Texas; and (3) the policy is issued in the course of the
a pleading will trigger coverage under a Comprehensive               insurer’s business in Texas. Hefner v. Republic Indem. Co.
General Liability (“CGL”) policy must include, at a minimum,         of Am., 773 F. Supp. 11, 13 (S.D. Tex. 1991). The Texas
the following issues:                                                Supreme Court, however, has cautioned that Article 21.42
                                                                     should be interpreted narrowly to avoid giving the statute
   Choice of law                                                     an extraterritorial effect. Austin Bldg. Co. v. Nat’l Union
                                                                     Fire Ins. Co. of Pittsburgh, PA, 432 S.W.2d 697, 701 (Tex.
   Trigger of the Duties to Defend and Indemnify the                 1968) (“[Article 21.42] cannot be given extraterritorial
   Insured                                                           effect.”). Recently, Texas courts have held Article 21.42 to
                                                                     be inapplicable to insureds not incorporated in the state
   Whether the Pleadings Allege an “Occurrence” under                of Texas. Reddy Ice Corp. v. Travelers Lloyds Ins. Co., 145
   a CGL Policy                                                      S.W.3d 337, 340 (Tex. App.—Houston [14th Dist.] 2004,
                                                                     pet. denied). Instead, these courts have determined what
   If a Bodily Injury or Property Damage have been                   law would be applied in the coverage determination by
   Alleged                                                           applying the “most significant relationship” test set out
8                                                    ADVOCATE   ✯ WINTER 2006




                                               THE
in Restatement (Second) of Conflict of Laws §§ 6, 188              Recently, the Texas Supreme Court clarified that Texas courts
(1971). See Duncan v. Cessna Aircraft Co., 665 S.W.2d 414,         are to determine the duty to defend without consideration of
421 (Tex. 1984).                                                   any extrinsic evidence. Guideone Elite Ins. Co. v. Fielder Road
                                                                   Baptist Church, 197 S.W.3d 305, 309-11 (Tex. 2006). The
Based on current Texas law, parties should not presume that        Texas Supreme Court’s opinion in Guideone was based, in
Texas law would apply if the insured is not a resident of, or      part, on the CGL policy wording that was used in the 1973
incorporated in, Texas. The differences between the various        ISO form which stated:
states’ laws on insurance coverage can be profound.
                                                                      The company will pay on behalf of the insured all sums
2. Triggering the Duty to Defend vs. the Duty to Indem-               which the insured shall become legally obligated to
nify                                                                  pay as damages because of [bodily injury or property
Although a claimant may only be interested in whether an              damage] to which this [insurance] applies, caused by
insurer will indemnify, or provide coverage, for a claim against      an occurrence, and the company shall have the right
the insured defendant, the defendant is equally concerned             and duty to defend any suit against the insured seeking
that the insurance policy will also provide a defense to the          damages on account of such bodily injury or property
claims asserted. Under Texas law, the duty to defend an               damage, even if any of the allegations of the suit are
insured and the duty to indemnify an insured “are distinct            groundless, false or fraudulent…
and separate duties.” King v. Dallas Fire Ins. Co., 85 S.W.3d
185, 187 (Tex. 2002); see also Trinity Universal Ins. Co. v.       Id. at 307 (emphasis added). Because some of the later ISO
Cowan, 945 S.W.2d 819, 821-22 (Tex. 1997). Generally, a            CGL policy forms do not contain the language concerning
liability policy defines the duty to defend more broadly than      “groundless, false or fraudulent” claims, arguments will likely
the duty to indemnify.                                             be made that the holding of Guideone should be limited to
                                                                   policies which contain language similar to the policy involved
a. Insurer’s Duty to Defend                                        in the Guideone analysis. See B. Hall Contracting, Inc. v. Evanston
The distinction between the elements required to trigger a         Ins. Co., No. 4:06-CV-050, 2006 WL 2527679, *3 (N.D.
duty to defend and the elements required to establish the          Tex. Sept. 1, 2006) (distinguishing a CGL policy from the
duty to indemnify are significant. The duty to defend is           one considered in the Guideone opinion because the defense
determined by the “eight corners” or complaint-allegation          obligation did not include a reference to “groundless, false
rule, under which an insurer’s duty to defend is determined        or fraudulent” claims). Regardless of the wording of the CGL
by the claimant’s pleadings, considered in light of the policy     policy obligation, the Texas Supreme Court has indicated
provisions, without regard to the truth or falsity of those        that the “eight corners” rule will apply to the duty to defend
allegations. Argonaut Sw. Ins. Co. v. Maupin, 500 S.W.2d 633,      in most cases, while leaving open the narrow exception of
635 (Tex. 1973); Heyden Newport Chem. Corp. v. S. Gen. Ins.        extrinsic evidence that is relevant solely to coverage and not
Co., 387 S.W.2d 22, 24 (Tex. 1965).                                material to the merits of the underlying claim. Guideone, 197
                                                                   S.W. 3d at 311.
The duty to defend arises when the facts alleged in the
underlying claim, if taken as true, “potentially state a           b. Insurer’s Duty to Indemnify
cause of action within the terms of the policy.” Id. (quoting      In contrast to the duty to defend, which is broadly interpreted
Cont’l Sav. Ass’n v. United States Fidelity & Guar. Co., 762       by Texas courts, an insurer’s duty to indemnify is narrower
F.2d 1239, 1243 (5th Cir.), amended on other grounds, 768          and arises from proven, adjudicated facts in the underlying
F.2d 89 (5th Cir. 1985)). An insurer is obligated to defend        lawsuit. Cowan, 945 S.W.2d at 821. The duty to indemnify
an insured for all causes of action alleged as long as the         is not based on the pleadings. Comsys Info. Tech. Servs.,
complaint alleges at least one cause of action within the          Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 190 (Tex.
policy’s coverage. Canutillo Indep. Sch. Dist. v. Nat’l Union      App.—Houston [14th Dist.] 2003, pet. denied). “No duty to
Fire Ins. Co. of Pittsburgh, PA, 99 F.3d 695 (5th Cir. 1996)       indemnify arises unless the underlying litigation establishes
(citing Rhodes v. Chicago Ins. Co., 719 F.2d 116, 119 (5th         liability for damages covered by the insuring agreement of
Cir. 1983)). Obviously, the expansive scope of the duty to         the policy.” CU Lloyd’s of Texas v. Hatfield, 126 S.W.3d 679,
defend can create a substantial financial obligation to an         683 (Tex. App.—Houston [14th Dist.] 2004, pet. denied).
insurer providing defenses to both covered and uncovered           As such, an insurer’s “duty to indemnify only arises after
claims alleged against its insured.                                an insured has been adjudicated, whether by judgment or
                                                     ADVOCATE   ✯ WINTER 2006                                                      9




                                               THE
settlement, to be legally responsible for damages in a lawsuit.”   result or injury may have been unexpected, unforeseen, and
Comsys, 130 S.W.3d at 190 (quoting Collier v. Allstate County      unintended). To determine whether an injury is accidental,
Mut. Ins. Co., 64 S.W.3d 54, 62 (Tex. App.—Fort Worth              the courts in Texas also examine the reasonably foreseeable
2001, no pet.).                                                    effects or consequences of the insured’s conduct. Lindsey, 997
                                                                   S.W.2d at 155; Malone v. Scottsdale Ins. Co., 147 F. Supp. 2d
3. What Constitutes an “Occurrence”?                               623, 627-28 (S.D. Tex. 2001).
a. Discrete Occurrences
Most CGL insurance forms require that the bodily injury or         A number of courts have concluded that allegations of defec-
property damage alleged in the underlying claim be caused          tive construction are neither “accidents” nor “occurrences,”
by an “occurrence,” which is often defined as                      and that coverage was not triggered by such allegations. See,
                                                                   e.g., Courtland Custom Homes, Inc. v. Mid-Continent Cas. Co., 395
   an accident, including continuous or repeated exposure          F. Supp. 2d 478, 486 (S.D. Tex. 2005); Lamar Homes, Inc. v.
   to substantially the same general harmful conditions.           Mid-Continent Cas. Co., 335 F. Supp. 2d 754, 760 (W.D. Tex.
                                                                   2004), questions certified by Lamar Homes, Inc. v. Mid-Continent
See D. M ALECK, ET AL., COMMERCIAL GEN. LIAB. (6th ed.             Cas. Co., 428 F.3d 193, 200-01 (5th Cir. 2005); Jim Johnson
1997). A substantial number of opinions have been generated        Homes, Inc. v. Mid-Continent Cas. Co., 244 F. Supp. 2d 706,
by Texas’s state and federal courts in the last two decades        715 (N.D. Tex. 2003); Malone, 147 F. Supp. 2d at 628; Grimes
concerning the trigger of coverage by an “occurrence.” The         Constr., Inc. v. Great Am. Lloyds Ins. Co., 188 S.W.3d 805,
majority of these opinions deal with residential and com-          810-13 (Tex. App.—Fort Worth 2006, pet. filed); Hartrick,
mercial construction disputes and the issue of whether faulty      62 S.W. 3d at 277-78; Devoe v. Great Am. Ins., 50 S.W.3d 567,
workmanship or defective construction is an “occurrence”           572 (Tex. App.—Austin 2001, no pet.).
that would be covered by a CGL policy or an intentional act
which would not. In general terms, these cases have involved       Other courts in Texas have concluded that allegations of
the determination of whether the breach of a construction          faulty workmanship do constitute an “occurrence” at least for
contract can be an occurrence under a CGL policy.                  purposes of the duty to defend. See, e.g., Great Am. Ins. Co. v.
                                                                   Calli Homes, Inc., 236 F.Supp.2d 693, 698-702 (S.D.Tex.2002);
To determine whether there was an “occurrence” that triggered      Gehan Homes, Ltd. v. Employers Mut. Cas. Co., 146 S.W.3d 833,
coverage under a CGL policy, Texas courts look to whether          844 (Tex. App.—Dallas 2004, pet. filed); Grimes Construction,
there was an accident. Mid-Century Ins. Co. v. Lindsey, 997        188 S.W.3d at 813-14. Most of these latter cases, however,
S.W.2d 153, 155 (Tex. 1999). The Texas Supreme Court set           involved causes of action alleging both breach of contract
out the parameters for defining an accident as follows:            and negligence.

   [A]n injury is accidental if from the viewpoint of the          The Texas Supreme Court has not opined on the question as
   insured, it is not the natural and probable consequence         to whether faulty workmanship and defective construction are
   of the action or occurrence which produced the injury;          covered under the definition of “occurrence” found in most
   or in other words, if the injury could not reasonably           CGL policies and the length of this paper does not allow for an
   be anticipated by the insured, or would not ordinarily          exhaustive review of this issue. Currently, it is evident that the
   follow from the action or occurrence which caused the           consideration of this issue has received divergent treatment
   injury. . . both the actor’s intent and the reasonably          by state and federal courts in Texas. Practitioners considering
   foreseeable effect of his conduct bear on the determina-        this issue appear to have ample precedent to argue either side
   tion of whether an occurrence is accidental.                    of the occurrence issue in a constructions context.

Lindsey, 997 S.W.2d at 155 (internal quotations and cita-          b. Continuing Occurrences
tions omitted). “An injury that results from voluntary and         Another area of controversy in the state and federal courts in
intentional conduct is not an ‘accident’ and, therefore, not an    Texas is the temporal aspect of an occurrence. Often, these
‘occurrence,’ merely because the insured . . . did not intend      opinions deal with property damage or personal injury that is
the result.” Hartrick v. Great Am. Lloyd’s Ins. Co., 62 S.W.3d     caused by a continuing occurrence or exposure to an element
270, 277 (Tex. App.—Houston [1st Dist.] 2001, no pet.);            that causes damage over time.
Lindsey, 997 S.W.2d at 155 (an injury caused by voluntary and
intentional conduct is not necessarily an accident, even if the    In the last two decades, U.S. courts have developed a number
10                                                    ADVOCATE   ✯ WINTER 2006




                                                THE
of methods for determining when coverage was triggered for          the United States Court of Appeals for the Fifth Circuit has
“continuing occurrences.” The methodologies included:               opined that the manifestation trigger applies to property
                                                                    damage claims under Texas law. See Guaranty Nat’l Ins. Co.
     1.   the “strict manifestation rule,” deeming coverage         v. Azrock Indus., Inc., 211 F.3d 239, 248 (5th Cir. 2000); see
          triggered by actual discovery of the injury;              also Snug Harbor, Ltd. v. Zurich Ins., 968 F.2d 538, 544 (5th
                                                                    Cir.1992) (finding that the occurrence is when the damage
     2.   the “modified manifestation rule,” finding cov-           is sustained); Am. Home Assur. Co. v. Unitramp Ltd., 146 F.3d
          erage triggered in the first CGL policy period            311, 313 (5th Cir.1998) (finding that Texas courts have held
          during which discovery could be possible;                 that property damage occurs when the damage becomes
                                                                    manifest); Mathew Heating & Air Conditioning LLC v. Liberty
     3.   the “exposure rule,” finding coverage triggered           Mut. Fire Ins. Co., 384 F. Supp. 2d 988, 994 (N.D. Tex. 2004)
          in any CGL policy period when exposure to the             (finding that the manifestation trigger applies to property
          cause occurred;                                           damage claims due to mold); Great Am. Ins. Co. v. Calli Homes,
                                                                    Inc., 236 F. Supp. 2d 693, 702-03 (S.D. Tex. 2002) (adopting
     4.   the “injury-in-fact rule,” finding coverage trig-         the manifestation rule).
          gered in personal injury cases when the “body’s
          defenses are ‘overwhelmed;’” and                          4. Bodily Injury and Property Damage
                                                                    Although CGL policies provide coverage for “bodily injury”
     5.   the “multiple trigger” approach, finding coverage         and “property damage,” there are some contractual and/or
          under each CGL policy in effect during period of          judicial limitations on these definitions which can impact
          continuing exposure and manifestation.                    coverage for these sorts of claims.

Bayou Bend Homes, Inc. v. Scottsdale Ins. Co., No. 4:05-CV-1544,    a. Bodily Injury
2006 W.L. 2037564 (S.D. Tex July 18, 2006); see, e.g., Am.          Most CGL policies contain a definition of “bodily injury”
Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 853 n.20 (Tex.     similar to the following:
1994); Pilgrim Enters., Inc. v. Md. Cas. Co., 24 S.W.3d 488, 495
(Tex. App.—Houston [1st Dist.] 2000, no pet.).                        “Bodily Injury” means bodily injury, sickness or disease
                                                                      sustained by a person, including death resulting from any
Currently, the Texas Supreme Court has not decided what               of these at any time.
trigger of coverage methodology should be used by Texas
courts. See Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co.,   Although the definition seems to be fairly straight forward,
No. 14-05-00487-CV, --- S.W.3d ----, 2006 WL 1892669,               Texas courts have placed some limitations on this application
*5-7 (Tex. App.—Houston [14th Dist.] July 6, 2006, no pet.          of “bodily injury” to various types of claims. In Cowan, the
h.); Bayou Bend Homes, Inc. v. Scottsdale Ins. Co., C.A. No. H-     Texas Supreme Court had to determine whether a claimant’s
05-1544, 2006 WL 2037564 (S.D. Tex. July 18, 2006). The             allegation of mental anguish alone was sufficient to allege
state courts in Texas have adopted different methodologies to       “bodily injury” for purposes of a standard homeowners’
determine trigger of coverage. Compare Dorchester Dev. Corp. v.     insurance policy. 945 S.W.2d at 820. The policy defined
Safeco Ins. Co., 737 S.W.2d 380, 383 (Tex. App.—Dallas 1987,        “bodily injury” as “bodily harm, sickness or disease.” The
no writ); Cullen/Frost Bank of Dallas, N.A. v. Commonwealth         court reasoned that “bodily injury,” as defined in the policy,
Lloyd’s Ins. Co., 852 S.W.2d 252, 257 (Tex. App.—Dallas 1993,       did not include purely emotional injuries and required “an
writ denied); State Farm Mut. Auto. Ins. Co. v. Kelly, 945 S.W.2d   injury to the physical structure of the human body.” Id. at
905, 910 (Tex. App.—Austin 1997, writ denied) (applying the         823. Realistically, most claims of mental anguish would be
manifestation rule to a claim for property damage resulting         accompanied by other claims which may provide an inde-
from allegedly defective construction); with Pilgrim Enters.,       pendent basis for coverage under a liability policy. See Boyles
Inc. v. Md. Cas. Co., 24 S.W.3d 488, 495 (Tex. App.—Houston         v. Kerr, 855 S.W.2d 593, 597-98 (Tex. 1993) (holding that
                                                                       Kerr
[1st Dist.] 2000, no pet.) (applying the exposure methodology       mental anguish is only an element of recoverable damages
to claims of property damage from continuous exposure to            when some otherwise cognizable legal duty is breached).
toxic chemicals).
                                                                    Recently, Texas appellate courts have considered the applica-
To add some complexity to the issue of trigger of coverage,         tion of the “bodily injury” definition to claims alleging that
                                                      ADVOCATE   ✯ WINTER 2006                                                    11




                                                THE
cell phones emit harmful radio frequency radiation that             late courts have adopted the view that economic loss flowing
potentially causes injury to human cells when the cell phones       from property damage to the subject matter of a contract
are used without a headset. Samsung Electronics America, Inc.       between the insured and a claimant falls within the definition
v. Federal Ins. Co., No. 05-04-01316-CV, --- S.W.3d ---, 2006       of “property damage.” See Lennar Corp. v. Great Am. Ins. Co.,
WL 2391095 (Tex. App.—Dallas Aug. 21, 2006, no pet.                 200 S.W.3d 651 (Tex. App.—Houston [14th Dist.] 2006, pet.
h.); Nokia Inc. v. Zurich Am. Ins. Co., No. 05-04-01729-CV,         filed) (finding that damages caused by defective EIFS was
--- S.W.2d ---, 2006 WL 2391098 (Tex. App—Dallas Aug.               within the definition of “property damage” under a CGL
21, 2006, no pet. h.). In both of these cases, the court was        policy); Home Owners Mgmt Enters., Inc. v. Mid-Continent Cas.
attempting to determine whether the insurers’ duty to defend        Co., 2005 WL 2452859, *7 (N.D. Tex, Oct. 3, 2005) (finding
had been triggered by the claims for “injury to human cells.”       arbitration award to homebuyers for damages caused by a
The court reasoned that since injury to human cells was             defectively constructed foundation was within the definition
not clearly included within or excluded by the policy provi-        of “property damage” under a CGL policy); Mid-Continent
sions, the underlying allegations for injury to human cells         Cas. Co. v. JHP Dev., No. 3:04-CV-2061, 2005 WL 1123759,
potentially stated a claim that triggered the insurers’ duty to     *4-5 (N.D. Tex., April 21, 2005) (holding that damage to
defend. Samsung, 2006 WL 2391095 at *6; Nokia, 2006 WL              the subject of the contract between insured and claimants
2391098 at *4.                                                      sufficient to satisfy “property damage” definition).

b. Property Damage                                                  Clearly, some of the recent appellate opinions which analyze
The determination of whether property damage claims are             “economic loss” in the context of CGL policies are also consid-
covered under standard CGL policy wording is one of the more        ering whether the loss in question would be an “occurrence”
conceptually challenging areas of insurance coverage law in         as well. This tendency to combine the issues of “economic
Texas. The challenges are presented by the “economic loss”          loss” and “occurrence” is one of the reasons that Texas law is
rule, as well as the “business risks” exclusions found in most      currently in flux as to whether damage to the subject matter
CGL policies. Although CGL policy exclusions are dealt with         of a contract between the insured and the claimant is property
in a separate section of this paper, because the “business risks”   damage under a CGL policy.
exclusions have a significant impact on claims for property
damage, they will be analyzed in this section.                      c. Business Risks Exclusions
                                                                    Most CGL policies contain standard “business risks” exclu-
Under the “economic loss” rule, injury that is caused solely        sions that apply to construction and manufacturing activities
to the product of the insured’s work pursuant to a contract is      conducted by the insured. See Lennar Corp. v. Great Am. Ins.
essentially a loss to the purchaser of the benefit of the bargain   Co., No. 14-02-00860-CV, 2006 WL 406609, *12 (Tex.
with the seller. Mid-Continent Aircraft Corp. v. Curry County       App.—Houston [14th Dist.] Feb. 23, 2006, pet. filed) (not
Spraying Serv., 572 S.W.2d 308, 312-13 (Tex. 1978). Injury to       designated for publication). The “business risks” exclusions
the subject matter of the contract between the insured and          “recognize[] that a CGL policy is not meant to act as a warranty
a third party is not property damage, but, rather, economic         of the insured’s work and protect the insured from liability in
loss. “Property damage” is not the economic loss to the subject     contract when the work was not that for which the damaged
of a contract. Jim Walter Homes v. Reed, 711 S.W.2d 617, 618        party bargained.” Id. The “business risks” exclusions are also
(Tex. 1986).                                                        at the heart of the current judicial debate concerning coverage
                                                                    for faulty workmanship and defective construction. Although
Generally, Texas courts have held that CGL policies do not          the recent opinions concerning these “business risks” are too
provide coverage for damages for purely economic loss. See,         numerous to analyze in this paper, they do provide a thorough
e.g., Gibson & Assocs., Inc. v. Home Ins. Co., 966 F. Supp. 468,    review of these exclusions—often in light of the “occurrence”
474 (N.D. Tex. 1997); AIU Ins. Co. v. Mallay Corp., 938 F.          and “products-completed operations hazard” definition. The
Supp. 407, 411 (S.D. Tex. 1996), aff’d, 116 F.3d 407 (5th           “products-completed operations hazard” generally includes
Cir. 1997); State Farm Lloyds v. Kessler, 932 S.W.2d 732, 736
                                   Kessler                          damage that occurs after a construction project is completed
(Tex. App.—Fort Worth 1996, writ denied); Terra Int’l, Inc.         and is in the owner’s possession. Any practitioners that
v. Commonwealth Lloyds Ins. Co., 829 S.W.2d 270, 272 (Tex.          are dealing with claims and coverages involving defects in
App.—Dallas 1992, writ denied); Houston Petroleum Co. v.            construction or manufacturing should be familiar with the
Highlands Ins. Co., 830 S.W.2d 153, 156 (Tex. App.—Houston          “business risks” exclusions and the recent cases concerning
[1st Dist.] 1991, writ denied). Recently, however, some appel-      these exclusions.
12                                                      ADVOCATE   ✯ WINTER 2006




                                                  THE
Examples of the standard “business risks” exclusions                 denied); Mid-United Contractors, Inc. v. Providence Lloyds
accompanied by recent relevant Texas cases are set forth as          Ins. Co., 754 S.W.2d 824, 827 (Tex. App.—Fort Worth
follows.                                                             1988, writ denied).

Exclusion (j)—Damage to property                                     Exclusion (k)—Damage to your product
Exclusion (j) bars coverage for:                                       “Property damage” to “your product” arising out of
                                                                       any part of it.
     “Property damage” to:
                                                                        “Your Product” is:
           1.   Property you own, rent, or occupy;
                                                                         1.   Any goods or products, other than real property,
           2. Premises you sell, give away or abandon, if the                 manufactured, sold, handled, distributed or disposed
              “property damage” arises out of any of those                    of by:
              premises;
                                                                              a. you;
           3. Property loaned to you;                                         b. others trading under your name; or
                                                                              c. a person or organization whose business or assets
           4. Personal property in the care, custody or control                   you have acquired; and
              of the insured;
                                                                         2.   Containers (other than vehicles) materials, parts or
           5. That particular part of real property on which                  equipment furnished in connection with such goods
              you or any contractors or subcontractors                        or products.
              working directly or indirectly on your behalf are
              performing operations, if the ‘property damage’           “Your Product” includes:
              arises out of those operations; or
                                                                         1.   Warranties and representations made at any time with
           6. That particular part of real property that must                 respect to the fitness, quality, durability, performance
              be restored, repaired or replaced because ‘your                 or use of Your Product; and
              work’ was incorrectly performed on it.                     2.   The providing of or failure to provide warnings or
                                                                              instructions.
     Paragraph (6) of this exclusion does not apply to ‘property
     damage’ included in the ‘products-completed operations             “Your product” does not include vending machines or other
     hazard.”                                                           property rented to or located for the use of others but not
                                                                        sold.
     “Products-completed operations hazard” includes all “bodily
     injury” and “property damage” occurring away from premises      Essentially, this provision excludes coverage if the named
     you own or rent and arising out of “your product” or “your      insured’s product (as defined in the CGL form) suffers
     work” except: (1) Products that are still in your physical      property damage. Although this exclusion bars coverage
     possession; or (2) Work that has not yet been completed or      for damage to the product itself, the exclusion does not
     abandoned.... Work that may need service, maintenance,          bar coverage to other property in which the damaged
     correction, repair or replacement, but which is otherwise       product is incorporated; the exclusion, likewise, does
     complete, will be treated as completed.                         not apply to bar coverage for damages to the property of
                                                                     a third party. See, e.g., Hartford Cas. Co. v. Cruse, 938 F.2d
Texas appellate courts have found that “if defective work            601, 604-05 (5th Cir. 1991) (applying Texas law); Nat’l
is performed by or on behalf of the insured, and such                Union Fire Ins. Co. of Pittsburgh, PA v. Puget Plastics Corp., 450
defective work causes damage to other work of the insured            F. Supp. 2d 682, 697 (S.D. Tex. 2006) (holding exclusion
that was not defective, then there would be coverage for             prevented a recovery based on damages to product, but
repair, replacement, or restoration of the work which                damages to property of a third party were not excluded).
was not defective.” Gar-Tex Const. Co. v. Employers Cas.             This exclusion also precludes coverage for damages that
Co., 771 S.W.2d 639, 643 (Tex. App.—Dallas 1989, writ                the insured becomes legally obligated to pay as a result
                                                       ADVOCATE   ✯ WINTER 2006                                                         13




                                                 THE
of negligent misrepresentation and breach of warranty               by a subcontractor of the insured. CU Lloyd’s, 79 S.W.3d at 698
claims. See Valmont Energy Steel, Inc. v. Commercial Union          (duty to defend existed for claims that property damage was
Ins. Co., 359 F.3d 770, 776 (5th Cir. 2004) (applying               caused by subcontractors because subcontractor exception
Texas law); see also Puget Plastics, 450 F. Supp. 2d 696-697        to exclusion applied).
(damages to product, including damages arising from a
breach of warranty, were clearly excluded, but damages to           Exclusion (m)—Damage to impaired property or property
property of third party were not excluded). The exclusion           not physically injured
does not apply to the construction of buildings because             Exclusion (m) provides that the insurance does not apply
they are constructed or erected, not manufactured. CU               to:
Lloyd’s of Tex. v. Main Street Homes, Inc., 79 S.W.3d 687, 697
(Tex. App.—Austin 2002, no pet.); Mid-United Contractors,              “Property damage” to “impaired property” or property that
754 S.W.2d at 826.                                                     had not been physically injured, arising out of:

Exclusion (l)—Damage to your work                                            (1) A defect, deficiency, inadequacy, or dangerous
Exclusion (l) bars coverage for the following:                                   condition in “your product” or “your work;” or

  “Property damage” to “your work” arising out of it or any                  (2) A delay or failure by you or anyone acting on
  part of it and included in the “products-completed operations                  your behalf to perform a contract or agreement
  hazard” are excluded from coverage.                                            in accordance with its terms.

  This exclusion does not apply if the damaged work or the          This exclusion does not apply to the loss of use of other property
  work out of which the damage arises was performed on your         arising out of sudden and accidental physical injury to “your
  behalf by a subcontractor.                                        product” or “your work” after it has been put to its intended use.

  “Your work” means:                                                   “Impaired property” means tangible property, other than
                                                                       “your product” or “your work,” that cannot be used or is
         a. Work or operations performed by you or on your             less useful because:
            behalf; and
                                                                             a. It incorporates “your product” or “your work”
         b.   Materials, parts or equipment furnished in con-                   that is known or thought to be defective, deficient,
              nection with such work or operations.                             inadequate or dangerous; or

Under this provision, coverage is excluded for an insured’s                  b.   You have failed to fulfill the terms of a contract
liability to repair or replace his or her defective work. This                    or agreement:
exclusion, for example, has been held to preclude liability for
damage to a building resulting from the insured’s failure to           if such property can be restored to use by:
construct the building according to specifications. McCord,
Condron & McDonald, Inc. v. Twin City Fire Ins. Co., 607 S.W.2d              a. The repair or replacement, adjustment or removal
956, 958-59 (Tex. Civ. App.—Fort Worth 1980, writ ref’d                         of “your product” or “your work” or
n.r.e.). The exclusion does not, however, bar coverage for
damages to a third-party’s property resulting from insured’s                 b.   Your fulfilling the terms of the contract or agree-
negligence that are separate and apart from damage to the                         ment.
insured’s work. Mt. Hawley Ins. Co. v. Steve Roberts Custom
Builders, Inc., 215 F. Supp. 2d 783, 792 (E.D. Tex. 2002)           Because the exclusion begins by barring coverage for
(exclusion applied to bar coverage to contractor’s work on          “impaired property,” it is important to grasp the meaning
driveway, but exclusion did not apply to alleged negligence         of that term. See Mt. Hawley, 215 F. Supp. 2d at 793 (noting
caused by encroachment on third-party’s property that was           that while this exclusion applies to “impaired property,” the
separate and apart from damage to the driveway or other             exclusion does not apply to allegations of physical injury to
materials or structures constituting “your work” under the          property). Impaired property is, by definition, restricted to
policy). Further, an exception exists if the work was performed     tangible property that, on one hand, cannot be used or is less
14                                                           ADVOCATE     ✯ WINTER 2006




                                                       THE
useful, but, on the other hand, can be restored to use. If the              a. Pollution/Toxic Substances Exclusions
property has been damaged to such an extent that it is not                  Bodily injuries resulting from exposure to pollutants or toxic
only unusable but also cannot be repaired or replaced, the                  substances may be excluded from coverage under CGL poli-
impaired property exclusion does not apply. Federated Mut.                  cies that do not contain endorsements or “buy backs” that
Ins. Co. v. Grapevine Excavation Inc., 197 F.3d 720, 728 (5th               provide such coverages. The pollution and toxic substances
Cir. 1999) (applying Texas law) (damage caused by defective                 exclusions differ in some respects between insurers and
filler used in asphalt paving was not to “impaired property”                years of issue. The following are some examples of these
because paving could not be restored to use by the repair,                  exclusions:
replacement, adjustment or removal” of the defective filler).
                                                                              Example 1.
Exclusion (n)—Recall of products, work or impaired                            This policy does not apply to ... any Personal Injury or
property                                                                      Property Damage arising out of the actual or threatened
Exclusion (n) precludes coverage for:                                         discharge, dispersal, release or escape of pollutants, anywhere
                                                                              in the world; ... “Pollutants” means any solid, liquid, gaseous
     Damages claimed for any loss, cost or expense incurred by                or thermal irritant or contaminant, including smoke, vapor,
     you or others for the loss of use, withdrawal, recall, inspection,       soot, fumes, acids, alkalis, chemicals and waste material.
     repair, replacement, adjustment, removal or disposal of: (1)             Waste materials include materials which are intended to be
     ‘Your product’; (2) ‘Your work’; or (3) ‘Impaired property’; if          or have been recycled, reconditioned or reclaimed.
     such product, work, or property is withdrawn or recalled from
     the market or from use by any person or organization because             Example 2.
     of a known or suspected defect, deficiency, inadequacy or                This insurance does not apply to:
     dangerous condition in it.                                                …
                                                                               (1) “Bodily injury” or “property damage” which would not
Exclusion (n) is known as the “sistership exclusion.”1 It                           have occurred in whole or in part but for the actual,
denies coverage for claims based on the cost of withdrawing a                       alleged or threatened discharge, seepage, migration,
product from the market or of replacing a product, or the loss                      dispersal, release, or escape of “pollutants” at any
of use of a product temporarily or permanently withdrawn                            time.
from the market because of defects in the same or similar
product. Gulf Ins. Co. v. Parker Prods., Inc., 498 S.W.2d 676,                  (2) Any loss, cost or expense arising out of any:
677 (Tex. 1973). Such recalls involve expenses incurred to
prevent accidents that have not occurred. Id. While liability                        (a) Request, demand or order that any insured
insurance covers damages for injuries and property damage                                or others test for, monitor, clean up, remove,
caused by the failed product, “it was never intended that the                            contain, treat, detoxify, or neutralize or in any
insurer would be saddled with the cost of preventing other                               way respond to, or assess the effects of “pollut-
failures, any more than it was intended that the insurer would                           ants”; or;
pay the cost of preventing the first failure if the product had
been discovered to be in a dangerous condition before the                            (b) “Claim” or “suit” by or on behalf of any govern-
occurrence.” Id. The exclusion bars coverage for damages                                  mental authority or others for damages because
when the property is withdrawn from the market or use,                                    of testing for, monitoring, cleaning up, removing,
but only the damages for “withdrawal, inspection, repair,                                 containing, treating, detoxifying or neutralizing,
replacement, or loss of use of the property;” the exclusion                               or in any way responding to, or assessing the
does not apply to damages for the destruction or loss of the                              effects of “pollutants.”
property itself. Id. at 678-79.
                                                                              “Pollutants” means any solid, liquid, gaseous or thermal
5. Other Policy Exclusions that Frequently Impact                             irritant or contaminant, including smoke, vapor, soot,
Pleadings and Claims                                                          fumes, acids, alkalis, chemicals and waste. “Waste”
Most CGL policies contain numerous exclusions that cannot                     includes materials to be recycled, reconditioned, or
be covered by this limited article. The following, however,                   reclaimed.
are two exclusions that are frequently involved in disputes
between claimants, insurers and insureds.                                   Some CGL policies contain exceptions which state that
                                                     ADVOCATE   ✯ WINTER 2006                                                    15




                                               THE
the exclusions do not apply to “bodily injury” or “property        Recently, the Texas Supreme Court, in Utica, analyzed a
damage” arising out of escape of materials such as fuels,          professional services exclusion similar to the example quoted
lubricants, or other operating fluids needed for the operation     above in a fact scenario where an employee of the insured
of mobile equipment that is used by the insured. In addi-          stole anesthetic from the insured surgical center. The employee
tion, most policies contain an exception for “bodily injury        used a syringe to remove the anesthetic from the glass storage
or “property damage” arising out of smoke, heat or fumes           containers, injected himself with the drug, and then injected
from a hostile fire.                                               saline solution back into the containers so that the theft would
                                                                   not be discovered. The employee was infected with Hepatitis
Provisions similar to those quoted above have been found to        C and his use of the same syringe allegedly contaminated the
be unambiguous and enforceable by numerous Texas courts            containers of saline. A number of patients who received anes-
and the Fifth Circuit. See, e.g., Amoco Prod. Co. v. Hydroblast    thetic injections before the employee’s crime was discovered
Corp., 90 F. Supp. 2d 727, 732-33 (N.D. Tex. 1999), aff’d,         subsequently tested positive for Hepatitis C. The patients filed
226 F.3d 642 (5th Cir. 2000); Certain Underwriters at Lloyd’s      suit against the insured, alleging numerous negligent actions
London v. C.A. Turner Constr. Co., 112 F.3d 184, 187 n.4 (5th      against the doctors’ association and its members, including
Cir. 1997); Bituminous Cas. Co. v. Kenworthy Oil Co., 912 F.       negligence in “failing to properly secure anesthesia narcotics”
Supp. 238, 240 (W.D. Tex. 1996), aff’d, 105 F.3d 656 (5th          and in “exposing patients to contaminated medication.” The
Cir.1996); Hamm v. Allstate Ins. Co., 286 F. Supp. 2d 790,         professional indemnity insurer offered a defense, but then
793-94 (N.D. Tex. 2003); Na’l Union Fire Ins. Co. of Pittsburgh,   became insolvent, leading to a claim for coverage against the
PA v. CBI Indus., 907 S.W.2d 517, 519 (Tex. 1995); Zaiontz v.      insured’s CGL insurer.
Trinity Universal Ins. Co., 87 S.W.3d 565, 571-74 (Tex.
App.—San Antonio 2002, pet. denied).                               In reviewing the professional services exclusion in the
                                                                   CGL policy, the Court focused on the fact that the policy
The application of the pollution exclusions can vary based         excluded claims “due to” the rendering or failure to render
on the specific wording of the policy, the scope of the pollu-     any professional services, as opposed to claims “arising
tion event, and the damages incurred. A welder’s inhalation        from” such services. The Court found that the term “due to”
of phenol gas under a welding tent, for example, was held          requires a more direct type of causation that could tie the
not to be covered under the first exclusion quoted above.          insured’s liability to the manner in which the services were
C.A. Turner Construction, 112 F.3d at 188. Similarly, bodily       performed. Based on this interpretation, the Court rejected
injury claims resulting when employees were injured while          the CGL insurer’s argument that the professional services
removing petroleum waste materials from a fuel-mixing tank         relieved it of the duty to defend. The Court determined that
were held not to be covered under the second above-quoted          because the underlying claims alleged a cause of action that
exclusion. United Nat’l Ins. Co. v. Motiva Enters., L.L.C., No.    could establish liability on behalf of the insured even in the
Civ. H-04-2924, 2006 WL 83482 (S.D. Tex. 2006). See also           absence a breach of a professional standard of care, the CGL
Hydroblast, 90 F. Supp. 2d at 732-33.                              insurer had a duty to defend the insured.

b. Professional Services Exclusions                                When dealing with the professional services exclusion, one
CGL policies often contain some sort of professional services      must also consider Texas law concerning the distinction
exclusion which can prohibit coverage for “‘bodily injury,’        between “separate and independent” causation and “concur-
‘property damage,’ ‘personal injury’ or ‘advertising injury’       rent” causation because their impact on coverage is drastically
due to rendering or failure to render any professional service.”   different. In claims alleging injuries that involve separate and
Utica Nat’l Ins. Co. of Tex. v. Am. Indem. Co., 141 S.W.3d 198,    independent causation, the claimant’s injury must be caused
199 (Tex. 2004). The application of the professional services      independently by both the covered event and uncovered event
exclusion is dependent on the nature of the services being         and the insurer must provide coverage despite the exclusion.
rendered when the injury allegedly occurred, and can include       See Guaranty Nat’l Ins. Co. v. North River Ins. Co., 909 F.2d
health services and engineering services. Courts frequently        133, 137 (5th Cir.1990) (finding that a hospital’s failure to
review professional services exclusions in light of claims that    lock windows and to properly treat a psychiatric patient
could fall either within the scope of a general liability policy   were both the proximate cause of the patient’s suicide and
or within separate professional indemnity coverage. In those       therefore a professional exclusion did not apply); Warrilow
instances, courts usually focus on the issue of causation to       v. Norrell, 791 S.W.2d 515, 526 (Tex. App.—Corpus Christi
determine which coverage would be implicated.                      1989, writ denied); Cagle v. Commercial Standard Ins. Co.,
16                                                   ADVOCATE   ✯ WINTER 2006




                                               THE
427 S.W.2d 939, 943-44 (Tex. Civ. App.—Austin 1968, no             predictability in judicial interpretations of the policy terms,
writ). On the other hand, in claims involving concurrent           that desire has not yet been realized.
causation, the covered and excluded events must combine
to cause the plaintiff’s injuries. If the combined causes of       Glenn Legge is a partner in Legge, Farrow, Kimmitt, McGrath &
the injury cannot be separated, the exclusion is triggered.        Brown, L.L.P and focuses his practice in the areas of commercial
See Travelers Indem. Co. v. Citgo Petroleum Corp., 166 F.3d        litigation, as well as energy, marine, environmental and insur-
761, 771-72 (5th Cir.1999) (applying Texas law and finding         ance coverage matters. He was a speaker at the 1996, 1998 and
liability for the failure to comply with separate corporate        2001 Liability Underwriters’ Group Conferences in Oxford and
safety standards caused the excluded negligent driving claim);     Cambridge, England on the subjects of environmental claims,
Burlington Ins. Co. v. Mexican Am. Unity Council, 905 S.W.2d       insurance coverage and bad faith. He also participated in the
359, 363 (Tex. App.—San Antonio 1995, no writ) (finding            Energy and Marine Liability Conferences in London in 2001,
that because negligent supervision of a resident of a youth        2003 and 2004.
facility and intentional assault which caused her injuries
were not “separate and independent,” the assault and battery       Karen A. Conticello is an associate at Legge, Farrow, Kimmitt,
exclusion in the policy excluded coverage).                        McGrath & Brown, L.L.P. She maintains a diverse trial and
                                                                   appellate practice that includes insurance coverage, commercial
Conclusion                                                         litigation, personal injury defense, and employment law. She has
The determination of whether allegations in a petition             published articles on a variety of topics in the Houston Lawyer
or complaint will trigger an insurer’s duty to defend and          and the Houston Business Journal. ✯
indemnify an insured is important to claimants, insureds,
and insurers. Unfortunately for all parties concerned, many        1 The term “sistership exclusion” derives from an occurrence in
issues remain open in the current jurisprudential climate.         the aircraft industry where all airplanes of a certain make and
The determination of whether a claim triggers coverage as an       type were grounded by an order because one crashed and others
“occurrence,” for example, is not subject to uniform treatment     were suspected of having a common structural defect. Gulf Ins.
in the state and federal courts in Texas. In addition, judicial    Co. v. Parker Prods., Inc., 498 S.W.2d 676, 678 (Tex. 1973). The
treatment of the definition of “property damage” and various       damages stemming from the loss of use of the sister ships were
coverage triggers are also in a certain degree of flux in Texas.   enormous. Id.
Although insureds and insurers may desire some degree of
                                                    ADVOCATE   ✯ WINTER 2006                                                     17




                                              THE
                           EVOLVING ISSUES: E XTRINSIC EVIDENCE
                                AND THE DUTY TO DEFEND
                                                      BY DIANA L. FAUST



I. Introduction                                                   from 1992 to 1994, Evans was employed as an associate
The Texas Supreme Court recently considered whether               youth minister and was under the Church’s supervision and
extrinsic evidence could be relevant in determining the           control when he sexually exploited and abused Doe. The
duty to defend. In what does not appear to be the last            Church demanded a defense and indemnity from GuideOne,
word on the subject, the Court hinted that in the right           and GuideOne agreed to defend, but reserved its rights to
circumstance, extrinsic evidence might be considered as           determine coverage.
an exception to the longstanding “complaint-allegation” or
“eight-corners” rule. Restating the principles for determining    GuideOne filed a declaratory judgment action, seeking a
the insurer’s duty to defend, however, the court rejected the     declaration that it owed no duty to defend or indemnify the
use of extrinsic evidence where the petition’s allegations        Church against Doe’s lawsuit. After discovery, the Church
are insufficient and where the facts sought to be used to         advised GuideOne that Evans left the employ of the church
determine the duty to defend are relevant to both the merits      on December 15, 1992, before the GuideOne policy took
of the underlying lawsuit and the coverage determination.         effect. GuideOne sought to use the information to defeat the
The court emphasized that the duty to defend is determined        Church’s demand for a defense and its duty to defend against
by the allegations contained in the lawsuit, considered in        the Doe lawsuit.
light of the policy’s provisions, without regard to the truth
or falsity of those allegations. This article examines the        B. The Issues
court’s opinion in GuideOne Elite Insurance Co. v. Fielder Road   GuideOne argued that it owed no duty to defend the Church
Baptist Church, 197 S.W.3d 305 (Tex. 2006), and explores          based on Evans’ dates of employment prior to the policy’s
its ramifications for insurers and insureds alike.                effective date. GuideOne urged that extrinsic evidence of when
                                                                  the employment relationship ended established no coverage
II. GuideOne Elite Insurance Company v. Fielder Road              existed for Evans’ acts alleged in the complaint. GuideOne
Baptist Church                                                    argued that the court should recognize an exception to the
A. Facts                                                          eight-corners rule, for the following reasons:
GuideOne Elite Insurance Company issued a commercial
general liability policy to Fielder Road Baptist Church, for        the extrinsic evidence was primarily relevant to the issue
the period of March 31, 1993 to March 31, 1994. The policy          of coverage, rather than the merits of the underlying
included liability coverage for sexual misconduct:                  suit; the extrinsic evidence is needed to supplement the
                                                                    plaintiff’s allegations because the allegations alone are
  We agree to cover your legal liability for damages                insufficient to determine coverage or the duty to defend;
  because of bodily injury, excluding any sickness or               and the extrinsic evidence involved “overlapping” or
  disease, to any person arising out of sexual misconduct           “mixed evidence relative to coverage and the merits of
  which occurs during the policy period. We shall have              the underlying lawsuit and should be recognized as an
  the right and duty to investigate any claim . . . and to          exception to the eight-corners rule.
  defend any suit brought against you seeking damages,
  even if the allegations of the suit are groundless, false       The court concluded that the evidence on which GuideOne
  or fraudulent, and we may make any settlement we                relied was relevant to both coverage and the merits,
  deem expedient.                                                 and rejected its use as an exception to the eight-corners
                                                                  rule because it posed a significant risk of undermining
Jane Doe filed a sexual misconduct lawsuit against the church     the insured’s ability to defend itself in the underlying
and Charles Patrick Evans. She alleged that at all times          litigation.1
18                                                  ADVOCATE   ✯ WINTER 2006




                                              THE
C. The Law: Duty to Defend                                           covered claim is all that is needed to invoke the insurer’s duty
In reaching its holding, the court restated the well-                to defend, whereas, the facts actually established in the
established principles governing the determination of the            underlying suit control the duty to indemnify.9
duty to defend. Under the eight-corners or complaint-
allegation rule, an insurer’s duty to defend is determined by     Accordingly, applying the terms and scope of GuideOne’s
the third-party plaintiff’s pleadings, considered in light of     duty expressed under its policy’s provisions, the court held
the policy provisions, without regard to the truth or falsity     that where the fact at issue goes to both the merits and
of those allegations.2 The court explained that the rule takes    coverage, the exception cannot apply.10
its name from the fact that only two documents are relevant
to the determination of the duty to defend: the policy and        III. Ramifications of GuideOne
the pleadings.3 The court emphasized that “[f]acts outside        While the court rejected the exception to the eight-corners
the pleadings, even those easily ascertained, are ordinarily      rule under the circumstances presented, it impliedly
not material to the determination and allegations against the     recognized that in other, more appropriate, circumstances
insured are liberally construed in favor of coverage.”4           the limited exception the Fifth Circuit discussed in Northfield
                                                                                            Insurance Company v. Loving Home
In analyzing the use of extrinsic                                                           Care, Inc., 363 F.3d 523 (5th Cir.
evidence by Texas courts, the                 “...applying the terms and scope of           2004), might be applied: (1) “[w]hen
GuideOne court acknowledged that              GuideOne’s duty expressed under               it is initially impossible to discern
a narrow exception has permitted                                                            whether coverage is potentially
                                            its policy’s provisions, the court held
the use of extrinsic evidence when                                                          implicated,” and (2) “[w]hen the
relevant to independent and discrete         that where the fact at issue goes to           extrinsic evidence goes solely to
coverage issues,5 not touching                both the merits and coverage, the             a fundamental issue of coverage11
on the merits of the underlying                      exception cannot apply.”               which does not overlap the truth
third-party claim.6 In rejecting the                                                        or falsity of any facts alleged in
exception, the court emphasized                                                             the underlying case.”12 Without
that recognizing the exception would “conflate the insurer’s      changing the analysis required for determining the duty
defense and indemnity duties” without regard for the policy’s     to defend, the court emphasized that the policy language
express terms. The court also rejected GuideOne’s argument        continues to govern the inquiry.
that ignoring the truth invited fraudulent or collusive
pleading as a “true facts” exception to the duty to defend,       Since GuideOne, one court has concluded that the duty to
finding no evidence of collusion in the record.                   defend and the duty to indemnify are coextensive, where
                                                                  policy language differed from that considered in GuideOne.
The court explained:                                              In B Hall Contracting Inc. v. Evanston Insurance Company, 447
                                                                  F. Supp. 2d 634 (N.D. Tex. 2006), the court concluded that
   The policy here obligated GuideOne to indemnify the            the eight-corners or complaint-allegation rule did not apply
   Church in the event of a meritorious claim for sexual          where a commercial general liability policy obligated the
   misconduct, but with respect to the duty to defend, the        insurer to pay:
   contract provided that GuideOne should “defend any
   suit brought against [the insured] seeking damages,               [T]hose sums that the insured becomes legally obligated
   even if the allegations of the suit are groundless, false         to pay as damages because of ‘bodily injury’ or ‘property
   or fraudulent.”7                                                  damage’ to which this insurance applies. . . . [imposing]
                                                                     the duty to defend the insured against any ‘suit’ seeking
By its terms, the policy defined the duty to defend more             those damages. . . however, we will have no duty to
broadly than the duty to indemnify.8 The court explained:            defend the insured against any ‘suit’ seeking damages
                                                                     for ‘bodily injury’ or ‘property damage’ to which this
   This is often the case in this type of liability policy and       insurance does not apply.13
   is, in fact, the circumstances assumed to exist under the
   eight-corners rule. Because the respective duties differ in    Nonetheless, the court concluded that the insurer owes a
   scope, they are invoked under different circumstances.         duty to defend a damage suit brought against its insured, in
   A plaintiff’s factual allegations that potentially support a   which the claims in the suit are based on groundless, false,
                                                            ADVOCATE    ✯ WINTER 2006                                                              19




                                                      THE
or fraudulent allegations, so long as the liability facts state
a claim for damages “to which the insurance applies.” The                   draws a distinction between cases in which the merit of the claim is
court made clear that the insurer may not avoid defense                     the issue and those where the coverage of the insurance policy is in
obligations on the ground that extrinsic facts establish that               question. In the first instance the allegation of the petition controls,
the insured is not liable in the underlying suit. The key is                and in the second the known or ascertainable facts are to be allowed
whether the suit “seeks” damages to which the insurance                     to prevail.”); Int’l Serv. Ins. Co. v. Boll, 392 S.W.2d 158, 161 (Tex.
applies.14                                                                  Civ.App.—Houston 1965, writ ref’d n.r.e.) (considering extrinsic
                                                                            evidence of identity of driver of insured vehicle by stipulation to
As the principles governing analysis of the duty to defend                  conclude no duty to defend or indemnify arose).
                                                                            6 For example, in Boll, an auto-collision case, the court considered
continue to evolve, and the language within the standard
                                                                            extrinsic evidence because the petition’s allegations that the
commercial general liability policy likewise evolves, one
                                                                            “insured’s son” was driving were insufficient to identify the driver,
thing remains constant: Texas courts must continue to                       where a policy endorsement excluded from coverage any claim
analyze the insurer’s duty to defend utilizing the long-                    arising from accidents which occur while being operated by Bolls’
standing eight-corners or complaint-allegation rule.15                      son, Roy Boll. The parties stipulated that Roy Boll, the insured’s
                                                                            only son, was driving the insured vehicle. The court concluded
Diana L. Faust is a shareholder in the Dallas office of Cooper &            the stipulation established the accident had not been covered and
Scully, P.C. Her practice areas include Appellate Law, Medical              the insurer owed no duty to defend. The court explained that the
Malpractice and Insurance Law. Ms. Faust graduated cum laude                extrinsic evidence went strictly to the coverage issue and did not
from Southern Methodist University School of Law.✯                          contradict any allegation in the claimant’s pleadings material to the
                                                                            merits of the underlying claim. Boll, 392 S.W.2d at 160.
                                                                            7 GuideOne, 197 S.W.3d at 310.
                                                                            8 GuideOne, 197 S.W.3d at 310 (citing Utica Nat’l Ins. Co. of Texas v.
1 GuideOne, 197 S.W.3d at 309.                                              Am. Indem. Co., 141 S.W.3d 198, 203 (Tex. 2004) (observing that
2GuideOne,    197 S.W.3d at 308 (citing Argonaut SW. Ins. Co. v. Maupin,    duty to defend and duty to indemnify are distinct and separate);
500 S.W.2d 633, 635 (Tex. 1973); Heyden Newport Chem. Corp. v.              Whatley v. City of Dallas, 758 S.W.2d 301, 304 (Tex.App.—Dallas
S. Gen. Ins. Co., 387 S.W.2d 22, 24 (Tex. 1965)).                           1988, writ denied) (duty to defend is defined by the terms of the
3 GuideOne, 197 S.W.3d at 308 (citing King v. Dallas Fire Ins. Co.,         contract)).
                                                                            9 GuideOne, 197 S.W.3d at 310 (citing Trinity Universal Ins. Co. v.
85 S.W.3d 185, 187 (Tex. 2002)).
4 GuideOne, 197 S.W.3d at 308 (citing National Union Fire Ins.              Cowan, 945 S.W.2d 819, 821-22 (Tex. 1997)).
                                                                            10 See, e.g., Gulf Chem. & Metallurgical Corp. v. Associated Metals & Min-
Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.
1997)).                                                                     erals Corp., 1 F.3d 365, 367 (5th Cir. 1993) (rejecting use of extrinsic
5 See, e.g., W. Heritage Ins. Co. v. River Entm’t, 998 F.2d 311, 313 (5th   evidence where petition did not allege when product shipped but did
Cir. 1993) (“However, when the petition does not contain sufficient         allege when claimants suffered injuries from exposure of produce,
facts to enable the court to determine if coverage exists, it is proper     and evidence would have established that insured had not shipped
to look to extrinsic evidence in order to adequately address the            product after expiration of insurance policy).
                                                                            11 The Fifth Circuit explained that fundamental coverage issues
issue.”); Westport Ins. Corp. v. Atchley, Russell, Waldrop & Hlavinka,
L.L.P., 267 F.Supp.2d 601, 621-22 (E.D. Tex. 2003) (extrinsic evi-
L.L.P                                                                       have been defined to include: (1) whether the person sued has been
dence admissible in deciding the duty to defend where fundamental           specifically excluded by name or description from any coverage; (2)
policy coverage questions can be resolved by readily determined             whether the property in suit is included in or has been expressly
facts that do not engage the truth or falsity of the allegations in the     excluded from any coverage; and (3) whether the policy exists.
underlying petition, or overlap with the merits of the underlying           Loving Home Care, Inc., 363 F.3d at 530.
                                                                            12 See GuideOne, 197 S.W.3d at 309-10.
suit); State Farm Fire & Cas. Co. v. Wade, 827 S.W.2d 448, 452-53
                                                                            13 This language is similar to that contained within the ISO 1998
(Tex. App.—Corpus Christi 1992, writ denied) (concluding that
extrinsic evidence could be admitted in deciding the duty to defend         Commercial General Liability Occurrence Form, CG 00 01 07 98,
when the facts alleged are insufficient to determine coverage and           Insuring Agreement, Coverage A:
“when doing so does not question the truth or falsity of any facts               We will pay those sums that the insured becomes legally
alleged in the underlying petition”); Gonzales v. Am. States Ins.                obligated to pay as damages because of “bodily injury” or
Co., 628 S.W.2d 184, 187 (Tex. App.—Corpus Christi 1982, no                      “property damage” to which this insurance applies. We
writ) (holding that facts extrinsic to the petition relating only to             will have the right and duty to defend the insured against
coverage, not liability, may be considered to determine a duty to                any “suit” seeking those damages. However, we will have
defend, where such evidence does not contradict any allegation in                no duty to defend the insured against any “suit” seeking
the petition); Cook v. Ohio Cas. Ins. Co., 418 S.W.2d 712, 715-16                damages for “bodily injury” or “property damage” to which
(Tex. Civ. App.—Texarkana 1967, no writ) (“[T]he Supreme Court                   this insurance does not apply. We may, at our discretion,
20                                                       ADVOCATE   ✯ WINTER 2006




                                                   THE
     investigate any “occurrence” and settle any claim that may
     result.
14 The B Hall court also conducted the eight-corners or complaint-

allegations rule analysis, and reached the same conclusions regarding
Evanston’s duty to defend.
15As courts recognized decades ago, allegations contained within

the petition are those allegations of the insured’s liability, and no
legal determination of the insured’s ultimate liability is required
before the insurer’s duty to defend arises. See Gonzales, 628 S.W.2d
at 186. Indeed, as the GuideOne court recognized, use of extrinsic
evidence relevant to the merits of the underlying suit to determine
the duty to defend undermines the ability of the insured to prepare
a defense to that suit. The insured could not reasonably have
anticipated such a self-defeating burden when it purchased the
policies at issue and such a requirement raises the potential for
inconsistent judgments. See Dairy Road Partners v. Island Ins. Co.,
Ltd., 992 P.2d 93, 112-113 & n.12 (Haw. 2000) (rejecting use of
extrinsic evidence relevant to coverage and merits of underlying
lawsuit, and noting split of authority among other jurisdictions
on issue of insurer’s use of extrinsic evidence to disclaim duty to
defend, despite presence of allegations set forth in complaint, which
if true, establish possibility of coverage).
                                                     ADVOCATE   ✯ WINTER 2006                                                     21




                                               THE
                              THE INSURER’S DUTY TO SETTLE:
                            CURRENT DEVELOPMENTS IN THE L AW
                                               BY TARRA BALDWIN SOWERS




A  N INSURANCE POLICY is a contract between an insured
    and the insurer whereby the insured agrees to pay
    premiums in exchange for the insurer’s promise to pay
indemnity. An insurance policy is subject to the same prin-
ciples of construction as any contract. Courts determine what
                                                                   Not only is a third party prohibited from directly suing the
                                                                   insured’s carrier, but a third party is also prohibited from
                                                                   joining the insurer with its insured in a direct action. See
                                                                   Tex. R. Civ. P. 51(b). Causes of action for bad faith and breach
                                                                   of contract are not viable against an insurer by a third party
rights and obligations are owed under the policy, to whom          claimant because there is no privity between the insurer and
they run, and under what circumstances they are owed.              the third party claimant. Likewise, a third party claimant
                                                                   cannot sue a liability insurer directly for violations under the
Courts are sometimes asked to decide whether or not an             DTPA or the Texas Insurance Code. Section 541.060(b) of
insurer has a duty to settle or pay a claim. Ultimately, an        the Texas Insurance Code states that a violation of Subsection
insurer’s duty to settle or pay a claim is dependent upon the      (a), which lists various unfair settlement practices, does not
context in which the claim arose. This article will address        provide a cause of action to a third party asserting one or
two types of claims: (A) Third Party Claims, where an              more claims against an insured covered under a liability
insured seeks coverage for injuries to a third party, and (B)      insurance policy. Further, a liability carrier does not owe a
First Party Claims, where an insured seeks recovery for the        fiduciary duty to a third party claimant in its handling of
insured’s own loss.                                                claims because there is “no special relationship” between
                                                                   an insurer and a third party. Transp. Ins. Co. v. Faircloth, 898
A. Third Party Claims                                              S.W.2d 269 (Tex. 1995). There are currently no trends in
A failure to settle a third party claim could be a breach of       Texas case law which suggest that Texas will become a “direct
the insurance contract. A party must have standing to bring        action” state in the near future.
a claim for breach of contract against the insurer, and to do
so a party must first establish privity of contract with the       1. The Insurer’s Duty to Respond to a Settlement
insurer. A third party, one who is not the insured under the       Demand
policy, is generally not in privity with the insured.              Although an insurer does not have a duty to settle a claim, it
                                                                   may have a duty to respond to a settlement demand. Failure
In Texas, an insurer does not have a duty to settle a claim        to do so could be considered bad faith. An insurer’s duty to
brought against its insured by a third party until the insured’s   respond can arise where a third party makes a settlement
liability is judicially established. In State Farm County Mut.     demand against an insured, and the claim is covered under
Ins. Co. v. Ollis, the Texas Supreme Court ruled that a third      the policy. This duty is subject to prerequisites that were set
party claimant “cannot enforce the policy directly against         forth by the Texas Supreme Court in G.A. Stowers Furniture
the insured until it has been established, by judgment or          Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex. Comm’n
agreement, that the insured has a legal obligation to damages      App. 1929, holding approved).
to the injured party.” 768 S.W.2d 722, 723 (Tex.1989) (citing
Great Am. Ins. Co. v. Murry, 437 S.W.2d 264 (Tex.1969)). The       2. The Stowers Duty
Court in State Farm also stated that an insurer is not obligated   If the claimant’s demand meets the criteria set forth in
to pay where its insured has been released by the third party      Stowers, an insurer has a duty to respond to that settlement
because a “settlement agreement does nothing more than buy         demand. This duty to respond is generally referred to as a
peace.” Id. This is certainly true when settlement agreements      “Stowers” duty. Rocor Int’l, Inc. v. Nat’l Union Fire Ins. Co. of
specifically state that the agreement is not an admission of       Pittsburgh, PA, 77 S.W.3d 253, 259 (Tex. 2002); Coats v. Ruiz,
liability by the insured.                                          198 S.W.3d 863, 882 (Tex. App.—Dallas 2006, no pet.); Welch
22                                                    ADVOCATE   ✯ WINTER 2006




                                                THE
v. McLean, 191 S.W.3d 147, 167 n.18 (Tex. App.—Fort Worth,         gated to solicit settlement offers, or to further negotiate. Id.
no pet.). Stowers states that where
                                                                   4. Challengeability of the Insurer’s Acceptance of a
     an insurance company makes a contract, it, by the very        Reasonable Demand
     terms of the contract, assumed the responsibility to act      An insurer’s acceptance of a demand to settle a claim cannot
     as the exclusive and absolute agent of the assured in all     generally be challenged by the insured. However, an insured
     matters pertaining to the questions in litigation, and,       may challenge the insurer’s acceptance of a demand where
     as such agent, it ought to be held to the degree of care      specific language in the contract such as a “consent” or
     and diligence which an ordinarily prudent person would        “consult” clause requires that the insurer obtain the insured’s
     exercise in the management of his own business; and if        consent to settle. A settlement may also be challenged by the
     an ordinarily prudent person, in the exercise of ordinary     insured if the insurer paid “a claim without conducting a
     care, as viewed from the standpoint of the assured,           reasonable investigation with respect to the claim.” See TEX.
     would have settled the case and failed or refused to do       INS. CODE §541.060 (a)(7).
     so, then the agent, which in this case is the indemnity
     company, should respond in damages.                           5. Multiple Claimants/Exhaustion of Policy Limits
                                                                   The Texas Supreme Court addressed in an insurer’s duty to
Id. at 547. The Stowers duty is the insurer’s common law           settle when multiple claimants are involved in Texas Farmers
duty to exercise reasonable care in responding to settlement       Insurance Exchange Co. v. Soriano, 881 S.W.2d 312 (Tex.1994).
demands that are within the insured’s policy limits. The           When an insurer is “faced with [a] settlement demand
Texas Supreme Court has outlined the circumstances under           arising out of multiple claims and inadequate proceeds, an
which the Stowers duty is triggered.                               insurer may enter into a reasonable settlement with one of
                                                                   the several claimants even though such settlement exhausts
3. Triggering the Stowers Duty                                     or diminishes the proceeds available to satisfy other claims.”
In American Physicians Insurance Exchange v. Garcia, the Court     Id. at 315. The Court reasoned that this approach promoted
stated that “a Stowers settlement demand must propose              “settlement of lawsuits” and encouraged “claimants to make
to release the insured fully in exchange for a stated sum          their claims promptly”. Id.
of money, but may substitute ‘the policy limits’ for a sum
certain.” 876 S.W.2d 842, 848-49 (Tex. 1994). However,             6. Uncovered claims
three prerequisites must be met before the Stowers duty is         The Stowers duty would appear to be applicable only to
activated:                                                         covered claims which are within policy limits. Garcia, 876
                                                                   S.W.2d at 849. In Garcia, the Court held that “if a petition
      (1) the claim against the insured is within the scope        does not allege facts within the scope of coverage, an insurer
          of coverage,                                             is not legally required to defend a suit against its insured.” Id.
                                                                   at 848. Based on that proposition, the Court reasoned that an
      (2) the demand is within the policy limits, and              insurer does not have a duty to settle non-covered claims. Id.
                                                                   at 849. However, the Garcia court did not address the insurer’s
      (3) the terms of the demand are such that an ordi-           duty to consider an insured’s exposure for uncovered claims.
          narily prudent insurer would accept it, consid-          Instead, the Court stated:
          ering the likelihood and degree of the insured’s
          potential exposure to an excess judgment.                   A liability policy requires an insurance company
                                                                      to indemnify an insured only up to the insured’s
Id. at 849. In Ranger County Mutual Insurance Co. v. Guin,            contractual limits with that company. Thus, insurers
the Court elaborated by stating that ordinary care included           have no duty to accept over-the-limits demands. We
“investigation, preparation for defense of the lawsuit, trial         do not reach the question of when, if ever, a Stowers
of the case, and reasonable attempts to settle.” 723 S.W.2d           duty may be triggered if an insured provides notice of
656 (Tex.1987). The insurer must also be given a timeframe            his or her willingness to accept a reasonable demand
within which to respond to the demand, and this timeframe             above the policy limits, and to fund the settlement,
must be reasonable given the circumstances. This duty to              such that the insurer’s share of the settlement would
respond is also limited to each demand individually. See              remain within the policy limits. Nor do we address
Garcia, 876 S.W.2d at 849. Further, the insurer is not obli-          the Stowers duty when a settlement requires funding
                                                    ADVOCATE   ✯ WINTER 2006                                                    23




                                              THE
  from multiple insurers and no single insurer can fund           not bargained to bear the cost of payment for uncovered
  the settlement within the limits that apply under its           claims, and the insured had not paid the insurer for the
  particular policy.                                              premiums for the risk.

Id. at 849 n.13.                                                  Interestingly, the Court noted that Frank’s Casing’s demand
                                                                  that Lloyd’s pay ARCO’s settlement demand essentially
In 2000 the Texas Supreme Court addressed this issue and          “Stowerized” Lloyd’s. Under the circumstances Lloyd’s had
decided that an insurer did not have the right to reimburse-      two choices: (1) Lloyd’s could have refused to settle, risking
ment from the insured for the payment of uncovered claims         a bad faith claim by Frank’s Casing if it later was determined
where the insurer established neither an implied-in-fact          that ARCO’s claims were covered under the excess policy, or
nor an implied-in-law right to reimbursement. Tex. Assoc.         (2) it could have settled with ARCO with “no right of recourse
of Counties County Government Risk Mgmt. Pool v. Matagorda        against the insured” if it later was determined that there was
County, 52 S.W.3d 128 (Tex.2000). Then, in 2005, the Texas        no coverage, which effectively created coverage where there
Supreme Court again addressed the issue of “whether excess        was none.” The Court went on to say that “once an insured
insurance carriers that disputed coverage but that settled        asserts that a settlement demand has triggered a Stowers duty,
third-party claims against their insured are entitled to recoup   and the insurer then accepts that settlement offer or a lower
the settlement payments from their insured when it was            one, the insured is estopped from asserting that the settle-
subsequently determined that the claims against the insured       ment is too financially burdensome for the insured to bear if
were not covered.” Excess Underwriters at Lloyd’s, London v.      it turns out the claims against the insured are not covered.”
Frank’s Casing Crew & Rental Tools, Inc., No. 02-0730, 2005 WL    Under the facts of the case, the Court found that an excess
1252321, 48 Tex. Sup. Ct. J. 735 (Tex. May 27, 2005), reh’g       carrier could seek reimbursement from its insured.
granted (Jan 06, 2006). ARCO filed suit against Frank’s Casing
after a drilling platform built by Frank’s Casing collapsed in    A Motion for Rehearing was filed in July of 2005 by Frank’s
the Gulf of Mexico. Frank’s Casing had a primary liability        Casing. The motion for rehearing was granted, and this case
policy with limits of $1 million and a $10 million excess         was re-argued before the Texas Supreme Court on February
policy from Lloyd’s. The excess carrier issued reservation        16, 2006.
of rights letters in which they asserted that some of ARCO’s
claims against Frank’s Casing were not covered under the          B. First Party Claims
excess policy. Ultimately a settlement was reached for $7.5       An insured can sue the insurer directly alleging that the
million. The excess carrier paid its portion of the $7.5 mil-     insurer wrongfully refused to pay or settle a claim under the
lion at Frank’s Casing’s demand, but made clear that, despite     insured’s policy. This type of claim is a breach of contract
Frank’s Casing’s objection, it intended to pursue the coverage    claim. An insured can bring a cause of action against the
issues at a later date. The coverage issues were subsequently     insurance company for breach of contract because both
resolved in the excess carrier’s favor. The excess carrier sued   are parties to the contract. A claim brought by the insured
Frank’s Casing to recoup the settlement payments made after       against the insurance company is generally referred to as a
Frank’s Casing refused to reimburse the excess carrier. There     “first party” claim.
was no express agreement for reimbursement.
                                                                  Because the insurance policy is a contract, the policy language
The Court held that the excess liability insurer was entitled     is construed according to the principles of contract interpreta-
to reimbursement from the insured for payments made to            tion. Further, the duty of good faith and fair dealing in the
a third party claimant for uncovered claims, explaining           performance and enforcement of a contract is imposed upon
that whether the insurer or the insured ultimately bears the      the parties. See Arnold v. Na’l County Mut., 725 S.W.2d 165
cost of a reasonable settlement with a third party should         (Tex.1987). If an insurer violates its duty of good faith and
depend on whether there is coverage. The Court reasoned           fair dealing in the performance and enforcement of a contract,
that “reimbursement rights encourage insurers to settle cases     then an insured can allege not only breach of contract, but
even when coverage is in doubt.” This inures to the benefit       also “bad faith.” A finding that an insurance company denied
of injured third parties. When an insurer settles a claim for     a claim in “bad faith,” or violated a provision of the Deceptive
which coverage is in doubt, the risk is shifted to the insurer    Trade Practices Act could be devastating to an insurer because
and is lifted from the injured plaintiff who sued the insured.”   the insured can recover the amount of actual damages, court
Reimbursement should be available because the insurer had         costs, and attorney’s fees. Furthermore, the insured plaintiff
24                                                   ADVOCATE   ✯ WINTER 2006




                                               THE
may also recover up to three times the amount of actual            not a reasonable basis for denying the claim or delaying the
damages if the jury believes that the insurance company            payment of the claim.” 748 S.W.2d 210, 213 (Tex.1988). The
acted “knowingly.”                                                 first element is an objective test which determines whether or
                                                                   not a reasonable insurer under similar circumstances would
To prevail under a “bad faith” claim, an insured must first        have delayed or denied the claimant’s benefits. The second
prove that the denial of the claim was a breach of the insur-      element is a subjective element which balances the right of an
ance contract. If the insurance company did not breach             insurer to reject an invalid claim with the duty to investigate
the insurance contract, then the insured is not entitled to        and pay compensable claims. Id.
damages, but if there is breach, then the court can determine
whether or not the insurer violated its duty of good faith         Because the duty of good faith and fair dealing is a tort
and fair dealing (i.e., acted in “bad faith”), in its denial of    concept, an insured who is successful in a breach of contract
the claim.                                                         claim against an insurer can recover both contractural dam-
                                                                   ages and tort damages. Fraud, negligence, gross negligence,
Once a court determines that the insurer breached the insur-       breach of warranty, estoppel, and waiver are examples of
ance policy a two-pronged test is applied to determine whether     extra contractural claims. However, the extra contractural
or not the contract was breached in “bad faith.” Under Aranda      claims, including bad faith, are derivative. Thus, there are
v. Insurance Co. of North America, a “claimant who asserts that”   no other claims available to the insured if there is no breach
its insurer has breached its duty of good faith and fair dealing   of contract by the insurer.
by refusing to pay or by delaying payment of a claim must
establish: (1) the absence of a reasonable basis for denying       Tarra Sowers is an attorney with Handlin & Associates, staff
or delaying payment of the benefits of the policy and (2)          counsel for American International Companies, Inc., in Houston,
that the carrier knew or should have known that there was          Texas. ✯
                                                      ADVOCATE   ✯ WINTER 2006                                                  25




                                                THE
                      CONSIDERING SETTLEMENT? CURRENT ISSUES
                        RELATING TO THE STOWERS DOCTRINE
                                                  BY CHRISTOPHER S. AYRES



                   Introduction and Overview                        Appeals noted, “[W]hile one need not wait until all appeals
G.A. Stowers Furniture Co. v. American Indemnity is the             have ended to sue, all the elements to an enforceable Stowers
landmark case that allowed an insured to sue its insurer for        claims have yet to accrue while appeals remain pending.”13
failure to settle a third party claim made against the insured.1    Under the Amarillo Court’s holding, as a matter of law, “An
Essentially, a Stowers claim is a negligence cause of action        insurer who refuses to settle a claim within its policy limits
possessed by an insured against his insurance carrier. The          before trial is not negligent if the insurer is absolved of
duty owed by the insurance carrier is to exercise the degree        liability for the underlying claim [on appeal].”14 While not
of care and diligence that an ordinary prudent person would         explicitly stated, the Amarillo Court of Appeals seems to
exercise in the day to day handling of his or her own busi-         suggest that any Stowers claim filed prior to the completion
ness when responding to settlement demands within policy            of all underlying appeals on the third party claim is either
limits.2 The breach of that duty occurs when a reasonable           (1) not ripe and/or (2) subject to abatement.15
and appropriate settlement is rejected. As with any other
negligence claim, the breach of the duty must actually cause        There are several evidentiary matters that will be considered
the insured some form of damage.                                    in the context of a Stowers lawsuit. These matters include
                                                                    evidence concerning the underlying factual investigation of
As the Supreme Court has stated, the Stowers duty is not acti-      the third party claim against the insured, trial and defense
vated until three prerequisites are met. First, the third party’s   of the insured against the third party claim, and the conduct
claim against the insured must be within the insured’s scope        of both the insured and the insurer during settlement dis-
of coverage.3 Second, the third party’s settlement demand           cussions with the third party claimant.16 These evidentiary
must be within the policy limits of the insured.4 Third, the        issues, of course, are “necessarily subsidiary to the ultimate
terms of the demand must be such that an ordinary prudent           issue of whether the claimant’s demand was reasonable under
insurer would accept it, considering the likelihood and degree      the circumstances, such that an ordinary prudent insurer
of the insured’s potential exposure to an excess judgment.5         would accept it.”17

A Stowers claim is the only cause of action relating to third              ISSUES INVOLVING MULTIPLE CLAIMANTS AGAINST
party liability insurance.6 There is no duty of good faith and                AN INSURED AND RELEASES OF THE INSURED
fair dealing, DTPA, or Article 21.21 claim against an insurer       In Soriano, the Texas Supreme Court addressed what pre-
relating to handling of third party insurance claims.7 Courts       cise Stowers duty was owed in situations where there were
have been unwilling to extend Stowers to the area of negligent      multiple claims made against an insured.18 Farmers offered
handling of third party claims or any other issue beyond a          the full policy limits of $20,000.00 to the Medinas, the
failure to settle a third party claim.8 Similarly, an insurer has   third party claimants against Soriano (the insured), but the
no duty to make a settlement offer to a third party claimant,9      Medinas rejected the offer because they wanted to investigate
nor respond to a demand made outside of policy limits.10            Soriano’s personal assets and his personal ability to satisfy
Likewise, an insurer has no duty to obtain a release or deal        their damage claims.19 In the meantime, Farmers settled with
with other claims made against its insured by the third party       another claimant for $5,000.00, thus leaving only $15,000.00
in a separate case.11                                               remaining under Soriano’s policy.20 Farmers offered this
                                                                    amount to the Medinas, who rejected it and then demanded
A Stowers claim need not be asserted until after all claims in      $20,000.00, the original policy limits that they previously
the underlying third party case against the insurer are resolved    rejected.21 The Medinas proceeded to trial and obtained a
and all appeals are exhausted.12 As the Amarillo Court of           judgment for approximately $170,000.00.22
26                                                    ADVOCATE   ✯ WINTER 2006




                                                THE
In the Stowers case, the Supreme Court held, “[W]e conclude         the release;” or (3) the hospital is a party to the release.31
that when faced with a settlement demand arising out of
multiple claims and inadequate proceeds, an insurer may                   GOING BEYOND PRIMARY INSURANCE POLICY LIMITS,
enter into a reasonable settlement with one of the several                      YET PRESERVING A VALID STOWERS CLAIM
claimants even though such settlement exhausts or diminishes        An underlying third party claimant may encounter an
the proceeds available to satisfy other claimants.”23 The           insured with insufficient primary insurance coverage to
Supreme Court noted several significant factors supporting          satisfy the third party claimant’s damages. In some situations,
its decision. First, it believed that while Farmers necessarily     the insured may very well carry excess insurance coverage
reduced the amount of insurance proceeds available to satisfy       beyond its primary coverage. In others, the insured itself
the Medinas’ claims, it also reduced Soriano’s exposure by          may be willing to contribute funds to a settlement beyond
settling an additional, pending claim against its insured.24        the primary’s insurance policy limits to achieve a full release.
Similarly, by allowing an insurance company to settle some          Beyond those two situations, a third party claimant may
claims while others are pending, the Texas Supreme Court            attempt to “stack” various primary insurance policies of the
noted that such an approach “permits settlement of lawsuits         insured to increase the available pot to settle his or her claims.
and encourages claimants to make their claims promptly.”25          No matter which avenue is undertaken, pursuit of a settlement
Despite the fact that the Medinas’ claims may have been             beyond the primary insurance policy of an insured may have
more serious than the claim that Farmers settled, the only          drastic consequences on a future Stowers action.
issue to be analyzed in a multiple claimant Stowers context
is whether the insurer settled a “reasonable” claim by one or       A. “Stacking” Primary Insurance Policies from Different
more claimants against its insured.26                               Time Periods.
                                                                    Garcia represents a classic case in a medical malpractice
While the holding seemed clear in Soriano, the Supreme              area where a doctor’s continued treatment of a patient over
Court’s Bleeker decision casts a haze in the area.27 In Bleeker,
                                                          Bleeker   time results in an injury.32 During the time of treatment, the
multiple claimants (and ultimately all claimants) were rep-         doctor was covered by four separate insurance policies.33 One
resented by one attorney.28 That attorney made settlement           of the policies, covering the earliest time of treatment, was
demands on behalf of several of his clients. The Supreme            a “claims made” insurance policy, which was not in effect
Court noted that “[a]ssuming without deciding that Villegas’        when the third party claimant’s suit was filed. Thus, there
[the attorney] letter was in fact a settlement offer, and further   was no possible coverage under that policy for the third
assuming that a Stowers demand may be made on behalf of             party’s claims.34 During the other three years of treatment, the
only some of the total pool of potential claimants, Villegas        insured retained “occurrence based” policies with $500,000 of
did not meet the requirement that he offer to release those         coverage for each year.35 Because of the continuing course of
claimants fully.”29 While unclear, the Supreme Court seems to       treatment, coverage under each of the policies was possible.36
suggest that there may be one Stowers standard where multiple       In an attempt to obtain proceeds under all three occurrences
claimants are represented by separate counsel, yet another          based policies, the third party claimant alleged malpractice
Stowers standard in cases where all claimants are represented       by the insurer in each of the three policy periods.37
by one counsel. Such a decision would have catastrophic
consequences on a party’s right to choose counsel and client        Despite calling into question all three policy periods and their
conflicts for plaintiff’s counsel.                                  corresponding primary insurance policies, the Texas Supreme
                                                                    Court held that the third party claimant was unable to “stack”
Of other importance in the Bleeker decision is the require-         or aggregate the primary insurance policies of the insured
ment that, in order to have a full and unconditional release        to multiply coverage for a single claim involving indivisible
in a Stowers demand, where a valid hospital lien exists,            injury.38 The Court’s rationale included citation to an out of
the hospital lien must also be fully addressed in the third         state case that noted, “The principal of indemnity implicit
party claimant’s settlement demand.30 To achieve a Stowers          in the policies requires that successive policies cover single
demand where a hospital lien exists, the release must state         [continuing] injuries.”39 The Court also noted that an insured
that (1) the hospital charges were paid in full before the          is certainly allowed to purchase umbrella or excess insurance
execution delivery or receipt; (2) the hospital charges were        coverage, but cannot use aggregation of its primary insurance
paid “before the execution and delivery of the release to           coverage to achieve a larger amount of insurance proceeds by
the extent of any full and true consideration paid to the           “stacking temporally distinct policies.”40 An insured is allowed
injured individual by or on behalf of the other parties to          to pick from the various available primary insurance policies
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                                                 THE
to satisfy any continuing, indivisible injury, thus leading to       An insured may very well have coverage beyond his primary
the selection of the largest possible policy limits from any         insurance policy. Likewise, individually, the insured may have
one of several available policies.41 Presumably, a third party       sufficient personal assets to satisfy the third party claimant’s
claimant would play some role in assisting the insured with          damages. If such sources exist, a third party claimant takes a
that decision, although the insured’s self-interest should           calculated risk of waiving a future Stowers claim by making
promote the selection of the largest policy limits.                  a demand above the primary policy limits.

From Garcia, there are several relevant considerations in            In Garcia, the Supreme Court directly sidestepped the
play for both third party claimants and insureds. Garcia’s           issues of when or if a Stowers duty is owed when a demand
holding is limited to a situation where there is a single            is made beyond the primary insurance policy limits. The
indivisible injury. It may very well be possible for a third         court stated:
party claimant to segregate his or her damage claims through
proof of an expert of divisible injuries, and then be able to           We do not reach the question of when, if ever, a Stowers
go after multiple occurrence based policies of the insured.42           duty may be triggered if an insured provides notice of
In such a situation, if a settlement demand is rejected, a              his or her willingness to accept a reasonable demand
third party claimant should comport his jury charge with                above the policy limits, and to fund the settlement,
Casteel43 to allow multiple findings during each occurrence             such that the insurer’s share of the settlement would
based policy.                                                           remain within the policy limits. Nor do we address the
                                                                        Stowers duty when a settlement requires funding from
Showing divisible injuries may be difficult, but not necessarily        multiple insurers and no single insurer can fund the
impossible.44 For example, as in Royal Ins. Co. of America,             settlement within the policy limits that apply under its
the plaintiff’s expert witness opined that separate breaches            particular policy.54
of the applicable medical standard of care led to separate,
distinct, and divisible injuries.45 The failure to clean and apply   In a second case, the Supreme Court again expressly declined
medication led to rashes.46 Other breaches led to a urinary          to address this situation. In Maldonado, the Supreme Court
tract infection.47 Failure to secure the patient led to bruises.48   noted that there was no evidence in the record that insurer
Improper massage led to skin tearing and pain.49 As the Fifth        knew that its insured had made an unconditional offer to
Circuit stated, “These breaches of the standard of care and          pay the portion of the settlement offer beyond the insurer’s
the resulting injuries are divisible from the alleged acts of        policy limits, thus negating a Stowers action.55 Other courts
negligence that occurred a year later that caused pneumonia,         in the State of Texas recognize that the viability of Stowers
and a massive, infected, Stage IV pressure sore and resulting        remains an open question when settlement is demanded
sepsis, leading to Trevin’s death.”50 This led to the Fifth          beyond the primary insurance proceeds.56
Circuit’s conclusion that Texas law’s “stacking” prohibition
was inapplicable because the divisible injury claims raised          One court of appeals, the Texarkana Court of Appeals, had
coverage in separate, occurrence based policies.51                   specifically dealt with the issue of Stowers demands by third
                                                                     party claimant that attempt to position and attack excess
From a defense perspective, if there is an indivisible injury and    coverage.57 In Birmingham Fire, the third party claimants
multiple policies that could cover the injury, care should be        requested the insured and its primary insurance company
taken to notify each and every insurer of the claims and allow       tender the primary policy limits so that the third party claim-
full participation by all insurers. In Garcia, for example, the      ants could then pursue a claim against the excess carrier.58
insurers agreed to pay litigation costs on a pro rata coverage       The Texarkana Court held that such an offer did not trigger
basis.52 Once a suitable settlement demand is made or judg-          a Stowers duty because it did not fully and unconditionally
ment is obtained, each applicable insurer must satisfy his pro       release the insured.59 However, the Texarkana Court seems
rata portion and subrogation will likely result.53                   to suggest that a third party claimant can create a Stowers
                                                                     cause of action by “bifurcating” its offer. Citing to a San
B. Obtaining Settlement Beyond the Primary Insurance                 Antonio Court of Appeals’ opinion in Maldonado, the court
Policy Limits.                                                       noted that a third party claimant can create a valid Stowers
In situations where the primary insurance proceeds are               claim by promising a release in exchange for separate, specific
insufficient to satisfy damages, a third party claimant should       monetary demands to the primary insurance carrier and then
investigate and consider additional sources for satisfaction.        the party satisfying any demand beyond the primary policy
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                                                THE
limits, be it the insured and/or the excess carrier.60              Court has repeatedly held that a proper Stowers demand must
                                                                    propose a full and complete release to the insured in exchange
The Texarkana Court noted that such action was not taken            for a stated sum, “although it may substitute the ‘policy limits’
in its case, but the court’s language seems to suggest such         for that amount.”61 This alleviates any need to state a specific
an approach is permissible. For example, in a case where            sum when dealing with a wasting policy, particularly given
there was primary insurance coverage of one million dollars,        the continuous deductions in a wasting policy that will never
excess coverage of two million dollars, and an appropriate          provide a static number for a third party demand.
settlement of two million dollars, the following would be a
permissible, bifurcated settlement offer triggering Stowers         Often times, informal discussions will be held between plain-
under the rationale found in Birmingham Fire. The third party       tiffs and defense counsel regarding the status of the wasting
claimants would send a letter to a defense counsel for the          policy and what demand should be made.62 Such informal
insured stating that they were willing to accept full policy        discussions and “quibbling” can ultimately cause the third
limits of the primary insurance carrier and one million dollars     party plaintiff and insured to lose their Stowers cause of action
from the excess carrier in exchange for a full and complete         if a proper demand for the remainder of the wasting policy is
release of the insured.                                             not made.63 In the Westerchester Fire Insurance Company case,
                                                                    the Fort Worth Court held that there was sufficient evidence
Logic dictates that such action has to be the only effective        to raise a fact issue about whether or not settlement demand
way to create a Stowers demand when excess coverage exists          was made within policy limits, but the length and outline of
or where the insured is willing to contribute settlement            the factual matters in the opinion made clear that significant
proceeds. If the primary insurance carrier refuses the offer        confusion resulted during settlement.64
for its policy limits, then it should have Stowers liability. On
the other hand, if the primary carrier pays it policy limits        The better course is to simply confirm the current state of
and the excess carrier refuses, then Stowers liability should       the wasting policy and include a written demand for the
be imposed for any judgment amount over the remaining               remainder of the wasting policy. For example, counsel should
demand to the excess carrier. However, because the Supreme          write, “It is my understanding from our discussions that,
Court has not weighed in on the issue and the Texarkana             at present, the wasting policy of Mr. Insured is $700,000.
Court of Appeals’ rationale is dicta, the issue remains unsettled   Plaintiff hereby makes demand for that amount or the
in Texas law.                                                       remaining policy limits of Mr. Insured.” Obviously, in addition
                                                                    to this monetary language must be the release language to
       THE PROPER APPROACH TO “WASTING” POLICIES                    complete the proper Stowers demand.
Because a proper Stowers demand requires a demand “within
policy limits,” special care should be given to situations             STANDARD OF REVIEW AND THE NECESSITY OF E XPERT
where an insurer retains a “wasting,” “eroding,” or “burning”                 WITNESS TESTIMONY IN A STOWERS CASE
insurance policy. These are the types of insurance policies         The Supreme Court has recently articulated a heightened and
where cost of defense and other litigation costs are deducted       broad standard review of evidence that is unparalleled in the
from many available insurance policy proceeds. Immediately,         history of Texas jurisprudence. The Supreme Court’s recent
in any underlying case, plaintiff’s counsel should review           decisions significantly affect how mental scienter evidence is
any insurance policy received in response to a request for          weighed and evaluated on appeal, drastically changing how
disclosure to determine if a third party claim is possibly          cases must be prepared and tried. The impact on Stowers
satisfied by a wasting insurance policy. In many situations,        cases will be felt in two specific areas.
it would certainly be a good idea for third party claimant’s
counsel to send a confirming letter to defense counsel to           A. The Two Key Decisions: City of Keller and Suberu
verify the nature of such a policy. If defense counsel refused      The City of Keller v. Wilson involved a dispute about the City
to confirm the existence of wasting policy, it would certainly      of Keller’s liability for flooding damage to Wilson’s land.65
be permissible for the third party claimant to send either a        Analyzing the legal sufficiency of the evidence, the Supreme
request for admission or interrogatory on the subject to the        Court stated, “Crediting all favorable evidence that reasonable
insured.                                                            jurors could believe and disregarding all contrary evidence
                                                                    except that which they could not ignore, we hold there was
While many practitioners believe Stowers requires a demand          no evidence of the City’s approval of the revised drainage plan
of a specific dollar amount, such is not the case. The Supreme      was an intentional taking.”66 In analyzing scienter, the Supreme
                                                                                                               scienter
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                                               THE
Court states that “[A] reviewing court cannot evaluate what        anything more than “[C]reate a surmise suspicion that Kroger
the City knew by disregarding most of what it was told.”67         did not believe she was guilty of shoplifting, because it merely
Specifically, the Court held that in cases involving scientific    invites speculation that Kroger framed her and lied to the
or technical issues requiring expert advice, “[J]urors cannot      police.”82 In essence, the Texas Supreme Court reversed the
disregard a party’s reliance on experts hired for the very         jury’s determination of hotly dispute factual matters and found
purpose without some evidence applying a reasonable basis          “no evidence” of an essential element of Suberu’s claim.
for doing so.”68 After cataloging the reports of three engineers
hired by the City, the Supreme Court claimed that there was        B. The Scienter Aspects of Stower’s Impacted by the City
only “one logical inference that jurors could draw” about the      of Keller and Suberu.
City’s scienter.69
       scienter                                                    In the context of Stowers, there are two important elements
                                                                   that will draw scrutiny on appeal after City of Keller and
Of similar importance is the Texas Supreme Court’s decision        Suberu. First, a Stower’s plaintiff must prove breach of the
in Kroger Texas Limited Partnership v. Suberu.70 Suberu involved   insurer’s duty by showing that the insurer failed to exercise
a false imprisonment claim arising in Kroger’s store. Suberu       that “‘degree of care and diligence which an ordinary prudent
arrived at the Kroger store to purchase medication.71 Because      person would exercise in the management of his own business’
she did not have enough cash to make her purchase, Suberu          when responding to settlement demands within the policy
informed the pharmacist that she would exit the store to get       limits.”83 Second, a Stower’s duty is only triggered by fulfill-
more money from her car.72 What transpired during the exit         ment of three pre-requisites, one of which is that “the terms
was disputed. Kroger employees and management claimed              of the demand are such that an ordinary prudent insurer
that Suberu was pushing a cart and/or was following several        would accept it, considering the likelihood and degree of the
individuals who were stealing merchandise.73 Suberu denied         insured’s potential exposure to an excess judgment.”84
ever having used a cart in the store and stated that Kroger’s
employees refused to listen to her statement of where she          C. The Necessity of Expert Witnesses in Stowers Cases.
had been or why she was leaving the store, nor confirm             In the era of City of Keller, Suberu, and Robinson,85 it is critical
her story with the pharmacy.74 Suberu was detained and             to have expert testimony to fulfill both scienter aspects dis-
arrested.75 Suberu was acquitted of all criminal charges; a        cussed above. Plaintiff’s counsel pursuing a Stowers claim,
civil jury found for her on her malicious prosecution claims       either on behalf of the insured or a third party assigned the
and awarded actual and exemplary damages.76                        insured’s rights to the Stowers claim, must present sufficient
                                                                   expert testimony of the insurance carrier’s failure to act with
In that case, the Supreme Court held that, as to the probable      reasonable care or risk being reversed and rendered on appeal
cause element, “Courts must presume that the Defendant             for failure to present legally sufficient evidence. A Stowers
acted reasonably and had probable cause to initiate criminal       plaintiff must make sure his expert is qualified by one or
proceedings.”77 The Court continued, “[T]o rebut this              more avenues under TEX. R. EVID. 702.
presumption, the plaintiff must produce evidence that the
motives, grounds, beliefs, and other information upon which        Traditionally, two types of experts have sufficed in this regard.
the defendant acted did not constitute probable cause.”78 In       First, an expert witness with prior experience in the insur-
setting out the standard review, the Court cited and applied       ance industry is likely the most qualified person to provide
the City of Keller, which credits all evidence that supports the
            Keller                                                 Stowers testimony. In at least one case, the Fort Worth Court
verdict and disregards all contrary evidence unless reasonable     of Appeals analyzed the testimony of an insurance expert who
jurors could not disregard it.”79                                  based his opinion on a review of the Stowers letter, twenty-five
                                                                   years of experience in analyzing Stowers letters, and “knowing
The Court continued, “The law presumes that Kroger honestly        how a plaintiff Stowerizes an insurance company.”86 Based
and reasonably acted on the basis of these observations in         on that testimony, the Fort Worth Court of Appeals found
reporting Suberu to the police.”80 Upholding the presumption       more than a scintilla of evidence that a Stowers demand had
under the application of the City of Keller standard, the Court    been made.87
found as a matter of law that “Suberu produced no evidence
that Kroger initiated her prosecution on the basis of something    Second, some but not all attorneys could certainly qualify
other than a reasonable belief that she was guilty.”81 Suberu’s    under Robinson, Daubert and Rule 702 to present expert
testimony about her opinions and factual observations of           testimony. However, it may be preferable to have an insurance
Kroger’s actions did not, in the Supreme Court’s view, do          defense lawyer serve as an expert witness. While not wholly
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                                                THE
disregarded, the Supreme Court gave little weight to personal       several opinions against the third party claimant’s sole
counsel for the insured as the sole evidence in a Stowers case.88   opinion, it may negate a potential Stowers action against
In point of fact, in an age of heightened expert scrutiny, it is    itself in the post-City of Keller world.
best for a Stowers plaintiff to obtain expert testimony from
an insurance defense lawyer in the particular industry sur-         E. Defense Counsel Beware: You Must Document Your
rounding the particular Stowers claim at issue. For example, an     Opinions to the Insurer.
insurance defense lawyer who routinely handles automobile           Defense counsel should be wary of becoming the target
collisions may not suffice in serving as an expert witness          defendant in a Stowers case.90 The game is simple for an insurer
in a Stowers case involving medical malpractice claims, or          after City of Keller. The insurer tells the counsel it hires that
                                                                                  Keller
vice versa. Similarly, a plaintiff’s attorney may not suffice       it needs certain information in regular reports. The hired
as an expert witness in analyzing the reasonableness of an          defense counsel does not inform the insurer of every detail
insurance company’s decisions. Because the related issue            in the case. A settlement is rejected and a verdict ensues that
surrounds the scienter of the insurance carrier, the person         is beyond the insured’s policy. A Stowers action is filed by the
testifying about that issue must have the requisite 702 and         insured against the insurer. Insurer names defense counsel
Robinson/Daubert factors to testify about handling of a claim       as a responsible third party because the insurer alleges the
by the insurance industry.                                          lawyer failed to tell the insurer and insured of a “critical” detail
                                                                    in counsel’s letters and reports (ie. “If I had only known X, Y,
D. Predictable Traps and Defenses of Insurance Carriers             or Z, then we would have accepted the plaintiff’s demand”).
after City of Keller.
              Keller                                                Insured then sues defense counsel.
An additional fertile ground comes through the analysis of
whether “the terms of the demand are such that an ordinary          The insurer will argue that it retained defense counsel to
prudent insurer would accept it, considering the likelihood         serve as the “expert” in preparation and trial of the case.
and degree of an insured’s potential exposure to the excess         It depended on defense counsel to convey all information
judgment.” Given City of Keller, it is predictable that many
                            Keller                                  pertinent to an accurate evaluation of the underlying case.
insurance carriers should and will begin relying upon “inde-        Without that information, it was unable to properly analyze
pendent” expert witness testimony to provide cover from             the case. In the age of City of Keller, such an argument may
                                                                                                    Keller
future Stowers actions. For example, in a medical malpractice       be successful. If “reliance” on expert advice is now key to
case, an insurance carrier might obtain reports and opinions        what evidence a jury can and cannot disregard, then expect
from multiple doctors in the applicable sub-specialty (of the       insurers to argue they could not have acted properly because
insured), stating that they, as experts, do not believe liability   their expert (defense counsel) failed to provide the requisite
is reasonably clear. Beyond medical malpractice, the same           information to make a “reasonable” decision.
analysis would result in a number of other areas, including
products liability, trucking cases, fiduciary litigation, profes-   The key for defense counsel is to author detailed, complete,
sional malpractice, or any case where the insured maintains         and most importantly, objective reports to the insurer and
heightened knowledge or expertise.                                  insured. Full disclosure of the good, the bad, and the ugly
                                                                    must be made. Do not allow an insurer to keep its head in
Although the City of Keller does not appear to support a            the sand and later claim ignorance. When writing a report
“quantity over quality” analysis, it does seem to suggest           or letter that recommends or rejects settlement, defense
that there is safety in numbers. Under City of Keller, it is
                                                     Keller         counsel should reference all prior communications and
important to remember that a jury cannot disregard the              adopt those into the recommendation or rejection. An offer
insurer’s reliance on information provided to it, especially        should be extended to the insured and insurer to fully review
in technical and scientific cases. Stowers cases routinely          defense counsel’s case file if any additional information is
state that settlement negotiations are adversarial with the         desired or required for the insurer or insured to make a full
plaintiff.89 It is one small step to state that an insurer is not   and competent decision. In short, be thorough, complete,
required to recognize or attribute any significance to the          and timely so that no one can reasonably assert you
third party claimant’s expert because of that adversarial           withheld material information from a settlement decision.
relationship, thus freeing insurers to rely solely on the           Consistent with Tilley, defense counsel should encourage
information they choose to obtain. Even if the third party          the use of personal counsel as a back-up to defense counsel’s
claimant has one opinion from one expert who is the “go             recommendation.
to” expert in the field, if the insurer of the defendant stacks
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                                               THE
          ETHICAL DUTIES OF DEFENSE COUNSEL WITH                   Of additional concern for defense counsel is the possibility
          CONSIDERATION GIVEN TO FRANK’S CASING                    of being put in the middle of a negotiating session between
Under most standard insurance policies in the State of Texas,      the insured and the insurer concerning coverage. In Frank’s
an insurer is required and/or given the ability to conduct a       Casing there were multiple offers between the insurer and the
defense of the insured regarding a third party claim under         insured about how the underlying case and coverage matters
the policy. In exercising its duty to defend, an insurer often     could be settled.100 One offer proposed that Frank’s Casing
appoints and hires defense counsel to assist and represent         contribute directly to the settlement, the underwriters would
the insured. In such a situation, although hired and paid by       pay the remainder of the settlement, and that insurance
the insurer, the lawyer owes an “unqualified loyalty to the        coverage issues would be waived by the insurer.101 In a second
insured.”91 As the Texas Supreme Court states, “The lawyer         alternative, the underwriters proposed to fund the settlement
must at all times protect the interests of the insured if those    and resolve all coverage issues in arbitration.102
interests would be compromised by the insurer’s instruc-
tions.”92 This fundamental duty underscores the only basis         Defense counsel should be strongly encouraged to avoid
upon which the “tripartite relationship between insurer,           participation in such negotiations for several reasons. First,
insured and insurance defense counsel” can possibly work.93        defense counsel represents only the insured. Purporting
Defense counsel, while not wanting to “bite the hand that          to exchange offers on behalf of the insurer may very well
feeds it” must remember its duty remains solely to the insured     lead to or create the appearance of a conflict. Second, the
– his or her only client.94                                        disciplinary rules would not enable the attorney to serve as
                                                                   an intermediary in such a situation, given the obvious issues
Frank’s Casing adds a new wrinkle to the concern that “no          of conflict present between the insurer and the insured.103
man can serve two masters.”95 While the purpose of this            If defense counsel feels that such negotiations would be
paper is not to address Frank’s Casing, particularly given its     fruitful, he or she should encourage the insurer to have its
complex procedural history and the pending decision after          counsel represent its interests and state, in writing, that he
rehearing, a brief discussion is necessary about a fundamental     or she refuses to represent the insurer. At that point, defense
and unspoken complication that results from its holding.96 In      counsel could represent the insured in such negotiations
Frank’s Casing, there was a coverage dispute and the insured       with the insurer, but should given strong consideration
demanded that its insurer accept the settlement offer made         to disclosing his relationship to the insured and offering
within policy limits.97 In such a situation, the insured is        the insurer a chance to have separate counsel analyze the
deemed to have viewed the settlement offer as a reasonable         situation.
one.98 As the Court noted, “Requiring an insured to reimburse
its insurer for settlement payments if it is later determined          Stowers and Medical Malpractice under Chapter 74
there was no coverage does not prejudice the insured.”99           In 2003, Texas passed legislation aimed at achieving “tort
                                                                   reform” in a host of various areas. Specifically, in the realm
The current holding in Frank’s Casing places added burdens         of medical malpractice, the Legislature created a statu-
on defense counsel. When a reservation of rights or coverage       tory scheme now known as Chapter 74 of the Texas Civil
issue exists at the time of a settlement demand, counsel must      Practice and Remedies Code. When creating Chapter 74, the
remember that its sole client is the insured. A proper analysis    Legislature clarified a previously open question surrounding
of the settlement demand is crucial so that the insured and the    the application of the Stowers doctrine in medical malpractice
insurer are made aware of whether defense counsel believes         cases.
the settlement demand should be accepted or rejected and
why. This aspect is no different than any other case. However,     A. Life before Chapter 74 and the Open Question of
given a reservation of rights or coverage issue, defense counsel   Judgments beyond the Caps
must also make the insured aware that if it agrees to accept the   Under old 4590i, there was an open question about whether
settlement or suggests to its insurer that the settlement should   or not an insurer could be liable beyond the statutory caps via
be accepted, there may be consequences at a later date during      a Stowers claim. Specifically, Section 11.02(c) of Article 4590i
a coverage dispute. Specifically, given the result in Frank’s      read, “This section shall not limit the liability of an insurer
Casing, defense counsel should make the insured aware that         where facts exists that would enable a party to invoke the
by acceptance of the settlement proposal, the insured may be       common law theory of recovery commonly known in Texas
estopped and/or waive any ability to challenge the validity of     as the ‘Stowers doctrine.’”104 Section 11.02 through 11.04 set
the settlement amount at a later date in a coverage dispute.       out the caps on damages. Given the caveat in Section 11.02(c),
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                                                THE
the question remained whether or not an insurer could be            theory of recovery commonly known in Texas as the Stowers
held liable in excess of the caps found in 4590i, simply by         doctrine shall not exceed the liability of the insured.”115 The
virtue of a possible Stowers claim.                                 Legislature appears to have directly adopted the logic and
                                                                    analysis of the Fort Worth Court in Welch. Section 74.303(d)
In Welch v. McClean, the Fort Worth Court of Appeals sought         drastically limits Stowers application in medical malpractice
to address the issue of an insured’s liability beyond the caps of   and statutorily foreclosed the ability of a third party medical
old 4590i.105 In that case, the plaintiffs made a demand for Dr.    malpractice victim to obtain a judgment that upwardly devi-
Welch’s full insurance policy, which totaled $1,000,000.00.106      ates from the economic and non-economic damage caps of
That offer was refused by Dr. Welch’s insurance carrier.107         Chapter 74.
The jury’s verdict led to a total possible judgment amount
of $5,514,992.87 based on actual damages, pre-judgment              C. The Viability of Stowers Case under the Chapter 74
interest, court costs, post-judgment interest and ad litem          Framework.
fees, which was well above the adjusted caps of 4590i.108           When analyzed with the current damage cap provisions of
The plaintiffs sought and received a judgment from the trial        Chapter 74, Section 74.303(d) makes it clear that Stowers
court for the full amount of $5,500,000.00, arguing that            actions stemming from underlying medical malpractice cases
Section 11.02(c) afforded a judgment for the entire amount,         are limited to two distinct situations.
including judgment over the caps, because facts existed to
invoke a Stowers claim.                                             1. Using Stowers where minimal insurance proceeds are
                                                                    available.
The Fort Worth Court of Appeals held that Section 11.02(c)          If a healthcare provider carries minimal liability insurance
“[D]oes not lift the damages cap of Section 11.02(a) as to          coverage (which is beginning to become more and more
physicians. Accordingly, the trial court erred by refusing to       frequent since 2003 because liability is limited), Stowers
apply the damage caps to the jury’s verdict in this case.”109       may be useful. For example, take a situation where a doctor
The Fort Worth Court reasoned that a Stowers action concerns        maintains $100,000.00 or $250,000.00 of insurance. In such
damages of an insured suffered as a result of the insurer’s         a situation, Stowers is definitely a factor to be considered.
conduct, not damages of the third party suffered as a result        When combining any economic damages with the statutory
of the insured’s conduct.110 Further, if the underlying insured     cap for non-economic damages, a total possible verdict and
was unsuccessful in his Stowers case, then a doctor would           judgment may likely exceed the caps of Chapter 74. In such
have to “bear permanently the burden of a judgment far in           a case, a Stowers demand should be made in order to preserve
excess of the damage caps.”111 The Fort Worth Court did             a Stowers action, in the event a jury awards damages beyond
not believe that the Legislature intended such an “[a]bsurd         the policy limits.
result, particularly in situations where the physician may be
willing to settle for policy limits but his insurer is not.”112     2. The use of Stowers where significant economic damages
Thus, any potential Stowers liability under 4590i would be          are at issue.
for any amount (1) in excess of the insurance policy up and         As in old law cases, where there are significant economic
until the damage caps under 4590i, (2) courts costs, (3)            damages, Stowers remains a viable and important theory.
post-judgment interest, and (4) ad litem fees.”113                  In cases involving obstetricians, neurosurgeons, or other
                                                                    specialties where medical negligence may result in extensive
The Texas Supreme Court never addressed the issues pre-             future medical expenses, Stowers is still a viable option when
sented in Welch or clarified the meaning of Section 11.02(c).       confronting large damage claims and limited insurance
Specifically, the Supreme Court directly bypassed the oppor-        proceeds. Likewise, if a significant wage earner is harmed by
tunity to decide the issue when presented to the Court for          medical negligence, thus creating a high lost wage or earning
review.114 In Mayer, the Supreme Court expressly dismissed
               Mayer                                                capacity claim, Stowers should definitely be considered.
the petition for review on the issue of Stowers, Section 11.02,
and avoidance of the damages caps through Stowers.                      THE ANTI-STOWERS : FEDERAL RULE 68 & TEXAS CIVIL
                                                                            PRACTICE AND REMEDIES CODE CHAPER 42.
B. Legislative Clarification through Chapter 74.                    Stowers has traditionally been a doctrine that allows plaintiffs
In the 2003 tort reform, the Legislature expressly clarified        lawyers to place potentially tremendous pressure on the
the issue by statute. In Section 74.303(d), the Legislature         defendants and insurance carriers to settle cases. Though
states, “The liability of any insurer under the common law          seldom used, there are similar provisions available to defen-
                                                          ADVOCATE   ✯ WINTER 2006                                                         33




                                                    THE
dants, defense counsel, and insurers to put pressure on the              statutory requirements.123 The downside to Chapter 42 is that
plaintiffs attorneys and their clients.                                  a defendant who makes an offer must do so in an accurate
                                                                         and reasonable fashion, because if it does not, it risks being
A. Federal Rule of Civil Procedure 68: Offer                             taxed with court costs and attorney’s fees if the judgment
of Judgment                                                              is more than 120% of the rejected offer.124 Nonetheless, in
FED. R. CIV. P. 68 allows an offer of judgment by a defen-               limited cases, Chapter 42, much like FED. R. CIV. P. 68, has
dant.116 The rule states that “At any time more than ten days            potentially significant effects.
before the trial begins, a party defending against a claim
may serve upon the adverse party and offer to allow judg-                One of three possibilities can arise after a Chapter 42 offer
ment to be taken against the defending party for the money               is rejected. First, a jury could award less than 80% of the
or property to the effects specified in the offer, with costs            defendant’s offer. Second, the jury could award between
accrued.”117 Rule 68 then explains that a plaintiff would                80%-120% of the defendant’s offer. Third, a jury could
have ten days to accept the offer, let the offer lapse, or reject        award more than 120% of the defendant’s offer. Under the
the offer. In the event that the offer is not accepted or lapses         first scenario, the defendant is no worse off than making
after ten days, there is potential exposure for costs against            an offer, because it neither receives its litigation costs, nor
the plaintiff if the judgment “finally obtained” is not more             pays any additional costs of the plaintiff that it would not
favorable than the offer. Essentially, if the judgment is less           ordinarily be required to pay. Under the second scenario,
than the offer, than a plaintiff will be required to pay cost            the defendant would be entitled to receive all of its litigation
incurred by the defendant after the Rule 68 offer. Under                 costs, including attorney’s fees. Under the third scenario, the
federal law, depending on the underlying statute, these “costs”          defendant would be required to pay the plaintiff’s litigation
can include attorney’s fees.118 Parties should be mindful of             costs, including fees. As long as a reasonable and accurate
local rules and what district-wide orders or plans are in                evaluation occurs, the possibility of the third scenario
place.119 In such cases, regardless of the underlying statute,           rearing its head should be minimal. As a practical matter,
attorney’s fees can be taxed.120                                         the defendant primarily stands to gain by making an offer
                                                                         of settlement under Chapter 42.
While the construction of Rule 68 will be reviewed de novo,
the district court’s underlying factual determinations and               C. Real World Exercise of Rule 68 or Chapter 42.
findings about Rule 68 offers and acceptances are reviewed               Exercising rights under Federal Rule 68 and Chapter 42 must
for clear error.121 It is predictable that, in federal court, district   be done on a case by case basis. Few practitioners in Texas
judges will be less than thrilled with a plaintiff who refuses           have chosen to use Chapter 42 since its enactment in 2003.
a settlement offer, takes the court’s time and resources with            Use of Federal Rule 68 has been more common, particularly
a full trial on the merits, and then receives less than the              given its one-way nature and the fact that it has not included
offer of judgment. The plaintiff should presume that full                additional attorney’s fees exposure that would not ordinarily
and extensive costs will be taxed against them by a district             be present in the case. From the author’s perspective, it seems
court, who retains discretion to do so. This could reduce or             as though Federal Rule 68 is a valuable tool for the defense
eliminate a plaintiff’s recovery or, worse yet, require a plaintiff      attorney in federal court to create risk for the plaintiff. In state
to actually pay money to the defendant despite prevailing.               court, Chapter 42 may be an appropriate vehicle when dam-
Competent plaintiff’s counsel must inform his or her client              ages are nominal or less than six figures, given the fact that
about Rule 68 consequences and realistically evaluate his or             the insured and the insurance carrier may achieve savings that
her case, particularly in an area of increasingly erratic jury           might not ordinarily be possible without exercise of Chapter
panels and verdicts. It is advisable to copiously document               42 rights. In any event, analysis of any offer under Rule 68 or
such information in the file.                                            Chapter 42 should be done reasonably and conservatively by
                                                                         any defense lawyer to achieve the effect of putting pressure
B. Texas Civil Practice and Remedies Coder Chapter 42:                   on plaintiff’s counsel.
Settlement
In 2003, the Texas Legislature passed a similar set of provi-            Chris Ayres practices in Dallas with his father in the Law Office
sions. In certain types of cases,122 a party who makes a                 of R. Jack Ayres, Jr. Mr. Ayres focuses on civil trial and appeallate
specific settlement offer is entitled to the award of litigation         law, including complex commerical cases, personal injury litigation,
costs in limited situations, even without prevailing on the              and medical malpractice. Mr. Ayres received his J.D. from Baylor
merits, assuming the settlement offer comports with the                  Law School. ✯
34                                                         ADVOCATE    ✯ WINTER 2006




                                                     THE
1 G.A. Stowers Furniture Co. v. Amer. Indem. Co., 15 S.W.2d 544 (Tex.      F.2d 1034, 1049-50 (D.C. Cir. 1981).
Comm’n. App. 1929, holding approved).                                      40 Id. at 854-55.
2 Amer. Physicians Exchange v. Garcia, 876 S.W.2d 842, 848 (Tex.           41 Id. at 855.

1994) (citing Stowers, 15 S.W.2d at 547).                                  42 Royal Ins. Co. of Amer. v. Caliber One Indem. Co., ___ F.3d ___,
3 Id. at 848-49.
                                                                           2006 WL 2716506, at * 4 (5 th Cir. 2006) (citing to Garcia).
4 Id.                                                                      43 Crown Life Ins. Co. v. Casteel, 22 S.W.2d 378 (Tex. 2000).
5 Id.                                                                      44 Royal Ins. Co. of Amer., 2006 WL 2716506, at * 6.
6 Id. at 846; see State Farm Mutual Auto. Ins. Co. v. Traver, 980 S.W.2d
                                                      Traver               45 Id.

625, 628 (Tex. 1998).                                                      46 Id.
7 Garcia, 876 S.W.2d at 846; see also Ford v. Cimarron Ins. Co., Inc.,     47 Id.

230 F.3d 828, 832 (5 th Cir. 2000).                                        48 Id.
8 Wayne Duddlesten, Inc. v. Highland Ins. Co., 110 S.W.3d 85, 97 (Tex.     49 Id.

App.—Houston [1st Dist.] 2003, pet. denied).                               50 Id.
9 Garcia, 876 S.W.2d at 851.                                               51 Id. at *7.
10 See State Farm Lloyds Ins. Co. v. Maldonado, 963 S.W.2d 38, 41          52 Garcia, 876 S.W.2d at 844.

(Tex. 1998).                                                               53 Id. at 855; see Royal Ins. Co. of Amer. v. Caliber One Indem. Co., ___
11 Coats v. Ruiz, ___ S.W.3d ___, 2006 WL 2337737, at *11-14 (Tex.
                                                                           F.3d ___, 2006 WL 2716506, at * 2 n.12 (5th Cir. 2006).
App.—Dallas 2006, no pet. h.).                                             54 Garcia, 876 S.W.2d at 849 n.13 (citations omitted).
12 Street v. Honorable Second Court of Appeals, 756 S.W.2d 299, 301        55 State Farm Lloyd Ins. Co. v. Maldonado, 963 S.W.3d 38, 41 (Tex.

(Tex. 1988).                                                               1998).
13 Archer v. Medical Protective Co., 197 S.W.3d 422, 426 (Tex.             56 See Westerchester Fire Ins. Co. v. Amer. Contractors Ins. Co. Risk

App.—Amarillo 2006, pet. filed).                                           Retention Group, 1 S.W.3d 872, 874 (Tex. App.—Houston [1st Dist.]
14 Id. at 425-26.
                                                                           1999, no pet.).
15 Id.; see also Oscar Render Contracting, Inc. v. H&S Supply Co. Inc.,    57 Birmingham Fire Ins. Co. v. Amer. Nat’l Fire Ins. Co., 947 S.W.2d

195 S.W.3d 772, 776-77 (Tex. App.—Waco 2006, pet. filed).                  592 (Tex. App.—Texarkana 1997, no pet.).
16 Amer. Physicians Exchange v. Garcia, 876 S.W.2d 842, 849 (Tex.          58 Id. at 599.

1994); see Coates, 2006 WL 2337737, at *13 (citing Garcia).                59 Id.
17 Garcia, 876 S.W.2d at 849.                                              60 Id. at 600-601.
18 Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994).          61 Rocor Int., Inc. v. National Union Fire Ins. Co., 77 S.W.3d 253, 262
19 Id. at 313.
                                                                           (Tex. 2002) (citing Garcia, 876 S.W.2d at 849).
20 Id.                                                                     62 See Westchester Fire Ins. Co. v. Admiral Ins. Co., 152 S.W.3d 172,
21 Id.
                                                                           193-196 (Tex. App.—Fort Worth 2004, pet. filed).
22 Id. at 313-14.                                                          63 See id.
23 Id. at 315 (citations omitted).                                         64 Id.
24 Id. at 315.                                                             65 City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005).
25 Id. (citations omitted).                                                66 Id. at 830 (emphasis added).
26 Id. at 316.                                                             67 Id at 829.
27 Trinity Universal Ins. Co. v. Bleeker, 966 S.W.2d 489 (Tex. 1998).
                                 Bleeker                                   68 Id. (emphasis added).
28 Id. at 490.                                                             69 Id.
29 Id. at 491 (some emphasis added).                                       70 Kroger Texas Ltd. P’ship. v. Suberu, ___ S.W.3d ___, 2006 WL
30 Id. (citing TEX. P ROP. CODE A NN. § 55.007(a) (Vernon’s 1995)).
                                                                           1195331 (Tex. 2006).
31 Id.                                                                     71 Id. at *1.
32 Amer. Physicians Exchange v. Garcia, 876 S.W.2d 842, 843-45             72 Id.

(Tex. 1994).                                                               73 Id.
33 Id. at. 843-44.                                                         74 Id.
34 Id. at n.3.                                                             75 Id.
35 Id. at 844.                                                             76 Id. at *2.
36 Id. at 844 & n.4.                                                       77 Id. (citations omitted).
37 Id. at 845.                                                             78 Id. (citations omitted).
38 Id. at 853-54; see Royal Ins. Co. of Amer. v. Caliber One Indem. Co.,   79 Id. at *3 (citing City of Keller v. Wilson, 168 S.W.3d 802, 827

___ F.3d ___, 2006 WL 2716506, at * 4 (5th Cir. 2006) (citing to           (Tex. 2005)).
Garcia).                                                                   80 Id. (citations omitted).
39 Garcia, 876 S.W.2d at 854 (citing Keene Corp. Ins. v. N. Amer., 667     81 Id. (citing City of Keller, 168 S.W.3d at 829-830).
                                                                                                  Keller
                                                           ADVOCATE    ✯ WINTER 2006                                                          35




                                                     THE
82 Id. at *4.                                                              103 See TEX. DISCIPLINARY R. P ROF’L CONDUCT 1.07, reprinted in TEX.
83 Amer. Physician’s Ins. Exchange v. Garcia, 876 S.W.2d 842, 848          GOV’T CODE A NN., tit. 2, subtit. G app. A (Vernon Supp. 1997).
(Tex. 1994) (citations omitted).                                           104 TEX. R EV. CIV. STATS. A NN. art. 4590i § 11.02(c) (repealed 2003)
84 Id. (citation omitted).
                                                                           (current version at TEX. CIV. P RAC. & R EM. CODE § 74.303(d)
85 E.I. du Pont de Nemours & Co. v. Robinson, 923 S.W.2d 549 (Tex.
                                                                           (Vernon’s 2005)).
1995).                                                                     105 Welch v. McClean, 191 S.W.3d 147 (Tex. App.—Fort Worth
86 Westchester Fire Ins. Co. v. Admiral Ins. Co., 152 S.W.3d 172 195-196
                                                                           2005, no pet. h.).
(Tex. App.—Fort Worth 2004, pet. filed).                                   106 Id. at 167.
87 Id.                                                                     107 Id.
88 See Garcia, 876 S.W.2d 842 (Tex. 1994).                                 108 Id.
89 Id. at 849.                                                             109 Id at 171.
90 See Keck, Mahin & Cate v. Nat. Union Fire Ins. Co. of Pittsburgh, 20    110 Id.

S.W.3d 692 (Tex. 2000).                                                    111 Id.
91 Employers Cas. Co. v. Tilly, 496 S.W.2d 552, 558 (Tex. 1973); see       112 Id.

Northern Country Mutual Ins. Co. v. Dableous, 140 S.W.3d 685, 690          113 Id.

(Tex. 2004).                                                               114 Spohn Hosp. v. Mayer, 104 S.W.3d 878, n.1 (Tex. 2003) (per
                                                                                                Mayer
92 State Farm Auto. Ins. Co. v. Traver, 980 S.W.2d 625, 628 (Tex.
                                                                           curiam).
1998).                                                                     115 TEX. CIV. P RAC. & R EM. CODE § 74.303(d) (Vernon’s 2005).
93 Id. at 629 (Gonzalez, J. concurring and dissenting).                    116 FED. R. CIV. P. 68.
94 Id. at 634.                                                             117 Id.
95 Id. at 634.                                                             118 Marek v. Chesny, 105 S.Ct. 3012, 3016 (1985).
96 Excess Underwriters at Lloyd’s London v. Franks Casing Crew &           119 Texarkana Nat’l Bank v. Brown, 920 F.Supp. 706 (E.D. Tex.

Rental Co., ___ S.W.3d ___, 2005 WL 1252321 at *4 (Tex. 2005)              1996).
(reh’g granted).                                                           120 Id. at 708.
97 Id.                                                                     121 Basha v. Mitsubishi Motor Credit of America, 336 F.3d 451, 453
98 Id.
                                                                           (5th Cir. 2003).
99 Id.                                                                     122 TEX. CIV. P RAC. & R EM. CODE § 42.002 (Vernon’s 2005).
100 Id. at *1.                                                             123 Id. at § 42.003.
101 Id.                                                                    124 Id. at § 42.004.
102 Id.
36                                                   ADVOCATE   ✯ WINTER 2006




                                               THE
               STATE FARM V. GANDY —FULLY ADVERSARIAL TRIAL
                                                       BY R. BRENT COOPER




I. Introduction                                                   litigation, the insured had claimed that no molestation had
It has been ten years since the State Farm v. Gandy1 decision     occurred, yet later agreed to a judgment in excess of $4
was handed down by the supreme court. One issue which             million. The supreme court noted that: “The court of appeals
has continued to elude most lawyers and jurists is what           did not exaggerate when it called Gandy’s agreed judgment
was meant by the term “fully adversarial trial.” Numerous         against Pearce ‘a sham’ or when it stated that the judgment
cases have attempted to interpret what the supreme court          ‘perpetuates a fraud’ and ‘an untruth.’”
meant with this phrase. Some consistencies have emerged
from the judicial interpretations. However, a number of           The holding in the Gandy decision, however, did not hold
inconsistencies still remain. This article will examine what      all covenants and assignments as against public policy. The
was meant by the supreme court in the use of the term “fully      court’s holding in this case was somewhat narrow. The court
adversarial trial” and how this term has been interpreted by      held that:
the courts.
                                                                     Balancing the various considerations we have men-
II. Gandy Decision                                                   tioned, we hold that a defendant’s assignment of his
In 1996, the Supreme court handed down its decision in State         claims against his insurer to a plaintiff is invalid if
Farm Fire and Casualty Co. v Gandy.2 In the majority opinion,        (1) it is made prior to an adjudication of plaintiff’s
authored by Justice Hecht, the supreme court took a totally          claim against defendant in a fully adversarial trial, (2)
different approach than had been taken by the prior courts           defendant’s insurer has tendered the defense, and (3)
of appeals. The approach taken by the supreme court was              either (a) defendant’s insurer has accepted coverage or
not whether or not the covenant and assignment negated any           (b) defendant’s insurer has made a good faith effort to
damages on the part of the insured, but rather whether or not        adjudicate coverage issues prior to the adjudication of
the assignment itself was void as being against public policy.       plaintiff’s claim. We do not address whether an assign-
The supreme court addressed four of its prior decisions              ment is also invalid if one or more of these elements
which had held that assignments in other context were void           is lacking. In no event, however, is a judgment for
as against public policy. These decisions were Zuniga v. Groce,      plaintiff against defendant, rendered without a fully
Locke & Hebdon,3 Elbaor v. Smith,4 International Proteins Corp.      adversarial trial, binding on defendant’s insurer or
v. Ralston Purina Co.,5 and Trevino v. Turcotte.6                    admissible as evidence of damages in an action against
                                                                     defendant’s insurer by plaintiff as defendant’s assignee.
In each of these decisions, the court discussed the public           We disapprove the contrary suggestion in dicta in
policy factors weighing in favor of and against assignability        Employers Casualty Company v. Block, 744 S.W.2d 940,
of the particular chosen action. Applying those same public          943 (Tex. 1988), and United States Aviation Underwriters,
policy factors to the Gandy case, the court held that an             Inc. v. Olympia Wings, Inc., 896 F.2d 949, 954 (5th Cir.
assignment under the facts in Gandy should be void and               1990).
against public policy.
                                                                  A. What Gandy Decided
There were two public policy bases for the court’s decision.      1. Assignments Void
First, the court noted that such a settlement and assignment      Two issues were definitely decided by Gandy. The first was
would not terminate litigation but would rather extend and        under what circumstances an assignment would be void as
encourage future litigation. Second, the court noted that         against public policy. Under the Gandy decision, an insured’s
such settlements would greatly distort the litigation that        assignment of a claim against his insurer to a plaintiff is
followed. The court noted in that case that in the underlying     invalid if (1) it is made prior to the adjudication of plaintiff’s
                                                     ADVOCATE   ✯ WINTER 2006                                                     37




                                               THE
claim against defendant in a fully adversarial trial, (2)          that “a person or organization may sue us to recover on an
defendant’s insurer has tendered a defense, and (3) either (a)     agreed settlement or on a final judgment against the insured
defendant’s insurer has accepted coverage or (b) defendant’s       obtained after an actual trial.” The confusion that arises is
insurer has made a good faith effort to adjudicate coverage        that, depending upon whether the insurer wrongfully refused
issues prior to the adjudication of the plaintiff’s claim.         to defend or has tendered a conditional defense, certain
However, no guidance is given by the court when fewer than         conditions may not be enforceable by the insurer. On the
all three of these elements are present.                           other hand, the supreme court did not appear to make any
                                                                   exceptions to that rule. However, courts interpreting the
2. Judgments as a Result of Non-Adversarial Proceedings            “fully adversarial trial” requirement have created exceptions
Gandy also held that in no event is a judgment for the plaintiff   of their own.
against the defendant, rendered without a fully adversarial
trial, binding on the defendant’s insurer or admissible as         4. General Rules Governing Decisions
evidence of damages in an action against defendant’s insurer       There has been no standard stated for finding a fully
by plaintiff as defendant’s assignee. There are several issues     adversarial trial. When an agreement between parties
presented by this holding. The first is whether this issue is      regarding assignment of rights occurs before the trial, the
one for the court or for the jury. The question is open as to      courts are likely to find the proceeding non-adversarial.8 This
whether the court or the jury should decide if a proceeding        can range from two weeks prior to trial9 to a jury having been
is an adversarial trial. Though the issue of whether or not        seated, but an agreement being reached before the conclusion
an adversarial trial was a question not expressly addressed        of plaintiff’s evidence.10 When a party fails to participate in
by the court in Gandy, at least it was implicitly addressed. In    the trial, such as by failing to present evidence, cross-examine
this case, there was no question submitted to the jury as to       parties or deliver opening or closing statements,11 the courts
whether or not there had been an adversarial trial. The court,     will likely find that an adversarial trial has not taken place.12
on its own, made a determination as a matter of law that           Generally, the courts will examine the proceeding in which
indeed there had been no adversarial trial. From the limited       a judgment was rendered and the activities of the parties
guidance given by the court in Gandy, it would appear that         at that proceeding and the time surrounding it, whether
this is a question for the court.                                  it seems that the parties contested issues or are “working
                                                                   together toward a mutual goal, i.e., imposing liability on [the
The second issue is what is an adversarial trial? The test         insurer].”13 As mentioned, while participation in the trial
articulated by the supreme court in Gandy was as follows:          proceedings or timing of the assignment are the closest to
“What result would plaintiff and defendant have reached had        common requirements, there does not seem to be a standard
they remained fully adversarial to the end?”7                      list of requirements a court can examine to determine the
                                                                   occurrence of a fully adversarial trial.
In other words, if the defendant had put up a defense to the
conclusion of the case, what would have been the result?           In addition, courts are also more inclined to find a fully
                                                                   adversarial trial where the insurer has reached its duty to
A third and final issue presented is whether or not the            defend as opposed to those situations where the insurer is
limitation regarding an adversarial trial is limited only to       defending or has tendered a defense that has been rejected by
those actions where the plaintiff is suing as the defendant’s      the insured. In those cases where the insurer has breached its
assignee. If the defendant has not made an assignment, but         duty to defend, the courts have apparently reasoned that the
there is nonetheless an agreed judgment, would the same            insured, having been left to its own devices, should be able
holding apply? Logic would dictate that there should be no         to seek out what protection on its own it can find.
distinction. Decisions since Gandy have held this to be no
distinction.                                                       III. Pre-Trial Agreements
                                                                   In American Eagle Ins. Co. v. Nettleton,14 the spouse of a plane
3. Fully Adversarial Trial versus Actual Trial                     crash victim sued the plane’s pilot. When the amended
One issue that must be kept in mind in reading the cases           petition included possible covered and non-covered claims,
interpreting Gandy is the fact that most liability policies have   insurer represented to plaintiff that it was willing to pay the
conditions requiring an actual trial or settlement agreed to       percentage of judgment attributable to covered claims.15 Two
by the company as a condition to any suit under the policy.        weeks prior to trial, plaintiff and defendant pilot entered into
For example, the 1998 CGL occurrence form provides                 “Covenant Not to Execute,” which held that a final judgment
38                                                  ADVOCATE   ✯ WINTER 2006




                                              THE
must be entered in favor of plaintiffs against defendants at     punched plaintiff Burnley in the face.31 Upon suit, Henderson
case, and if coverage under insurer’s policy is not found,       requested defense by homeowner’s insurer State Farm.32
plaintiffs could not recover against defendants.16 At the        While Burnley amended his petition (five different times),
damages trial, defendants called no witnesses and failed to      State Farm agreed three times to provide a defense, and twice
offer any evidence regarding the cause of the crash other than   revoked the defense.33 During a period in which State Farm
causes covered under the policy.17 Judgment was entered          had not obligated itself to defend Henderson, Henderson and
citing that a covered cause of the crash was 90% responsible     Burnley entered into an agreement wherein Burnley would
for the crash and plaintiff’s damages.18 The El Paso Court       only proceed to trial against State Farm, and would look only
of Appeals found that fact issues existed as to whether an       to insurance proceeds for recovery.34 In exchange, Henderson
“actual trial” had taken place (the policy contained a clause    would assign all rights against State Farm to Burnley, and
citing a condition precedent to action against the policy        would retain claims against State Farm for court costs and
was a judgment determined by “actual trial”), and that the       attorney fees and up to $2,500 for half the cost of an appellate
Covenant Not to Execute possibly turned the trial into a         brief.35 When Burnley’s suit proceeded, State Farm was not
“less than vigorous contest.”19 The court cited Gandy and        present, and the trial court rendered a judgment in favor of
the requirement of a “fully adversarial trial” in support of     Burnley for $49,885.45.36 During the suit, Henderson filed a
insurer’s argument that it was not bound by the judgment         declaratory judgment action to declare State Farm indeed had
of the damages trial (“Moreover, the Gandy court rejected        a duty to defend.37 The Houston Court of Appeals focused on
shenanigans similar to that in the instant case [followed by     lack of privity issues State Farm raised regarding itself and
quoting the three Gandy requirements]”).20                       Henderson in the underlying injury case, and did not directly
                                                                 address State Farm’s fully adversarial trial issue.38 However,
In First General Realty Corp. v. Maryland Casualty Co.,21        the court stated that the “apparent non-adversarial nature of
developers and homeowners were involved in a suit over           the trial could be deemed to be a result of Henderson’s and
flood damage to homes in Montgomery County, Texas.22             State Farm’s lack of privity,” and that the court “is likewise
After conducting investigation, developers and homeowners        suspicious of Burnley’s and Henderson’s agreement prior to
entered into “Covenant not to Execute, Indemnification           trial.”39 This seems to indicate that the court, had the issue
Agreement and Assignment of Claims.”23 In this Covenant,         been directly before it, would have ruled that the underlying
developers assigned to homeowners all claims and causes          suit, in light of Henderson’s and Burnley’s agreement, was
of action they possessed against insurer Maryland, paid          not fully adversarial.
homeowners $4,725,000, and in exchange, homeowners
agreed not to execute any judgment against developers, but       In Heathcock v. Southern County Mutual Insurance Co.,40
went with the understanding that any judgment would be           plaintiffs were injured in a car accident, caused by an insured
only be enforced against Maryland.24 The trial court rendered    of Southern County, who denied tortfeasor driver’s claim for
a judgment for homeowners in the amount of $9,011,894.25         defense on grounds that the policy had been cancelled six
Developers brought a declaratory action against Maryland         months earlier due to non-payment.41 Plaintiffs and tortfeasor
to determine whether coverage existed, and after the             driver entered into an agreed judgment awarding plaintiffs
Covenant was executed and trial court judgment rendered,         $703,454.00.42 Tortfeasor assigned any claims it had against
homeowners intervened to seek coverage for a portion of the      Southern County to plaintiffs.43 Plaintiffs then instituted suit
$9M judgment.26 The Austin Court of Appeals held that a          against Southern County for various claims including bad
fully adversarial trial had not taken place, calling the trial   faith and breach of liability contract.44 Southern County was
court judgment a “sham judgment.”27 The court held that          granted summary judgments against claims of plaintiffs, after
even though damages were not specified in the Covenant,          arguing that the underlying judgment was obtained without
as in Gandy, the fact that the homeowners and developers         a fully adversarial trial, and therefore, was unenforceable.45
agreed in the Covenant that entry of judgment against            However, the Houston Court of Appeals, upon examination,
developers in the underlying suit was a condition precedent      found that the only evidence Southern County presented
to the homeowners refusing to execute against developers         in support of its contention that the judgment had been
was a distortion of the legal positions of the parties.28 This   obtained without adversarial trial was a “supplement,” which
distortion, the court held, was exactly the type of distortion   included a copy of the court docket sheet, containing only
and non-adversarial trial the Gandy decision prohibited.29       two entries (“case assigned to trial” directly followed by
                                                                 “Final Judgment per Agreed Decree”).46 Plaintiff argued that
In State Farm Lloyds v. Henderson,30 insured Henderson           the effect of the Judgment must be taken into consideration,
                                                     ADVOCATE   ✯ WINTER 2006                                                      39




                                               THE
but offered no evidence that the Judgment was ever attached        USAA as insurer of defendants.65 The district court approved
to motions or responses for the trial court to consider.47         the settlement and entered a judgment reflecting the same.66
Therefore, the court held, the trial court’s granting of the       The San Antonio Court of Appeals ruled, however, that the
motion for summary judgment could not be overturned                judgment would not be enforceable against USAA.67 The
(though it seemed the court would have ruled it had not been       court noted that the settlement may have been an attempt to
a fully adversarial trial).48                                      find a way to recover against USAA, as the damages incurred
                                                                   were not likely to equal the $35,000 sought.68 Further, the
In Transportation Insurance Co. v. Heiman,49 plaintiffs filed      court found the wording of the settlement and the distortion
professional negligence suit against defendant accountants.50      of interests of the parties seemed to indicate that the
Defendants notified Transportation, their professional liability   settlement was an attempt to take advantage of USAA.69 The
carrier, of the suit.51 Transportation agreed to defend subject    Court held that while the judgment was not void for public
to a reservation of right.52 Transportation filed a declaratory    policy concerns, it did not result from a fully adversarial trial,
judgment action in federal court regarding its duty to defend      and would not be binding on USAA or admissible as evidence
the claim, in which the federal court granted Transportation’s     of damages in any action against USAA by plaintiff.70
motion for summary judgment.53 Plaintiffs and defendant
accountants then entered into an “Agreement in Settlement          V. Default Judgment
and Resolution of Claims,” in which plaintiffs would amend         In Reyna v. Safeway Managing Gen. Agency for State and Cty.
the petition, which defendants would then forward to               Mut. Fire Ins. Co.,71 a great deal of miscommunication between
Transportation, demanding an “unconditional defense.” If           insured and his insurer and insurer’s agents led to the entry
Transportation failed to provide such a defense, the parties       of a default judgment being entered against him in a suit for
would enter into an agreed judgment of $1,149,755.49, with         damages resulting from a car accident. The plaintiffs later
plaintiffs agreeing not to execute against defendants.54 When      approached the insured with the possibility of obtaining from
Transportation again agreed to defend defendants subject to        him an assignment of rights against his insurer (Safeway)
a reservation of right, plaintiffs and defendants entered into     and the insurer’s agents (Reyna) in exchange for a covenant
judgment pursuant to the Agreement’s terms.55 Plaintiffs           not to execute.72 After such a covenant was executed, the
then filed a garnishment action against Transportation to          insurer, the plaintiffs and the insured settled all claims
pursue the amount of the judgment.56 The Dallas Court of           against each other for $75,000, and realigned together against
Appeals held the agreed judgment unenforceable because             the insurer’s agents in a suit against the agents for breach of
there had not been any fully adversarial trial.57 Plaintiffs,      contract, breach of fiduciary duty and DTPA and Insurance
the court found, contrived a scheme to avoid the effects of        Code deceptive practices based upon the allowance of the
an unfavorable “no coverage” determination by the federal          default judgment to be rendered against the insured.73 After
court by proposing and executing the Agreement.58 The court        judgment was reached in favor of insured and plaintiffs and
felt the Agreement served to further litigation and distorted      against the agents in excess of $900,000, agents appealed,
positions between parties, thereby violating the holding of        arguing that the judgment did not comply with Gandy, and
Gandy.59 The court stated that it did not matter that it was a     was not the product of a fully adversarial trial.74 The San
garnishment action rather than another sort of action.60 The       Antonio Court of Appeals held that the judgment did comply
court held the Agreement indicated the trial was not fully         with the Gandy requirements, stating that no evidence was
adversarial, and specifically found that the covenant included     presented to prove that the default judgment was not rendered
in the Agreement “makes the insured insulated from liability,      by the trial court after sufficient evidence had been presented
and makes this arrangement so highly suspect.”61                   for its consideration.75 The court noted that, in Gandy, the
                                                                   opposing “defendant” in the agreed judgment hearing did
IV. Settlement During Trial                                        not appear, and no evidence was introduced regarding the
In Polinard v. United Services Automobile Association,62 a         calculation of damages.76 The court quoted from Gandy: “[in
plaintiff sued defendant neighbors for damages caused to           Gandy, without] the assignment and covenant not to execute,
plaintiff’s pets by neighbors’ dogs.63 Neighbors’ homeowner’s      the judgment would never have been rendered.”77 The court
insurer USAA declined to provide defendant neighbors a             pointed out that in the present case, the assignment was
defense.64 After a jury was seated but prior to conclusion         executed after the default judgment was rendered, and the
of plaintiff’s evidence, plaintiff and defendant neighbors         default judgment was rendered as a result of the failure of
reached a settlement in which defendants agreed to pay             the agents to present the insured’s suit to the insurer, rather
$2,400, but that an additional $35,000 would be sought from        than the decision not to appear as in other cases.78
40                                                    ADVOCATE   ✯ WINTER 2006




                                                THE
In Vang v. Delta Lloyds Ins. Co.,79 plaintiffs’ son drowned         was an “actual trial.”96 The court cited the fact that Great
in defendant Dimension’s apartment complex.80 Plaintiffs            American had notice of all relevant claims under the policy,
sued Dimension, whose insurer subsequently went into                and as such, had constructive knowledge of the claim and
receivership.81 Plaintiffs notified Delta, the primary insurer      state court action.97 Further, the court stated, unlike Gandy,
in the receivership, of the claim, and Delta refused to             there was no possibility of collusion between plaintiffs and
defend, stating it had not been informed by insured that            defendants by way of the earlier judgment and settlement.98
potential liability could be in excess of policy limits.82 At       The court noted that the driver and employer did not merely
trial, defendant Dimension did not appear, resulting in             consent to the judgment, but actually defended themselves
a default judgment in favor of plaintiffs for two million           pro se, contesting liability.99 While the court never declared
dollars.83 Several months later, Dimension assigned plaintiffs      the state court trial to be an “actual trial”, it seemed satisfied
any contractual rights it had against Delta. Based on this,         with the fact of the pro se defendants’ appearance to not
plaintiffs filed suit against Delta requesting declaratory          address the qualifications any further.
relief regarding the rights and liabilities of all parties under
the Delta policy. The trial court granted Delta’s motion for        VI. No Defense
summary judgment, which asserted it did not have a duty             In State Farm Lloyds Insurance Co. v. Maldonado,100 a plaintiff
to defend and neither policy terms nor conditions precedent         sued her former employer for defamation.101 State Farm, the
to coverage were met.84 The Dallas Court of Appeals, in             employer’s insurer, agreed to defend under a reservation
examining the conditions precedent to coverage, found that          of rights.102 Plaintiff made a settlement demand of $1.3M
the policy’s requirement that Dimension take reasonable             to State Farm, and when State Farm did not accept by the
steps to conduct an adequate defense was not met.85 In its          deadline, plaintiff and employer entered an agreement in
examination, the court found that, based on Gandy, Delta            which employer agreed to pay plaintiff $1M from his personal
could not be liable for judgment against Dimension without          assets in exchange for a covenant not to execute any later
a fully adversarial trial conducted on the matter. Plaintiffs       judgment against him, as well as that any monies over $1M
had argued that a “fully adversarial proceeding” had been           recovered by employer from State Farm in a bad faith suit
conducted, regardless of the fact that neither Dimension            would be split evenly between employer and plaintiff.103
nor the primary insurer had appeared at trial.86 The court          At trial, employer’s counsel presented no evidence, did not
refused this analysis, stating that nothing in the record           cross-examine any witnesses, and did not present opening
supported any contention that adversarial proceedings had           or closing statements.104 State Farm was denied any attempts
been conducted.87                                                   to intervene.105 Judgment was rendered for plaintiff in
                                                                    amount of $2M. Plaintiff and employer then brought a bad
In Minter v. Great Am. Ins. Co.,88 a truck driver operating         faith claim against State Farm, which resulted in a $6M
employer’s truck collided with plaintiff. Plaintiff filed a         judgment for employer and $1.5 for plaintiff.106 While the
state court action against driver, employer and lessee motor        Texas Supreme Court declined to consider State Farm’s
carrier over various claims.89 Lessee motor carrier notified        Gandy arguments of no fully adversarial trial having taken
its insurance agent of the suit, and the agent failed to forward    place,107 the court did consider State Farm’s argument that
notice of the suit to Great American, excess insurer for lessee     in order for plaintiff, as a third-party beneficiary, to recover
motor carrier.90 While primary insurer defended lessee motor        on the policy, plaintiff would have to show that employer
carrier, it did not defend driver or employer in state court        satisfied all conditions precedent to recovery on the policy,
suit.91 State trial court awarded a directed verdict to plaintiff   including the requirement that any judgment sought to
on liability and the jury awarded $2.6M in damages against          be enforced against State Farm must be obtained from an
driver and employer, $1.6M exemplary damages against                “actual trial.”108 In holding that an “actual trial” had not
driver, and $300,000 exemplary damages against employer.92          taken place, the court pointed to the facts that all evidence
Primary insurer settled with receiver for plaintiff for $1.9M.93    in the case was uncontested, the employer failed to appear
Receiver then filed a federal action against Great American         at trial, his counsel failed to cross-examine any witnesses,
for the remaining portion of the state court judgment against       introduce any of his own, or contest liability or damages in
driver and employer which had not been satisfied by the             any way.109 The court held that as there was no real contest
$1.9M settlement.94 Great American argued the judgment              of issues, there was no “actual trial,” and employer could
was unenforceable, since it did not result from an actual trial     not sue (and as a result, plaintiff could not collect) on the
as required by Gandy.95 The Fifth Circuit held the judgment         policy. Even though the court did not explicitly address
enforceable, and seemed to find that the state court trial          whether a fully adversarial trial was conducted, its finding
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                                                 THE
regarding “actual trial” would seem to mirror a finding of a          $140,500 and $360,000.127 The court then granted summary
non-adversarial trial.110                                             judgment and JNOV in favor of Northern.128 The plaintiffs
                                                                      then returned to the remanded first suit, seeking recovery
The Vang case, noted previously in the section discussing             on the jury verdict from the second suit.129
default judgment cases, also presents the situation where
there was no defense.111 Defendant Dimension’s insurer was            The Dallas Court of Appeals declared that the second suit
in recieivership, and the primary insurer in the receivership,        was not a fully adversarial trial pursuant to Gandy. In its
Delta, refused to defend. 112Neither appeared at trial, and           reasons, the court held that the second trial was to determine
the court entered a default judgment.113 After plaintiffs filed       the facts pointing to Sunset’s fault in the collision, yet Sunset
a declaratory judgment action seeking to enforce the rights           was not a named defendant, was not served with citation, nor
Dimension assigned them against Delta, the court of appeals           did it make any appearance in the second suit.130 The court
held there had been no “fully adversarial trial,” and that            also held that the second trial was on factual issues which,
Delta was not liable for any judgment against its insured,            by way of the settlement agreement between the plaintiffs
Dimension.114                                                         and Sunset, had already been resolved in the underlying
                                                                      suit by way of the settlement.131 Further, the court stated
VII. Post-Trial Settlement                                            that the case illustrated the concern the court in Gandy
In Burns Motors, Inc. v. Gulf Ins. Co.,115 plaintiff sued             voiced regarding possible distortion of resulting judgments
insurance agent for misrepresentation of terms of coverage            once a defendant is assured of no personal liability and has
of insurance policy.116 Trial court rendered judgment for             assigned its rights against an insurer to a plaintiff.132 In the
plaintiff; thereafter, agent assigned plaintiff all claims agent      second case, the court pointed out, insurer Northern tried
had against employer Gulf.117 Gulf contested the judgment,            to piece together a defense after plaintiffs introduced eight-
arguing that the proceeding which produced it was not fully           year-old testimony of the Sunset driver, citing that the driver
adversarial, as agent had fully admitted his liability at trial.118   was not Northern’s client and that Northern had no control
The Corpus Christi Court of Appeals found that there was              over the witness.133 The court ruled that these problems
nothing in the record to indicate that the trial was not fully        in trying to reconstruct an adversarial posture between
adversarial, and that the fact that agent admitted liability          defendant and plaintiff were ones the Gandy decision aimed
merely indicated that the agent chose to take responsibility          to prevent, concluding that the second trial was not a fully
for his own actions, and this did not indicate any collusion          adversarial trial, and that there had not been any judgment
or distortion by the parties to cause the assignment to be            rendered against Northern which would allow plaintiffs to
unenforceable.119                                                     recover.134

VIII. Trial in Coverage Action                                        IX. Agreement on Appeal
In Stroop v. Northern Cty. Mut. Ins. Co.,120 plaintiffs were          No decisions have touched on the issue of a settlement on
injured in a collision with a truck owned by defendant                appeal. The test articulated in Gandy was as follows: What
Sunset. Plaintiffs and Sunset agreed to judgments against             result would plaintiff and defendant have reached had they
Sunset of $750,000 and $500,000 in favor of plaintiffs.121            remained fully adversarial to the end?
Sunset assigned plaintiffs its rights against insurer Northern.
In return, plaintiffs agreed not to execute judgments                 This arguably would include an agreement to terminate the
against Sunset.122 Plaintiffs then, as assignees of Sunset’s          litigation while on appeal. There are at least two issues that
rights against Northern, sued Northern, alleging breach               would have to be addressed. First and foremost would be
of insurance contract.123 The trial court granted summary             the issue of whether there was a valid appeal. Since there
judgment in favor of Northern, and the Dallas Court of                should be a record of the proceedings, the court can look at
Appeals upheld the summary judgment, holding that the                 the record and determine if the appeal would have had merit.
assignment to plaintiffs was void pursuant to Gandy.124               This is similar to the review done in a legal malpractice case
However, plaintiffs returned to trial court and obtained              alleging malpractice in the handling of an appeal. If there
a turnover order, requiring Sunset to turn over its rights            was no merit, then the insurer would have no argument. If,
against Northern to plaintiffs.125 Plaintiffs then filed a second     however, there was merit and the appeal was dismissed to
suit against Northern in a different district court.126 The jury      prevent the court of appeals from considering the merits,
in the second suit rendered a verdict placing 55% of the              Gandy would apply.
negligence to Sunset’s driver, finding damages for plaintiffs of
42                                                       ADVOCATE   ✯ WINTER 2006




                                                   THE
A second issue is whether the insurer was continuing to
provide a defense. If the insurer was still defending, the              24 Id.
argument is much stronger and has more merit.                           25 Id.
                                                                        26 Id.
R. Brent Cooper is a named shareholder in Cooper & Scully, P.C.’s       27 Id at 499-500.

Dallas office. Mr. Cooper is also Board Certified in Personal Injury    28 Id at 500.

Trial Law by the Texas Board of Legal Specialization. Mr. Cooper        29 Id at 499-500.
                                                                        30 1998 WL 322689 (Tex. App.—Houston [14 th Dist]).
has written and spoken extensively on issues in litigation.
                                                                        31 1998 WL 322689, at *1.
                                                                        32 Id.
1 925 S.W.2d 696 (Tex. 1996).                                           33 Id.
2 Id.                                                                   34 Id.
3 878 S.W.2d 313 (Tex. App.—San Antonio 1994, writ ref’d)               35 Id.

(assignment of legal malpractice claims).                               36 Id.
4 845 S.W.2d 240 (Tex. 1992) (Mary Carter agreements).                  37 Id. at *2.
5 744 S.W.2d 932 (Tex. 1988) (assignment of plaintiff’s claims in       38 Id. at *3-4.

order to circumvent prohibition of a settling defendant seeking         39 Id. at *4 n.5.

contribution).                                                          40 1999 WL 1041480 (Tex. App.—Houston [14th Dist]).
6 564 S.W.2d 682 (Tex. 1978) (assignment of an interest in an           41 Id. at *1.

estate)                                                                 42 Id.
7 Id. at 719.                                                           43 Id.
8 State Farm Lloyds v. Henderson, 1998 WL 322689 (Tex.                  44 Id.

App.—Houston [14th Dist]); National Union Fire Ins. Co. v. United       45 Id. at *1, 3.

L.P. Gas Corp., 2002 WL 396533 (Tex. App.—Houston [1st Dist]);          46 Id. at *3.

First General Realty Corp. v. Maryland Casualty Co., 981 S.W.2d 495     47 Id. at *4.

(Tex. App.—Austin, 1998); State Farm Lloyds Ins. Co. v. Maldonado,      48 Id.

963 S.W.2d 38 (Tex.1998).                                               49 1999 WL 239917 (Tex.App.—Dallas).
9 See Amer. Eagle Ins. Co. v. Nettleton, 932 S.W.2d 169 (Tex. App.—El   50 Id. at *1.

Paso 1996, writ denied).                                                51 Id.
10 Polinard v. United Servs. Auto. Assoc., 1996 WL 460040 (Tex.         52 Id.

App.—San Antonio 1996).                                                 53 Id.
11 Nettleton, 932 S.W.2d 169; Maldonado, 963 S.W.2d 38; Vang v. Delta   54 Id.

Lloyds Ins. Co., 2001 WL 722279 (Tex. App.—Dallas 2001).                55 Id.
12 One exception is Crocker v. Nat’l Union Fire Ins. Co., 2005 WL       56 Id. at *2.

1168429 (W.D.Tex) where the court found that a fully adversarial        57 Id at *8.

trial had taken place, despite an employee not being in attendance      58 Id.

at the trial. The court found, however, that because the insurer’s      59 Id. at *8-9.

counsel for the employee’s employer was present, and the cases          60 Id. at *8.

against both parties were tried in the same proceeding, the counsel     61 Id. at *8-9.

had the opportunity to participate in the defense via cross-examina-    62 1996 WL 460040 (Tex. App.—San Antonio 1996).

tion of witnesses and objecting when necessary, so as to preserve       63 Id. at *2.

an adversarial setting.                                                 64 Id.
13 Transp. Ins. Co. v. Heiman, 1999 WL 239917, at *9 (Tex.              65 Id.

App.—Dallas).                                                           66 Id.
14 932 S.W.2d 169 (Tex. App.—El Paso 1996, writ denied).                67 Id. at *4.
15 932 S.W.2d at 171.                                                   68 Id.
16 Id.                                                                  69 Id.
17 Id.                                                                  70 Id.
18 Id.                                                                  71 27 S.W.3d 7 (Tex. App.—San Antonio 2000).
19 Id. at 176-77.                                                       72 Id. at 12-13.
20 Id.                                                                  73 Id. at 14.
21 981 S.W.2d 495 (Tex. App.—Austin, 1998).                             74 Id. at 15.
22 981 S.W.2d at 496.                                                   75 Id. at 17.
23 Id at 497.                                                           76 Id.
                                                   ADVOCATE   ✯ WINTER 2006                                                         43




                                             THE
77 Id.                                                          108 Id. at 40.
78 Id. at 17-18.                                                109 Id.
79 2001 WL 722279 (Tex. App.—Dallas 2001).                      110 See Amer, Eagle Ins. Co. v. Nettleton, 932 S.W.2d 169 (Tex. App.—El
80 Id. at *1.
                                                                Paso 1996, writ denied) (cited above).
81 Id.                                                          111 See Vang v. Delta Lloyd’s Ins. Co., 2001 WL 722279 (Tex.
82 Id.
                                                                App.—Dallas 2001).
83 Id.                                                          112 Id. at *1.
84 Id. at *2.                                                   113 Id. at *2.
85 Id. at *3.                                                   114 Id. at *2-3 & n.3.
86 Id. n.3.                                                     115 975 S.W.2d 810 (Tex. App.—Corpus Christi 1998), rev’d on other
87 Id.
                                                                grounds, 22 S.W.3d 417 (Tex. 2000).
88 423 F.3d 460 (5th Cir. 2005).                                116 Id. at 812.
89 Id. at 462.                                                  117 Id.
90 Id. at 463.                                                  118 Id. at 816.
91 Id.                                                          119 Id. at 815-16.
92 Id.                                                          120 133 S.W.3d 844 (Tex. App.—Dallas 2004).
93 Id. at 464.                                                  121 Id. at 847.
94 Id.                                                          122 Id.
95 Id. at 473.                                                  123 Id.
96 Id.                                                          124 Id.
97 Id.                                                          125 Id.
98 Id.                                                          126 Id.
99 Id.                                                          127 Id.
100 963 S.W.2d 38 (Tex.1998).                                   128 Id.
101 963 S.W.2d at 39.                                           129 Id.
102 Id.                                                         130 Id. at 849.
103 Id.                                                         131 Id.
104 Id.                                                         132 Id.
105 Id.                                                         133 Id. at 849-50.
106 Id. at 40.                                                  134 Id. at 850.
107 Id. at 40 n.4.
44                                                  ADVOCATE   ✯ WINTER 2006




                                              THE
              UNTANGLING THE INSURANCE COVERAGE
      REIMBURSEMENT ISSUES ARISING FROM THE TEXAS SUPREME
               COURT ’S DECISION IN FRANK’S C ASING
                        BY ROBERT J. CUNNINGHAM & ROBERT M. (RANDY) ROACH, JR.




I. The Texas Supreme Court Dramatically Changes                   doctrine in Texas, and the remaining viability of factors
Insured Settlements.                                              presented in Matagorda County, but left unexamined in
The dynamics of insured settlements have been dramatically        Frank’s Casing.
altered by a recent ruling announced by the Texas Supreme
Court. Excess Underwriters at Lloyd’s, London v. Frank’s Casing   The article also touches on post-submission briefing by
Crew and Rental Tools, Inc.,—S.W.3d—, No. 02-0730, 2005           Frank’s and supporting amici responding to concerns
WL 1252321 (Tex. May 27, 2005), rehearing granted (Jan. 6,        expressed at oral argument. They argue that equitable relief
2006). In an opinion by departing Justice Owen, the court         of reimbursement is not an appropriate remedy, and that
changed Texas jurisprudence and greatly expanded the              the court should not consider any prospective “windfall” to
opportunity for insurers to seek reimbursement of arguably        either party in reaching its decision in this case. As of this
non-covered claims from insured defendants after settlements,     writing, no post-submission brief has been filed by Excess
even when the insurance policy does not specify a right to        Underwriters or amici supporting the insurer position.
reimbursement.
                                                                  II. Caught in the Middle Again: Defense Attorneys in the
Apparently this right is triggered merely by the policyholder’s   New Settlement Scenario
statement that the settlement amount is reasonable, or by the     Every litigator is familiar with this standard settlement
policyholder’s express consent to the settlement itself. The      scenario:
greatly expanded right of reimbursement not only alters Texas
insurance law by changing the circumstances under which               ß    Plaintiff makes a Stowers settlement demand
an insurer may seek reimbursement, but it fundamentally                    addressed to the defendant-policyholder.
changes the balance between insurers and policyholders in
handling and settling virtually every case where coverage             ß    Defense counsel forwards the settlement demand
is disputed.                                                               to the insurer with a recommendation that
                                                                           the settlement amount is reasonable based on
Although the original holding in Franks Casing was by a                    counsel’s prior reports and evaluations.
unanimous 7-0 vote (including three concurring opinions), the
decision caused such an uproar from policyholders and other           ß    On behalf of the defendant-policyholder, defense
interested parties that the court granted rehearing in January             counsel urges the insurance carrier to accept the
2006, and heard oral argument again on February 15, 2006.                  settlement.
The initial decision and the rehearing prompted numerous
amici briefs from both insurers and policyholders.                    ß    Insurer previously issued a reservation of rights
                                                                           indicating that certain of plaintiff’s claims may
This article reviews some of the questions and problems that               not be within the coverage of the policy, but no
may arise as a consequence of the Frank’s Casing opinion.
                                             s                             separate declaratory action has been filed nor
Specifically, it addresses how, in current formulation, Frank’s            any other effort made to resolve those coverage
Casing will change the dynamics of settlement, the role of                 questions.
defense counsel, the court’s understanding of the Stowers
                                                     ADVOCATE   ✯ WINTER 2006                                                    45




                                               THE
    ß    Recognizing that the settlement demand is a               Government Risk Management Pool v. Matagorda County, 52
         reasonable amount and wishing to avoid any risk           S.W.3d 128 (Tex. 2000). The court established that when no
         of additional liability under Stowers if a judgment       right of reimbursement is provided in the policy, an insurer
         exceeds policy limits for covered damages, the            cannot unilaterally create such a right and must instead have
         insurance carrier agrees to pay the settlement.           the policyholder’s express consent.3 The court expressly
                                                                   held that when coverage is disputed and a liability insurer is
So far, this scenario seems commonplace and wholly unre-           presented with a reasonable settlement demand within policy
markable. By longstanding Texas tradition and practice, and        limits, if the insurer chooses to fund the settlement it may
by Texas Supreme Court precedent established only five             not subsequently seek reimbursement for non-covered settled
years ago, the settlement would resolve all issues. Plaintiff,     claims unless the insurer first obtains the policyholder’s clear
policyholder, and insurer would go their separate ways             and unequivocal consent both to the settlement itself and to
without further recourse against one another. The case             the insurer’s right to seek reimbursement.4
would be over.
                                                                 In Matagorda County, plaintiffs offered to settle for an amount
The new ruling by the Texas Supreme Court in the Frank’s         within policy limits. Both the insurer and the policyholder
Casing case reverses current practice                                                    acknowledged the settlement was
and precedent, prescribing a totally                                                     reasonable. The policyholder refused
different outcome in our scenario.            “ The new ruling by the Texas to contribute to the settlement, how-
Under the new rule the litigation is not       Supreme Court in the Frank’s              ever, insisting the claim was covered.
concluded by settlement with plaintiff,         Casing case reverses current             The insurer reasserted there was no
but continues with a reimbursement                 practice and precedent,               coverage, but advised the policyholder
action by the insurer against the              prescribing a totally different           it would fund the settlement and then
defendant-policyholder.1                                                                 seek reimbursement. The policyholder
                                                  outcome in [the standard
                                                                                         never agreed to allow such reimburse-
Worse, by agreeing that the settlement              settlement] scenario.”               ment, but remained silent while the
amount is reasonable and by urging                                                       insurer funded the settlement.
settlement, the policyholder (and defense counsel) apparently
have created a right that would not otherwise exist but for      The court held that no implied-in-fact agreement was created
the policyholder’s (or counsel’s) agreement, allowing the        allowing the insurer to seek reimbursement based simply
insurer to seek reimbursement even though the insurance          upon the policyholder’s silence in response to the insurer’s
policy itself does not specify that right.                       letter stating it would seek reimbursement after it funded the
                                                                 settlement, because no such right was included in the actual
Litigation has merely shifted from the plaintiff’s claim         insurance policy. The court similarly concluded that neither the
against the defendant-policyholder over liability and dam-       doctrine of equitable subrogation, nor quasi-contractual theories
ages, to a suit for reimbursement by the insurer against         of quantum meruit or unjust enrichment should be applied.
its defendant-policyholder. The reimbursement suit will          The 7-2 majority opinion authored by Justice O’Neill held that
determine what portion of the settlement amount may be           the insurer could not be entitled to reimbursement unless the
attributable to claims outside coverage, and therefore how       policyholder clearly and unequivocally consented both to the
much must be reimbursed by the policyholder to the insurer.      settlement and to the insurer’s right to seek reimbursement.
This new state of affairs regarding the finality of settlements
and the relationship between and among the various inter-        At the core of the holding in Matagorda County was the
ested stakeholders in Texas litigation—plaintiffs, defendants,   court’s recognition that, where coverage is questioned in
policyholders, insurers and counsel for each—has been the        the context of a settlement opportunity, the insurer—rather
subject of heated debate.2                                       than the policyholder—should be required to choose an
                                                                 appropriate course of action.5 The court reasoned that the
III. The Prior Law—No Implied Right of Reimbursement             insurer is in the business of analyzing and allocating risk and
The decision in Frank’s Casing is all the more remarkable a      is in the better position to assess the viability of its coverage
change in Texas law because it marks a fundamental departure     dispute.6 Moreover, insurers are better positioned to handle
from the rule established by the Texas Supreme Court only        this risk, either by drafting policies to specifically provide for
five years previous in Texas Association of Counties County      reimbursement or by structuring premium rates to account
46                                                  ADVOCATE   ✯ WINTER 2006




                                              THE
for the possibility that they may occasionally pay uncovered      carrier, and seek reimbursement for non-covered claims.
claims.7 Finally, the court expressed concern that an insurer’s   Excess Underwriters contacted plaintiff and accepted the
suit for reimbursement seems too similar to subrogation,          settlement offer. The primary carrier simultaneously tendered
which has long been prohibited by an insurer against its          its remaining policy limits.
own policyholder.8
                                                                  The excess insurance policy included a provision requiring
An extensive dissent was authored by Justice Owen and             Frank’s approval of any settlement. The written settlement
joined by Justice Hecht in Matagorda County.9 They argued         agreement among Plaintiff, Frank’s, and Excess Underwriters
that when an insurer reserves its right to contest coverage and   preserved “any claims that exist presently” between Frank’s
there has been a settlement demand within policy limits that      and Excess Underwriters. Prior to execution of the settlement
the policyholder agrees is reasonable, the insurer may settle     agreement, Excess Underwriters filed suit against Frank’s for
the claim and recover settlement costs based on an obligation     reimbursement and Frank’s answered.
that is implied in law. In order to prevent unjust enrichment,
the dissenters said, obligations are implied in law even when     In the reimbursement action, the trial court initially granted
there is no agreement, either express or implied.                 three separate motions for partial summary judgment in
                                                                  favor of Excess Underwriters, finding that none of Plaintiff’s
IV. Frank’s Casing—Creating a New Implied Right of                claims against Franks were covered, and required Franks
Reimbursement                                                     to reimburse Excess Underwriters for the full amount of
Times, and the membership of the Texas Supreme Court,             the settlement. Shortly thereafter, the opinion in Matagorda
have changed. In Frank’s Casing, a seven-member court             County was issued by the Texas Supreme Court. The trial
fundamentally departed from the holding of the Matagorda          court consequently withdrew its summary judgment and
County majority opinion and essentially adopted the view of       entered a take-nothing judgment against Excess Underwriters
the Matagorda County dissent.10 The Frank’s Casing majority
                                          s                       because Frank’s had not given clear and unequivocal consent
“clarified” that insurers may seek reimbursement of settle-       to reimbursement as required by Matagorda County.
ment payments, even if the policy does not provide a right
of reimbursement, and even though the policyholder does           The appellate court felt similarly constrained by Matagorda
not expressly consent.11                                          County. It affirmed the trial court, while recognizing the
                                                                  “somewhat disquieting” result that Frank’s Casing was able
A. Background of Frank’s Casing Case                              to resolve the coverage dispute in its own favor without
Frank’s was sued for allegedly defective work in fabricating      subsequent reimbursement “simply by sending a Stowers
an offshore platform that collapsed.12 Frank’s was defended       demand to the Underwriters.”14
under a separate primary liability policy with a different
insurer, and its Excess Underwriters issued a reservation         B. Frank’s Casing Case: Analysis and Critique
of rights asserting that certain of the claims against Frank’s    The Texas Supreme Court reversed, holding that recoupment
were not covered.                                                 is available when an insurer has asserted its reservation
                                                                  of rights and notified the policyholder it intends to seek
During trial, Frank’s in-house counsel negotiated with            reimbursement, and either:
Plaintiff for a settlement demand within excess insurance
limits in an amount Frank’s considered reasonable, then               1)   the policyholder agrees that the settlement
forwarded Plaintiff’s offer to Excess Underwriters with a                  amount is reasonable, whether or not consent
demand to pay the settlement in full or be exposed to liability            to settlement or to reimbursement is also given
beyond policy limits under Stowers. 13                                     (Part II.B);15 or

Excess Underwriters agreed the amount was reasonable, and             2) the policyholder has control over whether to settle
offered to fund the settlement if Frank’s expressly agreed that          and expressly agrees the third party’s settlement
all coverage issues would be resolved at a later date. Frank’s           offer should be accepted, and the insurer has
refused. Frank’s sent a second letter demanding that Excess              notified the policyholder that it intends to seek
Underwriters accept and fully fund the settlement offer. Excess          reimbursement (Part II.C).16
Underwriters advised Frank’s that they would pay the full
settlement demand, less any contribution from the primary         In Part II.B of its opinion, the majority reasoned that when
                                                    ADVOCATE   ✯ WINTER 2006                                                     47




                                              THE
a policyholder demands that its insurer accept a settlement       The majority rejected concurrences arguing for a more nar-
offer within policy limits, the policyholder is deemed to         rowly tailored rule.25 The court even stated broadly that there
have viewed the settlement offer as a reasonable one. The         “are additional circumstances that will give rise to a right of
insurer should be entitled to settle for the amount the poli-     reimbursement” but offered no further specifics.26
cyholder has agreed is reasonable and to seek recoupment
from the policyholder if the claims were not covered.17 This      V. Issues Raised by the Frank’s Casing Opinion
portion of the opinion does not address (or even mention)         The new rule of reimbursement in Frank’s Casing, and its
Matagorda County’s holding that the policyholder must also        departure from Matagorda County, raise a number of important
expressly consent to the insurer’s asserted right to seek         issues that affect not only Texas insurance law, but also parties
reimbursement.18                                                  and lawyers who participate in an insured settlement.

In support of the reasoning in Part II.B, the court cites         A. Effect on Settlement Dynamics
California law.19 The opinion does not discuss any of the         The majority in Frank’s Casing stated that “[r]eimbursement
                                                                                          s
substantial differences between California and Texas juris-       rights encourage insurers to settle cases even when coverage
prudence in this area of insurance coverage law. The opinion      is in doubt.”27 The court reasoned that reimbursement rights
indicates that reimbursement becomes available to an insurer      benefit injured plaintiffs by shifting the risk of non-coverage
whenever a policyholder agrees that a settlement amount is        and financial solvency from the dispute between the plaintiff
reasonable.20                                                     and the defendant, to the defendant-policyholder and its
                                                                  insurer.28 The court also indicated that reimbursement rights
In Part II.C, the court reasoned broadly that “[a]n insured who   would encourage insurers to fully fund settlement in the
agrees to the settlement and benefits by having claims against    first instance, then pursue additional recovery from their
it extinguished cannot complain that it must reimburse its        policyholder in a subsequent action.29
insurer if the claims against the insured were not covered by
its policy.”21 It appears the court considered Matagorda County   The court did not address how insurers currently settle
distinguishable because there the insurer controlled defense      claims involving disputed coverage. The facts recited in
and settlement, whereas in Frank’s Casing the policyholder
                                      s                           Frank’s Casing illustrate that insurers sometimes attempt to
                                                                         s
ostensibly controlled both defense and settlement.22              settle only those claims the insurer believes are potentially
                                                                  covered, or may seek contribution from the policyholder for
After reciting these distinctions of control as if they were      supposed non-covered claims as a condition for settlement of
important differences in determining when and whether to          undisputedly covered claims.30 Sometimes, insurers simply
allow insurer reimbursement, the court’s majority opinion         refuse settlement offers that include amounts attributable to
nevertheless concludes Part II.C with a confusingly broad         the non-covered claims and evaluate the reasonableness of
statement stating simply that:                                    settlement based solely on undisputedly covered claims.31

  An insured who agrees to the settlement and benefits by         Will reimbursement rights encourage fair settlements? Or
  having claims against it extinguished cannot complain           will insurers have greater incentive to promote unreasonably
  that it must reimburse its insurer if the claims against        generous settlements, believing that some or all of the settle-
  the insured were not covered by its policy.23                   ment ultimately will be recoverable from the policyholder?
                                                                  In complex or expensive cases, insurers may have particular
Significantly, in Part II.D, relying again on California          incentive to limit defense costs by quickly reaching even
authorities, the court indicated that the insurer’s right         an excessive settlement, and then seek reimbursement in
to seek reimbursement need not appear in the insurance            a less expensive, more streamlined coverage case against a
contract. Rather, reimbursement may be “implied in law.           financially solvent policyholder. The risk of abuse is greatest
It is quasi-contractual.”24 From the context it is not clear      against naive or unsophisticated entities and individuals who
whether the court’s application of equitable standards is         are least able to protect themselves from their own litigation-
predicated upon the actual facts in the underlying Frank’s        savvy insurers, such as small businesses, homeowners, and
Casing case, or applies broadly in either of the more general     auto drivers.
circumstances described by the court in Parts II.B & C of
the majority opinion.                                             Is it always in the policyholder’s interest to enter a reason-
                                                                  able settlement, regardless of whether the plaintiff’s claim is
48                                                      ADVOCATE   ✯ WINTER 2006




                                                  THE
covered by insurance? The court indicated that: “If the offer          approach to insurance as irrelevant to settlement objectives,
is one that a reasonable insurer should accept, it is one that         seems at odds with the court’s recent advices elsewhere that
a reasonable insured should accept if there is no coverage.”32         the mandatory production of insurance policies in discovery
Thus, the court ventured that a policyholder is in no worse            is intended precisely to facilitate settlement negotiations.38
position than if it had sustained a non-covered judgment
except it now owes reimbursement to its own insurer instead            So too, the supposed irrelevance of insurance coverage for
of owing payment to the plaintiff directly.33 The court overtly        settlement negotiations may be difficult to reconcile with the
assumed that an objectively reasonable settlement amount               obligation imposed on insurers to expeditiously file and obtain
can be divined, based solely on an evaluation of liability             declaratory relief on coverage issues whenever possible. The
and damages, and divorced from whether a claim is covered              Court’s stated purpose in imposing this obligation on insurers
by insurance or not. Many practitioners might disagree,                to resolve outstanding insurance coverage issues, is precisely
including even the staunchest representatives of insurance             to expedite settlement where coverage or non-coverage is
interests.34                                                           relevant to determining a reasonable settlement.39

In her concurrence, Justice O’Neill recognized that when cov-          B. Role and Risks of Defense Counsel / Appointment of
erage is questionable, the ability of the defendant-policyholder       Independent Counsel
to pay becomes a paramount concern driving settlement                  The reimbursement rule advanced in Frank’s Casing does not
                                                                                                                     s
negotiations.35 She concluded that when a policyholder calls           hinge on the provisions of the insurance policy. Rather, the
upon its insurer to settle a disputed claim with insurance             decisive factor is whether or not the policyholder agrees the
money, the policyholder is not necessarily agreeing it is willing      settlement amount is reasonable or consents to the settlement.
and able to pay the same amount if the insurer ultimately              In other words, the policyholder’s affirmative act of agreement
prevailed in its coverage dispute.36 A principal reason for            on reasonableness and/or consent to the settlement creates a
purchasing insurance, after all, is to protect against risks of        new right of reimbursement, to which the insurer otherwise
liability greater than the policyholder can afford to sustain          would not be entitled in the absence of such agreement or
and pay for out of its own resources.                                  consent.

Many of these issues are among the concerns expressed in               Neither Frank’s Casing nor Matagorda County specifically
                                                                                      s
the amicus brief by Shell Oil Company, Motiva Enterprises              involves or discusses the role of defense counsel in com-
LLC, Burlington Resources, Inc., Temple-Inland, Inc., and              municating the defendant-policyholder’s agreement on the
Brad Fish, Inc., supporting Frank’s request for rehearing.37           reasonableness of or consent to settlement. It is clear, though,
These major commercial policyholders argue that, contrary              that defense counsel owes unqualified loyalty to, and must
to the view espoused by the majority opinion in Frank’s                protect the interests of, the defendant-policyholder, not the
Casing, insurance and the scope of coverage are always, in             insurer, even when the insurer retains and pays the defense
reality, central considerations in litigation and settlement           counsel.40
negotiations in virtually every major claim. From their
perspective, the Court’s reasoning in Frank’s Casing upsets
                                                  s                    Frank’s Casing raises troubling questions about communi-
the traditional dynamics of settlement in Texas and unduly             cations to the insurer by defense counsel. Under Frank’s
disrupts the respective risks and burdens placed on insurers           Casing, can defense counsel inadvertently create rights
and policyholders concerning decisions about settlement                of reimbursement against the defendant-policyholder, by
and settlement negotiations. These corporate policyholders             communicating case evaluations or settlement recommenda-
predict that litigation between insurers and policyholders             tions to the insurer? Might reimbursement rights be created
will increase as a result of the current ruling, and that such         where they otherwise would not exist, when defense counsel
coverage litigation often will require trial of essentially all the    transmits the plaintiff’s settlement demand to the insurer
issues that supposedly were settled in the underlying suit.            and advises that the settlement demand is reasonable and
                                                                       should be accepted? Conversely, if defense counsel simply
One might also wonder why the Texas discovery rules specifi-           transmits the very same settlement demand but without
cally require production of a defendant-policyholder’s insur-          further comment or recommendation, would this lack of
ance policies to the plaintiff as a matter of right, if insurance is   affirmative recommendation serve to prevent a reimburse-
not relevant to evaluating the reasonable range of settlement.         ment right from arising in favor of the insurer?
Tex. R. Civ. P. 192.3(f). In fact, Frank’s Casing’s dismissive
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                                                THE
In light of the Court’s holding, cautious defense counsel may          binding the insured on the issue of reasonableness—an
refrain from any communication with the insurer that could             issue critical to the right of reimbursement under the
possibly be deemed as a consent or agreement to settlement.            court’s opinion in this case. No doubt, claimants may
An insurer might settle at an amount within counsel’s recom-           make offers precisely to divide the client and counsel
mended range, and then seek reimbursement, arguing that                at those times when the client needs zealous advocacy,
defense counsel’s advice defined an “objectively reasonable”           e.g., during trial.42
settlement. Similarly, defense counsel’s evaluation of the
policyholder’s potential liability for plaintiff’s various claimsOf course, if defense counsel is constrained from reporting
might be used by an insurer to support reimbursement for         on such core issues as the defendant-policyholder’s potential
those particular claims in which coverage is disputed.           liability to the plaintiff, the likely quantum of plaintiff’s
                                                                 damages, or the reasonable range for which the suit might
As a consequence of Frank’s Casing defense counsel may be
                              s                                  be settled, this eliminates the exact kind of communications
justifiably concerned about making any report or evaluation      an insurer needs to determine how to conduct its own duty
to the insurer that might be construed as a recommendation       to defend the case and to reasonably settle. In other words,
about the basis for or reasonable-                                                              the insurer may well be deprived
ness of an amount or reasonable                                                                 of the very resources necessary to
range of settlement. Without                “... the Court does not explain how                 make a competent Stowers decision
clear guidance in the Court’s               this doctrine—designed to protect                   about settlement, precisely because
opinion, there is cause for concern        the comparatively helpless defendant-                cautious defense counsel is forced
that such evaluations could be           policyholder from being taken advantage to be circumspect in order to avoid
interpreted as supporting a right of by its insurer—is now transmuted into creating a right of reimbursement
of reimbursement against the                                                                    under Frank’s Casing.
defendant-policyholder where no
                                                a protection for the insurer. ”
such right otherwise would exist.                                                               Moreover, if an insurer’s right of
Defense counsel must always be aware that when representing      reimbursement against the defendant-policyholder can be
the defendant-policyholder as the client, otherwise routine      affected—indeed, can be created out of whole cloth where
evaluations or recommendations from counsel to the insurer       it otherwise would not exist—due to the conduct of defense
might be construed as binding upon or carrying the authority     counsel in advising upon and recommending settlement, then
of the defendant-policyholder client. Litigators are all too     it seems likely that a true conflict of interest arises between the
familiar with the ethical problems burdening defense counsel     insurer and defendant-policyholder in every instance where a
by this “tripartite” relationship, which may be exacerbated      reservation of rights as to coverage could potentially generate
by Frank’s Casing.41                                             a right of reimbursement through the defendant-policyholder
                                                                 agreement on a settlement amount or consent to the settlement
This is the sort of caught-in-the-middle-again problem that      itself. If that is the case, then under prevailing Texas law a
prompted the Texas Association of Defense Counsel (“TADC”)       defendant-policyholder should be entitled to independent
to file an amicus letter brief joining in support for rehearing  counsel whenever such a potentially reimbursable reservation
and modification of the original opinion. The quandary is        of rights is issued by an insurer.43
described succinctly by the TADC:
                                                                 C. Confusion About Application of Stowers
   Under the Court’s opinion, the traditional role of            The Stowers risk—whereby an insurer may be exposed
   defense counsel in evaluating and recommending                to damages beyond the limits of its policy—is central to
   settlement would now expose the insured to the risk           the court’s reasoning when it provides for a right to seek
   that the insurer will demand reimbursement of the             reimbursement in order to alleviate the insurer’s burden in
   recommended settlement. Counsel’s advice to settle has        choosing whether to settle when coverage is disputed. It is
   triggered a new conflict of interest; if counsel elects to    surprising, then, that the court seems to misunderstand the
   remain silent on settlement, the client may argue this        most basic features of the doctrine.
   is malpractice. The client may feel that the potential
   conflict over reimbursement has caused counsel to             At its heart, Stowers is a tort principle, imposing on the insurer
   shade the settlement evaluation to favor the insurer.         consequential damages for failing to exercise reasonable care
   If defense counsel makes a recommendation, he risks           in settlement while controlling defendant-policyholder’s
50                                                  ADVOCATE   ✯ WINTER 2006




                                              THE
defense.44 The measure of such tort damages is the amount        or why Stowers would impose any duties at all upon Excess
of covered damages awarded when, instead of settling within      Underwriters, given the doctrine’s genesis in the insurer’s
policy limits, the insurer puts the defendant-policyholder’s     right to control defense and settlement. The court has been
own funds at unreasonable risk by going to trial. The Stowers    careful in other cases involving excess insurers to justify
duty is attributable to and arises because of the insurer’s      Stowers application on the basis of the insurer’s actual control
sole control of the defense and settlement of the suit, and      of defense and settlement.48
is intended to discourage the insurer from protecting its
own funds by failing to settle reasonably, thus placing the      It would be surprising, indeed, if the court intended in
defendant-policyholder at risk of incurring an uninsured loss    Frank’s Casing to extend Stowers duties to every liability
                                                                       s
beyond the policy limits.                                        insurer, whether or not they had the right to or in fact did
                                                                 control defense and settlement on behalf of the defendant-
Nowhere in the Frank’s Casing opinion does any member
                        s                                        policyholder.49 By applying Stowers to a non-defending excess
of the court explain how or why the Stowers tort doctrine        insurer sub silencio and magnifying its import with respect to
should affect the respective contract obligations between        an excess insurer’s decision to settle, the court has, at best,
the parties, established under the insurance policy or out       increased the level of confusion in this critical area.
of the insurance relationship. In particular, the Court does
not explain how this doctrine—designed to protect the            D. The Application of California Law is in Conflict with
comparatively helpless defendant-policyholder from being         Texas Jurisprudence
taken advantage of by its insurer—is now transmuted into         Additionally, the court apparently does not appreciate that
a protection for the insurer. As described by the court, the     liability for an excess judgment under the Stowers doctrine
purpose of the Stowers doctrine is turned on its head in order   in Texas is founded on critically different principles than the
to allow the insurer to alleviate its own risk by, in effect,    similar-looking duty established in California. This is a critical
using the policyholder’s funds for settlement by recovering      component of the majority’s reasoning in Part II.B of the opinion,
back again through reimbursement.                                which grants reimbursement where the defendant-policyholder
                                                                 simply agrees to the reasonableness of the settlement amount
At times, the court also seems to misapprehend the Stowers       independent of whether consent to settlement is also required
risk as a kind of strict liability imposed upon the insurer      under the policy or is otherwise volunteered.
for failing to settle, even though the opinion elsewhere
recognizes that the doctrine is negligence-based and             In Texas, an insurer is liable for an excess judgment only if
requires that a defendant-policyholder prove the insurer         it has failed to take the opportunity to settle a case where
acted unreasonably in order to recover damages awarded           the demand is within limits, the amount is reasonable, and
in excess of the policy limits.45 Furthermore, the majority      where the claims are within coverage. Under California law an
and concurring opinions sometimes imply that a Stowers           insurer faces the same risk of exposure beyond policy limits
demand is one made by the defendant-policyholder to its          without regard to whether the claim is within coverage, simply by
insurer.46 In fact the insurer’s obligation under Stowers is     failing to settle when the amount of the settlement demand
triggered when the insurer is made aware (usually through        is reasonable and within policy limits.50
its own control of the defense) of a settlement demand made
by the plaintiff upon the defendant-policyholder, whether or     These differences have profound consequences. In Texas, a
not the defendant-policyholder has any hand in transmit-         policyholder may recover an excess-of-limits judgment against
ting the demand or makes any affirmative comment about           its insurer only by showing that the claims were covered;
the demand. A Stowers-compliant demand must simply be            whereas in California the policyholder must merely show that
a demand: (1) within the policy limit, (2) in a reasonable       the rejected settlement demanded was reasonable. Once a
amount, and (3) for claims covered by policy.47                  California policyholder has shown the settlement demanded
                                                                 was reasonable, the insurer is liable for an excess judgement
The court never addresses a basic predicate question: How        without regard to coverage.
can Stowers even apply to the insurer in Frank’s Casing,
since the policy at issue there did not impose any duty to       Under Texas law, because coverage is an important issue for
defend on Excess Underwriters and the opinion is clear that      determining the insurer’s obligations for settlement, an insurer
the defendant-policyholder actually controlled settlement        is required to act in good faith to seek expeditious resolution
negotiations? In such circumstances, it is not apparent how      of coverage issues in a declaratory action prior to serious
                                                    ADVOCATE   ✯ WINTER 2006                                                       51




                                              THE
settlement negotiations or trial.51 According to the very case    In contrast with the solicitude expressed by Matagorda County
cited by the court as support for Part II.B, and elsewhere in     in favor of the policyholder, Frank’s Casing is silent about this
Frank’s Casing, California law is distinguishable from Texas      disparity of power or potential conflict of interest. In particular,
law on the issue of reimbursement precisely because in            the majority opinion gives no indication that it appreciates
California an insurer is prohibited from proceeding with any      how the new rule of reimbursement may be subject to abuse
such coverage action against its own policyholder before the      where the policyholder is not a sophisticated business entity
underlying suit is resolved.52 It is not surprising, then, that   with its own in-house lawyers capable of protecting its own
California allows for the insurer to obtain reimbursement of      interests, of appreciating litigation risk, and of significantly
non-covered claims paid towards an otherwise reasonable           influencing its insurer. The wisdom of a reimbursement
settlement, where the question of coverage can play no part in    right—based solely upon the policyholder’s agreement that
the insurer’s decision whether to settle based on exposure to     a settlement amount is reasonable or upon the policyholder’s
an excess judgment, and the insurer has no earlier opportunity    consent to a settlement—may look quite different in a situation
to resolve the coverage issues.                                   where an insurer’s sophisticated litigation savvy is arrayed
                                                                  against a policyholder who is an unsophisticated individual
The court did not address these differences in Frank’s Casing     homeowner or automobile driver, or a mom-and-pop small
when it essentially adopted California law to justify a rule      business inexperienced in litigation.
imposing reimbursement whenever a defendant-policyholder
merely agrees to the reasonableness of the settlement amount.     The right to reimbursement under Frank’s Casing is also
                                                                                                                   s
The opinion gives no inkling that the Court appreciates           likely to enhance the conflict-of-interest that naturally
the significant differences between Texas and California          arises between insurer and policyholder whenever there is a
jurisprudence on this matter.53                                   reservation of rights to coverage. Reimbursement suits may
                                                                  essentially require that the insurer prosecute the plaintiff’s
It is important that the court thoroughly think through the       liability case against the policyholder to establish which claims
basis and ramifications of its jurisprudential approach to        are not covered. The insurer might use information against the
reimbursement. The Frank’s Casing reasoning has already
                              s                                   policyholder that was developed when the insurer investigated
been adopted with respect to settlement reimbursement,            or defended the policyholder.58 In the reimbursement suit, the
and extended beyond the settlement context to create a right      policyholder faces essentially the same risks of litigation, but
of reimbursement by an insurer against the policyholder           without the benefits of an insurer-provided defense. Thus, a
for expenses incurred in the duty to defend.54 In contrast,       reimbursement suit may closely approximate a subrogation
other high courts have adopted reasoning congruent with           action by the insurer against its own policyholder, which
the court’s prior opinion in Matagorda County, and denied         Matagorda County acknowledged is widely prohibited.59 Frank’s
reimbursement to an insurer as an equitable remedy when           Casing does not address this issue.
the policy wording comprising the insurance contract does
not itself provide that right.55                                  The extreme departure of the Frank’s Casing opinion from the
                                                                                                       s
                                                                  reasoning and holdings in Matagorda County only five years
E. Uncertain Status of Matagorda County                           before prompted the Texas Civil Justice League (“TCJL”) to
In most respects, the court in Frank’s Casing does not discuss
                                      s                           file an amicus brief supporting rehearing and suggesting the
or distinguish its previous reasoning in Matagorda County,        opinion be withdrawn.60 The TCJL urged that the Frank’s
where the right of reimbursement was severely limited.            Casing opinion represents a step backwards from predict-
For example, the court in Matagorda County discussed the          ability in the law related to business transactions in Texas
disparity of power between policyholder and insurer and           and, therefore, a step back from attaining a fair, efficient
expressed concern that “allowing an insurer to unilaterally       and predictable civil justice system. The TCJL argues that
settle claims and then step into the shoes of the claimant        Matagorda County was effectively overruled in Frank’s Casing
could potentially foster conflict and distrust in the relation-   without due regard to the strong policies supporting adher-
ship between an insurer and its insured.”56 Matagorda County      ence to settled rules of law unless there exists the strongest
determined that the insurer, not the policyholder, should bear    reasons for change, as articulated in the stare decisis doctrine
the risk of choosing whether to settle claims with disputed       long recognized by the Court.61
coverage, in part because “the insurer is in the business of
analyzing and allocating risk and is in the best position to      Finally, the protection afforded policyholders in Matagorda
assess the viability of its coverage dispute.”57                  County was influenced by the ability of insurers to draft their
52                                                    ADVOCATE   ✯ WINTER 2006




                                                THE
policies to specifically provide for reimbursement.62 In the five  funded because the settlement allowed the insurer to cap its
years between that ruling and the initial opinion in Frank’s       defense costs and its liability for a potentially higher verdict.
Casing, however, standard liability policies in Texas were not     Moreover, reimbursement would be affirmatively detrimental
altered to include reimbursement clauses.63 Presumably, the        to Frank’s, because here, as in most instances, the value of
insurance market simply did not allow insurers to regularly        the settlement was inflated by the very existence of insur-
include reimbursement provisions in their liability policies.      ance. Hence, Frank’s would have to reimburse an amount
By granting an implied right of reimbursement, even though         for non-covered claims that is higher than the amount for
no such provision is included in the policy, Frank’s Casing        which those liabilities could have been settled if no insurance
enables insurers to circumvent the normal free market forces       was available.
governing insurance provisions. Granting
such a broad right of reimbursement could                                               Valero’s post-submission amicus brief
also make Texas a very attractive venue           “... Frank’s Casing enables likewise argues that the perceived windfall
for insurers who want to bring reimburse-           insurers to circumvent              to insurers is illusory. Virtually all settle-
ment actions that are not implied in law                                                ments, Valero argues, create “windfalls” as
                                                   the normal free market
elsewhere.64                                                                            to someone, as, for example, in pre-verdict
                                                 forces governing insurance “high-low” agreements, or when later
F. Equities and the Court’s                                provisions.”                 developments in jurisprudence negate
Discomfiture                                                                            the basis for a plaintiff’s lucrative prior
At the oral argument on rehearing it was                                                recovery, or where one party later suffers an
apparent the court is grappling with a visceral sense that is      unanticipated change of condition. In none of those ordinary
unfair in this specific case for the insurer to be precluded       instances does the settling party gain a right to redistribute
from reimbursement, when the insurer funded the entire             monies in order to correct the “windfall.” Rather, the parties
settlement after demand by its insured only to have it later       to a settlement recognize that the resolution brings finality,
determined that there was no coverage whatsoever under             and that each settlor bears the risk of having paid too much
the policy. This is obviously a difficult equitable pill for the   or too little for the claim.
Court to swallow.
                                                                   Both Frank’s and Valero argue that the risk of settling claims
Members of the court indicated particular concern about: (i)       that combine covered and non-covered liabilities is one that
whether reimbursement is appropriate to prevent a windfall         the insurer accepts as part of the bargain for the insurance
to the policyholder when the insurer pays to settle claims         contract. Premiums are established by an insurer in the
that are not covered by the policy; and (ii) whether Excess        expectation that a statistical portion of settlement funding may
Underwriters’ offer to fund settlement and Frank’s acceptance      pay for claims that are not actually within coverage. Insurers
of funding created an implied-in-law or implied-in-fact            are properly considered by their insureds and by the general
contract.                                                          public to be the experts in determining settlement value of liti-
                                                                   gation and the scope of coverage afforded under their policies.
Frank’s filed a post-submission brief addressing these and         That expertise is a major aspect of the product/service that an
other issues. A post-submission amicus brief and an amicus         insured purchases when it obtains insurance to protect itself
letter brief, both supporting the policyholder position, have      from the vicissitudes of tort liability. For the court to allow
also been filed with (“received” by) the Court.65 As of the date   an insurer to obtain reimbursement of settlement funding,
of this writing, no post-submission briefing has been sub-         when that right is not specified as part of the contract bargain
mitted by Excess Underwriters or any pro-insurer amicus.           and accounted for in the premium calculation, provides a
                                                                   windfall to insurers and not to insureds.
1. Windfall
In its post-submission briefing, Frank’s argues that insureds      2. Implied Contracts
do not receive a windfall when an insurer is precluded from        At oral argument, the court postulated on whether the cir-
obtaining reimbursement of settlement funds paid for non-          cumstances of settlement—a demand for settlement within
covered claims, where the policy does not include a provision      policy limits by underlying Plaintiff and by Frank’s, which
specifying that right. As in every similar situation there was     Excess Underwriters funded under a unilateral condition
no unearned gain or unjust enrichment in this case. Rather,        for reimbursement, and which funding Frank’s did not
Excess Underwriters also benefitted from the settlement they       reject—creates an “implied-in-fact” or an “implied-in-law”
                                                      ADVOCATE   ✯ WINTER 2006                                                     53




                                                THE
agreement. The post-submission brief by Frank’s and the             In this case, the parties had agreed to an actual contract
amicus letter brief by Pilco address those questions, as sum-       comprising their agreement, so it would be inappropriate
marized below.                                                      to resort to an implied-in-law remedy. Frank’s discusses at
                                                                    some length the procedures actually specified in the contract
An “implied-in-fact” agreement is one that arises out of the        for settling claims, and asserts that Excess Underwriters
acts and conduct of the parties, creating an implied agree-         could have protected themselves from settling non-covered
ment between the parties. To recover under this equitable           claims had they simply followed the contract provisions. In
theory, there must be a meeting of the minds, which Frank’s         any event, Frank’s asserts that it did not act improperly or
maintains was not present in this case.                             inequitably, so as to provide any basis for invoking equitable
                                                                    relief in favor of Excess Underwriters.
Frank’s argues that it never agreed to reimburse insurers,
impliedly or expressly. Instead it consistently contested           Pilco’s post-submission letter brief references a more detailed
Excess Underwriters’ coverage position and demanded                 discussion in its pre-argument amicus brief. More generally
full and unreserved payment. Nor, argues Frank’s, can its           than Frank’s post-submission brief, Pilco broadly argues that
silence and acceptance of settlement funding be construed           the court should not create extra-contractual reimbursement
as a meeting of minds in this context. Frank’s differentiates       rights to provide relief from perceived unfairness or windfall.
the settlement situation from the rule where an insured is          Such equitable remedies are seldom applicable, and are
deemed to acquiesce to an insurer’s unilateral reservation of       subject to strict factual requirements that are not met in the
rights merely by accepting the proffered conditional defense.       circumstances of this case. The court’s merely abstract concern
In that situation, the insurer asserts rights that are already      about fairness is insufficient. Moreover, Pilco argues, in its
contained in policy, whereas underwriters seek to assert a          Matagorda County decision the Court properly has rejected the
unilateral reimbursement right not contained in the policy.         implied contract route already, in similar circumstances.
Silence should not be equated with acquiescence in the
latter circumstance. Moreover, Frank’s argues that under            Pilco maintains that Excess Underwriters should be held to
the particular facts of this settlement Excess Underwriters         the terms of its actual contract which contained no reimburse-
asserted the reimbursement condition with insufficient time         ment provision. In any event, any unfairness was suffered by
for Frank’s to consider and accept or reject it, especially since   Frank’s and not by Excess Underwriters, in the circumstances
no such condition was timely raised in any prior reservation        where the insurer took advantage of uncertainty about
letter.                                                             coverage to further its own interests in hopes that Frank’s
                                                                    would contribute to the settlement.66
Nor should the Court consider that an “implied-in-law”
agreement is formed under the circumstances, argues Frank’s.        VI. Conclusion
An implied-in-law contract is one that is not based on any          The motion for rehearing was granted in Frank’s Casing
contractual undertaking of the parties, but is implied by           and the Court heard reargument on February 15, 2006.
law without regard to whether the parties actually agreed.          It remains to be seen whether the court will reevaluate its
An implied-in-law theory, argues Frank’s, is never available        decision, or address: (a) any of the practical considerations
simply to rectify a wrong perceived by the Court, or to             or jurisprudential concerns that are likely to substantially
preclude a windfall in favor of one party or the other from         affect settlement dynamics; (b) the role of defense counsel; (c)
rights exercised under an actual contract.                          the rights, obligations and relationship between insurers and
                                                                    policyholders in the defense and settlement of suits brought
The equitable relief associated with an implied-in-law theory       by third-parties; (d) the applicability of equitable relief to
involves claims such as unjust enrichment, quantum meruit,          prevent perceived windfalls to one settling party or another;
or money had and received. Frank’s argues that this remedy          or (e) the continuing viability of the Court’s prior reasoning
is never available when there is an actual contract between         in Matagorda County.
the parties. Here, the insurance policy comprises Frank’s and
Excess Underwriters’ binding agreement. Moreover, these             Randy Roach is a partner in Cook & Roach, L.L.P. He is an
equitable remedies require that the party receiving a benefit       adjunct professor of appellate advocacy at the University of Texas
obtained its advantage through some improper means, such            and University of Houston law schools, and is certified in civil
as by fraud, duress or the like.                                    appeals and in personal injury trial by the Texas Board of Legal
                                                                    Specialization. Randy has been recognized as a Texas Super Lawyer
54                                                        ADVOCATE   ✯ WINTER 2006




                                                    THE
in appellate practice, and is honored to be listed as a leading Texas
insurance lawyer by Chambers USA, and named as one of the Best           from an insured for settlement payments when there is no coverage
Lawyers in America–Insurance. Randy is the current chair of the          is when there is an express agreement that there is a right to seek
Appellate Practice Section of the State Bar of Texas.                    reimbursement, we clarify that there are additional circumstances
                                                                         that will give rise to a right of reimbursement.”).
Bob Cunningham represents policyholders with insurance coverage          12. This article assumes the background facts taken from the Court’s

problems. For well over a decade, he has focused virtually exclu-        opinion, Id. at *1-2.
                                                                         13. G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544
sively on insurance coverage matters. As a partner with Cook &
Roach, L.L.P. his practice includes counseling on existing policies or   (Tex. Comm’n App.1929, holdings approved).
                                                                         14. 93 S.W.3d 178, 180 (Tex. App.—Houston [14th Dist.] 2002). This
prospective purchase of insurance, and resolving disputed coverage
                                                                         intermediate appellate decision was authored by then-Chief Justice
and related bad faith claims through negotiation, settlement,                               th
                                                                         Brister of the 14 District, who now sits as a Justice on the Texas
litigation and appeal. Bob is recognized as a leading Texas insur-
                                                                         Supreme Court but has not participated in the current appeal.
ance lawyer by Chambers USA, was honored as a Texas Super                15. 2005 WL 1252321 at *3-4 (Part II.B).
Lawyer in insurance, and is a frequent speaker and contributor to        16. Id. at *5 (Part II.C); Justice O’Neill and Justice Wainwright
seminars and publications addressing a broad range of insurance          joined in this Part II.C with different reasonings and in separate
coverage issues.                                                         concurrences.
                                                                         17. Id. at *3-4.
                                                                         18. 52 S.W.3d at 135. The majority does not mention much less
The authors are indebted to colleague Robert B. Dubose for
his insight and assistance in the formulation and editing                resolve this apparent contradiction with Matagorda County where
of this paper. The opinions expressed herein do not neces-               reimbursement was denied because the policyholder stipulated
sarily reflect the views of Cook & Roach, L.L.P nor any of               that the amount of the settlement was reasonable and did not
                                                                         object to the settlement, but did not also agree that the insurer
its clients, nor even necessarily of the authors themselves in
                                                                         had a right to seek reimbursement. Id. at 130. In contrast, Justice
every aspect. ✯
                                                                         Hecht’s concurrence straightforwardly maintains that Frank’s Casing
                                                                         wholly overturns any remaining validity of Matagorda County. 2005
1.  See Robert M. “Randy” Roach, Jr., Unsettling the Dynamics of         WL 1252321 at *7.
                                                                         19. 2005 WL 1252321 at *4, citing Blue Ridge Ins. Co. v. Jacobsen, 25
Settlement, 68 TEX. B.J. 804 (2005).
2. See, e.g., Roundtable: Excess Underwriters at Lloyd’s, London v.      Cal.4th 489, 106 Cal.Rptr.2d 535, 22 P.3d 313, 321 (Cal.2001).
                                                                         20. 2005 WL 1252321 at *3-4.
Frank’s Casing Crew &
                                                                         21. Id. at *5.
Rental Tools, TEX. LAWYER (Jan. 30, 2006); see also Respondent’s
                                                                         22. Id. at *5. The Court does not clearly delineate what sort of consent
Supplemental Appendix, filed February 6, 2006.
3. Tex. Assoc. of Counties County Government Risk Mgmt. Pool v.          to settlement is required on the part of the defendant-policyholder
Matagorda County, 52 S.W.3d 128,131-32 (Tex. 2000).                      to create a right of reimbursement. Since every settlement between
4. Id. at 135.                                                           a plaintiff and defendant-policyholder presumably will require a
5. Id.                                                                   signed dismissal, a settlement agreement and a release between
6. Id.                                                                   both those parties, it seems inconceivable that any settlement
7. Id. at 136.                                                           could ever actually be obtained by an insurer without requiring
8. Id. at 134.                                                           the defendant-policyholder’s actual consent in those procedural or
9. Id. at 136 (Owen, J. dissenting).                                     administrative acts, at least.
10. Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew &      23. Id.
                                                                         24. Id.
Rental Tools, Inc.,—S.W.3d—, No. 02-0730, 2005 WL 1252321
                                                                         25. See Id. at *10 - 12 (O’Neill, J.) and *12 - 19 (Wainwright, J.).
(Tex. May 27, 2005). The opinion is authored by Justice Owen who
                                                                         26. Id. at *6. The Court’s broad statement is particularly problematic
authored the dissent in Matagorda County, and was issued almost
immediately upon her confirmation to the Fifth Circuit. Her majority     because two very general bases for reimbursement are identified
opinion is joined by three justices who were not on the Court at         early in the opinion, but are not exactly parallel to the bases
the time of Matagorda County, as well as by Justice Hecht who had        described in its subsequent reasoning: (1) when an insured has
joined in the Matagorda County dissent. Justice O’Neill, the author      demanded that its insurer accept a settlement offer that is within
of the majority opinion in Matagorda County, concurred in part           policy limits, or (2) when an insured expressly agrees that the
of the majority opinion that she viewed as a minimal extension           settlement offer should be accepted. Id. at *3.
                                                                         27. Id. at *4.
of the prior rule, but not with the broader-based entitlement to
                                                                         28. Id.
reimbursement granted by the majority.
11. Id. at *6 (“To the extent Matagorda County indicated that the only   29. Id.
                                                                         30. Id. at *1. Prior to trial, Excess Underwriters independently and
circumstance under which an insurer may obtain reimbursement
                                                             ADVOCATE    ✯ WINTER 2006                                                             55




                                                       THE
without Frank’s knowledge contacted the Plaintiff in an effort to            available against a liability insurer, as Stowers provides sufficient
settle only those claims that Excess Underwriters believed were              policyholder protection), citing Texas Farmers Insurance Co. v. Soriano,
potentially covered. Excess Underwriters offered to pay a portion of         881 S.W.2d 312, 317-18 (Tex.1994).
the Plaintiff’s settlement demand to resolve those claims, apparently        46. 2005 WL 1252321 at *3, 4; in his concurrence, Justice Hecht

then leaving Frank’s to face Plaintiff’s remaining claims without            accurately states that the Stowers duty is generated by a demand
insurance coverage. Similarly, Excess Underwriters in Frank’s                from the claimant, not the policyholder. Id. at *7.
Casing later attempted to obtain significant contributions towards           47. Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d at 848-9.

settlement from Frank’s before finally agreeing to fund the entire           48. Rocor Intl., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 77

settlement and then seek reimbursement.                                      S.W.3d 253, 263-64 (Tex 2002).
31. See, e.g., St. Paul Fire and Marine Ins. Co. v. Convalescent Services,   49. See Keck, Mahin, & Cate v. Nat’l Union Fire Ins. Co. of Pittsburgh,

Inc., 193 F.3d 340, 344 (5th Cir. 1999).                                     Pa., 20 S.W.3d 692, 700 (Tex. 2000) (addressing the significant
32. 2005 WL 1252321 at *4.
                                                                             distinctions between a primary insurer which ordinarily has a
33. Id.; see also *9 (J. Hecht concurring).
                                                                             right and duty to defend, and an excess insurer which typically
34. Richard L. Antognini, Reimbursement of Settlement Payments Comes
                                                                             does not).
to Texas: Excess Underwriters v. Frank’s Casing Crew and Rental Tools,       50. Johansen v. Cal. State Auto. Assn. Inter-Ins. Bureau 15 Cal.3d 9,

IADC (“International Association of Defense Counsel “) Newsletter            12, 15-16, 123 Cal.Rptr. 288, 538 P.2d 744 (Cal. 1975); Blue Ridge
(June 2005).                                                                 Ins. Co. v. Jacobsen, 25 Cal.4th 489, 106 Cal.Rptr.2d 535, 22 P.3d
35. 2005 WL 1252321 at *11.
                                                                             313, 321 (Cal. 2001).
36. Id.                                                                      51. State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d at 714
37. Brief of Amici Curiae Shell Oil Company, Motiva Enterprises              52. Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th at 505, 106 Cal.Rptr.2d

LLC, Burlington                                                              535, 22 P.3d 313, 321 (Cal.2001).
Resources, Inc., Temple-Inland Inc. and Brad Fish, Inc., received            53. It is particularly surprising that Justice Hecht did not acknowl-

September 19, 2005;                                                          edge or comment on this distinction in his concurrence, since he
http://www.supreme.courts.state.tx.us/ebriefs/02/02073006.pdf                was the author of the Gandy opinion requiring insurers to attempt
38. In Re Dana, 138 S.W.3d 298, 303-04 (Tex. 2004).
                                                                             in good faith to resolve coverage actions through an early declara-
39. State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696, 714
                                                                             tory action.
(Tex.1996).                                                                  54. See Melton Truck Lines, Inc. v. Indem. Ins. Co. of N. America, No.
40. Employers Cas. Co. v. Tilley, 496 S.W.2d 552, 558 (Tex.1973);
                                                                             04-CV-263, 2006 WL 1876528 (N.D.Okla., Jun 26, 2006) (adopting
State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625, 627-28             reasoning as consistent with Oklahoma law, and holding that
(Tex.1998).                                                                  settlement funding does not waive insurer’s coverage defenses and
41. Id.; see also Michael D. Morrison & James R. Old, Jr., Economics,
                                                                             right to reimbursement); see also St. Paul Fire & Marine Ins. Co. v.
Exigencies and Ethics: Whose Choice? Emerging Trends and Issues in           Compaq Computer Corp., 377 F. Supp. 2d 719 (D. Minn., 2005),
Texas Insurance Practice, 53 Baylor L. Rev. 349 (2001).                      aff’d , 457 F.3d 766 (8th Cir., 2006) (applying Texas law to allow
42. Amicus Curiae Letter Brief of Texas Association of Defense
                                                                             reimbursement of defense fees when there was no basis for potential
                                                                                                                               th
Counsel, received December 13, 2005; http://www.supreme.courts.              coverage in the pleading). Interestingly, the 8 Circuit’s reasoning
state.tx.us/ebriefs/02/02073009.pdf at pg. 2.                                is closer to that of Justice Wainwright’s concurrence than to the
43. N. County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex.
                                                                             majority holding. The federal court found that a new contract
2004).                                                                       supplanted the terms of the policy itself, when the insurer agreed
44. See, G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d
                                                                             to give up its right under the policy to require certain designated
at 547; Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 848-9           defense counsel, but in doing so conditioned its acquiescence to
(Tex.1994); State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d at          policyholder’s choice of counsel upon a right for reimbursement
629.                                                                         of defense fees if it was later determined that the pleading did not
45. Compare 2005 WL 1252321 at *3 (Citing Garcia for the proposi-
                                                                             allege any covered claim.
tion that the duty imposed by Stowers is to “exercise ‘that degree           55. See Gen. Agents Ins. Co. of Am. v. Midwest Sporting Goods Co. et al.,

of care and diligence which an ordinarily prudent person would               215 Ill.2d 146, 828 N.E.2d 1092, 293 Ill.Dec. 594 (Ill. 2005).
exercise in the management of his own business.’ “ and that the “the         56. 52 S.W.3d at 134.

terms of the demand are such that an ordinarily prudent insurer              57. Id. at 135.

would accept it.”) with Id. at * 4 (faced with a demand within limits        58. For example, an insurer might settle plaintiff’s claims for

and an unresolved coverage question, the insurer “could refuse to            negligence and battery, then attempt to prove in a reimbursement
settle and face a bad faith claim if it is later determined there was        suit that the claim is not covered because the policyholder harmed
coverage. Or it could settle the third-party claim with no right of          the plaintiff intentionally, rather than negligently.
recourse against the insured . . .); see also Maryland Ins. v Head,          59. Id. at 134.

938 S.W.2d 27, 28 (Tex. 1996) (no common law bad faith action                60. Amicus Curiae Brief of Texas Civil Justice League, received
56                                                        ADVOCATE    ✯ WINTER 2006




                                                    THE
October 6, 2005;
http://www.supreme.courts.state.tx.us/ebriefs/02/02073008.pdf
61. Id. at pg. 3 - 6, notably citing the Chief Justice’s remarks on the

importance of stare decisis in Wallace Jefferson, State Jurisprudence,
the Rule of the Courts, and the Rule of Law, 8 TEX. REV. L. & POL.
271 (Spring 2004).
62. 52 S.W.3d at 136
63. Since the excess policy at issue in Frank’s Casing apparently was
                                                s
issued as surplus lines insurance, Excess Underwriters readily
could have included in their policies whatever provisions could
reasonably be marketed, without regulation or restriction by Texas
regulatory authorities.
64. As indicated in footnotes 55 and 56 above, a federal circuit court

in Minnesota applying Texas law already has expanded Frank’s
Casing to provide insurer reimbursement of defense fees in St.
Paul Fire & Marine Ins. Co. v. Compaq Computer Corp., and a federal
district court in Oklahoma has applied the reasoning as consistent
with Oklahoma law in Melton Truck Lines, Inc. v. Indem. Ins. Co. of
N. Am., No. 04-CV-263, 2006 WL 1876528 (N.D. Okla., Jun 26,
2006); by contrast, shortly before the Frank’s Casing opinion was
                                                  s
issued, the Illinois Supreme Court reached the opposite conclusion
in refusing reimbursement based on an insurer’s unilateral reserva-
tion in General Agents Insurance Co. of America v. Midwest Sporting
Goods Co. et al., on Mar. 24, 2005.
65. Corrected Brief of Amicus Curiae Valero Energy Corporation

received April 14, 2006; Letter Brief of Pilco, Inc. received April
24, 2006.
66. Pilco’s post-submission brief also touches on the Court’s concern

at oral argument about the proper application of the Stowers doctrine.
Those issues have been addressed elsewhere in this article.
                                                     ADVOCATE   ✯ WINTER 2006                                                57




                                               THE
                      INSURING A CIVIL CONFESSION IN TEXAS:
                    STRATEGIES FOR ALLEGING AND CHALLENGING
                              AFFIRMATIVE DEFENSES
                                                BY: RAIN LEVY MINNS-FINK




A  FFIRMATIVE DEFENSES ARE one of the most misused
    tools in Texas state court insurance litigation. Attorneys
    often succumb to the temptation to file an answer that
contains a kitchen sink of generic affirmative defenses. This
article provides a practical guide to asserting and challenging
                                                                  94, an affirmative defense must be raised in the “pleading to
                                                                  a preceding pleading.”7 This means that affirmative defenses
                                                                  must be alleged in the answer to a petition or the amended
                                                                  answer to an amended petition. This is also true in Texas
                                                                  federal court.8 In Texas state court, even though the answer
affirmative defenses in insurance litigation.                     is not due until the Monday following 20 days after the peti-
                                                                  tion is served,9 attorneys often have much less time once the
                I. Affirmative Defenses Defined                   client actually hands them the petition. This pressure tempts
The Texas Supreme Court has explained that the purpose            many attorneys to “throw in the kitchen sink” of affirmative
of affirmative defenses is to provide notice to the opposing      defenses.
party “of the defensive issues to be tried.”1 An affirmative
defense is “one of confession and avoidance.”2 In asserting      One strategy to resist this temptation is to use a checklist
an affirmative defense, the litigant “seeks to establish an      of possible affirmative defenses. I begin by reviewing the
independent reason why the plaintiff should not recover.”3       affirmative defenses that are listed in Texas Rules of Civil
Under Texas Rule of Civil Procedure 94 and Federal Rule of       Procedure 54 (regarding conditions precedent), 93 (regarding
Civil Procedure 8(c), affirmative defenses include “accord       verified pleas), and 94 (regarding affirmative defenses).
and satisfaction, arbitration and award, assumption of risk,     Then, I use a checklist of additional affirmative defenses.
contributory negligence, discharge in                                                My personal checklist of affirmative
bankruptcy, duress, estoppel, failure of                                             defenses for insurance litigation and a
consideration, fraud, illegality, injury by       “Affirmative defenses are          brief description of the types of issues
fellow servant, laches, license, payment,           often asserted without           to which each is applicable appears in
release, res judicata, statute of frauds,         adequate consideration or          the Appendix.
statute of limitations, waiver, and any
other matter constituting an avoidance
                                                 analysis to ensure that they
                                                                                     In any event, as the Texas Supreme Court
or affirmative defense.” This language of             are appropriate ... ”          has explained, “Rule 94’s requirement of
“constituting an avoidance or affirmative                                            pleading is not absolute.”10 There are a
defense” is the test for whether an allegation is an affirmative few exceptions to the pleading requirement for affirmative
defense in Texas state4 or federal5 court. In fact, the primary  defenses. First, if the plaintiff’s pleadings clearly antici-
difference between a claim and an affirmative defense is that    pate that the defendant will rely upon certain affirmative
a claim seeks some type of affirmative relief.6                  defenses, then the defendant may rely upon such affirmative
                                                                 defenses.11 Of course, it is better to assert an affirmative
             II. The Source of Affirmative Angst:                defense, rather than to rely on the court to agree that it
       Deciding Which Affirmative Defenses to Plead              has been implicitly raised. Second, no affirmative defense
Affirmative defenses are often asserted without adequate         need be pled to contest enforcement of a plainly illegal
consideration or analysis to ensure that they are appropriate,   contract.12 This is a matter of public policy.13 Third, it is
in part because there is often significant time pressure on      an abuse of discretion for a trial court to refuse to allow
attorneys to assert them. Under Texas Rule of Civil Procedure    a party to timely amend its pleadings unless either (1) the
58                                                  ADVOCATE   ✯ WINTER 2006




                                              THE
opposing party presents evidence of surprise or prejudice,       may include “any matter within the scope of discovery,
or (2) the amendment is facially prejudicial.14 The Texas        including statements of opinion or fact or the application of
federal courts also allow somewhat similar exceptions to         law to fact . . .”23 After all, one of the purposes of requests
the pleading requirements.15                                     for admission is to eliminate matters about which there is
                                                                 no real controversy.24 You can, through a series of admission
         III. Properly Pleading Affirmative Defenses             requests, essentially ask the defendant to negate the requisite
Lawyers often fail to properly plead their affirmative           factual basis for its affirmative defenses.25
defenses in insurance litigation. Under Texas Rule of Civil
Procedure 45(b), pleadings must “consist of a statement          For example, suppose one of the defendant’s affirmative
in plain and concise language of the plaintiff’s cause of        defenses is a statute of repose. Under such an affirmative
action or the defendant’s grounds of defense.” The purpose       defense, the defendant’s argument is that the plaintiff cannot
is to provide “fair notice to the opponent” through “the         collect money for the construction or repair at issue because
allegations as a whole.”16 Texas courts have interpreted this    more than 10 years has elapsed since its completion.26 Thus,
Rule to require that an affirmative defense be “specifically”    if you filed your lawsuit on January 1, 2006, and the work
pled.17                                                          at issue was completed one year earlier on January 1, 2005,
                                                                 then your admission request could be as follows: “Admit
Unfortunately, however, there is no bright line rule about       that the construction or repair at issue in this lawsuit was
what “specifically” pled means. A party is only required         completed after December 31, 2004.” The defendant must
to give “fair notice” of the claim, not detail its evidence.18   then (1) admit, (2) specifically deny, (3) “explain in detail”
This “fair notice” must be sufficient information to enable      why it cannot truthfully admit or deny, (4) object, (5) assert
the opposing party to respond.19 Even more confusing,            a privilege, or (6) move for a protective order.27
as previously discussed, not all defenses must even be
“specifically” pled.20                                           While it is acceptable to preface your admissions requests
                                                                 with “admit,” “deny,” or “admit or deny,” I recommend
   IV. Strategies for Dealing with the “Defensive” Lawyer        prefacing your admissions with either “admit” or “deny,”
A plaintiff should investigate the defendant’s affirmative       depending upon which will result in a favorable admission
defenses because these are the defendant’s allegations that,     for you. That way, if you are fortunate and the defendant fails
even if the plaintiff is correct about the basic facts behind    to respond within the required 30 or 50 days after service,28
its claims, there are independent reasons why the plaintiff      your admission requests are automatically deemed admitted
should not recover. Thus, a difficulty for a plaintiff is to     against the defendant.29 In other words, the defendant will
isolate the relevant affirmative defenses from the superfluous   have admitted that it lacks factual bases for its affirmative
affirmative defenses. The following are a few helpful            defenses. Of course, the defendant can still subsequently
strategies.                                                      challenge the deemed admissions, and you might still waive
                                                                 your right to rely upon the deemed admissions if you fail
A. Request for Disclosure                                        to object to the introduction of contrary evidence.30 In
Although most attorneys already do so as an initial              any event, it is likely that these admission requests will
discovery step, you should make a request for disclosure         demonstrate that some of the defendant’s affirmative defenses
under Texas Rule of Civil Procedure 194. Rule 194.2(c)           are not tenable.
requires the responding party to disclose “the legal theories
and, in general, the factual bases of the responding party’s     If that does not work, you can file a motion to compel
claims or defenses . . .” Thus, when responding to a request     proper responses to your requests for admission. If the Court
for disclosure, the defendant should provide a basic             grants your motion to compel, it may (1) deem the requests
explanation for the application of its affirmative defenses.     admitted or (2) order the defendant to amend its answers to
Failure to do so risks having the affirmative defenses           the requests.31 In addition, it is mandatory for the court to
excluded from trial.21                                           award your reasonable expenses unless the court finds (1)
                                                                 the request was objectionable, (2) the admission sought was
B. Requests for Admission                                        of no substantial importance, (3) the responding party had
For each affirmative defense that the defendant alleges, you     a reasonable ground to believe that it would prevail on the
can serve the defendant with requests for admission under        matter, or (4) there was another good reason for the refusal
Texas Rule of Civil Procedure 198.22 Requests for admission      to admit.32
                                                       ADVOCATE   ✯ WINTER 2006                                                      59




                                                 THE
C. Special Exceptions                                                 proof for its affirmative defenses, the plaintiff may file a no-
Special exceptions are a great tool for obtaining additional          evidence motion for partial summary judgment.39 However,
information about affirmative defenses. The purpose of special        the converse is not true – a defendant generally cannot file
exceptions is to inform the opposing party of defects in its          a no-evidence motion for partial summary judgment on its
pleadings so that the party can then cure the defects, if possible,   affirmative defenses.40 The rationale given in such cases is that
by amendment.33 If the defendant’s affirmative defenses fail to       the party with the burden of proof may not use the no-evidence
provide enough detail to give the plaintiff “fair and adequate        motion to shift that burden.41 In any event, before granting a
notice” of the affirmative defenses’ applicability, then special      no-evidence summary judgment motion, the court “must give
exceptions are appropriate.34                                                                the parties an adequate opportunity to
                                                                                             plead a viable cause of action.”42
D. Interrogatories and Depositions
                                                        “Since the number of
Once the defendant abandons its pro-             interrogatories and time for           By contrast, for a “traditional” summary
forma affirmative defenses, or if it             depositions are both limited,          judgment, you must prove each
only asserted a limited number of                you should reserve them for            element of your affirmative defense.43
affirmative defenses, the plaintiff can          investigating the defendant’s          This motion is more burdensome to
use interrogatories and depositions            strongest affirmative defenses.” prepare, but if the defendant proves
to further delve into the bases for the                                                 its affirmative defense and wins the
remaining affirmative defenses. Since                                                   motion, then the applicable plaintiff’s
the number of interrogatories and time for depositions are        claim is eliminated. Further, as previously discussed, the
both limited, you should reserve them for investigating the       defendant might not have the option of filing a no-evidence
defendant’s strongest affirmative defenses. Under Texas Rules     summary judgment motion.44
of Civil Procedure 192.3(j) and 197.1, a party may serve
contention interrogatories to discover the factual or legal bases F. Motion In Limine and Jury Charge
for the other party’s assertions. Contention interrogatories      Finally, if your case is set for a jury trial, you could file a
require the responding party to provide more detail than is       motion in limine to exclude evidence that supports the
required in response to a request for disclosure.35               affirmative defenses, but was not provided during discovery.45
                                                                  You might want to couple this with a challenge to the
While few deponents will admit to knowing the legal bases         defendant’s attempts to add these affirmative defenses to the
for an affirmative defense, you can obtain the factual bases for  jury charge. The basis for such a challenge would be that,
certain types of affirmative defenses.36 For instance, suppose    under Texas Rule of Civil Procedure 278, the affirmative
your client claims that the defendant breached a contract         defenses were not properly pled or supported by the
to remodel a kitchen. The defendant alleges the affirmative       evidence.46 This challenge can have special force, because
defense of prior material breach. When you depose the             it is the defendant’s burden to obtain a jury finding on its
defendant, you should ask him about when and how your             affirmative defenses.47 Consequently, if, despite your diligent
client allegedly breached the contract first.                     discovery efforts, you have no notice from the defendant of the
                                                                  elements of defendant’s affirmative defenses and the necessary
E. Motion For Partial Summary Judgment                            facts to support them, then you have a reasonable argument
If, even after your diligent pursuit of discovery, the defendant  to exclude such affirmative defenses from the jury charge.
still refuses to explain or amend its affirmative defenses, you
may be able to eliminate them altogether by filing a motion                                V. Conclusion
for partial summary judgment under Texas Rule of Civil            In insurance litigation, as with other litigation, lawyers often
Procedure 166a. In Texas, you have the option of filing a         use the kitchen sink approach to affirmative defenses in
no-evidence summary judgment motion, a “traditional”              their original answer, whereby they throw mud on the wall,
summary judgment motion, or a hybrid motion of both.37            in the hope that some of it will stick. This merely delays the
                                                                  moment of reckoning as those lawyers must later devote
The simplest approach is a no-evidence motion for partial         precious time in an effort to support or reevaluate shaky
summary judgment. The reason is that you are not required to      affirmative defenses. Rather, they should conserve their
provide evidence – you only need to allege that the opposing      efforts for more rewarding avenues. As Abraham Lincoln
party lacks evidence for one or more essential element of its     stated, “You cannot escape the responsibility of tomorrow
claim or defense.38 Since the defendant has the burden of         by evading it today.”
60                                                      ADVOCATE   ✯ WINTER 2006




                                                  THE
                                                Appendix: My Personal Affirmative Defense
                                                    Checklist For Insurance Litigation

     ß   abandonment (or election of remedies): The plaintiff         ß   express contract: In general, a plaintiff cannot recover
         relinquished its right or interest by engaging in an act         in quantum meruit or under a theory of unjust enrich-
         that is inconsistent with that right or interest.48              ment if a valid express contract covered the services
                                                                          or materials provided.59
     ß   acceptance of benefits: It would be unconscionable
         for the plaintiff to prevail on its breach of contract       ß   failure/duty to mitigate: The plaintiff should have
         claim because the plaintiff cannot accept the benefits           taken actions to reduce its damages, so the defendant
         of a contract and also seek to void the contract. This           is not liable for such unnecessary damages.60
         is a “species” of quasi-estoppel.49
                                                                      ß   fraudulent concealment: The defendant’s affirmative
     ß                                 agency
         agency theory (or ostensible agency): The defendant              defense of the statute of limitations is insufficient,
         is not liable because the acts at issue were not per-            because the defendant fraudulently concealed material
         formed by the defendant’s agent.50                               information.61

     ß   alteration (or misuse): The plaintiff altered or misused     ß   fraudulent misrepresentation: The defendant is not
         the product in an unforeseen manner that was a                   liable for a breach of contract because the defendant
         proximate cause of the damaging event.51                         entered the contract based upon the plaintiff’s misrep-
                                                                          resentation.62
     ß   assumption of risk: The plaintiff expressly consented
         to the conduct, which is in one of the contexts that         ß   Good Samaritan statute: The defendant is not liable for
         has not been “abolished” in Texas.52                             ordinary negligence because it administered emergency
                                                                          care.63
     ß   bad faith: The plaintiff acted with dishonesty of belief
         or purpose, despite a duty to act in good faith.53           ß   immunity: The defendant is exempt from the duty the
                                                                          plaintiff alleges the defendant failed to, or improperly,
     ß   conditional privilege: The defendant is immunized                performed.64
         from liability for its inaccurate statements because of
         a legal or moral duty.54                                     ß   implied duty of good and workmanlike performance:
                                                                          The defendant does not owe full payment to the
     ß   cure: The plaintiff is not entitled to the award of treble       plaintiff because the plaintiff failed to fulfill its implied
         damages under the Deceptive Trade Practices Act since            duty of good and workmanlike performance.65
         the defendant fixed the defects.55
                                                                      ß   justification (or privilege): The plaintiff acted despite
     ß   election of remedies: Under certain circumstances,               having notice of the defendant’s untrue statement.66
         a litigant is barred from “pursuing two inconsistent             Justification is also a defense against the plaintiff’s
         remedies.”56                                                     tortious interference claim.67

     ß   equitable estoppel: The plaintiff made a material            ß   knowledge of falsity: The plaintiff’s knowledge of the
         misrepresentation or concealment with knowledge                  defendant’s misrepresentations is a counter-defense to
         of the facts, the defendant lacked such knowledge,               the defendant’s claim of misrepresentation.68
         and, as the plaintiff intended, the defendant acted on
         its inadequate/incorrect knowledge. This affirmative         ß   lack of consideration: The agreement is not enforce-
         defense subsumes fraudulent concealment.57                       able against the defendant because there is a lack of
                                                                          consideration.69
     ß   excuse (or legal justification): The defendant is not
         blameworthy because of some reason that relieves it          ß   mistake: The contract is not binding, because the
         of its duty.58                                                   defendant was mistaken about a material element of
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                                            THE
    the contract.70 Mistake is also a counter-defense to the    ß   repudiation: The plaintiff did not intend to perform
    affirmative defense of release.71                               the contract, so the defendant need not do so.83

ß   mitigation: The plaintiff failed to mitigate damages,       ß   rescission: The parties agreed to discharge their
    so its recovery should be reduced.72                            respective duties and terminate the contract.84

ß   modification: Even though the defendant breached            ß   retraction: The plaintiff is not entitled to enforcement,
    the terms on the face of the contract, this is irrelevant       because the plaintiff withdrew its renunciation.85
    because the contract was subsequently modified.73
                                                                ß   settlement: The parties previously settled the issues, so
ß   mutual mistake: The contract is not binding, because            the plaintiff’s current claims against the defendant are
    the parties entered the contract based on mutual                against the public policy of favoring settlement.86
    mistake.74
                                                                ß   status as a bona fide purchaser: The defendant’s status
ß   novation: The contract is not binding, because the              as a bona fide purchaser is an affirmative defense in a
    parties entered a substituted contract.75                       title dispute.87

ß   offset (or setoff): The plaintiff is not entitled to the    ß   statute of repose: The plaintiff, who constructed or
    amount it requests, because the defendant has already           repaired an improvement to real property, failed to
    provided partial compensation.76                                sue not later than 10 years after the completion of the
                                                                    construction or repair.88
ß   penalty: The contract’s liquidated damages provision
    is essentially a penalty, the enforcement of which is       ß   suicide: The plaintiff’s conduct in committing or
    against public policy.77                                        attempting to commit suicide was the sole cause of
                                                                    its damages.89
ß   prior material breach: The plaintiff first breached
    the contract, so the defendant’s performance or lack        ß   truth: The defendant’s statements were true, so the
    thereof is excused.78                                           plaintiff’s claims of slander, libel, or defamation should
                                                                    be denied.90
ß   promissory estoppel: A promise made without
    consideration is enforceable to prevent injustice if        ß   unclean hands: The plaintiff cannot seek equitable
    the plaintiff intended for, and the defendant acted in,         relief against the defendant unless it has “come to the
    reasonable reliance.79                                          court with clean hands.”91

ß   quasi-estoppel: Since it would be unconscionable for        ß   unreasonableness of attorney’s fees: The court may
    the plaintiff to maintain inconsistent positions, the           reduce unreasonable attorney’s fees.92
    defendant has an equitable reason for plaintiff’s claim
    to be denied.80                                             ß   volenti: Defendants’ affirmative defense to a negligence
                                                                    action in which (1) the defendant is responsible for a
ß   ratification: The plaintiff retained the benefits of            dangerous condition or activity, and (2) the plaintiff
    the transaction after acquiring full knowledge of the           knows of the danger, appreciates it, and voluntarily
    unauthorized act.81                                             exposes himself thereto.93

ß   representation: The defendant is not liable, because        ß   willful and intentional misconduct: The plaintiff’s
    it did not act in the plaintiff’s alleged representative        negligence claim should be denied because the plaintiff
    capacity.82                                                     acted with willful and intentional misconduct.94
62                                                            ADVOCATE     ✯ WINTER 2006




                                                        THE
Mrs. Minns-Fink is an associate attorney at Bickel & Brewer.
She specializes in civil litigation, particularly complex commercial           Trust No. 2, 162 S.W.3d 281, 289-90 (Tex. App.—Amarillo 2005,
litigation. Her other publications include academic journals, bar              pet. denied) (“. . . simply alleging in one sentence that a litigant’s
journals, and treatises. Prior to joining the firm, she was recognized         conduct violated the covenant of good faith and fair dealing did
for her outstanding trial work as an Assistant Attorney General                not give fair notice sufficient to comply with Rule 47. . . . Stating
for the State of Texas. Mrs. Minns-Fink received her JD from                   that ‘questions’ exist regarding ‘acts’ of a party would not afford a
Cornell University Law School and clerked for Chief Judge George               reasonable attorney fair notice of the claims involved or potentially
P. Kazen in the Southern District of Texas. She would like to thank            relevant evidence necessary to defend against them.”).
                                                                               12 Shoemake, 826 S.W.2d at 937.
her mentor, Michael J. Collins, for advising her that it was “about
                                                                               13 Id.
time” for her to write another article. ✯                                      14 See TEX. R. CIV. P. 62, 63, 66; Sosa v. Central Power & Light, 909

                                                                               S.W.2d 893, 895 (Tex. 1995); Chapin & Chapin, Inc. v. Texas Sand
                                                                               & Gravel Co., 844 S.W.2d 664, 665 (Tex. 1992).
1 Land Title Co. v. F.M. Stiger, Inc., 609 S.W.2d 754, 756 (Tex. 1980);        15 See, e.g., FED. R. CIV. P. 8(f), 15(a), (b), (d), 15; Foman v. Davis,

see accord TEX. R. CIV. P. 47.                                                 371 U.s. 178, 182 (1962); Chambers v. Johnson, 197 F.3d 732, 735
2 Texas Beef Cattle Co. v. Green, 921 S.W.2d 203, 212 (Tex. 1996).
                                                                               (5th Cir. 1999); PYCA Indus., Inc. v. Harrison Cty. Waste Water Mgmt.
3 Id.
                                                                               Dist., 177 F.3d 351, 363 (5th Cir. 1999); Martin’s Herend Imports,
4 See Phillips v. Phillips, 820 S.W.2d 785, 789 (Tex. 1991) (internal
                                                                               Inc. v. Diamond & Gen trading U.S. Co., 195 F.3d 765, 770 (5th Cir.
citations omitted).                                                            1999).
5 See FED. R. CIV. P. 8(c).                                                    16 TEX. R. CIV. P. 45(b).
6 See e.g., My-Tech, Inc. v. University of N. Tex. Health Sci. Ctr. at Fort    17 Shoemake, 826 S.W.2d at 937; see also Southwestern Fire & Cas.

Worth, 166 S.W.3d 880, 884 (Tex. App.—Dallas 2005, pet. filed                  Co. v. Larue, 367 S.W.2d 162, 163 (Tex. 1963).
July 29, 2005) (“To determine whether a defendant’s answer asserts             18 Horizon/CMS Healthcare Corp. v. Auld, 34 S.W.3d 887, 896 (Tex.

a counterclaim or an affirmative defense, courts should analyze the            2000).
facts alleged. . . . We ask whether the defendant could have main-             19 Paramount Pipe & Sup. Co. v. Muhr, 749 S.W.2d 491, 494-95 (Tex.
                                                                                                                 Muhr
tained the claim as an independent suit. . . . However, to determine           1988) (“The purpose of the fair notice requirement is to provide
if a defendant’s prayer for general relief is a counterclaim or an             the opposing party with sufficient information to enable him to
affirmative defense, we look at the general purpose of the pleadings. .        prepare a defense. Rule 45 does not require that the plaintiff set
. . If there is no prayer for affirmative relief, matters that are pleaded     out in his pleadings the evidence upon which he relies to establish
defensively do not present a counterclaim.”); Doyer v. Pitney Bowes,           his asserted cause of action.”); Boyles v. Kerr, 855 S.W.2d 593, 601
                                                                                                                            Kerr
Inc., 80 S.W.3d 215, 218 (Tex. App.—Austin 2002, pet. denied);                 (Tex. 1993) (“A court should uphold the petition as to a cause of
Kuehnhoefer v. Welch, 893 S.W.2d 689, 692 (Tex. App.—Texarkana                 action that may be reasonably inferred from what is specifically
1995, writ denied) (“When a party requests affirmative relief with             stated, even if an element of the cause of action is not specifically
the issue, the court cannot treat the counterclaim as an affirmative           alleged.”); Perez v. Briercroft Serv. Corp., 809 S.W.2d 216, 218 (Tex.
defense . . . Alternative pleadings may entitle the party to a jury            1991); see accord J.K. and Susie L. Wadley Research Inst. & Blood
question on both the affirmative defense and the counterclaim.”);              Bank v. Beeson, 835 S.W.2d 689, 693 (Tex. App.—Dallas 1992, writ
Adams v. Tri-Continental Leasing Corp., 713 S.W.2d 152, 153 (Tex.              denied) (Alleging an affirmative defense of “common law statute
App.—Dallas 1986, no writ).                                                    of limitations” is insufficient to give the plaintiff “fair notice” of a
7 See accord Quantum Chem. Corp. v. Toennies, 47 S.W.3d 473, 481
                                                                               statute of limitations under a specific statute.).
(Tex. 2001) (“It is the defendant’s burden to plead and request                20 See, e.g., Shoemake v. Fogel, Ltd., 826 S.W.2d at 937.

instructions on an affirmative defense.”); Davis v. City of San Antonio,       21 See TEX. R. CIV. P. 193.6(a); see accord National Family Care Life

752 S.W.2d 518, 519 (Tex. 1988).                                               Ins. Co. v. Fletcher, 57 S.W.3d 662, 667-68 (Tex. App.—Beaumont
                                                                                            Fletcher
8 See FED R. CIV. P. 8(c); Freeman v. Chevron Oil, 517 F.2d 201, 204
                                                                               2001, pet. denied).
(5th Cir. 1975).                                                               22 However, you might want to be careful about submitting a large
9 See TEX. R. CIV. P. 99(b).
                                                                               set of admissions requests at one time. See, e.g., Reynolds v. Murphy,
10 Shoemake v. Fogel, Ltd., 826 S.W.2d 933, 937 (Tex. 1992) (“. . .
                                                                               188 S.W.3d 252, 260-61 (Tex. App.—Fort Worth 2006, pet. filed
the defense of immunity, like the defense of penalty, is not waived            May 30, 2006) (“When a party has objected to a large set of requests
by the failure to specifically plead it if it is apparent on the face of       for admissions on the ground that the volume of the requests is
the petition and established as a matter of law.”).                            unduly burdensome and harassing, requiring that party to file a
11 See e.g., Phillips, 820 S.W.2d at 789 (“Whenever the defense is not
                                                                               more specific objection to each request to prevent the admissions
clearly established on the face of the pleadings, as it is here, it must       from being deemed would defeat the purpose of filing such a general
be pleaded. . . . We apply a narrow but necessary exception, long              objection, a motion for protective order, or both, which are expressly
and well established, to the general requirement that affirmative              authorized by the rules.”).
defense be pleaded.”) see accord Rogers v. In re: Ardella Veigel Inter Vivos   23 TEX. R. CIV. P. 198.1.
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                                                    THE
24 See, e.g., Natural Gas Pipeline Co. of Am. v. Pool, 30 S.W.3d 639,     49 See, e.g., Lopez v. Munoz, Hockema & Reed, L.L.P., 22 S.W.3d 857,
652 (Tex. App.—Amarillo 2000), rev’d on other grounds, 124 S.W.3d         863-64 (Tex. 2000).
188 (Tex. 2003).                                                          50 See, e.g., Baptist Mem. Hosp. Sys. v. Sampson, 969 S.W.2d 945, 947
25 In Texas state courts, you can use admission requests that are         (Tex. 1998) (“Thus the burden shifted to Sampson to raise a fact
mixed statements of fact and law, but not solely statements of            issue on each element of her ostensible agency theory, which Texas
law. See, e.g., Fort Bend Central Appraisal District v. Hines Wholesale   courts have held to be in the nature of an affirmative defense.”)
Nurseries, 844 S.W.2d 857, 858-59 (Tex. App.—Texarkana 1992,              51 See, e.g., General Motors Corp. v. Hopkins, 548 S.W.2d 344, 351-52

writ denied); Esparza v. Diaz, 802 S.W.2d 772, 775-76 (Tex.               (Tex. 1977).
App.—Houston [14th Dist.] 1990, writ denied); Laycox v. Jaroma, 709       52 Davis v. Greer, 940 S.W.2d 582, 582 (Tex. 1996) (“Although
                                                                                         Greer
S.W.2d 2, 3-4 (Tex. App.—Corpus Christi 1986, writ denied).               Texas has abolished assumption of the risk as a complete defense
26 See, e.g., Ryland Group, Inc., 924 S.W.2d at 121.                      in some contexts, it remains viable when a party expressly consents
27 See TEX. R. CIV. P. 198.2(b).                                          to the conduct.”).
28 See TEX. R. CIV. P. 198.2(a).                                          53 See, e.g., Associated Indem. Corp. and Fireman’s Fund Ins. Co. v. CAT
29 See TEX. R. CIV. P. 198.2(c); Marshall v. Vise, 767 S.W.2d 699,        Contr., Inc., 964 S.W.2d 276, 280-86 (Tex. 1998).
700 (Tex. 1989); see accord Wheeler v. Green, 157 S.W.3d 439, 442         54 See, e.g., General Motors Acceptance Corp. v. Howard, 487 S.W.2d

(Tex. 2005).                                                              708, 710-11 (Tex. 1974); but cf. Denton Pub. Co. v. Boyd, 460 S.W.2d
30 See id.                                                                881, 883-85 (Tex. 1970) (The special exception privilege in a
31 See TEX. R. CIV. P. 215.4(a).                                          libel case may be lost if the plaintiff shows the counter-defense
32 See TEX. R. CIV. P. 215.4(b).                                          of malice).
33 See Horizon/CMS Healthcare Corp., 34 S.W.3d at 896 (“Texas follows     55 See, e.g., TEX. BUS. & COM. CODE § 17.50; Ramsey v. General Motors

a ‘fair notice’ standard for pleading, which looks to whether the         Corp., 685 S.W.2d 15, 16 (Tex. 1985).
opposing party can ascertain from the pleading the nature and basic       56 See Medina v. Herrera, 927 S.W.2d 597, 600 (Tex. 1996); France,

issues of the controversy and what testimony will be relevant.”).         648 S.W.2d at 285.
34 See Friesenhahn v. Ryan, 960 S.W.2d 656, 659 (Tex. 1998); see          57 See, e.g., Doe v. Linam, 225 F. Supp.2d 731, 736-37 (S.D. Tex.

accord Horizon/CMS Healthcare Corp., 34 S.W.3d at 897; Roarke v.          2002) (citing Gulbenkian v. Penn, 252 S.W.2d 929, 31 (Tex. 1952));
Allen, 633 S.W.2d 804, 810 (Tex. 1982) (citing TEX. R. CIV. P. 90,        Cook Composites, Inc. v. Westlake Styrene Corp., 15 S.W.3d 124, 135
91).                                                                      (Tex. App.—Hou. [14th Dist.] 2000, pet. dism’d) (citing Schroeder
35 See TEX. R. CIV. P. 194 cmt.2.                                         v. Texas Ironworks, Inc., 813 S.W.2d 483, 489 (Tex. 1991)).
36 See TEX. R. CIV. P. 192.1(f), 199.5.                                   58 See, e.g., Sterner v. Marathon Oil Co., 767 S.W.2d 686, 689-90
37 See Binur v. Jacob, 135 S.W.3d 646, 650-51 (Tex. 2004).                (Tex. 1989); Woods v. William M. Mercer, Inc., 769 S.W.2d 515, 517
38 See TEX. R. CIV. P. 166a(i).                                           (Tex. 1988).
39 See accord TEX. R. CIV. P. 94, 166a(i).                                59 In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 740 (Tex.
40 See, e.g., Wortham v. Dow Chemical Co., 179 S.W.3d 189, 195 (Tex.      2005); Fortune Prod. Co. v. Connoco, Inc., 52 S.W.3d 671, 685 (Tex.
App.—Houston [14th Dist.] 2005, no pet.).                                 2000).
41 See, e.g., Nowak v. DAS Inv. Corp., 110 S.W.3d 677, 680 (Tex.          60 See, e.g., Gunn Infiniti, Inc. v. O’Byrne, 996 S.W.2d 854, 856-57

App.—Houston [14th Dist.] 2003, no pet.).                                 (Tex. 1999); Gulf Consol. Int’l. v. Murphy, 658 S.W.2d 565, 566 (Tex.
42 Friesenhahn, 960 S.W.2d at 659.                                        1983); TEX. CIV. P RAC. & R EM. CODE § 73.003; see c.f. Austin Hill
43 See, e.g., Park Place Hosp. v. Estate of Milo, 909 S.W.2d 508, 511     Country Rlty., Inc. v. Palisades Plaza, Inc., 948 S.W.2d 293, 296-97
(Tex. 1995).                                                              (Tex. 1997).
44 See also Ryland Group, Inc. v. Hood, 924 S.W.2d 120, 121 (Tex.         61 See, e.g., Baptist Mem. Hosp. Sys. v. Arrendondo, 922 S.W. 2d 120, 122

1996) (“When a defendant moves for summary judgment based on              (Tex. 1996); Borderlon v. Peck, 661 S.W.2d 907, 908 (Tex. 1983).
an affirmative defense, such as the statute of repose, the defendant,     62 See, e.g., Koral Industries v. Security-Connecticut Life Ins. Co.,

as movant, bears the burden of proving each essential element of          802 S.W.2d 650, 651 (Tex. 1990) (“. . . only the insurer’s actual
that defense.”).                                                          knowledge of the misrepresentations would have destroyed its
45 See TEX. R. EVID. 103, 104, 403; Hartford Acc. & Indem. Co. v.         defense of fraud.”).
McCardell, 369 S.W.2d 331, 335 (Tex. 1963).                               63 See, e.g., TEX. CIV. P RAC. & R EM. CODE § 74.151-52, 84.001-.008;
46 See, e.g., Union Pac. R.R. Co. v. Williams, 85 S.W.3d 162, 166         McIntyre v. Ramirez, 109 S.W.3d 741, 742 (Tex. 2003).
(Tex. 2002); Triplex Comm., Inc. v. Riley, 900 S.W.2d 716, 718 (Tex.      64 See, e.g., TEX. CIV. P RAC. & R EM. CODE §§ 73.004, 74.003; Kinnear

1995).                                                                    v. Texas Comm’n on Human Rights, 14 S.W.3d 299, 300 (Tex. 2000);
47 See, e.g., Little Rock Furniture Manufacturing Co. v. Dunn, 222 S.     University of Tex. Southwestern Med. Ctr. of Dallas v. Margulis, 11
W.2d 985, 205-06 (Tex. 1947).                                             S.W.3d 186, 187-88 (Tex. 2000).
48 See, e.g., France v. American Indem. Co., 648 S.W.2d 283, 285          65 See accord Melody Home Mfg. Co. v. Barnes, 741 S.W.2d 349, 352-53

(Tex. 1983).                                                              n.2, 358 (Tex. 1987).
64                                                          ADVOCATE    ✯ WINTER 2006




                                                      THE
66  See, e.g., Friendswood Dev. Co. v. McDade Co, 926 S.W.2d 280,           App.—Corpus Christi 1989, no writ).
                                                                            79 See, e.g., Nichols v. Smith, 507 S.W.2d 518, 520-21 (Tex. 1974).
283 (Tex. 1996).
67 See, e.g., Butnaru v. Ford Motor Co., 84 S.W.3d 198, 207 (Tex.           80 See, e.g., Lopez, 22 S.W.3d at 864 (Tex. 2000).
                                                                            81 See, e.g., Land Title Co., 609 S.W.2d at 756-57; Petroleum Anchor
2002); Prudential Ins. Co. v. Financial Rev. Servs., Inc., 29 S.W.3d
74, 77-83 (Tex. 2000).                                                      Equip. v. Tyra, 419 S.W.2d 829, 834 (Tex. 1967); TCA Bldg. Co.
68 See accord Sonnichesen v. Baylor University, 2004 Tex. App. LEXIS        v. Northwestern Resources Co., 922 S.W.2d 629, 634-35 (Tex.
7774, * 9 (Tex. App.—Waco Aug. 25, 2004, pet filed).                        App.—Waco 1996, writ denied).
69 See, e.g., Lakeway Co. v. Leon Howard, Inc., 585 S.W.2d 660, 662         82 See, e.g., Seale v. Nichols, 505 S.W.2d 251, 254-55 (Tex. 1974).
                                                                            83 See, e.g., Woods, 769 S.W.2d at 517; Universal Life & Accident Ins.
(Tex. 1979).
70 See, e.g., Williams v. Glash, 789 S.W.2d 261, 264 (Tex. 1990); Taylor    Co. v. Sanders, 102 S.W.2d 405, 407-08 (Tex. 1937).
                                                                            84 See, e.g., Smith v. Nat’l Resort Communities, Inc., 585 S.W.2d 655,
v. Arlington Ind. School Dist., 335 S.W.2d 371, 372-77 (1960); Benson
v. The Travelers Ins. Co., 464 S.W.2d 709, 712-13 (Tex. App.—Dallas         659-60 (Tex. 1979); Hunt Cty. Oil Co. v. Scott, 67 S.W. 451, 452 (Tex.
1971, no writ).                                                             App.—Austin 1902, writ ref’d); Rowan Cos. v. Transco Exploration
71 See, e.g., Gulf Consolidated Int’l, Inc., 658 S.W.2d at 566.             Co., 679 S.W.2d 660, 662 (Tex. App.—Houston [1st Dist.] 1984,
72 See, e.g., Gunn Infiniti, Inc. v. O’Byrne, 996 S.W.2d 854, 856-58        writ refused).
                                                                            85 See, e.g., Barclays American/Business Credit, Inc. v. E&E Enterprises,
(Tex. 1999); but cf. Austin Hill Country Realty v. Palisades Plaza, 948
                     cf
S.W.2d 293, 296-97 (Tex. 1997).                                             Inc., 697 S.W.2d 694, 701 (Tex. App.—Dallas 1985, no writ).
73 See, e.g., Brownlee v. Brownlee, 665 S.W.2d 111, 112 (Tex. 1984).        86 See e.g., Transport Ins. Co. v. Faircloth, 898 S.W.2d 269, 270-74, 280
74 See, e.g., Santos v. Mid-Continent Refrigerator Co., 471 S.W.2d 568,     (Tex. 1995); Hall v. Rawls, 171 S.W.2d 324, 324-27 (Tex. 1943).
                                                                            87 See, e.g., Madison v. Gordon, 39 S.W.3d 604, 606 (Tex. 2001).
569 (Tex. 1971).
75 See, e.g., Vickery v. Vickery, 999 S.W.2d 342, 356 (Tex. 1999) (citing   88 See, e.g., Ryland Group, Inc., 924 S.W.2d at 121.
                                                                            89 See, e.g., TEX. CIV. P RAC. & R EM. CODE § 93.001(a); Kassen v.
Flanagan v. Martin, 880 S.W.2d 863, 867 (Tex. App.—Waco 1994,
writ dism’d w.o.j.) (“The satisfaction in an accord and satisfaction        Hatley, 887 S.W.2d 4, 13 (Tex. 1994); Galindo v. Dean, 69 S.W.3d
is usually the performance of the new promise, rather than the new          623, 625 (Tex. App.—Eastland 2002, no pet.).
                                                                            90 See, e.g., TEX. CIV. P RAC. & R EM. CODE § 73.005; Randall’s Food
promise itself. When, however, the new promise is accepted as the
satisfaction, the accord is more properly termed a novation.”)).            Mkts., Inc. v. Johnson, 891 S.W.2d 640, 646 (Tex. 1995); McIlvain v.
76 See, e.g., TEX. CIV. P RAC. & R EM. CODE § 72.004; United States         Jacobs, 794 S.W.2d 14, 15-16 (Tex. 1990).
                                                                            91 See, e.g., Truly v. Austin, 744 S.W.2d 934, 938 (Tex. 1988); City of
Pipe & Foundry Co. v. City of Waco, 100 S.W.2d 1099, 1112 (Tex.
App.—Waco 1936), aff’d, 108 S.W.2d 432 (1937).                              Wink v. Griffith Amusement Co., 100 S.W.2d 695, 702 (Tex. 1936).
77 See, e.g., Phillips, 820 S.W.2d at 789-90.                               92 See, e.g., F.R. Hernandez Constr. & Supply Co. v. Nat’l Bank of
78 See, e.g., Mustang Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d       Commerica, 578 S.W.2d 675, 677, 79 (Tex. 1979).
                                                                            93 See, e.g., Rabb v. Coleman, 469 S.W.2d 384, 387 (Tex. 1971).
195, 196 (Tex. 2004); Hernandez v. Gulf Group Lloyds, 875 S.W.2d
                                                                            94 See, e.g., Ryland Group, Inc., 924 S.W.2d at 121.
691, 692 (Tex. 1994); Hauglum v. Durst, 769 S.W.2d 646, 651 (Tex.
                                                   ADVOCATE   ✯ WINTER 2006                                                   65




                                             THE
                              NONSUBSCRIPTION UNDER THE
                           TEXAS WORKERS’ COMPENSATION ACT
                                                      JAY M. WALLACE




H   ERE IS A TRIVIA QUESTION: Which State is the only
     State in the country that allows employers to opt out of
     the workers’ compensation system? Answer: Texas. This
article will discuss the issues associated with an employer
electing to not carry workers’ compensation insurance to
                                                                are mandated by contract to carry workers’ compensation
                                                                coverage. This is common in the construction industry and
                                                                similar situations in which there are several contractors
                                                                working at a particular work site.

cover employee injury claims.                                   II. The Pros And Cons of Becoming a Nonsubscriber
                                                                A. Advantages of Not Subscribing
I. What is Nonsubscriber and Who Can Become One?                Instead of being a part of the no-fault administrative scheme
A nonsubscriber is an employer with employees subject to        of workers’ compensation,4 the nonsubscribing employer is
the Texas Workers’ Compensation Act that elects to opt out      subject to a common law negligence lawsuit.5 An employer’s
of the Act. In practical terms, Texas is the only State where   employees must prove negligence to recover against the
employers have the option not to subscribe to workers’ com-     employer for a work injury. The requirement that a claimant
pensation – since 1913 participation under the Act has been     prove an employer’s negligence is a significant advantage to
voluntary.1 Nonsubscription became popular in the 1990’s        an employer. An employee cannot recover for a work-related
with the dramatic rise in workers’ compensation expenses.       injury unless the employer is found to have not acted as a
Currently, approximately 1/3 of Texas employees work for        reasonably prudent entity would have acted under the same
nonsubscribing employers.                                       or similar circumstances. See Werner v. Colwell6 and Leitch v.
                                                                Hornsby.7 Consequently, the case centers on the issue of safety.
The Texas Labor Code specifically prohibits two types of        Did the employer initiate and maintain safety programs? Did
employers from not subscribing to workers’ compensation:        the employer carefully supervise workers? Did the employer
(1) public employers; and (2) general contractors involved in   make sure that safety practices and procedures were being
a building or a construction contract with a governmental       followed? Does the employer update safety practices when
entity.2                                                        needed? If an employer does a good job of accident prevention
                                                                and provides educational safety programs for employees, that
Further, individuals employed in certain federally-regulated    employer can significantly decrease the number of successful
industries are subject to workers’ compensation schemes that    claims.
are not elective.3 Examples include:
                                                                The biggest advantage to nonsubscribing to workers’ compen-
    ß    Persons engaged in maritime employment, such           sation is that an employer manages the injured employee’s
         as ship workers and longshoremen, subject to the       medical costs and return to work and has control of the
         Longshore and Harbor Workers’ Compensation             employee’s medical providers. Approved medical providers
         Act in addition to the Texas statute;                  under a nonsubscriber’s occupational injury benefit plan are
                                                                chosen based on their expertise in their field of medicine
    ß    Masters of, or seamen on, vessels engaged in           are more likely to make well-reasoned decisions regarding
         interstate or foreign commerce, subject to the         the necessary treatment for the employee and release of an
         Jones Act; and                                         employee to return to work. The plan’s design (such as the
                                                                level of income replacement benefits) can also be designed
    ß    Employees of interstate rail carriers, covered by      to encourage employees with a financial incentive to return
         the Federal Employer’s Liability Act (FELA).           to work sooner from an injury.

Finally, although not prohibited by statute, some employers     As a nonsubscriber, losses are not merely transferred to an
66                                                 ADVOCATE   ✯ WINTER 2006




                                             THE
unrelated, third party insurance company. Employers are          negatively impact employee morale. Employees may perceive
directly responsible for and are in control of costs under       dropping workers’ compensation insurance (of which they
a nonsubscriber program. This creates heightened safety          must be notified) as the elimination of an employee benefit.
awareness and improved safety attitudes. Direct account-         Also, the employer may need to call upon fellow employees
ability for losses translates into a management attitude that    to assist in the employer’s defense of a lawsuit filed by an
is highly supportive of safety considerations and loss control.  injured employee. Employees want assurances that benefits
This, in turn, is communicated by the supervisors to the         will be received in the event of occupational injury. Many
line employees. Further, an employer will have greater flex-     employees, particularly those employees who have worked
ibility and control in deciding which cases are settled or go    many years for subscribing employers, view nonsubscription
to court, when claims will be resolved,                                               as depriving them of that assurance.
and the amount of settlements, if a case
is settled. The employer’s role is thereby       “As a nonsubscriber, the             Finally, as referenced above, customers
elevated from a passive participant to an          employer is subject to             may require employer to carry workers’
active one.                                                                           compensation. Certain clients require
                                               negligence liability associated their vendors to furnish certificates
B. Watch What You Ask For . . .                  with a work injury, which            evidencing workers’ compensation cov-
Disadvantages of Becoming a Nonsub-             includes the available range          erage. This is common in industries in
scriber                                        of damages associated with a which job sites have many contractors
An Injured Employee Can Sue the                  typical negligence claim.”           – such as the construction industry. All
Employer for Negligence                                                               business commitments must be reviewed;
As a nonsubscriber, the employer is                                                   some contractual commitments to carry
subject to negligence liability associated with a work injury,   workers’ compensation insurance may be either non-nego-
which includes the available range of damages associated         tiable or required by law.
with a typical negligence claim. In a negligence lawsuit,
the nonsubscriber cannot use the defenses of contributory        III. What Me, Worry? Liability Issues Facing the Non-
negligence, negligence by a fellow employee, or assumption of    subscriber
the risk.8 In other words, in the lawsuit, the employee is not   A. Is the Injured Person an Employee of the Nonsub-
limited to a schedule of benefits. The employee can recover      scriber?
any tort damages allowed under Texas law, including punitive     To prevail in a nonsubscriber case, the claimant must show
damages. The available damages also include damages for lost     that an employer-employee relationship existed at the time
earning capacity, pain and suffering, and mental anguish.        of injury with the defendant. The right to control the details
                                                                 of the claimant’s work is the decisive test. This includes
The insurance carrier is the real party in interest in a         having the right to tell the worker when and where to
workers’ compensation claim, and thus bears the costs of         begin and stop work, regulating hours, and the amount of
defense as well as any compensation award. In contrast, the      time spent on particular aspects of the work, the physical
nonsubscribing employer is the party defendant in a negli-       method or matter of accomplishing the job, and controls of
gence action and is the real party in interest, but can shift    the tools used to perform the work.9 Other relevant factors
the costs of defense, settlement, or payment of a judgment       include: (1) who had the right to hire and fire the claimant;
through obtaining appropriate liability insurance that covers    (2) which company signs the paycheck or has the obligation
nonsubscriber claims.                                            to pay wages; (3) which company withholds the claimant’s
                                                                 social security and income tax; and (4) what entity or person
An Employer May Be Subject to an Undesirable Venue               furnishes the claimant’s tools.
An employer’s chances at trial are significantly affected by
where the trial is located. For example, counties such as        B. Was the Claimant in the Course and Scope of His
Matagorda, Hidalgo, and Jefferson are significantly much         Employment at the Time of Injury?
better for plaintiffs than Dallas or Collin counties. The        Once it is determined that a claimant is an employee of the
employers’ location is a significant factor in determining       nonsubscriber, the next relevant question is whether the
whether nonsubscriber status is a prudent move.                  employee was in the course and scope of his employment
                                                                 as of the time of his injury. If the worker was not within
Further, the absence of workers’ comp insurance may              the course and scope of his employment, the employer is
                                                  ADVOCATE   ✯ WINTER 2006                                                    67




                                            THE
not liable under a nonsubscriber theory. The defendant               ß   to establish and enforce rules and regulations for
employer may owe some other duty to the employee, but it                 the safety of its employees16
is not liable under a nonsubscriber theory.
                                                               D. Did the Employer’s Negligence Proximately Cause the
An injured worker must prove two elements to establish that    Claimant’s Injury?
he or she was in the course and scope of their employment:     The plaintiff employee must also prove that the employer’s
(1) the injury must have occurred while the employee was       negligent acts proximately caused the injury. Proximate
engaged in or about the furtherance of his employer’s affairs  cause includes two essential elements: (1) cause in fact and
or business; and (2) the injury was of a kind and character    (2) foreseeability.17 The term proximate cause is defined as
that had to do with and originated in the employer’s work,     follows:
trade, business, or profession. The general
rule is that an injury arises in the course                                          “Proximate cause” means that cause
and scope of employment when there is a        “In order to be a proximate which, in a natural and continuous
causal connection between the required          cause, the act or omission           sequence, produces an event, and
work and the resulting injury.   10
                                                  complained of must be              without cause such event would
                                                 such that a person using            not have occurred. In order to be a
C. Was the Nonsubscriber Employer                ordinary care would have            proximate cause, the act or omission
Negligent?                                                                           complained of must be such that a
If an injured employee sues his employer
                                               foreseen that the event ... ”         person using ordinary care would have
following an injury, the employee car-                                               foreseen that the event, or some similar
ries the burden of proof to establish that the employer was       event, might reasonably result there from. There may
negligent. The Pattern Jury Charge definition of “negligence”     be more than one proximate cause of an event.18
is as follows:
                                                               E. Available Defenses Even if the Nonsubscribing Employer
    “Negligence” means failure to use ordinary care,           was Negligent
    that is, failing to do that which a person of ordinary     1. Intoxication
    prudence would have done under the same or similar         If an employee is found to have been intoxicated at the
    circumstances or doing that which a person of ordinary     time of the accident, it is an absolute defense to liability,
    prudence would not have done under the same or             even if the employer cannot prove that the intoxication of
    similar circumstances.11                                   the employee was a cause of the accident.19 “Intoxication”
                                                               is defined in the Texas Workers’ Compensation Statute as
When deciding whether negligence has occurred, the Texas       follows:
courts recognize that an employer owes the following duties
under Texas law:                                               The state of having an alcohol concentration to qualify as
                                                               intoxicated under Penal Code § 49.01(2) (the intoxication
      ß to provide employees with a reasonably safe place      level under this provision was reduced to .08 or more from
           to work12                                           .10 in 1999); or the state of not having the normal use of
                                                               mental or physical faculties resulting from the voluntary
      ß to see there are enough workers available to           introduction into the body of:
           perform a particular piece of work in order to
           ensure the safety of all who are engaged in that         ß an alcoholic beverage, as that term is defined by
           work13                                                       Section 1.04, Alcoholic Beverage Code;

    ß   to select careful and competent fellow ser-                  ß   a controlled substance or controlled substance
        vants14                                                          analogue, as those terms are defined by the Texas
                                                                         Controlled Substances Act (Chapter 481, Health
    ß   to furnish an employee with safe and suitable                    and Safety Code);
        appliances or tools so he may do the work with
        reasonable safety15                                          ß   a dangerous drug, as defined by § 483.0001,
                                                                         Health and Safety Code;
68                                                   ADVOCATE   ✯ WINTER 2006




                                               THE
     ß   an abusable glue or aerosol paint, as defined by          sion, but rather in background information to its decision;
         § 485.001, Health and Safety Code; and                    therefore, there has been some question regarding its value
                                                                   as authority).
     ß   any similar substance, the use of which is regu-
         lated under state law.                                    This issue was finally put to rest in Keng v. Kroger, 23
                                                                                                                     Kroger
                                                                   S.W.2d, 347 (Texas 2000)27 where the Texas Supreme Court
Intoxication does not include the loss of normal use of mental     rejected the statutory defense of comparative responsibility,
or physical faculties resulting from the introduction into the     finding that it should be included under the “common
body of a substance taken under and in accordance with             law” (i.e., court-created) defenses which a nonsubscriber is
a prescription written for the employee by the employee’s          deprived of under the Texas Labor Code. The Court based
doctor. Intoxication also does not include the loss of normal      its conclusion in large part on the theory that the Texas
use of mental or physical faculties resulting from the introduc-   Labor Code deprives nonsubscribing employers of their
tion into the body of a substance by inhalation or absorption      defenses as an incentive to subscribe to Texas workers’
incidental to the employee’s work (for example, glue or aerosol    compensation. Therefore, a defense such as comparative
paint at work).20                                                  responsibility as to the plaintiff employee is likewise not
                                                                   available to nonsubscribers.
2. Willful Intent
The second affirmative defense available to an employer is an      F. I Fought the Law and the Law Won: Invalid Nonsub-
employee’s willful intent to bring about the injury.21 This is     scriber Defenses to Negligence Claims
defined as action or non-action with the specific and wrongful     As discussed above, Texas courts have historically imposed
intention to produce an injury or to aggravate an already          a variety of duties upon employers to provide a reasonably
existing injury for the purpose of collecting compensation.        safe work place, comprised of the duties to provide employees
                                                                   (1) proper equipment to perform the job, (2) access to proper
3. Sole Proximate Cause                                            assistance, and (3) appropriate training for the work. Failure
The defense of contributory negligence is not available to a       to provide a reasonably safe workplace results in negligence
nonsubscriber. However, if the worker is the one and only          liability.
cause of his injury he will not recover; he loses, and the
employer wins.22                                                   Further, the workers’ compensation statute specifically pro-
                                                                   hibits contributory negligence as a defense in nonsubscriber
4. Comparative Negligence                                          negligence suit and also the statute expressly bars employers
Nonsubscribers have contended that comparative negligence,         from alleging that the employee was injured in whole or
a statutory defense, is available to nonsubscribers even if        in part from assuming some measure of risk in doing the
the Texas Labor Code states that contributory negligence,          activity causing the injury. Finally, an employer cannot
a common law defense, is not.23 These arguments have               assert as a defense that the employee was injured by the
met with mixed success. Here is an overview of how the             act of another worker. In other words, the co-worker’s act,
courts have weighed in: first, Yeldell v. Holiday Hills Nursing    even if he or she was negligent, is imputed to the employer
Home.24 This was the first decision to address whether             as long as the act was committed in the course and scope
nonsubscribing employers could assert their employee’s             of employment.
comparative responsibility for the accident. The Fort Worth
Court of Appeals concluded that comparative responsibility,        G. Damages
like contributory negligence, is not available to nonsub-          A nonsubscriber company is subject to all damages recover-
scribing employers.                                                able under Texas tort law. This includes: past and future
                                                                   medical expenses, past and future lost wages, pain and
In Byrd v. Central Freight Lines, Inc.,25 the Amarillo Court of    suffering, mental anguish, and loss of services and consor-
Appeals surprisingly upheld the “comparative responsibility”       tium for the spouse and children of an injured employee.
defense for nonsubscribers. The Court cited as authority           In addition, pre-judgment interest may be awarded on any
for its ruling the Texas Supreme Court’s decision in Texas         damages found for the employee.28 Punitive damages may
Workers’ Compensation Commission v. Garcia 26 (in which the        also be awarded in addition to other damages “for the sake
Texas Supreme Court first acknowledged this nonsubscriber          of example and by way of punishing” the tortious wrong-
defense . . . not as a formal part of the Supreme Court’s deci-    doer.29 Recovery of punitive damages is authorized only
                                                       ADVOCATE   ✯ WINTER 2006                                                      69




                                                 THE
in cases where the tortfeasor has engaged in particularly             insofar as they may now or hereafter relate to any employee
reprehensible conduct resulting from fraud, malice, or gross          benefit plan.”36 In Shaw v. Delta Air Lines, Inc.,37 the Supreme
negligence.30                                                         Court outlined the scope of section 514(a). Reviewing the
                                                                      legislative history, language, and structure of the provision,
Iv. Nonsubscriber Liability for Wrongful Discharge                    the Court concluded that “[a] law ‘relates to’ an employee
Section 451.001 (previously Article 8307c) of the Texas Labor         benefit plan . . . if it has a connection with or reference to
Code provides:                                                        such a plan.”38 Moreover, because “Congress used the words
                                                                      ‘relate to’ in their broad sense,” section 514(a) cannot “be
   No person may discharge or in any other manner dis-                interpreted to preempt only state laws dealing with the subject
   criminate against any employee because the employee                matters covered by ERISA — reporting, disclosure, fiduciary
   has in good faith filed a claim, hired a lawyer to                 responsibility, and the like.”39 Rather, as the Court reaffirmed
   represent him in a claim, instituted, or caused to be              in Pilot Life Insurance Co. v. Dedeaux,40 “the express preemption
   instituted, in good faith, any proceeding under the Texas          provisions of ERISA are deliberately expansive.”
   Workers Compensation Act, or has testified or is about
   to testify, in any such proceeding.                                If ERISA preempts a state law claim, the plaintiff may seek
                                                                      relief only under ERISA. ERISA preemption is usually quite
Does this apply to nonsubscribing employers? In Hodge v. SBS          beneficial, because under state law an employee normally
Investments, Inc.,31 the court held that Article 8307(c) (now         may recover a whole range of different types of relief, such
Section 451.001) applies equally to employees of subscribers          as punitive damages or damages for pain and suffering, and
and nonsubscribers. A claim against a nonsubscribing                  has the right to a jury trial. Under ERISA, punitive damages
employer has historically constituted a claim under the               are not recoverable41 and the courts have traditionally held
Workers’ Compensation Act within the meaning of Section               that no right to jury trial exists. 42
451.001.32 In a very important 1998 decision, the Texas
Supreme Court ruled, however, that nonsubscribers are not             Furthermore, Pilot Life and prior cases established that ERISA
subject to suit under § 451.001.33 The Texas Supreme Court            preempts state law causes of action for wrongful claims
ruled that the Texas Workers’ Compensation Act does not               administration with respect to any employee benefit plan.
apply to nonsubscribing employers unless a particular section         Thus, ERISA should preempt any state-law claim against a
of the Act specifically states its applicability to nonsubscribers.   nonsubscriber based on an allegation, for example, that the
Because § 451.001 contained no such statement, its anti-              employer misrepresented the plan’s coverage, or in some other
discrimination provisions apply only to subscribers. This             way acted improperly in determining or paying claims.
decision reversed several prior appellate court rulings, which
had applied § 451.001 to nonsubscribers.                              C. ERISA Preemption of Negligence Liability
                                                                      The more difficult question is whether ERISA preempts an
V. Occupational Injury Benefit Plans                                  employee’s claim for negligence against the nonsubscriber for
An employer’s policy of paying benefits to its employees in           injuries suffered on the job. On one hand, such a claim would
the event of work-related injuries will constitute an “employee       seem to “relate to” the plan to some extent because the plan
welfare benefit plan” and be subject to the Employee                  provides benefits for on-the-job injuries. But judicial decisions
Retirement Income and Security Act (“ERISA”).34 Such plans            also hold that ERISA does not preempt all state law claims
must comply with ERISA’s provisions regarding reporting and           that seek relief from an employer for personal injury damages,
disclosure, fiduciary responsibility, and administration and          rather than from an existing employee benefit plan.
enforcement. Failure to comply with those requirements may
result in criminal penalties or civil actions for enforcement.35      The primary authorities to directly address this issue are
Although compliance with ERISA’s regulatory requirements              cases decided several years ago. The landmark case of Eurine
is a significant undertaking, the consequences of ERISA               v. Wyatt Cafeterias, Inc.,43 involved claims by an injured
coverage, on the whole, benefit most nonsubscribers because           employee against an employer that rejected Texas workers’
of the extent to which ERISA “preempts,” or displaces, state          compensation coverage and implemented an occupational
law, and the relatively limited relief available under ERISA.         injury benefit plan for employees. United States District
                                                                      Judge Barefoot Sanders initially held, in an opinion issued
Section 514(a) of ERISA provides that, with certain exceptions,       May 16, 1991, that because the employee’s negligence claims
the provisions of ERISA “supersede any and all state laws             sought compensation (for past and future medical expenses,
70                                                    ADVOCATE   ✯ WINTER 2006




                                                THE
pain and suffering, lost earnings, etc.) that largely overlapped    Corporation,47 the United States Supreme Court upheld the
with the type of benefits provided under the employer’s             validity of an arbitration provision in the face of just such an
benefit plan, such claims “related to” the plan and were            attack. In that case, Gilmer, as part of his New York Stock
preempted by ERISA. A similar ruling was handed down by             Exchange Registration, agreed to have all disputes submitted to
United States District Judge Jerry Buchmeyer in the case of         arbitration. In other words, Gilmer had to sign the arbitration
Benson v. Wyatt Cafeterias, Inc.,44 on July 20, 1991. However,      agreement as a condition of becoming licensed as a broker.
both Courts subsequently reconsidered their rulings in              Gilmer later attempted to sue his employer for age discrimina-
these cases and both opinions were vacated. The Courts              tion under the ADEA in North Carolina federal court. In its
ultimately concluded that an action for negligence against          decision, the Supreme Court emphasized that it was placing
an employer in its capacity as an employer, rather than in is       arbitration agreements on the same footing as other contracts.
capacity as administrator of an employee benefit plan, has          The unequal bargaining power (or mere possibility of unequal
only a remote connection to the purposes of ERISA. This             bargaining power) between an employer and employee was
same conclusion was also reached by United States District          not sufficient reason to hold that arbitration agreements are
Judge John McBryde in the case of Nunez v. Wyatt Cafeterias,        never enforceable in the employment context. Ten years later,
Inc.45 The injured employees in all three of these cases were       in Circuit City Stores v. Adams,48 the United States Supreme
allowed to continue to pursue their negligence claims against       Court reaffirmed its view that mandatory arbitration agree-
the employer in state court (even though they apparently had        ments are enforceable in the employment context.
already received and might continue to receive benefits under
the employer’s occupational injury benefit plan). Thus, current     In a nonsubscriber case, Beldon Roofing & Remodeling Co. v.
case law indicates that ERISA will not preempt an employee’s        Tanner,49 the San Antonio Court of Appeals considered the
                                                                    Tanner
negligence action against the nonsubscriber for personal            following situation: Beldon Roofing offered its employees eligi-
injuries in the workplace merely because the nonsubscriber          bility under their injury benefit plan in exchange for signing a
establishes a benefit plan that is subject to ERISA.46              pre-injury agreement. In that agreement, the employee agreed
                                                                    not to sue the company in the event of a work-related injury,
VI. Alternative Dispute Resolution - Arbitration of                 but to, instead, submit any claim to arbitration. In exchange
Employee Injury Claims                                              for the employee’s agreement, Beldon agreed to give up any
A. Arbitration                                                      common law defenses that it might have to the payment of
Alternative Dispute Resolution (commonly referred to as             injury benefits (in other words, injury benefits were paid on
ADR) allows an employer and its employee to agree by                a “no-fault” basis). In its ruling enforcing Beldon’s arbitration
contract to resolve all, or part, of the disputes which may         agreement, the court emphasized the overwhelming public
arise between them through an alternative procedure such as         policy in Texas favoring arbitration.
arbitration, rather than through the litigation process. Many
ADR agreements encompass all claims which could arise               C. Mandatory Arbitration of Employment Disputes - What
between the employer and its employee, including personal           the Texas Supreme Court Says
injury claims, as well as all employment and labor disputes         In In re David’s Supermarkets, Inc., the Waco Court of
which may arise between them, such as claims for retaliatory        Appeals upheld a nonsubscriber arbitration program which
discharge, discrimination, and sexual harassment. Arbitration       was mandatory for all employees and covered all claims,
is designed to offer employers and employees a lower-cost           personal injury or otherwise, that could be asserted against
method of resolving disputes than traditional litigation.           the employer.50 In other words, the arbitration program was
                                                                    enforceable despite the fact that it was a condition of each
B. Are Agreements to Arbitrate Enforceable?                         worker’s employment with David’s Supermarkets.
Implementation of ADR agreements by nonsubscribing
employers represents a relatively new trend in the employment       The Texas Supreme Court’s 2002 decision In re Halliburton,
law field so until recently there was little existing legal prec-   Inc.51 gave employers, particularly nonsubscribers, the most
edent upholding their enforceability. Fortunately, however,         comprehensive statement to date upholding mandatory
numerous decisions in the last few years have demonstrated          arbitration by making it clear that arbitration agreements
a definite preference among courts to enforce ADR provisions        with employees are enforceable in almost all circumstances
in the employment context.                                          in Texas. The Supreme Court’s decision, In re Halliburton,
                                                                    Inc., significantly supported the position of employers that
In a landmark 1991 decision, Gilmer v. Interstate/Johnson Lane      have instituted mandatory arbitration programs. The Court
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                                                 THE
in Halliburton affirmed the ability of employers to institute
mandatory arbitration programs covering all employment               1 TEX. L AB. CODE A NN. § 406.002(a) (Vernon 1996).
disputes. The Court found that adequate consideration for            2 TEX. L AB. CODE A NN. §§ 406.002, .096 (Vernon 1996).
the agreement to arbitrate exists as long as the employee            3 Kilpatrick, TEXAS WORKERS’ COMPENSATION L AW § 1.06, Matthew
has notice of the arbitration program’s implementation and           Bender (1998).
thereafter continues to work for his/her employer or, for a          4 The only occurrence outside the no-fault scheme of workers’ com-
new hire, agrees to work with the employer after notice of the       pensation are occupational injuries that are caused by intentional
agreement. The Court also found that requiring employees as a        acts and death cases caused by the employer’s gross negligence.
condition of employment to submit future claims to arbitration       5 TEX. L AB. CODE A NN. § 406.033(d) (Vernon 1996).

was not “unconscionable” – i.e., not so fundamentally unfair         6 Werner v. Colwell, 909 S.W.2d 866 (Tex. 1995).

as to render the agreement unenforceable.                            7 Leitch v. Hornsby, 935 S.W.2d 114 (Tex. 1996).
                                                                     8 TEX. L AB. CODE A NN. § 406.033 (Vernon 1998).

Even before Halliburton, the Texas Supreme Court affirmed its        9 See United States Fidelity & Guar. Co. v. Goodson, 568 S.W.2d 443

approval of employer-sponsored arbitration agreements. One           (Tex. Civ. App. – Texarkana 1978, writ ref’d n.r.e.).
                                                                     10 See Jasper v. Tex. Employers Ins. Ass’n., 206 S.W.2d 646 (Tex. Civ.
of its significant earlier decisions in this regard, E-Z Pawn v.
Mancias,52 involved an employee who tried to circumvent the          App. – Waco 1947, no writ history).
                                                                     11 State Bar of Texas, TEXAS PATTERN JURY CHARGE: GENERAL NEG -
arbitration agreement he had signed with his employer, E-Z
Pawn. In attempting to avoid the agreement, Mancias claimed          LIGENCE AND INTENTIONAL P ERSONAL TORTS § 2.1 (2003 ed.).
                                                                     12 Cabrera v. Delta Brands, Inc., 538 S.W.2d 795, 797 (Tex. Civ. App.
that it was unenforceable because (1) he did not actually read
the agreement or understand its effect; (2) the agreement            – Texarkana 1976, writ ref’d n.r.e.).
                                                                     13 Holiday Lodge Nursing Home v. Huffman, 430 S.W.2d 826 (Tex.
violated public policy because E-Z Pawn told him that if he
did not sign the agreement he would lose his job; and (3) the        Civ. App. – Texarkana 1968, no writ).
                                                                     14 J. Weingarten, Inc. v. Sandefer, 523 S.W.2d 941 (Tex. Civ. App.
                                                                                                 Sandefer
agreement was simply unconscionable and unfair.
                                                                     – Beaumont 1975, writ ref’d n.r.e.).
                                                                     15 Id. at 944.
The Texas Supreme Court rejected all of Mancias’ arguments           16 Cabrera, 538 S.W.2d at 795.
stating that employees are responsible for thoroughly reading        17 Harrison v. Harrison, 597 S.W.2d 477 (Tex. Civ. App. – Tyler
and understanding any document that they sign, just like any
                                                                     1980, writ ref’d, n.r.e.).
other person who signs a contract in which they agree to do          18 TEXAS PATTERN JURY CHARGE: GENERAL NEGLIGENCE AND INTEN-
something. In returning this case to arbitration, the court          TIONAL P ERSONAL TORTS § 2.4.
commented that Texas law favors arbitration in general and           19 Dill v. Tex. Indem. Ins. Co., 63 S.W.2d 1016, 1018 (Tex Comm’n
arbitration agreements like the one instituted by E-Z Pawn.          App. 1933, judgment adopted).
“Arbitration offers a permissible choice to traditional litigation   20 TEX. L AB. CODE A NN. § 401.013 (Vernon 1998).
that does not favor either party.” With respect to Mancias’          21 Id. §406.033(c)(1).
argument that arbitration agreements were unconscionable,            22 Tex. Farm Prods. v. Stock, 657 S.W.2d 494, 500 (Tex. Civ. App.
the court stated that, even if continued employment was              – Tyler 1983, writ ref’d n.r.e.).
premised on the employee’s execution of the agreement,               23 TEX. L AB. CODE A NN. § 406.033 (Vernon 1998).
“there is nothing per se unconscionable about arbitration            24 686 S.W.2d 770, 775 (Tex. App. – Fort Worth), rev’d on other
agreements . . . assuming unequal bargaining power between           grounds, 701 S.W.2d 243 (Tex. 1985).
an employee and its employer does not establish grounds for          25 976 S.W.2d 257 (Tex. App. – Amarillo 1998, pet. denied).
defeating an agreement to arbitrate.”                                26 893 S.W.2d 504 (Tex. 1995).
                                                                     27 23 S.W.3d 347 (Tex. 2000).
Jay M. Wallace is a partner in the labor and employment section      28 Bethel v. Butler Drilling Co., 635 S.W.2d 834 (Tex. App. – Houston
of Gibson, McClure, Wallace & Daniels, L.L.P., and received his      [14th Dist] 1982, writ ref’d n.r.e.).
J.D. from The University of Texas School of Law. Mr. Wallace         29 Bernal v. Seitt, 313 S.W.2d 520 (Tex. 1958).

represents companies in all phases of employment law, and is the     30 TEX. CIV. P RAC. & R EM. CODE, § 41.003.

co-editor of the Texas Employment Law Manual, which provides an      31 783 S.W.2d 310 (Tex. App. – Dallas 1990, writ denied).

overview and analysis of the principal state and federal laws that   32 Id. at 313.

affect Texas employers. Mr. Wallace also gives presentations and     33 Tex. Mex. Ry. v. Bouchet, 963 S.W.2d 52 (Tex. 1998).

training seminars to employers and human resource professionals      34 29 U.S.C. §§ 1002-1461 (1974).

on a wide variety of employment-related topics. ✯                    35 See 29 U.S.C. §§ 1131-32.
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                                                     THE
36 29 U.S.C. 85 (§ 1144(a)).
37 463 U.S. 85 (1983).
38 Id. at 96-97.
39 Id. at 98.
40 481 U.S. 41, 46 (1987).
41 Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan

Enters., Inc., 793 F.2d 1456, 1462-65 (5th Cir. 1986), cert. denied,
479 U.S. 1034 (1987).
42 Calamia v. Spivey, 632 F.2d 1235, 1236-37 (5th Cir. 1980); but see

McDonald v. Aircraft Elec. Supply Co., 774 F. Supp. 29 (D. D.C. 1991)
(constitutional right to jury trial applies in contractual causes of
action involving ERISA).
43 1991 WL 206172 (N.D. Tex.).
44 804 F. Supp. 876 (N.D. Tex. 1991).
45 771 F. Supp. 165 (N.D. Tex. 1991).
46 See Villatoro v. Wyatt Cafeterias, Inc, No. 4-91-2113 (S.D. Tex. Oct.

30, 1991); Lockett v. Wyatt Cafeterias, Inc., No. 3-91-1139-G (N.D.
Tex. Sept. 16, 1991).
47 500 U.S. 20 (1991).
48 532 U.S. 105 (2001).
49 1997 WL 280482 (Tex. App. – San Antonio 1997).
50 In re David’s Supermarkets, Inc., 43 S.W.3d 94 (Tex. App. – Waco

2001, no writ).
51 In re Halliburton, Inc., 80 S.W.3d 566 (Tex. 2002).
52 934 S.W.2d 87, 91 (Tex. 1996).
                                                       ADVOCATE   ✯ WINTER 2006                                                   73




                                                 THE
             DO STATE MEDICAID AGENCIES HAVE THE RIGHT
         TO FULL R EIMBURSEMENT F OR MEDICAL PAYMENTS MADE
                 ON BEHALF OF A MEDICAID R ECIPIENT?
               THE U.S. SUPREME COURT HAS WEIGHED IN
                                  BY RANDALL O. SORRELS & JOHNNY N. GARZA, JR.




H   AVE YOU EVER HAD DIFFICULTY RESOLVING a case
     where the plaintiff’s claims are valued at $100,000, and
     with a $80,000 Medicaid lien, which cannot be reason-
ably reduced? This situation occurs on a regular basis, and
if the plaintiff cannot make a meaningful recovery, it makes
                                                                     lawsuit for $550,000. ADHS did not participate in the settle-
                                                                     ment negotiations, nor did it ask to participate. Nonetheless,
                                                                     ADHS asserted a lien against the settlement funds, seeking
                                                                     the entire amount of the lien, $215,645.30.

it difficult for attorneys on both sides of the bar to resolve       Ahlborn subsequently filed suit in the United States District
the case. Fortunately, the United States Supreme Court may           Court for the Eastern District of Arkansas, seeking a dec-
have provided attorneys an avenue that could lead to more            laration that ADHS could only recover the portion of the
settlements.                                                         settlement that was allocated for medical expenses. Ahlborn
                                                                     and ADHS reached a stipulation: (1) her claim was valued at
On May 1, 2006, the United States Supreme Court unani-               $3,040,708.12; (2) that the settlement amounted to one-sixth
mously held that a state’s assertion of a statutory lien on a        of this sum; and (3) if Ahlborn’s construction of the federal
recipient’s tort settlement is limited only to that portion of the   Medicaid law was correct, then ADHS would be entitled to
settlement representing the recipient’s past medical expenses.1      the portion of the settlement that represented Ahlborn’s
Specifically, a lien attaching to settlement proceeds related to     medical costs, that being $35,581.47 (ADHS would recover
damages other than medical costs is not authorized by the            $215,645.38 if it prevailed on its statutory construction).
federal Medicaid law and is also prohibited by the federal
Medicaid anti-lien provision. A state’s Medicaid agency              The District Court ruled that Arkansas’ Medicaid law did
cannot claim any part of the settlement that is allocated for        not conflict with the federal Medicaid law, and therefore
non-medical damages, including pain and suffering and lost           ADHS could recover the full amount of the medical payments
wages, etc. Limiting the state Medicaid agency’s claim for reim-     made on behalf of Ahlborn, $215,645.30. The Eighth Circuit
bursement to only medical expenses will likely create more           reversed the District Court and held that ADHS could only
settlement opportunities because the ultimate recovery by an         recover that portion of the settlement that represented pay-
injured victim often dictates their willingness to settle.           ments for medical care. The United States Supreme Court
                                                                     affirmed.2
               A. Heidi Ahlborn Set The Stage
In 1996, 19-year-old Heidi Ahlborn was seriously injured in                    B. THE INTERPLAY BETWEEN THE FEDERAL
a car accident, resulting in permanent disability. As Ahlborn                         AND STATE MEDICAID L AWS
could not pay for her extensive medical care, Arkansas’              Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq.,
Medicaid agency the Arkansas Department of Human Services            established the Medicaid program, which helps pay medical
(“ADHS”) paid medical providers $215,645.30 on her behalf            costs for those that have limited resources. Although not
under the Medicaid plan. In 1997, Ahlborn filed suit against         required, every state participates in the Medicaid program
the alleged tortfeasors, seeking to recover for her injuries. In     - the Federal Government pays a percentage of the medical
1998, ADHS intervened in Ahlborn’s lawsuit in order to assert        costs and in turn, the state must comply with the federal
a lien for the medical payments made on her behalf on any            Medicaid law, which includes administering the program
recovery obtained by Ahlborn. In 2002, Ahlborn settled her           within the state.
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                                                   THE
Specifically, federal Medicaid law requires participating states      representing medical expenses. This holding means that state
to do the following:                                                  agencies may not seek to recover any portion of a plaintiff’s
                                                                      recovery for lost wages, pain and suffering, permanent dis-
     1. [A]scertain the legal liability of third parties . . . to     ability, or other non-medical damages.
     pay for [a recipient’s] care and services available under
     the [state’s] plan.3                                             First, the Court held that the federal Medicaid law focuses
                                                                      on recovery of payments for medical care.9 Specifically, 42
     2. [To] seek reimbursement for [medical] assistance              U.S.C. § 1396k(a)(1)(A) states that Medicaid recipients must
     to the extent of such legal liability.4                          “assign the state any rights . . . to payment for medical care
                                                                      from any third party.” Thus, the federal Medicaid law does
     3. [T]o the extent that payment has been made . . .              not provide the state any rights to seek settlement funds
     for medical assistance for health care items or services         allocated to non-medical damages.
     furnished to an individual, the state is considered to
     have acquired the rights of such individual to pay-              Second, the federal Medical law’s anti-lien provision, §
     ment by any other party for such health care items or            1396p(a)(1), precludes liens “against the property of an
     services.5                                                       individual prior to his death on account of medical assistance
                                                                      paid . . . on his behalf under the state [Medicaid] plan.”
     4. [To] provide that, as a condition of [Medicaid]               Accordingly, the Court held that the anti-lien provision pro-
     eligibility . . . the individual is required--(A) to assign      hibits the state from attaching the settlement funds designated
     the state any rights . . . to payment for medical care           for non-medical damages, which is property belonging to
     from any third party; (B) to cooperate with the state . .        the individual.10
     . in obtaining [such] payments[]; and (C) to cooperate
     with the state in identifying, and providing information                               D. THE AFTERMATH
     to assist the state in pursuing, any third party who may         The fallout and spin-off issues from this decision are just
     be liable[].6                                                    beginning. In fact, it has been intimated that Ahlborn had a
                                                                      unique set of facts and that the attorney general may look for
     5. [A]ny amount collected by the state under an                  an opportunity to test Ahlborn with a different set of facts.
     assignment made . . . shall be retained by the state as is
     necessary to reimburse it for [Medicaid] payments made           Until that time comes, attorneys should consider several
     on behalf of [the recipient], and the remainder of such          issues, including:
     amount collected shall be paid to [the recipient].7
                                                                      1. Should the Ahlborn logic control repayment claims made
In Arkansas, the law provided that when a recipient obtained a        by other federal programs, such as those asserted by the
settlement, a lien was automatically imposed on the settlement        Medical Care Recovery Act or the Medicare Secondary Payer
in an amount equal to the medical payments made by the                Act?
Medicaid plan.8 Arkansas claimed a right to recover the full
amount of the benefits paid, which also meant it was entitled         Medicaid is not the only federal health care program that
to more than just the portion of the settlement or judgment           has asserted a right to priority repayment of tort settlements.
that represented the medical expenses, such as pain and               While the basic structure of a repayment obligation is the
suffering, lost wages, and loss of future earnings.                   same under all three federal statutes, each statute contains
                                                                      different language. Regardless of the statutory language,
     C. THE U.S. SUPREME COURT HELD THAT THE STATE                    the arguments for allocation should remain consistent,
     COULD NOT RECOVER THE SETTLEMENT PROCEEDS                        that a claim for reimbursement cannot take priority over
          ALLOCATED FOR NON-MEDICAL PAYMENTS                          the settlement funds allocated to non-medical expenses.
The matter was one of statutory construction: whether the             Alternatively, the statutes could possibly be challenged under
federal Medicaid law limited ADHS’ recovery to the portion of         the Administrative Procedures Act against the Centers for
the settlement allocated for medical expenses. In a unanimous         Medicare and Medicaid Services.
decision, the United States Supreme Court held that the
state Medicaid agency’s claim for reimbursement out of tort           2. The parties in Ahlborn stipulated as to the value of Heidi
settlements is limited to only that portion of the settlement         Ahlborn’s claims as well as the proportional value of the
                                                     ADVOCATE   ✯ WINTER 2006                                                     75




                                               THE
Medicaid-funded health care costs. State Medicaid agencies         lead to an equitable settlement allocation agreed to by all
do not have to agree to the allocations of values assigned to      parties involved.
the various elements of damages. In the instances that an
allocation cannot be reached, what will be the procedure to                                 E. CONCLUSION
make this determination?                                           The Ahlborn holding appears to be an effective tool to
                                                                   encourage settlements by ensuring that the injured victim is
In Ahlborn, the Court indicated that the government retained       more equitably compensated. It benefits defendants who may
the right to challenge the reasonableness of a settlement          be able to settle for a lesser gross amount, while assuring the
allocation as to past medical expenses. One option to resolve      injured claimant receives a greater net amount. Awareness
an allocation disagreement is for the matter to be submitted       of this decision and understanding the spin-off issues that
to a court to decide whether to approve or modify the settle-      are sure to arise may help attorneys settle their case, leaving
ment allocation. This could occur either in the original trial     both sides more satisfied.
court or in a separate declaratory judgment action. In fact,
post-settlement hearings involving allocation have taken place     Randall O. Sorrels is a partner at Abraham, Watkins, Nichols,
in Minnesota and Wisconsin.11                                      Sorrels, Matthews & Friend in Houston. Mr. Sorrels is Board
                                                                   Certified in Personal Injury Trial Law and Civil Trial Law by the
3. What duty does the plaintiff have to cooperate with the         Texas Board of Legal Specialization and is the immediate past
state’s agency? When should the state agency be notified?          President of the Houston Bar Association. Johnny N. Garza, Jr. is
                                                                   an associate at the Firm. ✯
In Ahlborn, the Court stated that the “duty to cooperate
arises principally, if not exclusively, in proceedings initiated   1 Ark. Dep’t of Health & Human Servs. v. Ahlborn, 126 S.Ct. 1752
by the state to recover from third parties” and that “[m]ost       (2006).
                                                                   2 Id. at 1758.
of the accompanying federal regulations simply echo this
                                                                   3 42 U.S.C. § 1396a(a)(25)(A).
basic duty.”12 Hence, the recipient’s duty to cooperate is
                                                                   4 Id. § 1396a(a)(25)(B).
undefined under the federal Medicaid law. However, it is           5 Id. § 1396a(a)(25)(H).
probably prudent to provide early written notification to          6 Id. § 1396k(a)(1).
the relevant state agency that recovery for tort damages           7 Id. § 1396k(b).
is being sought, possibly including the repayment of the           8 Ahlborn, 126 S.Ct. at 1759-1760.
state’s medical expenses. If the state agency does not get         9 Id. at 1761.
involved, then it should at least be invited to participate in     10 Id. at 1763.

the settlement negotiations or participate in a post-settlement    11 See Henning v. Wineman, 306 N.W.2d 550 (Minn. 1981); Rimes v.

hearing. Inviting the state agency to participate in the lawsuit   State Farm Mut. Auto. Ins. Co., 316 N.W.2d 348 (Wisc. 1982).
                                                                   12 Ahlborn, 126 S.Ct. at 1765.
and securing an accounting of the state’s medical costs may
76                                                  ADVOCATE   ✯ WINTER 2006




                                              THE
                                 DEAD OR ALIVE:
                      THE COLLATERAL S OURCE RULE AFTER HB4
                                                      BY KIRK L. PITTARD




T    HE COLLATERAL SOURCE RULE in Texas common law
    enjoys a long history.1 The purpose of the collateral
    source rule is based on long standing public policy that
recognizes that a tortfeasor should not have the benefit of
insurance proceeds procured by the injured party and to
                                                                 one considers the applicable rules of statutory construction
                                                                 and the relevant legislative history, it is apparent that the
                                                                 Collateral Source Rule is alive and well.

                                                                                    I. Legislative History
which the wrongdoer was not privy.2 The Collateral Source        In order to ascertain the meaning of section 41.0105 in
Rule is both a rule of evidence and of damages.3 That is to      conjunction with the Collateral Source Rule, it is important
say, a “defendant is not entitled to present evidence of, or     to understand the genesis and metamorphosis of the statute
obtain an offset for, funds received by the plaintiff from a     through the legislative process. The final language of sec-
collateral source.”4                                             tion 41.0105 is not the same language that was originally
                                                                 introduced at the beginning of the 78th Legislative Session,
The scope of the rule is extremely broad. For instance, the fol- nor is it the language that was referred to the conference
lowing have been found to be subject to the Collateral Source    committee—instead it was constantly changing throughout
Rule: (1) free medical services                                                           the legislative session.
given to a plaintiff,5 fringe benefits
received by the plaintiff related to     “...when one considers the applicable a. Version 1.
the claim,  6 voluntary payment of         rules of statutory construction and            Initially, at the beginning of the
wages by an employer,      7 veterans’
                                              the relevant legislative history,           78th Legislative Session, House
income and care benefits,   8 Veterans’
                                            it is apparent that the Collateral            Bill 3 (“HB3”) and HB4 were intro-
Administration disability benefits,9                                                      duced as comprehensive efforts to
                                              Source Rule is alive and well. ”
medical insurance purchased by the                                                        implement tort reform with HB3
plaintiff,10 reductions in medical                                                        specifically rewriting the relevant
expenses actually paid by Medicaid,11 benefits paid by the       medical malpractice law by amending Article 4590i. HB3
Medicaid program,12 and payments and reductions from             included a section that would have added Subchapter Q to
Medicare.13 The Collateral Source Rule’s application is not      Article 4590i. This subchapter, entitled “Collateral Source
dependent on the source of the funds but rather the character    Benefits,” would have effectively repealed the exclusion of
of the benefits received.14                                      most collateral sources with the following language:

In 2003, the Texas Legislature passed House Bill 4 (“HB4”)         SECTION 17.02 ADMISSIBILITY OF EVIDENCE OF
which implemented sweeping changes in tort law in the State        COLLATERAL SOURCE BENEFITS.
of Texas. One provision of HB4 included an amendment               A defendant physician or health care provider may
that added section 41.0105 to the Texas Civil Practice &           introduce evidence in a health care liability claim of any
Remedies Code. It is entitled “Evidence Relating to Amount         amount payable to the claimant as a collateral benefit. If
of Economic Damages” and provides: “In addition to any             a defendant physician or health care provider introduces
other limitation under law, recovery of medical or health care     evidence of a collateral source benefit, the claimant may
expenses incurred is limited to the amount actually paid or        introduce evidence of any amount the claimant has paid
incurred by or on behalf of the claimant.”15                       to secure the right to the benefit.

Many have questioned whether section 41.0105 was an              A “collateral source benefit,” in turn, was defined to include
attempt by the legislature to change the longstanding law in     Medicare, Medicaid, workers’ compensation, state or federal
Texas regarding the Collateral Source Rule. However, when        disability benefits (including Social Security benefits), and
                                                      ADVOCATE   ✯ WINTER 2006                                                    77




                                                THE
any private accident, health, or disability insurance benefits.16     under law, recovery of medical or health care expenses
Thus, this approach would have made evidence regarding                incurred is limited to the amount actually paid or
collateral benefits from these various sources admissible for         incurred by or on behalf of the claimant.
the first time in over a hundred years.
                                                                      (b) Authorizes a defendant to introduce evidence of any
b. Version 2.                                                         amount payable to the claimant as a collateral benefit
After two public hearings, HB3 and HB4 were merged into               arising from the event in the cause of action under
the committee substitute for HB4 (“CSHB4”). This committee            certain laws.
substitute also contained clear language that would have
repealed the Collateral Source Rule.17                                (c) Authorizes the plaintiff, if the defendant introduces
                                                                      evidence under Subsection (b), to introduce evidence
c. Verson 3.                                                          of any legal obligation to reimburse any subrogated
CSHB4 was then presented to the House of Representatives              entity.21
for debate, floor amendments, and a final vote. During
this process, an amendment was proposed and passed that             Only version 4 of HB4 contained subsections (b) and (c),
removed Subchapter Q. Thus, when the House reported the             version 5—the final version—did not.22 Therefore, the
engrossed version of HB4 on March 31, 2003, the aforemen-           report is not an analysis of the final language codified in
tioned provisions allowing admissibility of collateral source       section 41.0105. As such, the report lends no support for
evidence had been deleted.18                                        an argument that section 41.0105 repealed or affected the
                                                                    Collateral Source Rule.
d. Verson 4
HB4 was then referred to the Senate State Affairs Committee               III. House Research Organization Bill Analysis.
for consideration. The Senate committee substitute was              The House Research Organization’s bill analysis is also some-
reported on May 14, 2003 and included a limited repeal of the       times cited for the proposition that the legislative history of
Collateral Source Rule with regard to governmental health,          HB4 demonstrates that section 41.0105 repealed the Collateral
income, disability and workers’ compensation payments.19            Source Rule. However, the House Research Organization’s
The Senate version provided that a defendant could introduce        analysis suffers from the same unreliable foundation as does
evidence of such collateral source amounts payable to the           the Senate Research Center’s bill analysis. The House Research
claimant and that a plaintiff could then introduce evidence of      Organization’s bill analysis, dated March 25, 2003, states:
any legal obligation to reimburse any subrogation entity.20
                                                                      Medical expenses. Medical expenses should be limited
e. Version 5 – The Final Version                                      to what was actually paid, not the normal charge for
The Senate State Affairs Committee’s approach ultimately              the service. Managed care companies have special
did not survive the final legislative debate in conference. The       contracts with physicians and hospitals, so they pay
final version issued by the conference committee and passed           less. Similarly, Medicare reimburses at a rate below most
by both the House and the Senate, as quoted above, deleted            private insurers. In both cases, successful claimants
all provisions relating to subrogation interests and collateral       should be reimbursed the reduced amount originally
source evidence.                                                      paid for the services, (i.e. health care providers should
                                                                      not be charged for money they never received). This
          II. Senate Research Center Bill Analysis.                   provision would not limit future medical expenses and
The Senate Research Center’s bill analysis regarding HB4 is           would not preclude payment of Medicare costs.23
often cited as authority for the proposition that the Collateral
Source Rule has been repealed. However, the report actually         On March 25, 2003, the day of the House Research
analyzes version 4 of the bill which contained language in it       Organization’s bill analysis, the version of HB4 that was
that expressly repealed the Collateral Source Rule in certain       percolating through the legislative process was a version
circumstances. The analysis provides as follows:                    prior to version 3. On March 25, 2003, HB4 had not yet been
                                                                    passed by the House, by the Senate State Affairs Committee,
   Sec. 41.0105. EVIDENCE RELATING TO AMOUNT                        or voted on by the Senate, all of which came to pass after
   OF ECONOMIC DAMAGES.                                             the date of the bill analysis. Therefore, the House Research
   (a) provides that, in addition to any other limitation           Organization’s report analyzes a version of the bill that was
78                                                     ADVOCATE   ✯ WINTER 2006




                                                 THE
ultimatley considered and rejected by the legislature.24 As a        suggests that the jury should be instructed regarding the
result, the House Research Organization’s bill analysis does         language in section 41.0105, the Civil Practice & Remedies
not support a conclusion that the Collateral Source Rule has         Code seems to suggest otherwise. PJC 8.2 provides that:
been repealed.
                                                                        For actions filed on or after September 1, 2003, recovery
     IV. The Collateral Source Rule is Alive and Well.                  of medical or health care expenses incurred is limited
By reviewing each version of the legislation, one can ascertain         to the amount actually paid or incurred by or on behalf
the different approaches considered and, more importantly,              of the claimant. TCPRC § 41.0105. If there is a ques-
rejected by the legislature. While some suggest that section            tion whether medical expenses were actually paid or
41.0105 is an effort to modify or repeal the Collateral Source          incurred by or on behalf of the plaintiff, the following
Rule in Texas as it relates to both private insurance and               should be submitted for element i:
governmental benefits, reaching such a conclusion would
necessarily give earlier versions of the bill meaning despite                 i. Medical care expenses in the past actually paid
the fact that those versions were specifically contemplated                   or incurred by or on behalf of Paul Payne.
and rejected by the legislature.
                                                                              Answer:                       .26
Because the legislature specifically considered proposed
language that would have expressly either repealed or modi-          However, section 41.012 of the Texas Civil Practice &
fied the Collateral Source Rule and yet ultimately rejected          Remedies Code provides that “[i]n a trial to a jury, the court
such language in the final version of HB4, it appears that the       shall instruct the jury with regard to Sections 41.001, 41.003,
legislature did not intend to affect the Collateral Source Rule.     41.010, and 41.011.”27 Conspicuously absent from this list is
If the legislature had intended to alter the Collateral Source       any mention that the jury must be instructed regarding section
Rule, it is apparent through the various mutations of HB4            41.0105. The Pattern Jury Charge Committee’s comment to
that the legislature knew how to accomplish such a result            PJC 8.2 does not explain the basis for recommending that
had it chosen to do so. As a result, the Collateral Source Rule      juries be instructed as noted above. Thus, it appears that PJC
is alive and well and, therefore, must be read and applied in        section 8.2 may not be in accord with the statutory scheme
conjunction and in harmony with section 41.0105.                     which encompasses section 41.0105.

    V. Given the Viability of the Collateral Source Rule,            Therefore, in light of the fact that evidence regarding payments
       How Should Evidence of Recoverable Medical                    by a collateral source are not admissible, the fact that it does
                 Expenses Be Handled at Trial?                       not appear that the jury should be instructed regarding the
In light of the Collateral Source Rule and section 41.0105, one      contents of section 41.0105, and the fact that, to date, there
issue that often arises at trial concerning recoverable medical      is no guidance from any appellate court regarding what sec-
expenses is how evidence of medical expenses should be               tion 41.0105 means, the question remains: What is the most
handled in front of the jury. That is to say, should the plaintiff   efficient way of handling these issues at trial?
be allowed to offer evidence of medical expenses incurred,
should evidence of what a collateral source paid be admissible,      Judicial economy and efficiency are always a concern for
and should these issues be handled as evidentiary matters            trial courts. From a trial judge’s perspective, it is generally
before the jury or in some post-verdict proceeding? There            more desirable to try a case in such a way that, upon appel-
are numerous scenarios in which these issues may arise and           late review, the case can either be affirmed or reversed and
there are varying opinions on how this procedure should be           rendered without the need to re-try the case. In light of
implemented. However, a few fundamental principles should            these concerns, the most judicially efficient way to handle
guide the procedure to be followed.                                  the issue may be to: (1) allow the plaintiff to offer evidence
                                                                     of the reasonable and necessary medical expenses he or she
Although seemingly obvious, the most important consider-             has incurred, (2) encourage the parties to stipulate as to the
ation is the Collateral Source Rule which, as noted above,           amount of medical expenses that were actually paid by any
prevents the admissibility of evidence of or offsets for funds       collateral source, and (3) if the trial court sees fit, address
received from a collateral source.25                                 any award of medical expenses in a post-verdict proceeding
                                                                     based on the stipulation of the parties or evidence offered
While section 8.2 of the Texas Pattern Jury Charge (“PJC”)           to the court as to the amount of expenses actually paid by
                                                         ADVOCATE   ✯ WINTER 2006                                                          79




                                                   THE
a collateral source. By doing so, practitioners may provide
the trial and appellate courts the clearest record regarding            1 See, e.g., Tex. & Pac Ry. Co. v. Levi Bros. 59 Tex. 674, 676 (1883)
amounts of medical expenses both incurred and paid by or                (holding that damages cannot be offset by plaintiff’s insurance
on behalf of the plaintiff. The direct result of this approach is       compensation).
that a reviewing court of appeals would be in a much better             2 Brown v. Am. Transfer & Storage Co., 601 S.W.2d 931, 934

position to affirm or reverse and render without the need to            (Tex. 1980); see also Texarkana Mem’l Hosp. Inc. v. Murdock, 903
remand for a new trial on these damages.                                S.W.2d 868, 874 (Tex. App.—Texarkana 1995) (“The tortfeasor,
                                                                        however, has no right to get the benefit of a bargain made by
On the other hand, if a trial court only admits evidence of             [the benefit provider].”), rev’d on other grounds, 946 S.W.2d 836
medical expenses paid by or on behalf of the plaintiff or               (Tex. 1997).
                                                                        3 Taylor v. Amer. Fabritech, 132 S.W.3d 613, 626 (Tex. App.—Houston
some combination of incurred medical bills and paid medical
                                                                        [14th Dist.] 2004, pet. denied).
bills, a host of problems ensues. First, the Collateral Source          4 Id.
Rule is violated by the admission of the evidence in front              5 See Brown, 601 S.W.2d at 934.
of the jury concerning medical expenses actually paid by                6 See McLemore v. Broussard, 670 S.W.2d 301, 303 (Tex. App.—
a collateral source. Second, if the jury finds in favor of the          Houston [1st Dist.] 1983, no writ).
plaintiff, such a scenario would result in either a finding of          7 See Houston Belt & Terminal Ry. Co. v. Johansen, 107 Tex. 336,

medical expenses paid, incurred or some combination of                  339-40, 179 S.W. 853, 853-54 (1915).
                                                                        8 See Montandon v. Colehour, 469 S.W.2d 222, 229 (Tex. Civ.
the two. Without a finding on both the amounts paid and                                         Colehour
incurred, on appellate review, the court of appeals would be            App.—Fort Worth 1971, no writ).
                                                                        9 See Traders & Gen. Ins. Co. v. Reed, 376 S.W.2d 591, 593-94 (Tex.
confronted with a situation in which a reversal and remand
for a new trial, as opposed to a reversal and rendering,                Civ. App.—Corpus Christi 1964, writ ref’d n.r.e.)
                                                                        10 See Lee-Wright, Inc. v. Hall, 840 S.W.2d 572, 582 (Tex. App.—
would be the only option if the court of appeals concluded
                                                                        Houston [1st Dist.] 1992, no writ).
the trial court had reached the incorrect conclusion on its             11 See Texarkana Mem’l Hosp. Inc. v. Murdock, 903 S.W.2d 868, 873
interpretation of section 41.0105. It would be prudent for              (Tex. App.—Texarkana 1995), rev’d on other grounds, 946 S.W.2d
practitioners and trial courts to strive to avoid this potential        836 (Tex. 1997).
inefficiency.                                                           12 See Martinez v. Vela, No. 03-98-00707-CV, 2000 WL 12968, at

                                                                        *3 (Tex. App.—Austin Jan. 6, 2000, no pet.) (not designated for
                       VI. Conclusion.                                  publication).
                                                                        13 See Wong v. Graham, No. 03-00-00440-CV, 2001 WL 123932,
Based on the legislative history of HB4, which culminated
in section 41.0105 of the Texas Civil Practice & Remedies               at *11 (Tex. App.—Austin Feb. 15, 2001, no pet.) (not designated
Code, in applying the language of section 41.0105 to recover-           for publication).
                                                                        14 Lee-Wright, Inc. 840 S.W.2d at 582 (citing Phillips v. W. Co. of N.
able medical expenses, courts should keep in mind that the
                                                                        Am., 953 F.2d 923, 929 (5th Cir. 1992)).
Collateral Source Rule is still viable. Therefore, at trial, courts     15 TEX. CIV. P RAC. & R EM. CODE A NN. § 41.0105 (Vernon 2005).
and practitioners should strive to implement procedures that            16 SECTION 17.01 DEFINITION
apply section 41.0105 in conjunction with the Collateral                In this sub-chapter, “collateral source benefit” means a benefit paid
Source Rule and which reduce the potential for remands for              or payable to or on behalf of a claimant under:
a new trial after appellate review.                                     (1) The Social Security Act, 42 U.S.C. § 301(et.seq.), and its
                                                                             subsequent amendments;
Kirk Pittard is a partner at Durham & Pittard, LLP, an                  (2) A state or federal income replacement, disability, workers’
appellate boutique in Dallas, Texas. He can be reached at                    compensation, or other law that provides partial or full
kpittard@durhampittard.com.
kpittard@durhampittard.com The author wishes to acknowledge                  income replacement; or
and thank Jim Perdue, Jr. of the Perdue Law Firm in Houston, Texas      (3) Any insurance policy, other than a life insurance policy,
as the source for much of the legislative history relied upon in this        including:
                                                                             (A) An accident, health, or sickness insurance policy;
article. A more thorough discussion of the legislative history can
                                                                             and
be found in a recent law review article authored by Mr. Perdue,
                                                                             (B) A disability insurance policy.
Maybe It Depends on What Your Definition of “Or” Is? A Holistic         17 The committee substitute would have also amended Article 4590i
Approach to Texas Civil Practice and Remedies Code § 41.0105,           and added a new subchapter Q (section 17.01 et seq.) including
The Collateral Source Rule, and Legislative History, 38 TEX. TECH.      section 17.02 as follows:
L. R EV. 241 (2006). ✯                                                  SECTION 17.02 ADMISSIBILITY OF EVIDENCE OF COLLATERAL
                                                                        SOURCE BENEFITS. A defendant physician or health care provider
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                                                    THE
may introduce evidence in a health care liability claim of any           (b) A defendant may introduce evidence of any amount payable
amount payable to the claimant as a collateral benefit. If a defendant        to the claimant as a collateral benefit arising from the event
physician or health care provider introduces evidence of a collateral         in the cause of action under:
source benefit, the claimant may introduce evidence of any amount             (1) Social Security Act (42 U.S.C. § 301 et. seq.); or
the claimant has paid to secure the right to the benefit.                     (2) A state or federal income disability or Workers’
                                                                              Compensation Act.
18 The engrossed House version of HB4 would have deleted sub-            (c) If the defendant introduces evidence under sub-section (b),
chapter Q concerning “collateral source benefits” and contained the           the plaintiff may introduce evidence of any legal obligation
following language clarifying the scope of provisions concerning              to reimburse any subrogated entity.
                                                                         20 Id.
recovery of health care expense:
                                                                         21 Senate Research Center Bill Analysis of C.S.H.B. 4, May 14,

SECTION 9.01 RECOVERY OF PAST MEDICAL OR HEALTH                          2003 at 29.
CARE EXPENSES                                                            22 Compare language of version 4 of the bill set forth above with
   Recovery of past medical or health care expenses in a health          TEX. CIV. P RAC. & R EM. CODE A NN. § 41.0105.
   care liability claim shall be limited to the amount actually          23 House Research Organization Bill Analysis of H.B. 4 March 3,
   paid or incurred by or on behalf of the claimant.                     2003 at 14.
                                                                         24 Compare the language of version 1 of the bill set forth above with
19   The Senate substitute contained the following language:             TEX. CIV. P RAC. & R EM. CODE A NN. § 41.0105.
                                                                         25 Taylor v. Amer. Fabritech, 132 S.W.3d 613, 626 (Tex. App.—
SECTION 41.0105 EVIDENCE RELATING TO AMOUNT OF                           Houston [14th Dist.] 2004, pet. denied).
ECONOMIC DAMAGES                                                         26 State Bar of Texas, TEXAS PATTERN JURY CHARGE: GENERAL
(a) In addition to any other limitation under law, recovery of           NEGLIGENCE AND INTENTIONAL P ERSONAL TORTS, PJC 8.2 cmt. At
     medical or health care expenses incurred is limited to the          108 (2003 ed.).
     amount actually paid or incurred by or on behalf of the             27 TEX. CIV. P RAC. & R EM. CODE A NN. § 41.012 (Vernon 1997).
     claimant.
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                                                THE
                           INSURANCE ISSUES FOR TRIAL L AWYERS
                                          BY: MARK L. KINCAID & ZACH WOLFE




A   S EVERY EXPERIENCED TRIAL LAWYER KNOWS, and as new
    lawyers soon find out, insurance issues can substantially
    impact, and even dominate, trials—from before suit is
filed, up to when (and whether) the judgment is paid.
                                                                    prove a claim that is covered so the insurer will have to pay
                                                                    it. This rationale exists when the defendant does not have
                                                                    the resources to pay.

                                                                    In a thorough paper on the subject, Professor Ellen Pryor
The problem is that trial lawyers like to think about trials, not   identifies several other reasons why a plaintiff might plead
insurance. So what happens when insurance issues intrude?           into coverage:
What do you do? What do you need to know? What should
you be thinking about?                                                  (1) If an insurer finds itself obligated to defend, the
                                                                            insurer may take into account defense costs, even
These are the questions this paper will address. The hope                   those of a non-covered claim, which may give the
is that you will get enough information to become conver-                   claim settlement value.
sant with the important insurance issues you are likely to
encounter. For more experienced lawyers, this will be more              (2) If a claim is covered, the insurer has a duty to
of a review; for the less experienced, more of a heads-up,                  settle and may be liable for an excess judgment
but you won’t learn enough insurance law to be in danger of                 if it breaches that duty. An insurer defending a
becoming an “insurance nerd.”                                               potentially covered claim may determine that the
                                                                            risk of failing to settle is too high, so the insurer
The examples will follow the normal sequence of a trial, from               may be willing to pay.
pre-suit to post-verdict.
                                                                        (3) The insurer could erroneously fail to defend,
1.   The Plaintiff is considering filing suit. There may be                 which in some jurisdictions (but not Texas) will
     claims against several parties, and the facts may jus-                 “estop” the insurer from contesting its duty to
     tify alleging intentional and accidental conduct. What                 pay.
     should the Plaintiff be concerned about regarding
     insurance coverage?                                                (4) In some jurisdictions, if the insurer wrongfully
                                                                            denies a defense, it may be liable for extra-
One of the first insurance issues the Plaintiff’s lawyer will               contractual damages, which may give the claim
confront is whether to “plead into” coverage, although the                  value.
very idea is something of a misnomer. All a plaintiff can do
is plead the case in a manner that gives rise to the insurer’s          (5) If the insurer defends, but does not properly
duty to defend its insured. However, that doesn’t mean the                  reserve its right later to contest coverage, the
insurer has to pay the claim. The duty to pay depends on the                insurer may have waived coverage defenses and
proof at trial, and proof on coverage issues (in a subsequent               be required to pay the claim.
trial) that were not decided in the underlying suit.
                                                                    Ellen S. Pryor, The Stories We Tell: Intentional Harm & The Quest
a. Why plead into coverage?                                         For Insurance Funding, 75 Tex. L. Rev. 1721, 1734 (1997).
It seems counterintuitive that a plaintiff would intentionally
plead in a way that provoked an insurer to fund the opposi-         b. Why not?
tion. Nevertheless, there are significant reasons why this is       There may be valid reasons not to plead into coverage, if the
precisely what the plaintiff wants to do.                           facts support a claim that is not necessarily covered.

The most obvious reason to plead into coverage is to try to         For example, if the defendant has sufficient resources to pay
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                                                THE
the resulting judgment, requiring the defendant to defend a           ß   An insurer’s duty to defend is determined solely by
claim that is not covered by insurance may create economic                the allegations in the pleadings and the language
incentives to settle. Aside from economic considerations, a               of the insurance policy. This is the “eight-corners”
plaintiff may want to avoid triggering coverage, as a matter              or “complaint-allegation rule.” King, 85 S.W.3d at
of principle. For example, a victim of abuse may want to sue              187; Trinity, 945 S.W.2d at 821; National Union Fire
the abuser for intentional conduct, seeking vindication and               Ins. Co. of Pittsburgh, PA v. Merchants Fast Motor
to punish the wrongdoer.                                                  Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997).

Other strategic factors may favor not pleading into coverage.         ß   The allegations of the complaint should be con-
If the plaintiff wants quick injunctive relief, then triggering           sidered in light of the policy provisions, without
a defense by an insurer may hamper the process, without                   reference to the truth or falsity of the allegations,
providing any benefit. See Beth D. Bradley, Pleading Traps &              and without reference to what the parties know
Tricks: Pleading In & Out of Coverage, in State Bar of Texas              or believe the true facts to be. Argonaut Southwest
Insurance Law Section, Insurance, Litigation and You: The Impact          Ins. Co. v. Maupin, 500 S.W.2d 633, 635 (Tex.
of Insurance In Litigation, tab 3, p.11 (2004). Unnecessarily             1973); Colony Ins. Co. v. H.R.K., Inc., 728 S.W.2d
pleading multiple years, or invoking multiple lines of coverage,          848, 850 (Tex. App.–Dallas 1987, no writ); Gulf
may simply complicate negotiations because of issues between              Chem. & Metallurgical Corp. v. Associated Metals &
and among the various insurers. Id.                                       Minerals Corp., 1 F.3d 365, 369 (5th Cir. 1993).

2. The Defendant sent the pleadings from the Plaintiff’s              ß   A court resolves all doubts regarding the duty to
   suit to the Insurer, asking it to defend and pay if                    defend in favor of the insured. King, 85 S.W.3d
   necessary. The suit alleges various claims. Some                       at 187; Merchants, 939 S.W.2d at 141; Heyden
   appear to be covered, while some may not be. Is the                    Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d
   Defendant entitled to a defense?                                       22, 26 (Tex. 1965). “Where the complaint does
                                                                          not state facts sufficient to clearly bring the case
Under Texas law, the Defendant would be entitled to a defense             within or without the coverage, the general rule
as long as at least one of the claims is covered. If the peti-            is that the insurer is obligated to defend if there
tion potentially states any covered claim, the insurer must               is, potentially, a case under the complaint within
defend the entire suit. The courts reason that the insurance              the coverage of the policy. Stated differently, in
contract obligates the insurer to defend its insured, not to              case of doubt as to whether or not the allegations
provide a partial defense. See St. Paul Ins. Co. v. Tex. Dept. of         of a complaint against the insured state a cause of
Transp., 999 S.W.2d 881, 884 (Tex. App.–Austin 1999, pet.                 action within the coverage of a liability policy suf-
denied); Landmark Chevrolet Corp. v. Universal Underwriters               ficient to compel the insurer to defend the action,
Ins. Co., 121 S.W.3d 886, 890 (Tex. App.–Houston [1st Dist.]              such doubt will be resolved in the insured’s favor.”
2003, no pet.); Rhodes v. Chicago Ins. Co., 719 F.2d 116, 119             Heyden, 387 S.W.2d at 26 (quoted in Nat’l Union
(5th Cir. 1983). This is also an important principle for the              v. Merchants, 939 S.W.2d at 141).
Plaintiff to recognize when attemting to plead into coverage.
See Part 3, infra.                                                    ß   A court must focus on the factual allegations
                                                                          rather than the legal theories asserted. Farmers
This is just one of the many rules governing the insurance                Texas County Mut. Ins. Co. v. Griffin, 955 S.W.2d
company’s duty to defend. Under Texas law, the following                  81, 82 (Tex. 1997); Nat’l Union v. Merchants, 939
general principles will determine whether the Defendant will              S.W.2d at 141.
be entitled to a defense from its insurer:
                                                                      ß   If the petition does not allege facts within the
     ß   The duty to pay and the duty to defend are dis-                  scope of coverage, an insurer is not legally
         tinct, separate duties. King v. Dallas Fire Ins. Co.,            required to defend a suit against its insured. King,
         85 S.W.3d 185, 187 (Tex. 2002); Trinity Universal                85 S.W.3d at 187; Trinity, 945 S.W.2d at 821.
         Ins. Co. v. Cowan, 945 S.W.2d 819, 821-22 (Tex.
         1997).                                                       ß   A court will not look outside the pleadings or
                                                                          imagine factual scenarios that might trigger
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                                               THE
         coverage. National Union v. Merchants, 939 S.W.2d         read facts into the pleadings. See, e.g., Trinity Universal Ins.
         at 142.                                                   Co. v. Cowan, 945 S.W.2d at 825. On the other hand, clarity
                                                                   in pleadings may not be helpful when trying to plead into
3.   The Plaintiff has decided on a strategy of trying to          coverage. As noted above, courts generally hold that uncer-
     plead into coverage. How should the Plaintiff plead           tainties are resolved in favor of finding a duty to defend.
     the case?                                                     In Burlington Ins. Co. v. Texas Krishnas, Inc., 143 S.W.3d 226
                                                                   (Tex. App.–Eastland 2004, no pet.), the court found a duty to
If the Plaintiff decides to try to plead into coverage, the fol-   defend where several different theories were alleged against
lowing strategies should be considered.                            several different parties all arising out of abuse. Characterizing
                                                                   the pleadings as “vague,” “broadly worded,” and containing
a. Plead other theories                                            a “mishmash of legal theories and factual allegations,” the
Parties seeking to plead into coverage have an incentive to        court noted that that the pleadings might well be the result
allege alternate theories, even though some theories may be        of very careful, as opposed to very careless, pleading practice.
excluded. For example, in St. Paul Ins. Co. v. Texas Department    143 S.W.3d at 232.
of Transportation, the plaintiffs’ allegation that the insured
was negligent in its supervision of highway construction           c. Plead other insureds or actors
was sufficient to trigger the insurer’s duty to defend, even       Another strategy for pleading into coverage is to consider
though the plaintiffs’ allegations of gross negligence and         whether the facts support liability for more than one person
intentional torts would be excluded by the intentional injury      on more than one theory. For example, in King the insurer
exclusion. 999 S.W.2d at 887. Similarly, in Westchester Fire       had a duty to defend an insured employer against claims that
Ins. Co. v. Gulf Coast Rod, Reel & Gun Club, 64 S.W.3d 609         it negligently hired, trained, and supervised an employee who
(Tex. App.–Houston [1st Dist.] 2001, no pet.), the insureds        committed an intentional assault, even though the assault itself
were covered for claims that they intentionally dredged a          was not a covered “occurrence.” 85 S.W.3d at 186; see also Texas
waterway, where the resulting damage was not expected or           Krishnas, 143 S.W.3d at 231-32 (insurer had duty to defend
intended. The Fifth Circuit has held there is a duty to defend     allegations of negligently hiring, training, and supervising
based on pleadings that the defendant acted negligently, even      individuals who committed abuse); State Farm Gen. Ins. Co. v.
though extrinsic evidence showed the injuries to the child         White, 955 S.W.2d 474, 477 (Tex. App.–Austin 1997, no pet.)
were intentional. Northfield Ins. Co. v. Loving Home Care, Inc.,   (insurer had duty to defend bystanders sued for negligently
363 F.3d 523, 532-33 (5th Cir. 2004). The plaintiffs had           failing to report intentional abuse by another). Thus, even
amended the petition to remove all allegations relating to the     where one actor commits an intentional tort, there may be
intentional nature of the behavior. Id.                            legitimate grounds to allege that another actor was negligent,
                                                                   and the negligence claim is more likely to be covered.
Repleading to recharacterize conduct as negligent instead of
intentional will not work in cases where the conduct is inher-     Alleging that an individual acted as the agent for a defendant
ently intentional. For example, sexual molestation of a minor      can also help plead into coverage. In Heyden, the plaintiffs
is inherently intentional, no matter how it is pleaded. See,       alleged that Pickering was an agent for the insured, Newport
e.g., Maayeh v. Trinity Lloyds Ins. Co., 850 S.W.2d 193, 195-96    Industries, at the time of the collision. The court held this
(Tex. App.–Dallas 1992, no pet.). Even if the intentional act      allegation sufficient to invoke the duty to defend, regardless
exclusion does not apply, sexual assault is not an “occurrence”    of the defendant’s extrinsic allegation that Pickering was not
within the scope of coverage because it is not accidental. See     its agent at the time. 387 S.W.2d at 26.
State Farm Fire & Cas. Co. v. Brooks, 483 F. Supp. 2d 695, 702
(E.D. Tex. 1998). Similarly, pleading that the defendant was       d. Plead again
drunk will not make an intentional assault unintentional.          The duty to defend is determined based on the most recent
Id. at 698-99; see also Wessinger v. Fire Ins. Exch., 949 S.W.2d   pleading. See Fielder Road Baptist Church v. Guide One Elite
834, 840 (Tex. App.–Dallas 1997, no pet.).                         Ins. Co., 139 S.W.3d 384, 390 (Tex. App.–Fort Worth 2004,
                                                                   no pet.); Royal Ins. Co. v. Hartford Underwriters Ins. Co., 391
b. Plead broadly and generally                                     F.3d 639, 644 (5th Cir. 2004). If an initial pleading does
The general rule is that if the pleadings are too vague or         not trigger coverage, the party trying to plead into coverage
general, the court may find they lack sufficient facts to state    should consider an appropriate amendment that will invoke
a claim potentially within coverage, and the court will not        the duty.
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                                                 THE
e. Plead different dates                                             to providing a defense—or the insured may seek his own
Several cases find a duty to defend where the petition               counsel, at the insurer’s expense. None of these answers will
alleges conduct occurring during the period of the insurer’s         always be preferable. There are several factors that should be
coverage, even though extrinsic evidence shows the conduct           considered.
did not occur during the policy period. In Fielder Road Baptist
Church, the plaintiffs alleged the church’s youth pastor was         If coverage is doubtful, a defense under a reservation of rights
employed from 1992 to 1994 and committed sexual abuse                may be a good thing. Often an insurer will have to defend a
during that time. 139 S.W.3d at 387. The insurer’s policy was        claim based on the allegations in the petition, but the proof
effective from 1993 to 1994. Id. The court would not consider        at trial may negate coverage. In that event, the insured loses
extrinsic evidence that the youth pastor left employment with        nothing by accepting the qualified defense, because that is
the church in 1992, before the insurance policy took effect,         all he would be entitled to anyway. In addition to getting a
because that was extrinsic evidence that would contradict the        free defense, the insured may receive other benefits. First,
facts alleged in the petition. Id. at 389; see also Gulf Chemical,   the defense may be effective to win the claim, so coverage
1 F.3d at 370-71.                                                    does not matter. Second, the cost of defending the claim may
                                                                     create settlement value sufficient to get the claim resolved.
4.   The Defendant sent the pleadings from the Plaintiff’s           Third, the circumstances of the case, or sometimes just the
     suit to the Insurer, asking it to defend and pay if             momentum of the litigation, may induce the insurer to tender
     necessary. The Insurer sent back a letter citing                some amount in settlement, based on its perception that there
     many definitions and exclusions from the policy and             is a risk of coverage.
     explaining many reasons the Insurer asserts for never
     paying the claim. Nonetheless, the letter concludes             On the negative side, when an insurer defends under a
     with an offer to defend, and even pay for a lawyer to           reservation of rights there is an inherent conflict. One of the
     be chosen by the Insurer. The Defendant likes the               key benefits of a good defense is often to position the case for
     idea of a free lawyer, but is leery of one chosen by the        a favorable settlement. It may be very undesirable to reach a
     Insurer, especially considering the letter took pains to        critical juncture where the case could be settled only to have
     list all those reasons the Insurer has for never paying         the insurer insist that it will not settle because there is no
     the claim. What should the Defendant do?                        coverage. In that situation, the insured could benefit from
                                                                     a lawyer willing to aggressively argue coverage issues with
The insurer has sent what is known as a “reservation of              the insurer. An independent lawyer may be more effective
rights” letter, that is, it is agreeing to provide a defense, but    in making those arguments than a lawyer chosen by the
is reserving the right to later deny payment of the claim.           insurer who may be reluctant to jeopardize other relations
The insurer does this when coverage is in doubt so that it           with the insurer.
can defend the claim without facing the argument that it
has waived, or is estopped to assert, its right to later deny        It may be in the insured’s interest to insist that the insurer
coverage. See Farmers Texas County Mut. Ins. Co. v. Wilkinson,       embrace coverage. Failing that, it may be in the insured’s
601 S.W.2d 520, 522 (Tex. Civ. App.–Austin 1980, writ                interest to have his own attorney, being paid by the insurer.
ref’d n.r.e).                                                        Sometimes having an attorney chosen by the insured may
                                                                     create more uncertainty on a part of the insurer, which can
When an insurer decides to defend under a reservation of             create settlement pressure, if that is desired.
rights, the insured has the right to reject this “qualified
defense” and hire his own defense lawyer. The insurer must           There are reasons it might not be a good idea to insist that
pay for this lawyer. Britt v. Cambridge Mutual Fire Ins. Co., 717    the insurer pay for an attorney selected by the insured. When
S.W.2d 476, 481 (Tex. App.–San Antonio 1986, writ ref’d              the insurer chooses the lawyers, under certain circumstances
n.r.e.); Rhodes v. Chicago Ins. Co., 719 F.2d 116, 120-121 (5th      the insurer may be to blame and held responsible for conduct
Cir. 1983). When presented with a qualified defense, the             of that lawyer. A mistake in the defense of the case might be
insured can choose to accept the qualified defense, knowing          attributable to the insurer and thus create a basis to collect
the insurer may pay for the defense but later deny coverage.         from the insurer. On the other hand, if the insured chooses
Alternatively, the insured can reject the qualified defense and      a lawyer, the insurer may have a more plausible argument
insist that the insurer tender an unqualified defense—that           that it did not control the conduct of the lawyer and cannot
is, agreed to provide coverage to pay the claim, in addition         be blamed for any mistakes. Although the reasoning is
                                                     ADVOCATE   ✯ WINTER 2006                                                     85




                                               THE
questionable, one court held that the insured could be guilty      formulates its defense against the insured for non-coverage.’”
of contributory negligence based on his selection of, and          Id. at 522. Because the insurer in Wilkinson failed to send
failure to replace, his chosen defense counsel who the court       an effective reservation of rights, it was estopped to deny
said “was incapable of properly handling the civil case in a       coverage.
professional manner.” State Farm Fire & Cas. Co. v. Gandy,
880 S.W.2d 129, 137 (Tex. App.–Texarkana 1994), rev’d on           The Fifth Circuit has restated the elements as requiring
other grounds, 925 S.W.2d 696 (Tex. 1996).                         proof:

Another factor to consider is the attorney’s fees. Insurance            (1) that the insurer had sufficient knowledge of the
defense lawyers often agree to work for lower hourly rates,                 facts or circumstances indicating non-coverage
presumably in return for getting repeat business from the                   but
insurer. Hiring a person of similar experience in the “free
market” may require higher hourly fees, and the insurer may             (2) assumed or continued to defend its insured
balk at paying those fees. This creates the prospect of having              without obtaining an effective reservation of
to fight over the proper amount of fees at the very beginning               rights or non-waiver agreement and, as a result,
of the case.
                                                                        (3) the insured suffered some type of harm.
Still another factor to consider is that in many cases insurance
defense lawyers work under litigation guidelines imposed by        Pennsylvania Nat’l Mut. Cas. Ins. Co. v. Kitty Hawk Airways,
insurers. These guidelines may limit what work is done by          Inc., 964 F.2d 478, 481 (5th Cir. 1992).
the lawyer and may dictate that certain tasks be performed
by paralegals. A “free market” lawyer without an ongoing           The courts have held that for estoppel to prevent the assertion of
relationship with the insurer may be less likely to be influ-      a defense of non-coverage, there must be a showing of prejudice.
enced by such guidelines.                                          Pac. Indem. Co. v. Acel Delivery Serv., Inc., 485 F.2d 1169, 1173,
                                                                   1175 (5th Cir. 1973); State Farm Lloyds, Inc. v. Williams, 960
5.   The insurer agreed to defend and has been paying for          S.W.2d 781, 785 (Tex. App.–Dallas, 1997, writ dism’d by
     a defense lawyer. Unlike the preceding example, the           agreement); Kitty Hawk, 964 F.2d at 481 n.11. This require-
     insurer did not send a letter reserving a right later         ment of prejudice is not that onerous. When the insurer is
     to deny coverage. Nevertheless, the insurer changes           defending and at the same time trying to develop a defense to
     its mind and does try to raise a coverage defense.            coverage, the courts consider prejudice to be presumed from
                                                                   this inherent conflict of interest. See Wilkinson, 601 S.W.2d at
It is likely that the insurer has waived its ability to deny       521-22; Kitty Hawk Airways, 964 F.2d at 481 n.7; State Farm
coverage, by defending without a reservation of rights.            Lloyds, Inc. v. Williams, 791 S.W.2d 542, 553 (Tex. App.–Dallas
                                                                   1990, writ denied). However, there may be instances where
The general rule is that waiver and estoppel cannot be used to     the coverage issue does not relate to the facts litigated in the
create insurance coverage. Texas Farmers Ins. Co. v. McGuire,      underlying case. In that type of case, the Kitty Hawk court
744 S.W.2d 601, 603 n.1 (Tex. 1988). A significant excep-          required that there be some other showing of harm. 964
tion to this rule is referred to as the “Wilkinson exception.”     F.2d at 481.
In Farmers Texas County Mutual Ins. Co. v. Wilkinson, the
court recognized this general rule but held that “it follows       6.   Suit has been filed, and the Plaintiff’s ability to collect
from these general principles that, if an insurer assumes               will depend on the existence of insurance coverage.
the insured’s defense without obtaining a reservation of                What information should the Plaintiff get regarding
rights or a non-waiver agreement and with knowledge of the              coverage? What can the Plaintiff do about coverage
facts indicating non-coverage, all policy defenses, including           issues at this point?
those of non-coverage, are waived, or the insurer may be
estopped from raising them.” 601 S.W.2d 520, 521-22 (Tex.          In state court, the simplest way to obtain information about
App.–Austin, 1980, writ ref’d, n.r.e.). The Wilkinson court        the Defendant’s insurance coverage is to serve a standard
added, “[t]his rule is based on the ‘apparent conflict of          Request for Disclosure. Rule 194.2(g) of the Texas Rules of
interest that might arise when the insurer represents the          Civil Procedure requires the Defendant to disclose any indem-
insured in a law suit against the insured and simultaneously       nity and insuring agreements described in Rule 192.3(f). Rule
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                                                 THE
192.3(f) provides: “Except as otherwise provided by law, a            will be held to have waived any defense of non-coverage. See
party may obtain discovery of the existence and contents              Farmers Tex. County Mut. Ins. Co. v. Wilkinson, 601 S.W.2d 520,
of any indemnity or insurance agreement under which any               521-22 (Tex. App.–Austin 1980, writ ref’d n.r.e.).
person may be liable to satisfy part or all of a judgment
rendered in the action or to indemnify or reimburse for pay-          It may also be important for the Plaintiff to know whether
ments made to satisfy the judgment. Information concerning            the limits of the Defendant’s policy have been exhausted or
the indemnity or insurance agreement is not by reason of              diminished by other claims. The Plaintiff may want to depose
disclosure admissible in evidence at trial.” Similarly, Rule          a representative of a corporate Defendant with knowledge
26(a)(1)(D) of the Federal Rules of Civil Procedure requires          about the Defendant’s insurance coverage. The Plaintiff may
disclosure of “any insurance agreement under which any                even want to investigate what extra-contractual claims the
person carrying on an insurance business may be liable to             Defendant has against its insurer because these issues affect
satisfy part or all of a judgment which may be entered in the         collectibility and, hence, settlement value.
action or to indemnify or reimburse for payments made to
satisfy the judgment.” Note that these rules do not say that          Does Rule 192.3(f) authorize additional discovery concerning
discovery is limited to insurance policies that cover the alleged     insurance coverage, beyond merely obtaining a copy of the
loss. The language “may be liable,” although somewhat vague,          applicable insurance policies? In Dana Corp., the Texas
acknowledges the practical reality that whether a policy covers       Supreme Court said no. 138 S.W.3d at 302-04. The plaintiffs
an alleged loss is often highly uncertain.                            in that case sought to compel the defendant to produce a
                                                                      witness for deposition to testify regarding insurance policies.
Does this mean the Defendant must produce every insurance             Id. Specifically, the plaintiffs wanted to find out what policies
policy in its files? In In re Dana Corp., 138 S.W.3d 298, 301         existed and whether their limits were exhausted or about to
(Tex. 2004), a toxic tort case involving multiple plaintiffs, the     be exhausted. Id. The court acknowledged that the purpose
defendant argued that it should not be required to mass-pro-          of Rule 192.3(f) is to facilitate settlement discussions, but it
duce insurance policies until each plaintiff established which        refused to read the Rule broadly as authorizing discovery of
of the company’s products was allegedly at fault and for what         more than the insurance agreement’s existence and contents.
time periods the exposure allegedly occurred. The Supreme             Id. at 303-04. However, the court left open the possibility
Court of Texas refused to go that far, but it agreed that a           that discovery of additional information concerning insur-
“threshold showing of applicability must be made before a             ance coverage could be obtained under the general relevance
party can be ordered to produce multiple decades of insurance         standard for the scope of discovery stated in Rule 192.3(a).
policies.” Id. Insurance policies need not be produced until          Id. at 304. That Rule provides, in general, that a party may
they are shown to be applicable to a potential judgment. Id.          obtain discovery regarding any non-privileged matter that is
Thus, the Plaintiff should be prepared to take reasonable steps       “relevant to the subject matter of the pending action.” Tex.
to limit the requested policies to those that may apply to a          R. Civ. P. 192.3(a).
potential judgment, especially in cases implicating multiple
policies and policy periods. Of course, the insurance-savvy           Based on Rule 192.3(a), the court in Dana Corp. found that
Plaintiff will often want to obtain more than the insurance           the trial court did not abuse its discretion in ordering the
policy alone. For example, the Plaintiff may want to serve an         defendant to produce a witness for deposition on insurance
interrogatory asking what position the insurer has taken on           coverage. However, the court hinted that the scope of that
coverage, or serve a request for production asking for a copy         deposition might be limited to proving up the contents of the
of the insurer’s reservation of rights letter and any similar         policies. Dana Corp., 138 S.W.3d at 304. The court provided
correspondence.                                                       little guidance to the parties concerning the proper scope
                                                                      of questioning, if any, concerning erosion of the insurance
The reservation of rights letter provides especially valuable         policy limits. Id.
information. First, it will alert the Plaintiff to the coverage
issues in dispute, allowing the Plaintiff to shape its pleadings      So how much discovery of additional insurance information
and proof to try to maximize coverage (see the discussion             does Rule 192.3(a) allow? The easy part of the answer is that
of pleading into coverage in section 3 above). Second, the            the Plaintiff can obtain as much discovery as the Defendant
reservation of rights letter is important because if the insurer is   is willing to provide. If the parties are engaged in serious
defending without an effective reservation of rights, and with        settlement discussions, it may be in the Defendant’s own
knowledge of the facts indicating non-coverage, the insurer           interest to provide additional information about its insurance
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                                              THE
coverage. For example, if the Plaintiff has made a settlement     Does the prejudice requirement of Hernandez apply to an
demand that exceeds policy limits, the Defendant may want         insured’s failure to give timely notice of suit? In Hanson
to give the Plaintiff information about the limits to encourage   Production Co. v. Americas Insurance Co., 108 F.3d 627 (5th
the Plaintiff to make a lower demand. On the other hand,          Cir. 1997), the Fifth Circuit said “yes.” The insurer in Hanson
if the Defendant will not cooperate and the issue must be         argued that the prejudice requirement is limited to those
presented to the trial court, the question will be whether the    policies that are subject to a mandatory endorsement required
discovery is “relevant to the subject matter of the pending       by the State Board of Insurance. See Part 7.b, infra. The Fifth
action” under Rule 192.3(a).                                      Circuit disagreed, stating that it believed the Texas Supreme
                                                                  Court “would opt for a uniform rule of construction” requiring
7.   A lawyer selected by the Defendant has been defending        the insurer to show prejudice. Id. at 630. Applying Hernandez,
     the lawsuit for months. After taking discovery, filing       the court held that the insurer must show prejudice to avoid
     and responding to various motions, and engaging in           coverage based on the insured’s failure to provide prompt
     settlement discussions, the Defendant’s lawyer learns        notice of a claim. The court reasoned that “[t]he fundamental
     for the first time that the Defendant has an insurance       principle of contract law recognized in Hernandez—that a
     policy that might provide coverage for the Plaintiff’s       material breach by one contracting party excuses performance
     claims. What should the Defendant do?                        by the other party, and an immaterial breach does not—is
                                                                  equally applicable to notice cases.” Id. at 631.
Typically, the insurance policy will require the insured to
give prompt notice of a claim or suit to the insurer. However,    The Fifth Circuit followed the same reasoning in Ridglea Estate
the Defendant should not assume that coverage is lost when        Condominium Ass’n v. Lexington Insurance Co., 415 F.3d 474,
timely notice is not given. To preserve the Defendant’s rights,   480 (5th Cir. 2005), holding that the prejudice requirement
defense counsel should immediately send written notice to the     applied to a property insurance policy. The court based its
insurance company. See Sparks v. Aetna Life & Cas. Co., 554       decision on the “the method of the Texas Supreme Court’s
S.W.2d 228, 230 (Tex. Civ. App.—Dallas 1977, no writ) (oral       reasoning” in Hernandez, and the “general principle under-
notice was insufficient where policy required written notice).    lying that reasoning.” Id.
Next, the Defendant should avoid taking any action that
might prejudice the insurer. Although the issue is unsettled,     Coastal Refining is another case rejecting a narrow inter-
the insurance company may be required to prove that it was        pretation of Hernandez. In that case, the Houston Court of
prejudiced by the failure to give timely notice.                  Appeals rejected the insurer’s argument that the reasoning
                                                                  of Hernandez is limited to uninsured/underinsured motorist
Several factors may come into play in determining whether         claims, stating that “Hernandez was expressly decided on the
the insurer is required to show that it was prejudiced by the     fundamental principle of contract law that a material breach
delay in providing notice.                                        by one contracting party excuses performance by the other
                                                                  party, and an immaterial breach does not.” Coastal Refining
a. Is the notice requirement a covenant, or a condition           & Mktg., Inc. v. U.S. Fid. & Guar. Co., No. 14-04-00651-CV,
precedent?                                                        2006 WL 1459869, at *5 (Tex. App.—Houston [14th Dist.]
In Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691 (Tex. 1994),    May 30, 2006, no pet. h.).
the Texas Supreme Court held that an insured’s violation
of a settlement-without-consent exclusion does not negate         In contrast, the Dallas Court of Appeals has adopted a narrow
coverage where the insurer fails to show actual prejudice. Id.    interpretation of Hernandez, holding that the insurer is not
at 693. The exclusion in Hernandez stated that coverage did       required to prove prejudice where the policy states the notice
not apply to bodily injury or property damage with respect        requirement as a condition precedent to coverage. PAJ, Inc.
to which the insured made any settlement without the insur-       v. Hanover Ins. Co., 170 S.W.3d 258, 261 (Tex. App.—Dallas
ance company’s written consent. Id. at 692 n.1. However, the      2005, pet. granted); accord Prodigy Communications Corp. v.
court reasoned that insurance policies are subject to rules       Agric. Excess & Surplus Ins. Co., 195 S.W.3d 764, 767-68 (Tex.
applicable to contracts generally, including the principle that   App.—Dallas 2006, pet. filed) (applying PAJ). In PAJ, the
only a material breach by one party will excuse the other         court acknowledged Hernandez’s principle that only a material
party from performing. Id. at 692-93. When the insurer is         breach excuses performance by the other party. Id. at 260.
not prejudiced by the insured’s breach, the breach is not         However, the court distinguished Hernandez as dealing with a
material, and coverage is not affected. Id. at 693.               mere contractual covenant, as opposed to a contractual condi-
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                                               THE
tion. Id. at 263. Noting that the clause at issue in Hernandez     under a claims-made policy until the claim is reported
was contained within a policy exclusion, the court stated:         during the policy period. See, e.g., Hirsch v. Texas Lawyers’ Ins.
“We see a significant difference between a policy condition        Exch., 808 S.W.2d 561, 565 (Tex. App.–El Paso 1991, writ
(performance of which is necessary to trigger any obligation       denied) (“To require a showing of prejudice for late notice
for coverage) and a policy exclusion (which operates only after    would defeat the purpose of ‘claims-made’ policies, and in
the obligation for coverage is in place).” Accordingly, the PAJ    effect, change such a policy into an ‘occurrence’ policy.”).
court declined to follow federal cases requiring the insurer
to show prejudice. Id. The Texas Supreme Court granted a           A further distinction can be drawn between a “claims-made”
petition for review in PAJ but has not yet issued a decision.      policy, which requires that the claim be made during the
The court may use PAJ as an opportunity to clarify how far         policy period, and a “claims-made and reported” policy,
the reasoning of Hernandez reaches.                                which requires the claim to be made and reported to the insurer
                                                                   during the policy period. The insured might argue that the
b. Does the Texas Department of Insurance’s mandatory              prejudice requirement should apply where the policy is merely
endorsement apply?                                                 “claims-made” but not where the policy is “claims-made and
The Texas Department of Insurance requires general liability       reported.” However, at least one court has rejected this argu-
policies issued in Texas to include an endorsement stating         ment. Chicago Ins. Co. v. W. World Ins. Co., No. 3:96-CV-3179R,
that the insured’s failure to comply with a notice requirement     1998 WL 51363, at *3 (N.D. Tex. Jan. 23, 1998).
will not bar coverage for bodily injury or property damage
unless the insurance company is prejudiced. Chiles v. Chubb        d. Dealing with unclear case law
Lloyds Ins. Co., 858 S.W.2d 633, 635 (Tex. App.—Houston            As illustrated by the case law discussed above, “it is not
[1st Dist.] 1993, writ denied). If the policy is subject to this   entirely clear under Texas law whether an insurer must
requirement, and if the claim is for bodily injury or property     demonstrate prejudice before it can avoid its obligations
damage, the insurer will be required to show prejudice.            under a policy where the insured breaches a prompt-notice
Coastal Refining, 2006 WL 1459869, at *3. However, even if the     provision or a consent-to-settle provision.” Motiva Enterprises,
policy is subject to this mandatory endorsement, the prejudice     LLC v. St. Paul Fire & Marine Ins. Co., 445 F.3d 381, 386 (5th
requirement may not apply if the claim is for “personal injury”    Cir. 2006). What is clear is that the defendant who gives late
or “advertising injury” rather than bodily injury or property      notice of a claim or suit should do as much as possible to
damage. See PAJ, 170 S.W.3d at 263 (mandatory endorsement          make a factual record that demonstrates a lack of prejudice
did not apply to advertising injury coverage); Gemmy Indus.        to the insurer. Whether the insurer is prejudiced by lack of
Corp. v. Alliance Gen. Ins. Co., 190 F. Supp. 2d 915, 921-22       notice is generally a question of fact. Struna v. Concord Ins.
(N.D. Tex. 1998), aff’d 200 F.3d 816 (5th Cir. 1999).              Services, Inc., 11 S.W.3d 355, 359-60 (Tex. App.–Houston [1st
                                                                   Dist.] 2000, no pet.). The defendant should avoid entering
c. Claims-made or occurrence policy?                               into a settlement without the insurer’s consent, trying the case
Generally, an “occurrence” policy provides coverage for claims     without the insurance company’s involvement, relinquishing
arising out of an occurrence that takes place during the policy    rights the insurance company might want to preserve, etc. If
period, while a “claims-made” policy provides coverage for         prejudice is avoided, the defendant will at least preserve the
claims that are made during the policy period. In late notice      ability to argue that the failure to give timely notice does not
situations, this distinction can affect whether the insurer is     excuse the insurer from providing coverage.
required to show prejudice.
                                                                   8.   Two Plaintiffs sue the Defendant. One Plaintiff’s
Several decisions have held that claims-made policies,                  injuries are grievous; the other’s less so. Either claim
unlike occurrence policies, are not subject to a prejudice              would exceed the policy limits. The Insurer pays
requirement. Ridglea, 415 F.3d at 480 n.4; Fed. Ins. Co.                the policy limits to settle the smaller claim, leaving
v. CompUSA, Inc., 319 F.3d 746. 754-55 (5th Cir. 2003);                 Defendant exposed on the larger claim. What do the
Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co.,             remaining Plaintiff and the Defendant do?
174 F.3d 653, 658 (5th Cir. 1999); see also St. Paul Guardian
Ins. Co. v. Centrum G.S. Ltd., 383 F. Supp. 2d 891, 899-900        Unfortunately for the Plaintiff and the remaining Defendant,
(N.D. Tex. 2003) (prejudice requirement does apply to all          the Defendant probably has no claim against the Insurer for
occurrence-based policies regardless of the type of coverage       violating its Stowers duty to accept a reasonable settlement
at issue). The rationale is that coverage does not even arise      offer within policy limits. Under Texas Farmers Insurance
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                                              THE
Co. v. Soriano, 881 S.W.2d 312, 315 (Tex. 1994), an insurer       settlement demand within policy limits. Id. at 315-16.
cannot be held liable for negligence where it enters into a
reasonable settlement with one claimant, even where the           The Court also found that Farmers did not violate any duty to
settlement exhausts or diminishes the proceeds available to       its insured by entering into the Lopez settlement and leaving
satisfy other more serious claims. Soriano offers a cautionary    less money available to settle the more serious Medina claims.
tale for Plaintiffs who wait too long to make a Stowers demand.   “The fact that the Medinas’ claims may be more serious is
In the underlying suit, two groups of Plaintiffs, the Medinas     not evidence that the Lopez claim was unreasonable when
and the Lopezes, sued Soriano for wrongful death arising from     viewed in comparison to the more serious Medina claims,” the
a car accident. Soriano’s policy limits were $20,000. Texas       Court stated. “To be unreasonable,” the Court held, “Soriano
Farmers Insurance offered $20,000 to the Medinas, but the         must show that a reasonably prudent insurer would not have
Medinas rejected this offer. Farmers later settled the Lopez      settled the Lopez claim when considering solely the merits
claim for $5,000 and offered the remaining $15,000 to the         of the Lopez claim and the potential liability of its insured
Medinas. The Medinas rejected this offer, but later demanded      on the claim.” Id. at 316.
$20,000. Id. at 313. Farmers would not pay $20,000, and
the Medinas took their claims to trial, obtaining a judgment      For trial lawyers, the key point from Soriano is that the
exceeding $172,000. Id.                                           Insurer is free to evaluate the reasonableness of each claim
                                                                  independently from the other. Therefore, in a lawsuit with
Soriano subsequently sued Farmers for negligence and              multiple Plaintiffs, each Plaintiff has a powerful incentive
obtained a judgment including over $520,000 in actual             to be the first to make a Stowers demand within the policy
damages. Id. at 314. On appeal, Farmers argued that there         limits. This means that Plaintiffs must evaluate the settlement
was no evidence that it violated its Stowers duty by settling     value of the case as early as possible. Of course, this may be
the Lopez claim for $5,000 and subsequently refusing to           difficult when the net worth of the Defendant is unknown.
settle the Medina claims for $20,000. Soriano, on the other       Notably, the Soriano opinion states that the Medinas rejected
hand, argued the Lopez settlement was unreasonable when           the Insurer’s original $20,000 offer because they wished to
viewed in comparison to the more serious Medina claims.           investigate Soriano’s personal assets. Soriano teaches trial
When faced with multiple claims with inadequate proceeds,         lawyers that they may not have that luxury if they want to
Soriano argued, an insurer should weigh the seriousness of        preserve a Stowers claim against the Insurer.
the claims and attempt to settle those claims within policy
limits that pose the greatest threat of liability for an excess   What options, then, do the Plaintiff and the non-settling
judgment. Id.                                                     Defendant have when the Insurer pays the policy limits to
                                                                  settle one claim, leaving the non-settling Defendant exposed?
The Supreme Court rejected Soriano’s argument, holding that       In light of Soriano, the Plaintiff and the non-settling Defendant
“when faced with a settlement demand arising out of multiple      may want to consider choice-of-law principles as an escape
claims and inadequate proceeds, an insurer may enter into         hatch. See Part 12, infra. Another state’s law may recognize
a reasonable settlement with one of the several claimants         a broader duty of the insurer to act reasonably in settlement
even though such settlement exhausts or diminishes the            negotiations when faced with multiple claimants.
proceeds available to satisfy other claims.” Id. at 315. The
Court explained that this approach promotes settlement and        9.   The Insurer hired a lawyer to defend, but the Insurer
encourages claimants to make claims promptly. Id.                      keeps messing with the defense. The Insurer won’t
                                                                       pay the defense lawyer to do certain tasks, contending
The Supreme Court reasoned that Farmers could not be                   that they can be done by a paralegal. The Insurer
held liable for violating its Stowers duty because one of the          won’t pay for an expert the defense lawyer thinks is
elements of a Stowers claim is a settlement demand within              needed. The Insurer quibbles over venue choices and
policy limits. A demand above policy limits, no matter how             such. What should the defense lawyer do? What can
reasonable, does not trigger the Stowers duty to settle. Id. at        the Defendant do?
314-15 (citing Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d
842, 848-49 (Tex. 1994)). Although the Medinas eventually         The defense lawyer owes her unqualified duty of loyalty to
made a $20,000 settlement offer, that offer did not come          the insured. Employer’s Cas. Co. v. Tilley, 496 S.W.2d 552, 558
until after the policy limits had been reduced to $15,000 by      (1973). In State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d
                                                                                                                Traver
the Lopez settlement. Therefore, there was no evidence of a       625 (Tex. 1998), the court extended that view and held that
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                                                 THE
the attorney is the sole agent of the insured. The court also         will prevent the insurer from conducting the defense. Id. at
pointed out that ethical rules prohibit the attorney from             689. The court also listed four other circumstances when
letting any outside influences impair the insured’s defense.          the insured may rightfully refuse the insurer’s defense: (1)
Id. at 628. Thus, the defense lawyer is an independent con-           when the tendered defense is not a complete defense under
tractor. The court held that these factors prevent the insurer        circumstances in which it should have been; (2) when the
from exercising control over the attorney that would lead to          attorney hired by the carrier acts unethically, and at the
vicarious liability. Id.                                              insurer’s direction advances the insurer’s interests at the
                                                                      expense of the insured’s; (3) when the defense would not,
This just means that if the lawyer mishandles the case, the           under the governing law, satisfy the insurer’s duty to defend;
insurer cannot be held vicariously liable for the malpractice         and (4) when, although the defense is otherwise proper, the
of the defense lawyer it has chosen. On the other hand, the           insurer attempts to obtain some type of concession from the
insurer can be directly liable for its own conduct that limited       insured before it will defend. Id. Citing other authorities, the
the lawyer’s decisions or caused the mishandling of the               Davalos court noted that a party paying for another’s legal
case. In Traver, the court remanded for consideration of any
         Traver                                                       services—such as an insurer—must allow for reasonable
remaining claims based on the insurer’s own misconduct.               representation, and any directives must be reasonable in scope
Id. at 629.                                                           and character. The defense lawyer owes unqualified loyalty
                                                                      to the insured and “must at all times protect the interests of
If the insurer creates a conflict by insisting on a course            the insured if those interests would be compromised by the
adverse to the insured, the insurer may lose the right to             insurer’s instructions.” Id. at 689-90.
control the defense. The insurer may also incur liability to
the insured if it interferes with the lawyer’s efforts on the         10. The defense lawyer hired by the insurer is doing a
client’s behalf.                                                          great job of defending, but the Insurer has made clear
                                                                          that it is reserving the right to deny coverage. The
In Northern County Mutual Insurance Co. v. Davalos, 140 S.W.3d            defense lawyer says she can’t advise the Defendant
685, 689-90 (Tex. 2004), the court held the insurer did not               on “coverage questions” but will vigorously defend
breach its duty to defend, because the conditions the insurer             him. The Defendant is worried and wants advice.
tried to impose did not create a sufficient conflict of interest.
Although the insurer conditioned its offer of a defense on            Many fine defense lawyers believe that they have an ethical
the insured agreeing to waive his motion to transfer venue            duty to stay away from “coverage issues” when an insurer
filed by attorneys who were already representing him, the             hires them to defend an insured. However, the principles of
court found that this did not breach the duty to defend. Id.          Tilley and Traver make plain the opposite is true. Not only
The court recognized that under certain circumstances there           is it permissible for the defense lawyer to advise her client
will be a conflict of interests that prevents the insurer from        on coverage issues, she is risking a malpractice suit if she
conducting the defense; however, the court found this was             defends the suit without paying attention to coverage issues.
not such a case. The court reasoned that Davalos could have           Burying one’s head in the sand on coverage questions is
accepted the defense and then submitted the issue of venue            asking for trouble.
to the defense counsel for an independent examination.
The court suggested that the defense lawyer then could                If coverage issues did not effect how a case is defended, the
have rejected the insurer’s request to transfer venue if the          Defendant’s attorney might safely avoid dealing with coverage
insured’s interests would be compromised by the insurer’s             questions. But coverage questions often have a significant
instructions. Id. at 690.                                             impact on how a case should be handled. A few examples
                                                                      illustrate the point:
Nevertheless, there is much in the court’s opinion that may
offer protection to insureds in other cases. The court recog-            (a) Some of the Plaintiff’s claims are covered and others
nized a number of circumstances where a conflict of interests            are not. The insured has limited resources to fund
may prevent the insurer from controlling the defense. The                the defense, but the insurer is paying for the defense
court cited authority for the proposition that defending under           under a reservation of rights. The defense lawyer has
a reservation of rights letter will create a conflict of interests,      solid grounds for disposing of the covered claims
and when the facts to be adjudicated in the liability lawsuit            through a motion to dismiss or motion for summary
are the same facts upon which coverage depends, that conflict            judgment. Instinctively, the defense lawyer wants to
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                                                  THE
   “knock out” as many claims as possible before trial.              Should the result be any different when the insurance
   What should the defense lawyer do? If it is important             company is paying the lawyer’s bills? Before saying yes,
   to the insured for the insurance company to continue              remember Tilley and Traver. In Tilley, the Supreme Court
                                                                                              Traver
   paying for the defense—and it almost always is—then               held that an attorney selected, employed, and paid by the
   the last thing the Defendant’s attorney should do is              insurance company “owes the insured the same type of
   get rid of the claims that have triggered the insurer’s           unqualified loyalty as if he had been originally employed
   duty to defend.                                                   by the insured.” 496 S.W.2d at 558. In Traver, the Supreme
                                                                                                                Traver
                                                                     Court said that the lawyer hired by the insurance company to
   (b) The Plaintiff alleges the insured defendant negligently       represent the insured “must at all times protect the interests
   inflicted emotional distress (back when that was a                of the insured if those interests would be compromised by the
   viable theory). The Defendant’s lawyer wants to argue             insurer’s instructions.” 980 S.W.2d at 628. If the Defendant’s
   that the only valid theory is intentional infliction of           attorney takes these statements seriously, it will be difficult
   emotional distress, but the insurance policy has an               to defend the position that she cannot advise her client on
   intentional injury exclusion. Clearly, if the defense             coverage questions. Of course, the Defendant’s attorney
   lawyer is concerned with maximizing coverage, she                 should be careful not to take any action that would violate
   may want to rethink whether to make this argument.                any clause in the insurance policy requiring the insured to
   See Boyles v. Kerr, 855 S.W.2d 593, 603-05 (Tex. 1993)            cooperate with the insurer in the defense of the underlying
   (Gonzalez, J., concurring).                                       suit. Moreover, shaping the defense of the suit to maximize
                                                                     the client’s insurance coverage should not go so far as doing
   (c) The Plaintiff’s pleading lays out the Plaintiff’s allega-     any kind of “sweetheart deal” that would run afoul of the
   tions in meticulous factual detail, and the allegations           principles of State Farm Fire & Casualty Co. v. Gandy, 925
   make clear that an exclusion in the Defendant’s insur-            S.W.2d 696 (Tex. 1996); See Part 14, infra. However, if the
   ance policy applies. The Insurer has sent the Defendant a         Defendant’s counsel defends the suit in a way that jeopardizes
   letter denying coverage. If the Plaintiff would just delete       the Defendant’s insurance coverage, she may find herself
   some of the factual details from its petition, leaving the        named as a defendant in a malpractice action.
   same causes of action, the pleading would be sufficient
   to trigger the duty to defend. Ordinarily the defense             11. The Plaintiff feels her case is strong and well-devel-
   lawyer might like having a pleading that spells out                   oped, so she is ready to make a settlement demand.
   the details of the Plaintiff’s case, but in this case the             How does she make an offer the Insurer can’t (or
   Defendant’s lawyer is thinking about calling up the                   shouldn’t) refuse?
   Plaintiff’s lawyer to suggest amending the pleading to
   remove the specific allegations allowing the insurance            To make an offer that the Insurer will have to think twice
   company to deny coverage.                                         about refusing, the Plaintiff will want to consider how to
                                                                     make an offer that will expose the Insurer to a potential
In each of these situations, a defense lawyer who pays attention     Stowers claim if the offer is rejected and the Plaintiff later
to coverage issues and seeks to maximize her client’s insurance      obtains a judgment exceeding the Defendant’s policy limits.
coverage will defend the case differently than the lawyer who        Under Stowers, the insurer has a duty to accept a reason-
tries to ignore coverage questions. Indeed, in the first example     able settlement demand within policy limits. G.A. Stowers
above, the coverage issue would cause the defense lawyer to          Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544, 547-48 (Tex.
do the opposite of what she would ordinarily do. Therefore,          Comm’n App. 1929, holding approved). How far does the
it seems reasonably clear that, generally, the defense lawyer        Stowers duty reach? In Ranger County Mutual Insurance Co. v.
should give the client guidance on insurance coverage issues         Guin, 723 S.W.2d 656, 659 (Tex. 1987), the Texas Supreme
and avoid handling the case in a way that jeopardizes the            Court stated the insurer’s Stowers duty broadly as including
client’s coverage. Of course, there may be situations where          “investigation, preparation for defense of the lawsuit, trial
the Defendant and his lawyer will make a strategic decision          of the case and reasonable attempts to settle.” However, the
to take some action that is helpful to the defense of the case       supreme court significantly narrowed the scope of an insurer’s
notwithstanding the negative effect on insurance coverage.           Stowers liability in American Physicians Insurance Exchange v.
However, the point is that the defense lawyer should at least        Garcia, 876 S.W.2d 842 (Tex. 1994). Garcia is the starting
take the coverage issues into account and advise the client          point for any trial lawyer who wants to understand how to
about how litigation decisions will affect coverage.                 “Stowerize” an insurance company.
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                                                  THE
Under Garcia, the elements of a Stowers claim are: (1) the                    demand “the policy limits” rather than a stated
underlying claim against the insured is within the scope                      sum of money. See Garcia, 876 S.W.2d at 848-
of coverage; (2) the plaintiff in the underlying suit makes a                 49.
settlement demand that is within the policy limits; (3) the
settlement demand proposes to release the insured fully;                 c.   Failing to make an express settlement offer.
and (4) the terms of the demand are such that an ordinarily                   Although a “formal demand” is not an “absolute
prudent insurer would accept it, considering the likelihood                   prerequisite” for Stowers liability, Id. at 849, the
and degree of the insured’s potential exposure to an excess                   offer should be direct and unequivocal. Making an
judgment. Id. at 848-49. The Garcia court rejected the notion                 offer that is implicit or vague is dangerous, espe-
that the insurer has a broader duty to make reasonable efforts                cially considering that the Garcia court expressly
to settle a case. Id. at 849-50.                                              declined to shift the burden of making settlement
                                                                              offers onto insurers. Id. at 851. A communication
The Plaintiff should also be aware that Stowers now has a                     from the Plaintiff that merely invites the Insurer
statutory counterpart. In Rocor International, Inc. v. National               to make an offer within policy limits is unlikely
Union Fire Insurance Co. of Pittsburgh, PA, 77 S.W.3d 253, 261                to support a Stowers claim.
(Tex. 2003), the court held that a liability insurer can be liable
under article 21.21 of the Insurance Code for delaying settle-           d. Failing to make the settlement offer in writing.
ment. To establish the insurer’s statutory liability for failure to         Garcia does not say that an offer must be in
reasonably attempt settlement, the insured must show: (1) the               writing to trigger the Stowers duty. But why risk
policy covers the claim; (2) the insured’s liability is reasonably          a subsequent factual dispute about the offer?
clear; (3) the claimant has made a proper settlement demand                 If there is any dispute or confusion about the
within policy limits; and (4) the demand’s terms are such that              specific terms of the offer, it may not satisfy the
an ordinarily prudent insurer would accept it. Id. at 262.                  elements of a valid Stowers claim. See Rocor, 77
                                                                                                                      Rocor
                                                                            S.W.3d at 263. The insured in Rocor sought to rely
The elements stated in Garcia seem simple enough, but                       on an oral offer made by the plaintiff’s counsel at
there are many pitfalls for the lawyer who wants to make an                 a meeting with defense counsel, but the record
effective Stowers demand. Here are some potential mistakes                  revealed “great confusion” about the offer’s terms.
to avoid:                                                                   The Supreme Court held that the oral offer was
                                                                            insufficient, reasoning that “at a minimum the
     a.   Offering an amount that is not within policy                      settlement’s terms must be clear and undisputed.”
          limits. This is the key point. A demand above                     Id.
          policy limits, even though reasonable, does not
          trigger the Stowers duty to settle. Garcia, 876                e.   Offering only a partial release of the insured.
          S.W.2d at 849. Although one could argue for a                       Generally, an effective Stowers demand must
          broader duty to engage in reasonable settlement                     propose to release the insured fully. Garcia,
          negotiations, the Garcia court instead chose a strict               876 S.W.2d at 848-49. In many settlement
          rule requiring a settlement offer within policy limits.             negotiations, a full release of the defendant is an
                                                                              unspoken part of the deal, but a Plaintiff seeking
     b.   Failing to consider whether the policy limits                       to Stowerize an insurance company should make
          have been diminished by other claims. Suppose                       this point explicit. Furthermore, the Plaintiff
          the Plaintiff obtains a copy of the insurance policy                should be careful not to offer merely a partial
          in discovery, and it says the limits are $20,000.                   release of the Defendant.
          But what if the insurance company has already
          paid $5,000 to settle another claim? In that                   f.   Failing to address hospital liens. This is a corol-
          situation, a $20,000 settlement demand would                        lary of the requirement of offering a full release. If
          not support a Stowers claim. See Tex. Farmers Ins.                  there is a statutory hospital lien on the Plaintiff’s
          Co. v. Soriano, 881 S.W.2d 312, 315 (Tex. 1994).                    cause of action, the Plaintiff cannot release the
          Before making an offer, the Plaintiff should try                    cause of action without addressing the lien. See
          to determine the current available policy limits.                   TEX. PROP. CODE § 55.007(a). Thus, a settlement
          If there is uncertainty, the Plaintiff may want to                  demand that does not include a release of hospital
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         liens is not an effective Stowers demand. Trinity           apply greater pressure to the Insurer to get the case settled.
         Universal Ins. Co. v. Bleeker, 966 S.W.2d 489, 491
                               Bleeker
         (Tex. 1998).                                                The Defendant’s attorney will need to do some research and
                                                                     draw up a detailed roadmap to get to another state’s more
    g.   Not allowing a reasonable time to respond. If               favorable law. First, the Defendant should gather sufficient
         the plaintiff makes a Stowers demand but does               facts to determine the other states whose laws may poten-
         not give the defendant and its insurer a reason-            tially apply. This should include where the policy is issued,
         able time to respond, a court may find the offer            where the insured is located, where the insurer is located,
         ineffective to trigger the insurer’s duty to settle.        where the settlement negotiations take place, etc. Second,
         See State Farm Lloyds Ins. Co. v. Maldonado, 963            once the Defendant has identified each state whose law
         S.W.2d 38, 41 (Tex. 1998) (finding there was no             could potentially apply, the Defendant should research the
         evidence that insurer knew “at a point when it              substantive law of each state on the insurer’s duty to settle.
         had a reasonable amount of time to respond” that            The Defendant can then determine whether any of those states
         an unconditional offer had been made).                      define the insurer’s duty more broadly than Texas law. Third,
                                                                     the Defendant should identify the states where a suit against
12. The Defendant is very worried about liability and the            the insurer could be filed and identify the choice of law rules
    toll the ongoing suit is taking, but the Plaintiff hasn’t        applied in those states. The Defendant can then strategize
    made a demand, and the Insurer won’t make the first              about where a suit against the Insurer could be filed so that
    offer. What can the Defendant do to make the Insurer             the “right” state’s law is most likely to be applied.
    move?
                                                                     How do Texas courts deal with choice of law in insurance
The Defendant’s major problem in this situation is that the          cases? Absent a valid choice of law clause, Texas courts apply
Insurer’s duty to settle is very narrowly defined under Texas        the substantive law of the state with the “most significant
law. The Insurer does have a duty under Stowers to accept a          relationship” to the particular issue. Duncan v. Cessna Aircraft
reasonable settlement offer within policy limits, assuming all       Co., 665 S.W.2d 414, 421 (Tex. 1984).
of the elements of a Stowers claim are satisfied (see section
11 above). However, the Texas Supreme Court has held that            When insurance policies are involved, there is also a Texas
Stowers does not impose a general duty to make reasonable            statute to consider. Article 21.42 of the Insurance Code
efforts to settle the case within policy limits, and that it does    provides:
not require the Insurer to initiate settlement discussions. See
Soriano, 881 S.W.2d at 314-16; Garcia, 876 S.W.2d at 848-50.            Any contract of insurance payable to any citizen or
The Insurer’s “statutory” Stowers duty has similar limitations.         inhabitant of this state by any insurance company or
Rocor, 77 S.W.3d at 261-62. Furthermore, under Texas law
Rocor                                                                   corporation doing business within this state shall be
an insurer does not have a common law duty of good faith                held to be a contract made and entered into under and
and fair dealing with respect to a third-party liability policy.        by virtue of the laws of this state relating to insurance,
Maryland Ins. Co. v. Head Indus. Coatings & Services, Inc., 938         and governed thereby, notwithstanding such policy or
S.W.2d 27, 28 (Tex. 1996). In the third-party liability context,        contract of insurance may provide that the contract
the Stowers duty is the only common law tort duty recognized            was executed and the premiums and policy (in case
by Texas law. Id. at 28-29.                                             it becomes a demand) should be payable without this
                                                                        State, or at the home office of the company or corpora-
a. Choice of Law Principles                                             tion issuing the same.
So how can the Defendant pressure the Insurer to make a
move? One potential strategy is to investigate (1) whether some      Tex. Ins. Code Ann. art. 21.42. For this statute to apply, courts
other state’s law may apply and (2) whether that state’s law         have identified three requirements: (1) the insurance proceeds
defines the Insurer’s duty to settle more broadly. For example,      are payable to a citizen or inhabitant of Texas; (2) the policy
under New York law, a liability insurer has an implied duty          is issued by an insurer doing business in Texas; and (3) the
of “good faith” to settle. See Pavia v. State Farm Mut. Auto. Ins.   policy must be issued in the course of the insurance company’s
Co., 626 N.E.2d 24, 27-28 (N.Y. 1993). If another state’s law        Texas business. Reddy Ice Corp. v. Travelers Lloyds Ins. Co.,
is more favorable than Texas law and would potentially apply         145 S.W.3d 337, 341 (Tex. App.–Houston [14th Dist.] 2004,
to a suit against the Insurer, the Defendant might be able to        pet. denied). Courts construe article 21.42 narrowly to avoid
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giving it extraterritorial effect. Id. at 341. A corporation is an       (4) the insurer’s misconduct in failing to settle and
inhabitant only of a state where it is incorporated, and doing               defend took place in Texas,
business in other states is not enough. See id. at 341-42. Also,
this statute applies only when the Texas citizen is the insured          (5) the insurer was qualified to do business in Texas,
that is subject to the suit. The fact that other insureds might              and
be Texas residents does not suffice. Id. at 341 & n.6.
                                                                         (6) Texas had an interest in protecting its citizens
If a Defendant seeking to avoid application of Texas law can                 when there was a breach of the insurer’s duty to
show that article 21.42 does not apply, it can then argue                    an insured Texan.
that another state has the “most significant relationship.”
The substantive issues in the dispute with the insurer will          347 F.2d at 175-76.
determine which factors a court considers in determining
the most significant relationship. See, e.g., W.R. Grace &           The court in Snydergeneral Corp. v. Great American Ins. Co.¸
Co. v. Cont’l Cas. Co., 896 F.2d 865, 873 (5th Cir. 1990);           928 F. Supp. 674 (N.D. Tex. 1996), applied Minnesota law to
Snydergeneral Corp. v. Great Am. Ins. Co., 928 F. Supp. 674,         breach of contract claims because the relationship with the
677 (N.D. Tex. 1996).                                                insurer was centered in Minnesota, the policy was negotiated
                                                                     and bought in Minnesota, the defendant was incorporated
The lawyer seeking to apply another state’s law should also          and based in Minnesota, and the insurer transacted business
review several provisions of the Restatement (Second) of             in Minnesota. The defendant in Snydergeneral bought the
Conflict of Laws (1971). Section 6 has the general principles,       liability policy long before it was acquired by a Texas entity,
section 188 has general principles regarding contract rights,        so the parties had no reason to believe that Texas law
section 193 relates to contracts of casualty insurance, and          would apply. The court found that Minnesota had the most
section 145 has the general principle for torts. While courts        significant relationship to the contract claims. Id. at 678.
discuss the general principles in section 6, the other sections      However, the Snydergeneral court held that Texas law applied
usually decide the outcome.                                          to the claims for unfair claims settlement practices and
                                                                     breach of the duty of good faith and fair dealing. The court
b. Choice of Law Cases                                               reasoned that these causes of action accrued when the insurer
The following cases illustrate how Texas courts have applied         failed to respond to a demand for coverage and defense. At
choice of law principles in the insurance context:                   that time, the Texas-based defendant was the insured, and
                                                                     the Texas defendant communicated with the insurer from its
In Seguros Tepeyac, S.A. Compania Mexicana de Seguros                principal place of business in Texas. The court found that the
Generales v. Bostrom, 347 F.2d 168 (5th Cir. 1965), the              damages from the conduct occurred in Texas and that Texas
Texas insured bought an auto policy to provide coverage              had a significant interest in matters regarding violations of
while driving in Mexico, where a serious accident occurred.          its insurance laws. Id.
The court applied Mexican law to issues relating to breach
of contract, because the contract was executed in Mexico,            In W.R. Grace & Co. v. Continental Casualty Co., the underlying
there was a Mexican insurer, and the policy was expected             tort suit was filed in Texas. The defendant joined its insurers
to cover liability in Mexico. Id. at 172. However, the court         as third-party defendants and asserted claims for coverage
applied Texas law to the tort issues relating to the breach          against them. 896 F.2d at 867. The Fifth Circuit found that
of the Stowers duty. The court first noted that the place of         New York had the most significant relationship to the issues
injury, Mexico, was not relevant to the insurer’s liability.         in the case. Id. at 873-74. The insured and three of the eleven
The court found Texas law applied to the Stowers claim               excess insurers had their principal places of business in
because:                                                             New York, and the insurance broker was in New York. Most
                                                                     of the policies were solicited, negotiated, and delivered in
     (1) there was a Texas insured,                                  New York, and the premiums were paid in New York. The
                                                                     insured gave notice of the claims in New York. Id. at 873.
     (2) the offer to settle was made in Texas,                      The court concluded that New York was the center of the
                                                                     relationship between the insured and insurers and that New
     (3) the suit was filed in Texas against a Texas defen-          York had a strong and overriding interest in the outcome
         dant,                                                       of the insurance coverage disputes that involved a New
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                                               THE
York insured and contractual relations with insurers doing             The problem is that the Plaintiff can’t reasonably
business in New York. Id.                                              settle for just the underlying limit. But if she makes a
                                                                       demand that exceeds the underlying limits, the under-
The W.R. Grace court rejected the insured’s argument that              lying insurer can refuse to do anything. The excess
Texas law should apply because it would determine the source           insurer also says it doesn’t have to do anything until
of funds for settlement. Id. The court pointed out that school         the underlying insurer pays. How can the Plaintiff
districts were already paid. The coverage lawsuit would only           and Defendant break this gridlock?
determine the insured’s recovery from its insurers. Id. Texas
had an interest in the plaintiffs’ recovery in the underlying      Unfortunately for the Plaintiff and Defendant, Texas law is
suit, but that interest ended with the settlement. Thus, only      undeveloped and generally bad for the insured on triggering
New York had an interest in the remaining insurance disputes.      a duty to settle when there are multiple layers of coverage.
Id. at 873-74.                                                     Thus, the best option in this situation may be to argue that
                                                                   Texas law does not apply. See Part 12, supra. Some states
The insurer in Reddy Ice filed suit in Texas seeking a             have more favorable law on the duties of the primary and
declaratory judgment that it did not have a duty to defend         excess insurers in this situation. For example, under New
or indemnify the insured in personal injury suits filed in         York law, a primary insurer has a good faith duty to engage
Louisiana. 145 S.W.3d at 339. The court held that Texas law        the Plaintiff’s counsel in settlement negotiations even if the
applied to the coverage issue. Id. at 346. The court noted         Plaintiff’s offer exceeds the policy limits. See Young v. Am.
that if the issue is the duty to defend or indemnify, and the      Cas. Co., 416 F.2d 906, 910 (2d Cir. 1969). New York law also
issues require construction and application of the insurance       recognizes a duty of good faith owed by the primary insurer
policies, the relevant inquiry is what state has contacts with     to the excess insurer. See Pavia v. State Farm Mut. Auto. Ins.
the insurance dispute, not with the underlying suit. Id. at        Co., 626 N.E.2d 24, 27 (N.Y. 1993). Furthermore, under New
345. The court went further and said that for a nationwide         York law an excess insurer has a duty to negotiate in good
liability policy, the place of the contract, negotiations, and     faith and consider settlement offers after the primary insurer
domicile are the primary factors. Id. at 346. The courts also      tenders its limits. See Yonkers Contracting Co. v. Gen. Star Nat’l
have applied Restatement § 193 by noting that the location of      Ins. Co., 14 F. Supp. 2d 365, 373-74 (S.D.N.Y. 1998).
the risk and subject matter of the contract are not significant
or determinative in deciding choice of law for a multi-risk        If another state has more favorable law on the insurers’ duty
insurance contract. Id. at 345.                                    to settle, and if there is a good argument that the other state’s
                                                                   law applies, the insured may be able to obtain more leverage
In St. Paul Mercury Ins. Co. v. Lexington Ins. Co., 78 F.3d 202,   in settlement negotiations. However, if the facts of the case
205 (5th Cir. 1996), Louisiana had the most contacts with the      do not support the choice of law strategy, the Plaintiff and
underlying tort suit, but Texas had more contacts with the         Defendant will have to do the best they can under Texas law.
insurance dispute. Because the issues in the suit concerned        The problem lies in the Texas Supreme Court’s formulation
construction of the insurance policies, the court held that        of the elements of a Stowers claim. As the Supreme Court
Texas law applied. “We have held that when the issues of a         explained in Garcia, a demand above policy limits, even
case require the construction and application of insurance         though reasonable, does not trigger the Stowers duty to settle.
policies,” the court explained, “the relevant inquiry is what      876 S.W.2d at 849. If the plaintiff demands a reasonable
contacts the state has with the insurance dispute, and not         amount that exceeds the primary limits, arguably the primary
with an underlying lawsuit.” Id.                                   insurer has no duty to respond. Under other cases, the excess
                                                                   insurers have no duty to respond until the primary tenders
After reviewing these choices of law principles, the Defendant’s   its limits. See, e.g., Keck, Mahin & Cate v. Nat’l Union Fire Ins.
lawyer may be able to construct an argument that another           Co. of Pittsburgh, PA, S.W.3d 692, 701 (Tex. 2000). Thus, a
state’s law would apply to tort claims against the insurer. If     plaintiff trying to trigger multiple layers of coverage faces
so, the Defendant may be able to take advantage of another         gridlock. The primary does not have to respond to an excess
state’s more favorable law on the insurer’s duty to settle.        demand, and the excess insurers do not have to respond until
                                                                   the primary does.
13. The Plaintiff has a very large damage claim, which
    exceeds the Defendant’s first layer of coverage.               The court’s decision in Garcia contains what may be a very
    Fortunately, the Defendant also has an excess policy.          important qualification. The court recognized other cases
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                                                THE
where there may be excess demands. The court dropped a                 (1) Make sure all the insurers are put on notice.
footnote stating:
                                                                       (2) Make sure all the insurers are kept informed of
     A liability policy requires an insurance company                      settlement demands and offers, and the informa-
     to indemnify an insured only up to the insured’s                      tion needed to evaluate them.
     contractual limits with that company. Thus, insurers
     have no duty to accept over-the-limit demands. We                 (3) Insist that the primary insurer must tender so
     do not reach the question of when, if ever, a Stowers                 that the excess insurers will be obliged to act.
     duty may be triggered if an insured provides notice of
     his or her willingness to accept a reasonable demand              (4) If the primary tenders, insist that the next layer
     above the policy limits, and to fund the settlement,                  has a duty to tender in order to trigger the next
     such that the insurer’s share of the settlement would                 layer.
     remain within the policy limits . . . [n]or do we address
     the Stowers duty when a settlement requires funding               (5) Make an excess demand on all insurers for their
     from multiple insurers and no single insurer can fund                 combined limits, and insist that they cooperate
     the settlement within the limits that apply under its                 in settling.
     particular policy.
                                                                       (6) Consider a combined policy limits demand to all
876 S.W.2d at 849 n.13. The Supreme Court has not                          the insurers. Insist they cooperate to protect their
addressed this question in subsequent cases. This gives room               insured.
to argue that when there is a demand within the combined
limits perhaps the Stowers duty is modified to require a               (7) If, for example, you intend to argue that New
response by all of the insurers. This is still an open question,           York law applies, make sure that the demands
but one explicitly left open by the Supreme Court.                         are all made to the insurers in their New York
                                                                           offices and, if possible, that the settlement
One lower court has held that a primary insurer owed no                    decisions come from the New York offices.
duty to the excess insurer to settle a claim where the demand,             This will support the New York choice of law
although reasonable, exceeded the primary limits. The court                argument.
reached this conclusion despite noting the language in
footnote 13 in Garcia. See Westchester Fire Ins. Co. v. Am.            (8) Look for any conduct by any of the insurers that
Contractors Ins. Co. Risk Retention Group, 1 S.W.3d 872, 874               interferes with settlement, and document it.
(Tex. App.–Houston [1st Dist.] 1999, no pet.). Another court
has held that a demand that the primary insurer tender its         14. After the Plaintiff filed suit, the Insurer refused to
limits did not trigger the Stowers duty to settle. Birmingham          defend and made clear it won’t pay any resulting judg-
Fire Ins. Co. v. Am. Nat’l Fire Ins. Co., 947 S.W.2d 592, 599-         ment. The Plaintiff and Defendant think the claim
601 (Tex. App.–Texarkana 1997, writ denied).                           should be covered. The Defendant wants to avoid the
                                                                       expense of a trial and the risk of having to pay, so
The court in Garcia also left open another possibility. The            she has offered the Plaintiff an agreed judgment that
court suggested that “affirmative misconduct” by the primary           will admit liability, and an assignment of any claims
insurer that subverted or terminated settlement negotiations           she might have against the Insurer. The Defendant,
might support liability for failure to settle, despite an excess       in return, wants an agreement that the Plaintiff won’t
demand. 876 S.W.2d at 850 n.17. However, the decision in               execute against the Defendant and will look solely to
Birmingham Fire noted that this exception has never been               the Insurer. The Plaintiff is tempted. Is this a good
recognized since Garcia. 974 S.W.2d at 598-99.                         idea?

Based on the possibilities of openings in Texas law or the         15. The Plaintiff just got a huge verdict against the
application of another state’s more favorable law, here are            Defendant. The Plaintiff had offered to settle within
some suggestions that might help impose liability on the               the Defendant’s insurance limits, but the Insurer
insurers or at least apply settlement pressure by causing the          refused to settle. The Insurer now wants to pay the
insurers to fear excess exposure:                                      policy limits, but the Plaintiff now wants to collect
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                                               THE
    the entire judgment. What options do the Plaintiff             same interests as the insurer, or based on an uncontested,
    and Defendant have?                                            lay down “trial.”

In this instance the Plaintiff will obviously be anxious to        c. The background of Gandy
collect the full judgment and the Defendant’s priority will        In State Farm Fire & Casualty Co. v. Gandy, 925 S.W.2d 696
be avoiding payment on the excess judgment. Thus, in               (Tex. 1996), the court told us what not to do. Understanding
determining their options, the parties should consider the         how the issues arose sheds some light on the court’s hold-
following:                                                         ings.

a. The need for an agreement                                       Julie Gandy sued Pearce, her step-father, alleging that he
In these scenarios, the interests of the parties shift. The        had repeatedly abused her sexually. Pearce requested that
plaintiff wants recovery, and the only source may be the           State Farm defend him. State Farm provided homeowner’s
insurance company. The insured/defendant wants financial           insurance to Pearce, and Gandy alleged that some of the
protection from personal liability. Defeating the plaintiff        sexual abuse occurred at his home. Pearce hired Andrews
would be great, but if the plaintiff wins, the defendant           to act as his attorney in the civil suit. Andrews specialized
wants the insurer to pay. The insurer is in lockstep with the      in criminal law and was defending Pearce in the criminal
defendant on defeating the plaintiff, but if it goes badly, the    prosecution that had been filed because of Gandy’s
insurer would like to avoid paying.                                allegations. State Farm was notified of the suit about six
                                                                   months after Gandy’s suit was filed, State Farm advised
The plaintiff is adverse to the defendant and the insurer          Pearce that it had decided to defend him, but reserved its
on liability. The plaintiff is aligned with the defendant on       right to deny coverage based on the policy exclusion for
coverage, and adverse to the insurer. Can the plaintiff and the    intentional conduct. State Farm later sent Andrews a letter
defendant reach some sort of agreement that gets compensa-         directing him to send his bills to it and to keep it advised of
tion to the plaintiff and protects the defendant from personal     the progress of the lawsuit. Id. at 697-700.
liability? (By the way, these are two of the goals of liability
insurance in the first place.)                                     Andrews, who clearly was incapable of handling the civil
                                                                   case, continued to represent Pearce. Id. at 137. Andrews
No one yet knows the right answer, but we do know some             later filed a motion to withdraw as Pearce’s attorney after he
wrong answers.                                                     improperly answered interrogatories and failed to appear at a
                                                                   hearing on a motion to compel. The new attorney persuaded
b. A brief history of certain agreements                           the trial court not to sanction Pearce, and thereafter Pearce,
Historically, parties would enter into what came to be called      who had by that time concluded that State Farm had refused
by some the “sweetheart deal.” After the insurer abandoned         to do anything except pay Andrews’ bill, decided to settle
the defense, failed to settle, denied coverage, or did something   the case. Id. at 700.
else that made the defendant feel vulnerable, the defendant
and plaintiff would reach an agreement. The defendant              Pearce and Gandy then entered into an agreed judgment
would agree to a judgment, or at least would not oppose it.        awarding her actual and punitive damages of over $6
The defendant would assign to the plaintiff all, or part, of       million. At the same time, Pearce assigned Gandy all of his
his rights against the insurer. In return, the plaintiff would     rights and causes of action that he had against State Farm
agree not to collect the judgment from the defendant and           or any other insurer. Gandy, in turn, executed a covenant
would only look to the insurance proceeds.                         to limit execution on the judgment in return for Pearce’s
                                                                   assignment of his rights to her. State Farm was not a party
Defendants liked this, because it gave them what they had          to the settlement discussions and was completely unaware
bargained for under the insurance policy—protection from           of the agreed judgment until a copy of it arrived in the mail.
personal liability. Plaintiffs liked this, because it gave them    Id. at 700-702.
what they hoped for from the insurance policy—a source
of recovery for the defendant’s liability. Insurers hated this,    Gandy filed suit against State Farm as assignee of Pearce on
because they found themselves facing the asserted binding          the basis that State Farm had failed to provide Pearce an
effect of a judgment in the underlying case, for huge damages,     adequate defense. Although the trial court rendered summary
based on an agreement between parties who did not have the         judgment in favor of State Farm, explaining that the policy
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                                                 THE
did not cover Gandy’s injuries from Pearce’s intentional acts,       by State Farm’s mishandling of his defense. Id.
the jury found that State Farm was negligent in handling
Pearce’s defense and that State Farm violated the DTPA. The          The court also mentioned the change in Pearce’s position.
jury found Pearce’s actual damages to be $200,000 and set            Pearce, when Gandy’s suit was first filed, denied ever abusing
attorney’s fees at 15% of that amount. Id. at 703-704. The           her. Then he agreed to a $6 million judgment that stated
trial court rendered the judgment based on the verdict in            he abused her 325 times in two years. Later, in the lawsuit
favor of Gandy, and the court of appeals affirmed. Id. at 704.       against State Farm, Pearce again denied that he abused Gandy
The supreme court reversed and rendered a take-nothing               at all and claimed that he could have proven his innocence
judgment. Id. at 720.                                                if State Farm had provided him with competent counsel.
                                                                     Id. While taking inconsistent positions is not generally
d. The decision in Gandy                                             prohibited, the court found the change suspect because both
The basis for the court’s decision was its conclusion that           Gandy and Pearce took positions contrary to their natural
Pearce’s assignment to Gandy of his rights against State             interests so that a judgment might be secured against State
Farm was invalid; thus, Gandy had no right to recover from           Farm. Thus, the court found the agreed judgment was a sham
State Farm. Id. at 705. After expounding on the history              and held the assignment invalid. Id. at 712-13.
of law relating to the assignability of causes of action, the
court noted that, although the law originally prohibited             However, the court did not conclude that all settlements
such assignments, the modern rule is that, generally, the            involving an assignment of rights in exchange for a covenant
assignment of a cause of action is permissible. Id. at 705-          not to execute are invalid. Rather, the court held that an
07. However, according to the court, there are exceptions            assignment of an insured’s claim against his or her insurer
to the general rule when the assignment tends to increase            to the plaintiff is invalid if:
and distort litigation. The court gave four examples of
impermissible assignments: (1) causes of action for legal                (1) it is made prior to an adjudication of plaintiff’s
malpractice arising out of litigation, Zuniga v. Groce, Locke                claim against defendant in a fully adversarial
& Hebdon, 878 S.W.2d 313 (Tex. App.–San Antonio 1994,                        trial,
writ ref’d); (2) Mary Carter agreements, Elbaor v. Smith, 845
S.W.2d 240 (Tex. 1992); (3) the assignment of a tort claim               (2) defendant’s insurer has tendered a defense, and
to one tortfeasor so that tortfeasor can prosecute the claim
against another tortfeasor, Int’l Proteins Corp. v. Ralston-Purina       (3) either:
Co., 744 S.W.2d 932 (Tex. 1988); and (4) the assignment of
an interest in an estate, Trevino v. Turcotte, 564 S.W.2d 682                 (a) defendant’s insurer has accepted coverage,
(Tex. 1978). Id. at 707-11.                                                       or

According to the court, Pearce’s settlement with Gandy did                    (b) defendant’s insurer has made a good faith
not terminate the litigation but prolonged it because Gandy                       effort to adjudicate coverage issues prior to
wanted to recover against State Farm rather than Pearce. Id.                      the adjudication of plaintiff’s claim.
at 711-12. The court also found that the settlement “greatly
distorted” the litigation against State Farm. Id. at 712. As an      Id. at 714. The “fully adversarial trial” requirement is very
example, the court noted that in her lawsuit against Pearce,         important. The court stated, “In no event, however, is a
Gandy had claimed that she suffered $50,000 in damages               judgment for plaintiff against defendant, rendered without
each time Pearce abused her (325 times). However, at the             a fully adversarial trial, binding on defendant’s insurer or
time of settlement, Gandy’s lawyer claimed that $12,500              admissible as evidence of damages in an action against
per incident fairly compensated for Gandy’s injuries. In the         defendant’s insurer by plaintiff as defendant’s assignee.” Id.
lawsuit against State Farm, Gandy took the position that her         The court disapproved any contrary language in Employers
damages were actually far less than the judgment amount in           Casualty Co. v. Block, 744 S.W.2d 940, 943 (Tex. 1988), and
order to establish that Pearce was damaged by State Farm’s           United States Aviation Underwriters, Inc. v. Olympia Wings,
negligent handling of his defense. The court explained that          Inc., 896 F.2d 949, 954 (5th Cir. 1990). Id. The court felt
this last change in position was necessary in order to create        that requiring an adjudication of the plaintiff’s claim in a
damages for Pearce because, if the damages were as those in          fully adversarial trial would insure a fair determination of
the agreed judgment, Pearce would not have been damaged              the value of such a claim rather than allowing the parties to
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                                                 THE
place a value on the claim and thereby forcing the possibility       incentive to direct the suit elsewhere for relief” and would
of having to take positions inconsistent with their interests.       cause the litigation to continue with the parties in different
Id. at 713-714. The court did say that if the plaintiff and          roles—“precisely the results that have led us to prohibit
insured settle after a fully adversarial trial, “the value of        assignments in other contexts.” Assignability, the court
the [plaintiff’s] claim can be taken to be the amount of the         opined, “may encourage some buyers to cooperate—if not col-
judgment obtained.” Id. at 713.                                      lude—with a seller who may have been the one that actually
                                                                     misled them.” The four dissenting justices would have held
What if these elements are not all present? We do not know.          the DTPA claim was assignable, for the most part, because the
The court said, “[w]e do not address whether an assignment           assignment did not present the concerns that led to voiding
is also invalid if one or more of these elements is lacking.”        assignments in other cases. The dissenters distilled these
Id. at 714. While the court did not give guidance on what            concerns as: first, prolonging the suit rather than resolving
type of agreement would be valid, the court did not say that         the litigation; and, second, distorting the litigation by causing
all similar agreements would be bad. The court noted that            the parties to take positions that appeared contrary to their
these types of settlements frequently arise in situations where      natural interests.
the defendant has asked the insurer to provide a defense and
the insurer has refused or has provided a qualified defense.         While this was not an insurance case, the analysis of both the
In those cases, the settlement is designed to protect the            majority and the dissenters appears certain to fuel arguments
defendant from personal liability, which the court recognized        in future insurance cases about whether, and to what extent,
as a legitimate concern. However, the court felt that this           an insured defendant can assign to a plaintiff his claims
concern could be better addressed by resolving the issue of          under Texas Insurance Code article 21.21 (a companion
the insurer’s obligation to defend before the plaintiff’s claim is   to the DTPA) and other claims against his insurer. Gandy
adjudicated, such as by a declaratory judgment action. Thus,         voided the assignment based on the circumstances in that
the court’s requirement that the insurer make a good faith           case. The PPG case broadly prohibits assignment of DTPA
effort to adjudicate coverage issues prior to the resolution of      claims. Nevertheless, claims are generally assignable, so unless
the plaintiff’s claim.                                               the court is in full retreat from this position, there must be
                                                                     circumstances where assignments—that carefully navigate
A non-insurance decision by the Texas Supreme Court may              the court’s evolving policy concerns—are valid.
foreshadow how the court will decide whether, and to what
extent, an insured may assign to a third-party claimant the          So what do we conclude from all of this?
insured’s claims against an insurer. In PPG Industries, Inc. v.
JMB/Houston Centers Partners Ltd., 146 S.W.3d 79 (Tex. 2004),        e. Considerations from Gandy
a buyer of a commercial building sued the manufacturer of            Here are some of the considerations that can be distilled
defective windows under the DTPA for breach of warranty. The         from Gandy:
buyer asserted its right to sue based on a general assignment
by the original owner of all warranties. The court held that             1.   Does the agreement prolong the litigation
the DTPA claim was not assignable.                                            instead of terminating it? This seems to be a red
                                                                              herring. In ordinary cases, settlements usually do
Relying on the decision in State Farm v. Gandy, 925 S.W.2d                    terminate the suit. In insurance cases, there is
696 (Tex. 1996), the court held that a more important reason                  customarily an underlying suit where the insurer
not to allow assignment of the DTPA claim was because an                      cannot be a party and a coverage suit where the
assignment might “increase or distort litigation.” The court                  insurer can be. An agreement to assign a claim to
stated that it had “prohibited assignments that may skew the                  the plaintiff neither prolongs nor terminates the
trial process, confuse or mislead the jury, promote collusion                 coverage suit; it just changes who is seeking the
among nominal adversaries, or misdirect damages from more                     relief. It is also hard to see how an assignment to
culpable to less culpable defendants.” The court reasoned that                the plaintiff would prolong the litigation, consid-
juries would be confused by assessing the mental anguish                      ering that the plaintiff may already have standing
suffered by the consumer and the punitive damages based                       to sue as a judgment creditor or may acquire the
on the situation and sensibilities of the parties, only to have               defendant’s rights by a turnover order.
that money go to an assignee. The court also feared that an
assignment would give the seller and purchaser “a strong                 2. Does the agreement distort the litigation
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                                                 THE
           by causing the parties to change their posi-               down. And those are claims the insurer should not have to
           tions?                                                     pay. Thus, the “fully adversarial trial” requirement does not
                                                                      so much impose a burden as it takes away an advantage the
      3.   Was the agreement made prior to an adjudica-               court thought was unfair.
           tion of plaintiff’s claim against defendant in a
           fully adversarial trial? It seems this factor does         A covenant not to execute is bad for the plaintiff. Obviously,
           not go so much to the validity of the agreement            it takes away one source of recovery—the defendant. It also
           as it goes to the effect. The agreement may be             lets the insurer argue that the defendant is not really damaged,
           valid but will not bind the insurer to liability and       because he faces no liability, so the insurer has nothing to
           damages that were not adjudicated. If the issues           indemnify. See State Farm Lloyds, Inc. v. Williams, 960 S.W.2d
           were adjudicated, they should be binding on the            781, 789 nn.14-15 (Tex. App.–Dallas 1997, writ dism’d by
           insurer.                                                   agr.). Leaving aside the dubious merit of this argument, why
                                                                      give the insurer this attack?
      4.   Did the insurer tender a defense? If not, it is
           more justifiable that the insured had to make a            In the Williams case, the court rejected the argument that
           deal to protect himself. By analogy, if the insurer        the covenant negated damages, but the court did find that
           mishandled the defense—for example, by failing             the damages were not necessarily equal to the amount of
           to accept a reasonable settlement demand—the               the judgment, because the defendant’s personal liability was
           insured may also be justified in seeking protection        limited. From the plaintiff’s side, why make an agreement
           by an agreement with the plaintiff.                        that reduces the value of the claim?

      5.   Did the insurer accept coverage? If not, the               In the pre-suit example, a plaintiff may be tempted to offer a
           insured may be more reasonable in seeking                  covenant not to execute as an inducement for the defendant
           protection by an agreement.                                to agree to a judgment. This seems to go to the heart of what
                                                                      the Gandy court found repugnant. If the plaintiff’s claim is
      6.   Did the insurer make a good faith effort to                so weak that these enticements have to be exchanged, maybe
           adjudicate coverage issues prior to the adju-              that is the kind of agreement that ought to be void. On the
           dication of the plaintiff’s claim? This factor is          other hand, if the claim has merit, it should be triable without
           of questionable use. There are limited instances           the defendant’s induced acquiescence.
           when an insurer can get a determination of the
           duty to pay a claim before the underlying liability        In the post-verdict example, it is not clear why the plaintiff
           is actually resolved.                                      would ever agree to a covenant not to execute against the
                                                                      defendant. The plaintiff doesn’t need the defendant to agree
      7.   Does the agreement protect the defendant                   to liability; the defendant’s liability has been established. The
           from personal liability after the insurer has              plaintiff shouldn’t need to offer the covenant to acquire the
           breached an obligation? This is similar to No.             defendant’s rights against the insurer. The plaintiff already
           4. The court suggested that an agreement in this           has standing to sue as a judgment creditor on contract claims.
           context may be legitimate.                                 Seaton v. Pickens, 126 Tex. 271, 87 S.W.2d 709, 710 (1935).
                                                                      The plaintiff may be able to get a turnover order to obtain
f. Other considerations                                               the right to sue on the defendant’s extracontractual claims.
The plaintiff must have a fully adversarial trial. If the plaintiff   See 9 William V. Dorsaneo, Texas Litigation Guide § 132.05
has a fully adversarial trail against the defendant that will         (2002). Moreover, being on the losing end of the verdict, the
bind the insurer in the later coverage suit. If the defendant is      defendant has little leverage. If the plaintiff just won a fully
just a speed bump on the road to that second lawsuit, so that         adversarial trial, the defendant has little room to bargain. His
the plaintiff takes a default judgment or negotiates an agreed        best shot is to assign everything to the plaintiff and hope the
judgment, the plaintiff will need to have a fully adversarial         plaintiff gets paid by the insurer. If the plaintiff gets paid,
trial against the insurer. The bottom line is that the plaintiff      the defendant benefits to that extent, which beats immediate
has to try his case once, either against the defendant or             proceedings to collect on the judgment.
against the insurer. The cases hurt by the requirement are
the ones so weak they can only be won if the defendant lays           One gray area is the plaintiff’s right as judgment creditor to
                                                     ADVOCATE   ✯ WINTER 2006                                                       101




                                               THE
pursue extracontractual claims, such as those under article        lawyers may need to testify about settlement opportunities
21.21. See Allstate Inc. Co. v. Watson, 876 S.W.2d 145, 150-51     missed by the insurer. It makes sense to plan ahead for this
(Tex. 1994) (Spector, J., concurring)(would grant standing to      transition. The attorneys also should consider their ability to
judgment creditor). To that extent, it may be necessary, or at     fairly advise the client regarding events where the attorneys
least wise, to get an assignment. But for the reasons stated,      were key participants and will be key witnesses.
the defendant is still not in a position to demand a covenant
not to execute.                                                    Mark L. Kincaid is a partner with Kincaid, Horton & Smith in
                                                                   Austin. He graduated with honors from the University of Texas
Another thing to consider is who should pursue the litigation      Law School and teaches Texas Insurance Litigation there as an
against the insurer—the plaintiff, the defendant, or both?         adjunct professor. He is board-certified in Consumer Law, Civil
If the defendant has resources to fund the litigation it may       Trial Law, and Civil Appellate Law. He is co-author of West’s
make sense for the plaintiff to let the defendant do more of       Texas Practice Guide on Insurance Litigation, and has written and
the work. If the defendant has limited resources, it may be        spoken frequently on insurance and consumer issues.
necessary for the plaintiff’s attorney to take the lead because,
otherwise, neither the lawyer nor the client will get paid.        Zach Wolfe is a partner with Fleckman & McGlynn, PLLC in
                                                                   Austin. He has diverse experience in a variety of business litigation
Consideration should be given to the dual roles the attorneys      matters, including representation of businesses in disputes with
in the underlying case have as witnesses and advocates. While      their insurers. He graduated with honors from the University
it may be permissible, and cost effective, for the same lawyers    of Texas School of Law in 1997, where he learned most of what
to continue representing their respective clients, at some point   he knows about insurance law from Mark Kincaid’s Insurance
they likely will be material witnesses. For example, both          Litigation course. ✯
102
                     STATE BAR LITIGATION SECTION REPORT

                       A DVOCATE
                     THE


                       F
      LAW STUDENT             OLLOWING IS an article by Imrana Manzanares,
           ARTICLE            who just graduated from the Thurgood
      COMPETITION             Marshall School of Law. Mrs. Manzanares’s
                       paper was selected as the best student piece submitted
                       in a competition for student papers. Sponsored by the
                       Litigation Section for the State Bar of Texas, the
                       student competition is a new endeavor to encourage
                       law student participation in the discussion of legal
                       issues arising under Texas and federal practice and to
                       honor the best works.




                                  INSURANCE
                                 & LITIGATION
                                      ✯
                                                        ADVOCATE   ✯ WINTER 2006                                                   103




                                                  THE
            “C APPING STATUTES AND THEIR C ONSTITUTIONALITY ”
                                                    BY IMRANA MANZANARES




I. Introduction.                                                       when it came to premiums. A state in “crisis” is defined as
If a patient is injured by a doctor’s negligence, it seems             having “higher than average increase in malpractice insurance
that justice would ensure compensation. While that is true             premium rates, physicians’ reported difficulties obtaining
to some degree, legislatures across the U.S. have limited              malpractice insurance coverage, and reports of actions taken
this compensation in the form of “capping statutes.” These             by providers in response to the malpractice-related pressures
statutes are created for various reasons, including: decreasing        of rising premiums and litigation.” The GAO conducted the
expensive insurance premiums for medical malpractice                   study because capping statutes on the federal level were
insurance, decreasing the cost of health care in general, and          being proposed.1 The GAO reports that in the past thirty
making health care more accessible to all citizens. The statutes       years, health care providers have experienced three major
allow the victim to be compensated, without limitations, for           crises concerning medical malpractice insurance.2 Due to
economic losses. It is non-economic and punitive damages               premium increases, many physicians were unable to obtain
that the legislature has interfered with. Some states utilize          medical malpractice coverage. Why insurance premiums
formulas based on life expectancy, salary, and other factors.          rise is a question with many answers. One answer is that
Other states have a set limit, usually around $250,000. The            physicians practice medicine defensively, meaning they often
end result, however, is the same. Patients sustaining injuries         perform expensive and sometimes unnecessary tests and/or
based on medical malpractice will be limited in their recovery.        procedures to avoid the possibility of litigation.3 However,
Courts have been inundated with cries from victims claiming            this is not conclusive as this assertion has not been reliably
these statutes are unconstitutional. This assertion is based on        measured.4 Other factors may include falling investment
three central theories: that the statutes violate the right to trial   income and rising insurance costs. Ultimately, the GAO did
by jury, Due Process Clause, and Equal Protection Clause.              find that losses in medical malpractice claims, which are
                                                                       the largest parts of insurer’s costs, appear to be the main
II. Why are legislatures nationwide instituting Capping                reason why premiums increase in the long run.5 However,
Statutes?                                                              factors other than tort reform may also work to decrease
One of the main reasons state legislatures institute capping           rising medical malpractice insurance premiums such as, “the
statutes is to reduce the cost of medical malpractice liability        presence of state laws regulating the premium rate-setting
insurance. Medical malpractice insurers, physicians, and               process, and certain market forces, including the level of
medical associations have blamed the unlimited non-eco-                market competition among insurers and interest rates that
nomic damages (which often create unpredictable damage                 affect insurers’ investment returns.”7
awards) as the reason for the exorbitant costs of insurance
and health care in general. This alleged crisis has influenced         Regardless of why medical malpractice insurance pre-
legislators, health care providers, and insurers to create and         miums have risen, the response in many states has been to
lobby for capping statutes. To understand how premiums                 institute tort reform by passing capping statutes that limit
became so out-of-control that legislatures felt compelled to           non-economic and punitive damages to victims of medical
institute laws that cap the amount a plaintiff is able to recover,     malpractice. California, a state that is often considered
the history of the topic must be explored.                             innovative and the leader of controversial law, was one of
                                                                       the first states to institute such capping statutes in the form
a. The history of medical malpractice liability.                       of the Medical Injury Compensation Reform Act (MICRA).
The General Accounting Office (GAO) is an investigating divi-          In 1975, MICRA limited non-economic damages in medical
sion of Congress. In 2003, the GAO conducted a study of nine           malpractice lawsuits to $250,000. This amount has not been
different states that showed a range of tort reform and medical        adjusted for inflation. After California instituted MICRA,
malpractice premiums. The American Medical Association                 twenty-six other states followed suit with similar legislation.
(AMA) declared five of the nine states in a “crisis” situation         However, many states overturned such statutes for violating
104                                                 ADVOCATE   ✯ WINTER 2006




                                              THE
the Constitution, for reasons discussed later. At the end of      the above information, it can be concluded that doctors in
2000, twenty states had MICRA–like statutes in place.8 As of      states with capping statutes suffered a larger increase in
April 2006, only twenty states remain without capping stat-       insurance premiums than doctors in states without capping
utes on medical malpractice lawsuits. They are Washington,        statutes.13
Oregon, Wyoming, Arizona, Arkansas, Minnesota, Iowa,
Kentucky, Tennessee, Alabama, North Carolina, Pennsylvania,       An interesting side note is that insurance companies
New Jersey, Delaware, New York, Vermont, New Hampshire,           enjoyed slow payouts to victims of medical malpractice. The
Maine, Rhode Island, and Connecticut.9                            median payout of insurers in states with capping statutes
                                                                  grew by 37.8%, which is small compared to the increase
States that have or are thinking of implementing capping          of 71.3% in states without such limitations. Yet in lieu of
statutes should examine the effects of MICRA in California.       these slow payouts, insurers continued to increase policy
Given that MICRA was instituted in specific response to           premiums.14
medical malpractice premiums, it is interesting to note
that insurance premiums continued to rise, reaching an all        Weiss went on to identify six factors that affect medical mal-
time high of a 450% increase in 1988, twelve years after          practice insurance premiums more than medical malpractice
MICRA was put into place. California insurers’ answer to          lawsuits. They are: (1) the medical inflation rate: medical
why premiums continued to rise in spite of MICRA? They            costs have risen 75 percent since 1991; (2) the insurance
claim the increase was in response to court challenges to         business cycle: the insurance industry suffered a twelve
MICRA. California next enacted California Insurance Code          year “soft” period until 1999 and in an attempt to increase
section 1861.01, commonly known as Proposition 103. This          revenue, insurers have tightened underwriting standards and
Proposition required insurance premium rollbacks of up to         raised premiums;15 (3) the need to solidify reserves for poli-
20%. Ironically, within three years of Proposition 103, medical   cies in force: medical malpractice insurers have consistently
malpractice premiums dropped by 20.2%, and, after adjusting       under-reserved since 1997; at the beginning of 2002, this
for inflation, the reduction was actually 30.7%. Based on these   under-reservation added up to $4.6 billion, leaving only
results in California, it is easy to conclude that reasonable     one way to increase reserves, to increase premiums;16 (4) a
medical malpractice liability insurance premiums are achieved     decline in investment income: investment income declined
through the regulation of insurance rates and not by capping      by 23% in 2001 and then another 2.5% in 2002, which is
non-economic damages in lawsuits.10                               particularly critical for insurers of medical malpractice since
                                                                  the payout of claims usually take up to several years; (5)
b. The Weiss Study                                                financial safety: based on the Weiss Safety Ratings, 34.4%
Supporters of capping statutes in medical malpractice             of the nation’s medical malpractice insurers are vulnerable
lawsuits blame rising insurance premiums primarily on             to financial difficulties, compared to 23.9% of the property
“outrageous” awards for non-economic damage. It seems             and casualty insurance industry as a whole; to ensure avail-
this viewpoint must be based on statistical information           able finances, many medical malpractice insurers are under
supporting this allegation. However, just the opposite is         pressure to increase rates despite new laws to cap payouts;
revealed. In June 2003, Weiss Ratings Inc, one of the top         and (6) supply and demand for coverage: the number of med
five raters of life and health insurers, released the results     mal carriers increased through 1997 to 274, but has since
of a study entitled, “The Impact of Non-Economic Damage           fallen to 247 in 2002.17
Caps on Physician Premiums, Claims Payout Levels, and
Availability of Coverage.”11 The study indicates that capping     The Weiss Study offers a five-step approach to reducing, or
statutes have done nothing to reduce the cost of increasing       at least manage, medical malpractice insurance premiums
medical malpractice insurance premiums. Weiss noted               without instituting capping statutes in medical malpractice
the following trends: in nineteen states that implemented         lawsuits. First, until there is clear and convincing evidence
caps during the twelve-year period, physicians suffered a         that capping statutes will reduce medical malpractice insur-
48.2% jump in median premiums, from $20,414 in 1991               ance premiums, all legislation instituting said statutes must be
to $30,246 in 2002. However, in direct conflict with the          put on hold. Victims of medical malpractice should not have
assertion that capping statues reduce medical malpractice         to make a sacrifice of possible damages to further unfounded
insurance premiums, in thirty-two states without caps, the        results. Second, before rate increases are approved, regulators
pace of increase was actually somewhat slower, premiums           must review and revise their parameters. Third, insurance
rose by only 35.9%, from $22,118 to $30,056.12 Based on           companies should not be allowed to raise premiums to
                                                     ADVOCATE   ✯ WINTER 2006                                                 105




                                               THE
compensate for mismanagement. Fourth, the medical profes-          The first assertion that punitive damages are increasing in
sion must take more responsibility and police itself. Fifth,       number and frequency is simply not true; this is supported
states must be more proactive in licensing practitioners who       by empirical data. In actuality, punitive damages are awarded
have higher than average claims against them. 18 Sixth, and        infrequently. The Rand Institute for Civil Justice study of
lastly, consumers should not give up their right to recover        jury verdicts and the American Bar Foundation study of jury
non-economic damages until the medical profession and              verdicts in eleven states demonstrates as such.25 The Rand
legislatures adequately supervise and regulate health care         study demonstrates that there has been almost no change in
professionals and hospitals.19                                     the frequency of punitive damages in the past 25 years. For
                                                                   instance, a study of two counties from 1960-1984 showed
As the GAO study shows, insurance payouts have slowed              that out of 24,000 jury verdicts, only 6 awarded punitive
down, but these savings have not been passed onto the physi-       damages. The American Bar Foundation study found similar
cians in the form of reduced insurance premiums; therefore,        results; out of 25,627 jury verdicts, only 5% awarded punitive
the capping statutes have not reduced medical malpractice          damages.26
premiums as intended. The study concludes by stating that
capping statutes should not be implemented until their stated      The second claim, that punitive damages are awarded in
purpose of reducing medical malpractice insurance premiums         excessively high amounts, is likewise false. A study analyzing
for physicians can be demonstrated. Not surprisingly, the          Cook County (Illinois), Dallas County (Texas), Jackson
Physician Insurers Association of America (PIAA) has issued        County (Michigan), and Los Angeles County (California)
a statement concluding that Weiss’s study is flawed and the        found that from 1970 to 1990, median awards of punitive
conclusions are unsupported.20                                     damages remained constant and steady in three out of four
                                                                   counties. However, the mean in all four counties rose. Why
The statistics provided by the Weiss study essentially show        the disparity? It is due to rare, but high, awards. The mean,
that capping statutes do not reduce medical malpractice            but not the median, increased. This may contribute to the
insurance premiums, as they are explicitly designed to             impression that punitive damages have risen.27
do. Shockingly, even with this type of statistical evidence
available, the next step seems to be to have capping statutes      Another mantra of those wanting to institute tort reform
implemented by the federal government.                             limiting punitive damages is that frivolous medical mal-
                                                                   practice lawsuits drive up the cost of health care. In May
c. Mantras of those wanting to institute tort reform               of 2006, the Harvard School of Public Health (HSPH) and
that limits punitive and damages in medical malpractice            the Brigham and Women’s Hospital (BWH) released a study
lawsuits and studies that discredit them.                          that disputed this claim. HSPH and BWH reviewed 1,452
Punitive damages are damages, in additiona to compensatory         closed claims from five malpractice insurance companies
damages, that are awarded to a plaintiff in a civil lawsuit,       nationwide.28 The study disclosed the following statistical
such as a tort. They are usually awarded when a defendant’s        evidence: 72% of cases that did not involve medical error
actions are in total disregard of a plaintiff’s rights.21 The      (and may be called “frivolous”) were not compensated and
purpose of punitive damages is twofold. One, they are to           73% of cases that did involve error were compensated.
punish a defendant for acts of bad faith, and two; they are        Roughly 27% of cases had outcomes that did not match their
to discourage similar actions by other possible defendants.22      merit. According to the study, 16% of cases were meritorious
Recently, many states have enacted tort reform in the form         yet went unpaid and 10% were not meritorious yet the claim
of capping statutes that limit punitive damages. Punitive          was paid.29 Additionally, claims that are compensated that
damages may be limited to the type of injury suffered, to          did not involve medical error were paid approximately
reflect the amount of compensatory damages, or withheld all        $200,000 less than those that did.30 Another study entitled
together.23 The end result is the same, however: punitive dam-     “Medical Malpractice: Impact of the crisis and effect of state
ages are limited. How are those in favor of such tort reform       tort reforms” justifies similar conclusions.31 This study
convincing the public that this is a feasible, if not excellent,   found that caps on non-economic damages reduced punitive
idea? There are two mantras that are being chanted to sup-         damage awards by 20-30% and disproportionately burdened
port capping statutes and limitations on punitive damages          the most severely injured plaintiffs; additionally, caps did
in general. They are (1) punitive damages are increasing in        not constrain the growth of insurance premiums.
number and frequency and (2) they are awarded in exceed-
ingly high amounts.24
106                                                 ADVOCATE   ✯ WINTER 2006




                                              THE
III: Capping Statutes at the Federal Level                        or $250,000, whichever is greater. Further, for punitive dam-
a. President Bush and House Resolution 5                          ages to be available, a plaintiff would have to show through
President George W. Bush claims that physicians are not           clear and convincing evidence that the defendant acted with
able to practice their profession due to frivolous lawsuits. He   malice and/or negligence. The Act would preempt state laws
urges laws that limit damages in medical malpractice lawsuits     regarding medical malpractice lawsuits. As of May 4, 2006, this
against doctors and hospitals. Bush urges federal legislation     Act has not been passed or rejected, as the Senate Democratic
that (1) caps non-economic damages at $250,000, but not           leadership is trying to bring the bill to the floor.37
limiting economic damages; (2) limiting punitive damages to
whichever is less: $ 250,000 or twice the economic damages;       b. Why capping statutes should not be federalized
(3) including a statute of limitations on medical malpractice     Traditionally, tort reform, including reforms limiting damages
cases; (4) allowing physicians to pay patient awards in           in medical malpractice lawsuits, has been a function of the
installments rather than in one lump sum; and (5) requiring       state and not the federal government.38 The idea that capping
physicians to pay only the percentage of damages for which        statutes should be federalized is to “score political points . . .
they are directly responsible. Such legislation would be a        and not to be taken seriously by the Senate.”39 This sentiment
direct preemption of state law, especially given that many        was expressed by Senator Edward M. Kennedy, a Democrat
states have already found such statutes on the state level        from Massachusetts. He went on to say that the legislation
unconstitutional.32                                               proposes that the only way to help doctors is to hurt seriously
          Bush believes that medical malpractice insurance        injured patients, and this in itself is ineffective and simplistic
premiums have increased due to excessive damage awards.33         because it doesn’t benefit doctors or patients, it only benefits
His solution is House Resolution 5. This Resolution, officially   insurance companies. The proposed legislation does nothing
titled, “To Improve Patient Access to Health Care Services and    to reduce medical malpractice premiums, and it is unfair to
Provide Improved Medical Care by Reducing the Excessive           the victims of malpractice. Kennedy’s statement claims that
Burden the Liability System Places on the Health Care             H.R. 5 allows the health care industry to escape accountability
Delivery System,” is applicable to any health care lawsuit and    for the care it provides.40
limits the recovery of non-economic damages to $250,000.34
Such a law would pre-empt any state laws dealing with             Senator Kennedy further points out that a cap on non-eco-
this issue. The resolution is problematic for three reasons.      nomic damages deprives seriously injured patients of the
First, as demonstrated by the Weiss study, there are many         right to compensation. The most severely injured patients
factors contributing to rising medical malpractice insurance      who are brain injured, blind, or paralyzed are the ones who
premiums, and it is not clear whether this legislation will       ultimately suffer. Activities of daily living are altered forever
reduce said premiums. Second, the restrictions and provi-         for such patients, and reimbursement for medical bills and lost
sions of H.R. 5 are unreasonable because of their affect on       wages does not make them whole. However, non-economic
an injured patient’s ability to recover and hold wrongdoers       damages can help compensate such victims for their loss, and
accountable. Lastly, the overbroad legislation protects the       $250,000 in compensation is simply not enough.41
interests of large corporations at the expense of health care
providers and patients.35 This resolution was blocked by the      Further, Kennedy argues, the cap is arbitrary. For example, a
Senate on July 9, 2003.36                                         patient with a leg injury may be fully compensated without
                                                                  fully reaching the cap; whereas a patient who is paralyzed
a. Senate Bill 22, the Medical Care Access Protection Act         for the duration of his life will need more compensation
of 2006                                                           than the cap allows. “Is it fair to apply the same limit on
Another Act that will be considered by Congress is S.22,          compensation to a person who is confined to a wheelchair
the Medical Care Access Protection Act of 2006. S.22 would        for life that is applied to someone with a temporary leg
impose a $250,000 cap on pain and suffering damages               injury?” asks Kennedy. Said cap also discriminates against
rendered against a health care providers and institutions.        younger victims because they must live with the injury
“Health care providers” includes physicians, nurses, dentists,    longer, yet they are entitled to the same compensation as an
pharmacists, optometrists, chiropractors, and podiatrists.        older victims. Lastly, the cap discriminates against women,
“Health care institutions” includes hospitals, nursing homes,     children, minorities, and low income workers, who may not
assisted living facilities, ambulatory surgical centers, emer-    recover any (or minimal) lost wages, and therefore receive
gency medical services providers, and hospices. S.22 would        minimal economic damages. Should such citizens receive
further cap punitive damages at twice the economic damages,       less compensation? Is this justice?42
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As stated previously, capping statutes are primarily instituted    dollars in compensatory damages and $145 million in puni-
to reduce medical malpractice insurance premiums. Ironically,      tive damages. The trial court reduced these amounts to $1
as noted by Kennedy, medical malpractice premiums                  million and $25 million, respectively. Both the plaintiff and
constitute less than 2/3 of 1% of the nation’s health care         defendant appealed. The Utah Supreme Court applied the
expenditures annually. For example, in 2004, health care costs     “three guidepost” test set forth by the U.S. Supreme Court
were $1.88 trillion, and medical malpractice premiums were         in B.M.W. of North America v Gore and reinstated the $145
$11.4 billion. Medical inflation and the high cost of health       million award.46 The Gore test establishes three guideposts
care is not attributable to increases in medical malpractice       for assessing whether an award exceeds the constitutional
insurance premiums. Bills that (among other things) cap            limit: (1) the degree of reprehensibility of the defendant’s
non-economic damages for victims of medical malpractice            misconduct; (2) the disparity between the actual of potential
will not make health care more affordable.43                       harm suffered by the plaintiff and the punitive damages
                                                                   award; and (3) the difference between the punitive damages
Kennedy chides the White House and its supporters who              awarded by the jury and the civil penalties authorized or
assert that capping statutes will reduce malpractice premiums      imposed in comparable cases.47 The Utah Supreme Court
by point to evidence that refutes it. Kennedy points to the        found that all three guideposts were met: the defendant’s
following: between 2000 and 2003, there were increases in          conduct was reprehensible, the ratio between compensatory
the cost of medical malpractice insurance in states that had       and punitive damages was not unwarranted, and lastly, the
damage caps, as well as in states that did not. Rates have         award was not excessive when compared to other civil and
now stabilized, again both in states with and states without       criminal penalties the defendant could have faced. The U.S.
damage caps; national studies show that medical malpractice        Supreme Court granted writ of certiorari.
premiums are not lower on average in states that have enacted
damage caps than in states without these restrictions; based       The Court began by reiterating the well-established principle
on data from the Medical Liability Monitor on all fifty states,    that, while the States have the discretion over the imposition
the average medical malpractice premium in 2005 for doctors        of punitive damages, there are procedural and substantive
practicing in states without caps on malpractice damages           constitutional limitations to that discretion.48 The Due Process
($45,719) was actually lower than the average premium              Clause prohibits grossly excessive or arbitrary punishments
for doctors practicing in states with caps ($51,405). Such         on a tortfeasor.49 As to juries in civil lawsuits, the Court
statistical evidence directly refutes the assertion that capping   recognized that jury instructions usually leave the jury with
statutes reduce medical malpractice insurance premiums.            wide discretion in choosing the amount of award given, and
Kennedy further proves this statement by pointing to the           disclosure of a defendant’s net worth might create biased
Weiss study, which was discussed previously.44                     juries, particularly when businesses are involved.50 The
                                                                   principles established in Gore were in response to some of
The floor statement by Kennedy goes on to offer a solution         the concerns listed. In applying these principles, the Court
to end abuses by medical malpractice insurers by subjecting        found the Utah Supreme Court erred in reinstating the $145
the insurance industry to U.S. anti-trust laws. Insurance          million award.51 The Court outlined a detailed analysis of
companies are the only corporations that are free to fix prices,   how the Gore guideposts are to be utilized.
withold and restrict coverage, and engage in anti-competitive
actions. Kennedy ends his Statement by urging his colleagues       The first prong of the guideposts set forth by Gore deals with
to oppose S.22.45                                                  assessing the reprehensibility of the defendant’s conduct.
                                                                   According to the Supreme Court, reprehensibility is deter-
c. What does the Supreme Court say about Capping                   mined by considering whether the harm caused was physical
Statutes?                                                          as opposed to economic; whether the tortious conduct evinced
The Supreme Court has not specifically resolved the issue of       an indifference to or a reckless disregard of the health or safety
whether capping statutes that limit non-economic damages           of others; whether the target of the conduct has financial
in medical malpractice lawsuits are constitutional. However,       vulnerability; whether the conduct involved repeated actions
the Court has spoken on the issue of punitive damages in           or was it an isolated incident; and whether the harm cause
general.                                                           was the result of intentional malice, trickery, deceit, or mere
                                                                   accident. If one of these elements is absent, an award will be
In State Farm Mutual Insurance Company v Campbell, a jury          suspect; conversely, qualifying one of the elements does not
awarded a plaintiff in a wrongful death lawsuit $2.6 million       guarantee an award. Punitive damages are only to be awarded
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if the defendant’s actions are so reprehensible that sanctions       $250,000 cap on non-economic damages in medical malprac-
other than compensatory damages are to be imposed.52                 tice actions. The Supreme Court found that the Due Process
                                                                     and Equal Protection Clauses were not violated by said statute
The second prong of the Gore guideposts deals with the               based on the following: there was no due process violation
disparity between the actual or potential harm suffered by           because the Legislature’s actions in instituting the capping
the plaintiff and the punitive damages award. The Court              statute was rationally related to a legitimate state interest in
has not identified concrete constitutional limits on the ratio       controlling medical malpractice insurance costs. Further,
between harm to the plaintiff and a punitive damage award.53         the Equal Protection Clause was not violated because the
While the Court does not establish a bright-line ratio which         Legislature’s decision to limit the recovery of medical malprac-
punitive damages cannot exceed, it does note that few                tice plaintiffs was a rational response to medical malpractice
awards exceeding a single digit ratio between punitive and           insurance rates.58 Justice White went on to discuss how the
compensatory damages will satisfy due process. The Court             States are divided on determining the constitutionality of
looks to jurisprudence to state that damages that are double,        capping statutes in medical malpractice lawsuits. He reasoned
triple, or quadruple comport with due process. While these           that the division was due to the unanswered issue left by
numbers are not binding, they do offer guidance. Ultimately,         the Supreme Court in Duke Power Co. v Carolina Environment
when analyzing the punitive and compensatory damages ratio,          Study Group.59 Framing the issue as being whether the Due
the Court held that single-digit multipliers are likely to satisfy   Process Clause requires a legislatively enacted compensation
due process, as well as achieve the State’s goals of deterrence      scheme that mirrors the recovery at common law or provides
and retribution. However, there is no benchmark and ratios           a reasonable substitute remedy, Justice White encouraged the
greater than single-digit multipliers may still comply with          Supreme Court to find resolution.60 Moreover, he correctly
due process when “a particularly egregious act has resulted          predicted that more States would enact similar legislation,
in only a small amount of economic damages.”54                       and the issue would recur. 61

The last prong of Gore addresses the difference between the          IV. Case law addressing whether capping statutes are
punitive damages awarded by the jury and the civil penalties         Constitutional.
authorized or imposed in comparable cases. The Court begins          a. Do capping statutes violate a plaintiff’s constitutional
analyzing this prong by looking to see if criminal penalties         right to a trial by jury?
can be imposed. If a possible criminal penalty exists, the State     i. Case law supporting the assertion that the constitutional
views the wrongful action more seriously. Therefore, great care      right to trial by jury is not violated by capping statutes.
must be taken to avoid imposing significant dollar amount            The argument claiming that capping statutes violate a
awards in civil lawsuits to punish for criminal wrongdoings.         plaintiff’s constitutional right to trial by jury is central to
A defendant must be accorded a criminal trial for criminal           medical malpractice claims. An example of how the right to
penalties to ensure that heightened protections are met. In          trial by jury argument is utilized is demonstrated in Evans v
summation, large punitive awards in civil cases are not the          State.62 In that case, Alaska enacted a statute that included
place to punish a defendant for criminal wrongdoings.55              provisions capping non economic and punitive damages
                                                                     that are awarded in actions for personal injury and wrongful
While the Supreme Court’s holding from State Farm v Campbell         death.63 “Non economic” damages are defined as “compensa-
does not offer definitive guidelines in awarding punitive            tion for pain, suffering, inconvenience, physical impairment,
damages in civil lawsuits, it does offer the proper analysis         disfigurement, loss of enjoyment of life, loss of consortium,
in applying the Gore guideposts to such cases. However,              and other nonpecuniary damage.” Such damages are limited
Justices Scalia, Ginsburg, and Thomas dissented from this            to $400,000 or $8,000 multiplied by the injured person’s life
opinion. They found neither the Due Process Clause nor               expectancy, whichever is greater. These numbers are increased
the Constitution offered protection against “excessive” or           to $1,000,000 or $25,000 in cases involving extreme physical
“unreasonable” awards of punitive damages. Furthermore,              impairment or severe disfigurement. Punitive damages are
they found that punitive damages are usually governed by             limited three times compensatory damages, or $500,000,
the States.56                                                        whichever is greater. Slight variations of this cap occur if
                                                                     a tort is committed knowingly by the tortfeasor or by an
This reasoning is in line with Justice White’s dissent in Fein       employer.64 A lawsuit was instituted by Plaintiff’s who were
v Permanente Medical Group, a case from California.57 In that        contemplating tort actions. They instituted a claim seeking
case, the California Supreme Court upheld the validity of a          a declaration that the capping statute was unconstitutional
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because it barred the right to trial by jury.                       ii. Case law supporting the assertion that the Consti-
                                                                    tutional right to trial by jury is violated by capping
The right to trial by jury argument asserts that the right is       statutes.
violated because courts are basically throwing out the jury’s       The argument supporting the assertion that capping statutes
findings. For example, if a jury awards damages in the amount       violate the constitutional right to a trial by jury is demon-
of a million dollars, a capping statute will reduce this amount     strated in Boyd v Bulala, a case from Virginia.69 In that case, the
to be within limits of the statute. Plaintiffs contend that this    Virginia court held that capping statutes violated the Seventh
is a violation of the Seventh Amendment right to trial by jury      Amendment right to trial by jury because that amendment
by circumventing the rationale for having a jury trial. The         explicitly prohibits interference with the ultimate determina-
rationale is to let a jury make a finding of guilt, innocence,      tion of issues of fact by the jury. Additionally, the Seventh
or damages. By interfering with the jury’s decision, the right      Amendment requires a jury that can not only determine who
to trial by jury is therefore violated. Referring back to the       is liable, but also the extent of injury by
Evans case to illustrate; in analyzing the right to trial by jury
assertion, the court determined that the clause itself conferred    assessing damages.70 The way the Virginia statute was written,
the right to jury trial in suits that sought compensatory and       the jury could not even consider awarding damages in excess
punitive damages. The court found “a damages cap did not            of the capped amount without the jury’s finding of damages
intrude on the jury’s fact-finding function, because the cap        being invalidated per the capping statute. Either way, the
was a ‘policy decision’ applied after the jury’s determination,     fact-finding function of assessing damages of the jury was
and did not constitute a re-examination of the factual ques-        infringed upon. Given that a finding of damages is an issue
tion of damages.” The court next refers to two other cases, in      of fact for a jury to decide, any limitations on that decision is
which the Virginia Supreme Court distinguished between the          also a limitation on the role of the jury. Because the Seventh
jury’s fact finding duty and the legislature’s power to alter the   Amendment guarantees the right to a jury as a fact finder, any
law. To sum up the differences, that court held that “once the      limitation on that right makes such a statute unconstitutional.
jury has ascertained the facts and assessed the damages . . .       The Virginia court went on to explain that while it is true
the constitutional mandate is satisfied, [and] it is the duty of    that courts do have the power to set aside verdicts, order a
the court to apply the law to the facts.” This means that the       new trial, or enter a judgment notwithstanding the verdict;
jury can determine a plaintiff’s damages, but the legislature       these powers are not to be exercised unless the verdict is
may alter the result by placing a cap on the amount avail-          obviously contrary or unsupported by evidence. The way
able. Eight other courts have upheld capping statutes along         the statute is written, it requires an award greater than the
the same line of reasoning. This court held that the statute        amount set forth by the cap to be reduced, even though the
did not violate a plaintiff’s right to trial by jury because the    award is supported by evidence. This is impermissible.71 It
decision to cap is a policy choice and not a re-examination         is true that the legislature may institute measures that affect
of the factual decisions of juries.65                               how a jury determines factual issues, and can even confer
                                                                    procedural rules, abolish common law causes of action,
A similar result was found in Idaho, Kirkland by & ex rel.          and determine how damages are to be paid; however, the
Kirkland v. Blaine County Medical Center, which involed a
                                      Center                        legislature may not determine the amount of judgment to be
capping statute that limited non-economic recovery to               entered in a trial. Such determinations infringe on the right
$400,000.66 Again, the plaintiffs argued that the capping           to a jury, as well as interfere with the function of the judicial
statute violated their right to trial by jury as guaranteed by      branch, which in turn violates the separation of powers of
both the state and federal constitutions because the jury’s         the branches of government.72
right to determine the amount of non-economic damages
was limited. The issue for the court was, given that a plaintiff    The court in Moore v Mobile Infirmary Association agreed with
has a right to have a jury assess and award non-economic            this reasoning found in Virginia.73 Alabama had a capping
damages to personal injury plaintiffs, is this right violated       statute that limited non-economic damages to $400,000.74 The
by a capping statute that limits non-economic recovery?67           plaintiff in that case argued that the capping statute violated
The Idaho Supreme Court ultimately held the legislature had         a guaranteed right to trial by jury. The court analyzed the
the power to modify or repeal common law causes of action.          statute by utilizing the plain meaning standard of review and
Limiting or eliminating a plaintiff’s recovery in certain tort      focused on the exact wording that guarantees the right “of trial
causes of action is a permissible limitation consistent with        by jury [which] shall remain inviolate.” The key words in this
this power.68                                                       right are “shall remain inviolate,” which the court interprets to
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mean as forbidding the legislature to tamper with this right.75    This conclusion was reiterated in Wisconsin. In Ferdon v
Additionally, the court deduced that the jury alone, after         Wisconsin Patients Compensation Fund, a minor was subject
weighing all evidence, has the right to determine the sum of       to the $350,000 cap on non-economic damages.81 The issue
a plaintiff’s compensation. Allowing a judge to interfere with     was framed as whether the $350,000 cap on non-economic
this function of the jury minimizes the jury system itself.76      damages in medical malpractice cases constitutional? The
In cases involving damages that are unable to be precisely         court focused on the fact that the plaintiff was a minor and
calculated, the jury’s assessment of damages is only to be         went through an extensive equal protection analysis. However,
disturbed if it is flawed by passion, prejudice, corruption,       the court did state that the “Equal protection analysis and
or improper motive. If that is the case, the court would need      substantive due process have much in common. Under
to state its reasons for interfering with the verdict. To hold     substantive due process analysis the statute must bear a
otherwise would be for the right to trial by jury to lose its      rational relationship to a reasonable legislative goal. Under
constitutional status.77 In summation, the court reiterated this   equal protection analysis there must be a rational relationship
by stating “in cases involving damages incapable of precise        between the disparity in treatment resulting under a statute
measurement, a party has a constitutionally-protected right        and a legitimate governmental objective.”82
to receive the amount of damages fixed by a jury unless the
verdict is so flawed by bias, passion, prejudice, corruption,      ii. Case law that does not support the assertion that the
or improper motive as to lose that constitutional protection.      Constitutional right to due process is violated by capping
As a corollary to that principle, the soundness of a jury’s        statutes.
findings on the issue of damages must be evaluated on a            A Wisconsin court found that a similar argument did not
case by case basis.”78                                             support the assertion that capping statutes infringe on due
                                                                   process rights. In Guzman v St. Francis Hospital, Audrey
b. Do capping statutes violate a plaintiff’s constitutional        Guzman was seriously injured due to negligent health care
right to due process?                                              providers, and she appealed a verdict enforcing the Wisconsin
i. Case law supporting the assertion that the constitutional       capping statute, claiming it was unconstitutional.83 The
right to due process is violated by capping statutes.              Guzmans argued that the cap was arbitrary and thus violated
Another major argument against capping statues asserts             their substantive due process rights. The Due Process clause
that capping statutes are unconstitutional because they            guarantees fairness and bars certain government actions,
violate due process rights. Plaintiffs argue that the statutes     regardless of their fairness. For a statute to be constitutional,
are arbitrary and capricious due to their harsh and unequal        Guzman argued, substantive due process requires the legisla-
result and that they violate the right to redress guaranteed       ture to give medical malpractice injured plaintiffs some sort
by the Constitution.                                               of benefit in return for capping their amount of non-economic
                                                                   damages. The court rejected this argument by claiming that
A Texas court found such an argument to support the conclu-        the capping statute does not violate substantive due process
sion that a capping statute did violate due process protection     because it bears a rational relationship to a legitimate leg-
guaranteed by the Constitution. In Detar Hospital v Roque          islative objective. The Wisconsin legislature’s objective was
Estrada, a statute was created to reduce health care liability     based upon their determination that their healthcare system
claims, assure that awards were rationally related to actual       needed to be reformed in order to be more effective. To take
damages, and, among other things, make medical and health          a step in that direction, they further decided to restructure
care more affordable, accessible, and available.79 The court       their medical malpractice law as well as set time limits which
outlined the issue as follows: whether such purposes justify       claims can be filed. Therefore, there is a rational relationship
the restriction on a plaintiff’s constitutionally-guaranteed       between the cap on the recovery of non-economic damages
right to obtain full redress for injuries caused by another’s      and the legislature’s goal of improving their health care
wrongful conduct. The court found that this limitation of          system. Due to this fact, the court found no substantive due
recovery not only did not provide adequate compensation for        process violation.84
meritorious claims, but also did not eliminate non-meritorious
claims. The end result is that plaintiffs seriously injured by     Utah utilized a similar argument. In Judd ex rel. Montgomery
medical malpractice are not compensated, and therefore the         v Drezga, plaintiff argued that a capping statute violated the
limitation is unjustified. There is no offset of lower costs of    right of due process.85 However, the court held that the statute
medical care or lower insurance premiums, further justifying       was not arbitrary or unreasonable because it was a direct
a holding that the capping statute is unconstitutional.80          solution to the legislature’s perceived medical malpractice
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crisis.86 The court further held the statute to be reasonable         the non-economic capping statute is rationally related to its
because not all damages are capped; damages are merely                intended purpose. This means that plaintiff’s right to equal
limited.                                                              protection is not violated.91

c. Do capping statutes violate a plaintiff’s Constitutional           The same conclusion was reached in Federal Express
right to equal protection?                                            Corporation v United States, which held capping statutes
i. Case law supporting the assertion that the Constitu-               did not violate the equal protection clause.92 Plaintiffs in
tional right to equal protection is not violated by capping           that case argued that the liability cap in the New Mexico
statutes.                                                             Medical Malpractice Act was unconstitutional. The court
The final argument supporting the assertion that capping              applied the rational basis standard of review in its decision.
statutes are unconstitutional contends that the statutes              Initially, social and economic legislation is presumed valid.
violate the Equal Protection clause of the Constitution. The          Using the rational basis test, a plaintiff is required to show
theory is that equal protection rights are violated because it        that a statute’s classification is not rationally related to the
segregates medical malpractice victims from other types of            legislature’s goal. The Medical Malpractice Act achieves the
tort victims.                                                         purpose of ensuring health care providers are adequately
                                                                      insured so that patients can be reasonably compensated
A court in Michigan did not agree with this argument. In              for injuries due to malpractice.93 The court held that the
Zdrojewski v Murphy and William Beaumont Hospital, plaintiff          Act was not arbitrary or capricious in limiting plaintiff’s
argued that a Michigan capping statute violated the Equal             recovery, and it was further related to the legislative goal of
Protection clause of the Constitution because it treated              ensuring recovery for victims of medical malpractice while
medical malpractice plaintiffs differently from others.87             also reducing health care costs.94
The court explained that to determine whether a legislative
classification violates equal protection, the reviewing court         ii. Case law supporting the assertion that the Consti-
applies one of three tests. The first test is that of “strict scru-   tutional right to equal protection is violated by capping
tiny,” which is applied if the legislation targets an inherently      statutes.
suspect class, such as race, national origin, and ethnicity, or       This is contrast to the finding in the case of Detar Hospital v
affects a fundamental right.88 The “substantial relationship”         Roque Estrada. A plaintiff in Texas had a jury’s award of nearly
test is applied when other classifications are suspect, but not       two million dollars reduced to $827,878 per the provisions
inherently so. Social and economic legislation is generally           of the Medical Liability and Insurance Improvement Act , a
examined under the traditional “rational basis” test. Tort            capping statute.95 Incidentally, in 2005, this Act was replaced
reform is subject to the “rational basis” test because it deals       and codified in the Texas Civil Practice and Remedies Code
with social and economic legislation.89 This court rejected           Section.96 The Detar case demonstrates the argument that
the plaintiff’s argument that the statute should be examined          capping statutes violate equal protection rights. The plaintiff
using the strict scrutiny test because a class of personal injury     challenged the constitutionality of the Act, which limits the
victims cannot be compared to classes based on race or gender         amount of damages one may recover in a medical liability
and held the appropriate test is the rational basis test.90 In        claim, claiming it violates the equal protection clauses of the
utilizing the rational basis test, legislation is presumed to         state and federal constitutions.97
be constitutional and is not to be presumed otherwise if
the classification scheme is rationally related to a legitimate       Following standard procedure, the court initially presumed
governmental purpose. The person attacking the legislation            that the statute was valid and that the legislature had not
bears the burden of showing that the classification is arbitrary.     acted unreasonably or arbitrarily. Then, the court determined
The court found that the statute at bar was rationally related        what standard of review to apply based on the classification
to a legitimate governmental purpose. The 1993 legislation            of the statute being challenged. If the classification involves
was created by the Legislature’s concern about the effect of          a fundamental right or suspect class, the State bears a
medical liability on health care in the state. The purpose of         heavy burden to justify the classification. In other areas,
the capping statue was to control the increase in health care         such as tort law, the “rational basis” test is applied. In cases
costs by reducing the liability of medical care providers. This,      where a statute disables certain tort victims, the courts
in turn, reduces malpractice insurance premiums, which                have examined if there is societal quid pro quo (something
affects health care costs. Ultimately, controlling health care        in exchange for something) in their determination if said
costs is a legitimate governmental purpose, and therefore,            statute is constitutional. As for the case at bar, the court
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applied the rational basis test and framed the issue as being:       in health care costs) and whether it imposes unreasonable
whether the litigant’s right of redress was in some manner           restrictions on private rights.102 The court ultimately held
outweighed by the legislative basis for the statute imposing         that the statute arbitrarily and unreasonably discriminated
disabilities. To answer this issue, the court is to consider the     in favor of health care providers. While the statute may fulfill
general purpose of the statute and the extent to which the           the legislative objective of reducing health care costs, the costs
litigant’s right to redress is affected. The right of citizens to    to the general public and medical malpractice plaintiffs is too
bring causes of action to the court is well established, and         high, and thus violates the equal protection clause.103
this right cannot be denied by legislation without a showing
of a legislative basis outweighing the constitutional right of       As demonstrated by the cited case law, the courts are split
redress. The stated purpose of the statute, limiting damages         in their responses to these arguments.
in medical malpractice claims, is to improve the health
care system, reduce the frequent and excessive health care                                    V. Conclusion
liability claims, decrease the cost of such claims, protect          Based on the foregoing discussion, the following has become
hospitals and physicians against potential liability through         clear: there is statistical evidence supporting the assertion
reasonable insurance rates, and make health care readily             that capping statutes do not reduce medical malpractice
available to all citizens. In lieu of these stated purposes, the     premiums, capping statutes adversely affect the most seriously
court then must ask itself whether these purposes justify the        injured plaintiffs, and the state supreme courts are divided
restrictions on a plaintiff’s constitutionally guaranteed right to   in their holdings. Given the fact that the proposal of federal-
obtain full redress for injuries caused by another’s wrongful        izing capping statutes is currently before the House and the
conduct. The court found that the purposes did not justify           Senate, it is time for the Supreme Court to take notice of this
such restrictions. The ultimate holding was that the statute         nationwide situation. The Court should ultimately hold that
was unconstitutional because it infringed on a plaintiff’s           capping statutes are unconstitutional because they violate
constitutionally guaranteed right to obtain full redress by          the right to trial by jury, the Due Process Clause, and the
another’s wrongful conduct.98                                        Equal Protection Clause. This conclusion is supported by the
                                                                     discussed statistical analysis, case law, and law reviews. Only
A New Hampshire court found capping statutes to be                   until the Supreme Court speaks will a resolution be found.
volitional of the equal protection clause as well. In Carson
v Maurer, the plaintiff’s argued that a New Hampshire cap-
  Maurer                                                             Imrana Manzanares graduated in January 2007 from the Thurgood
ping statute violated the equal protection clause because            Marshall School of Law. ✯
it improperly singled out victims of medical negligence, as
distinct from other types of victims of negligence.99 The
                                                                     1 Jordyn K. McAfee, Medical Malpractice crisis factional or fictional?
statute had many types of classifications, such as: health care
tortfeasors as opposed to other tortfeasors, tort claimants of       : An overview of the GAO report as interpreted by the proponents and
                                                                     opponents of tort reform, 9 MICH. ST. J. MED. & L AW 161, 168 (2005)
medical malpractice versus other tort claimants, and medical
                                                                     (general).
malpractice victims whose compensation exceeded $250,000             2 Melissa C. Gregory, Recent Development in Health Care Law: Note:
against those whose compensation was less than $250,000.             Capping Noneconomic damages in medical malpractice suits is not the
Equal protection mandates that those who are similarly               panacea of the “medical liability crisis”, 31 WM. MITCHELL L. R EV.
situation be similarly treated.100 The court went on to decide       1031, 1035 (2005) (general).
that the statute must be examined with more scrutiny than            3 Id at 1036.

afforded by the rational basis test. While the United States         4 Supra note 1, at 169.
                                                                     5 Adam D. Glassman, The Imposition of Federal Caps in Medical
Supreme Court restricts the strict scrutiny analysis to cases
involving gender, race, sex, and other suspect classes, the          Malpractice Liability Actions: Will they cure the Current Crisis in Health
state is allowed to expand these classes, because the state          Care?, 37 AKRON L. REV. 417, 430 (2004) (Reasons for premium
may afford more, but not less, protection than the federal           increases).
                                                                     7 Supra note 1, at 170.
constitution. Therefore, this court concluded that the clas-         8 Supra note 2, at 1037.
sifications must be reasonable, nonarbitrary and be related to       9 CLAUDIA H. WILLIAMS AND MICHELLE M. M ELLO, ROBERT WOOD
legislative objectives under a strict scrutiny analysis.101 The      JOHNSON FOUNDATION, MEDICAL M ALPRACTICE: IMPACT OF THE CRISIS
issue was framed as being whether the statute has a fair and         AND EFFECT OF STATE TORT REFORMS (2006), available at http://www.
substantial relation to the legitimate legislative objective of      rwjf.org/publications/synthesis/reports_and_briefs/pdf/no10_poli-
reducing medical malpractice claims (which cause an increase                    f
                                                                     cybrief.pdf (last visited 11/08/06).
                                                        ADVOCATE   ✯ WINTER 2006                                                           113




                                                  THE
10 Supra note 5, at 459.                                               45 Id.
11 Supra note 5, at 460; see also Weiss study says Med-Mal Caps Fail   46  State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 415
to Prevent Premium Increases, INSURANCE JOURNAL, June 2, 2003,         (2003).
available at http://www.insurancejournal.com/news/national/200         47 GREGORY A. BIBLER AND ROBERT H. FITZGERALD, SUPREME COURT

3/06/02/29436.htm.                                                     TIGHTENS L IMITS ON P UNITIVE DAMAGES (2003). http://www.
12 Id at 461.                                                          goodwinprocter.com/getfile.aspx?filepath=/Files/publications/
13 Id at 462.                                                          ELA_PunDamages_4_03.pdf.
14 Id at 461.                                                          48 Campbell, 538 U.S. at 416. See also Honda Motor Co. v. Oberg,
15 Id at 463.                                                          512 U.S. 415 (1994), BMW of North America v. Gore, 517 U.S. 559
16 Id at 464.                                                          (1996), Cooper Industries Inc. v. Leatherman Tool Group, Inc., 532 U.S.
17 Id at 465.                                                          424, 443 (2001), TXO Production Corp. v. Alliance Resources Corp.,
18 Id at 466.                                                          509 U.S. 443 (1993).
19 Id at 467.                                                          49 Id at 416.
20 L ARRY SMARR , PIAA Says Weiss Study on TortReform and Medical-     50 Id at 417.

Liability Premiums is Flawed, INSURANCE JOURNAL, June 9, 2003,         51 Id at 418.

available at http://www.insurancejournal.com/news/national/200         52 Id at 419.

3/06/09/29583.htm.                                                     53 Id at 424.
21 Lori Woodward O’Connell, The Case for Continuing to Award           54 Id at 425.

Punitive Damages, 36 TORT & INS. L.J. 873, 875 (2001).                 55 Id at 428.
22 Id at 876.                                                          56 Id at 431.
23 Id at 879.                                                          57 Fein v. Permanente Medical Group, 474 U.S. 892 (1985).
24 Id at 883.                                                          58 Id at 893.
25 Id at 884.                                                          59 Duke Power Co. v. Carolina Environmental Study Group Inc., 438
26 Id at 885.                                                          U.S. 59 (1978).
27 Id at 886.                                                          60 Supra note 56, at 894.
28 Press Release, Harvard School of Public Health, Study Casts         61 Id at 895.

Doubt on Claims That the Medical Malpractice System Is Plagued         62 Evans v. State, 56 P.3d 1046 (2002).

by Frivolous Lawsuits (May 10,2006), available at http://www.hsph.     63 Id at 1049.

harvard.edu/press/releases/press05102006.html.                         64 Id. at 1050.
29 Id.                                                                 65 Id. at 1051. See also Pulliam v. Coastal Emergency Services of Rich-
30 Id.                                                                 mond, Inc., 257 Va. 1 (1999), Etheridge v. Medical Center Hospitals,
31 CLAUDIA H. WILLIAMS AND MICHELE M. M ELLO, J.D., P H.D,             237 Va. 87 (1989), Davis v. Omitowoju, 883 F.2d 1155 (1989).
MEDICAL M ALPRACTICE: IMPACT OF THE CRISIS AND EFFECT OF STATE         66 Kirkland v. Blaine County Med. Ctr., 4 P.3d 1115, 1116 (2000).

TORT REFORMS, (2006), http://www.rwjf.org/publications/synthesis/      67 Id at 1118.

reports_and_briefs/pdf/no10_policybrief.pdf.                           68 Id at 1119.
32 Supra note 1, at 165.                                               69 Boyd v Bulala, 647 F.Supp 781 (1986).
33 Id at 166.                                                          70 Id at 788. See also Ex parte Peterson, 253 U.S. 300 (1919), Dimick
34 Supra note 5, at 423.                                               v. Schiedt, 293 U.S. 474 (1935).
35 Id at 425.                                                          71 Id. at 789.
36 Supra note 1, at 166.                                               72 Id. at 790.
37 DEMOCRATIC POLICY COMMITTEE, S.22, THE M EDICAL C ARE               73 Moore v. Mobile Infirmary Association, 593 So.2d 156 (1991).

ACCESS P ROTECTION ACT OF 2006, (2006), http://democrats.senate.       74 Id at 158.

gov/dpc/dpc-new.cfm?doc_name=lb-109-2-59.                              75 Id at 159.
38 Id at 177.                                                          76 Id at 160; see also Montgomery Light & Traction Co. v. King, 187 Ala.
39 EDWARD M. K ENNEDY, FLOOR STATEMENT BY SENATOR EDWARD               619 (1914), Thompson v. Southern Ry., 17 Ala.App. 406, 408 (1920),
M. K ENNEDY ON OPPOSITION TO MEDICAL M ALPRACTICE L EGISLA-            Castelberry v. Morgan, 28 Ala.App. 70,72 (1938).
TION (2006), http://kennedy.state.gov/newsroom/statement.              77 Id at 161. See also Hammond v. City of Gadsden, 493 So.2d 1374,

cfm?id=855a8dd3-4e38-49f8-84c4-399e524ea342.                           1379 (1986).
40 Id.                                                                 78 Id at 162. See also Durham v. Sims, 279 Ala. 516, 517 (1966);
41 Id.                                                                 Birmingham Electric Co. v. Howard, 250 Ala. 421, 423 (1948).
42 Id.                                                                 79 Detar Hospital v. Roque Estrada, 694 S.W.2d 359 (1985).
43 Id.                                                                 80 Id at 366 .
44 Id.                                                                 81 Ferdon v. Wis. Patients Comp. Fund, 701 N.W.2d 440, 600
114                                                     ADVOCATE   ✯ WINTER 2006




                                                  THE
(2005).
82 Id at 445. See also Makos v. Wis. Masons Health Care Fund, 211

Wis.2d 41,75 (1997); State v. Post, 197 Wis.2d 279, 319 (1995).
83 Guzman v. St. Francis Hospital, 2001 WI App 21 (2000).
84 Id at 33.
85 Montgomery v. Drezga, 103 P.3d 135 (2004).
86 Id at 144.
87 Zdrojewski v. Murphy and William Beaumont Hospital, 254 Mich.

App. 50 (2002).
88 Phillips v. Mirac, Inc., 251 Mich. App. 586, 596 (2002). See also

Crego v Sock, 463 Mich. 248 (2000); Vargo .v Sauer, 457 Mich. 248,
                                               Sauer
259 (1998).
89 Id at 79. See also Crego v Coleman, 463 Mich. 248, 259 (2000),

Vargo v. Sauer, 457 Mich. 49, 60 (1998), Neal v. Oakwood Hosp.
           Sauer
Corp., 226 Mich. App. 710, 717 (1997); Wysocki v. Felt, 248 Mich.
App. 346, 354 (2001).
90 Id at 80.
91 Id. at 81.
92 Fed. Express Corp. v. United States, 228 F.Supp.2d 1267 (2002).
93 Id at 1270.
94 Id at 1271.
95 TEX. R EV. CIV. STAT. A NN. art. 4590i.
96 TEX. CIV. P RAC. & REM. CODE § 74.301.
97 Supra note 76, at 361.
98 Id at 365.
99 Carson v. Maurer, 120 N.H. 925 (1980).
              Maurer
100 Id at 931.
101 Id at 932.
102 Id at 933.
103 Id at 941.
                                                            115
             STATE BAR LITIGATION SECTION REPORT

               A DVOCATE
             THE
EVIDENCE &

               U
                     PDATES ON CASE LAW pertaining to
PROCEDURE            evidence and procedure as compiled
   UPDATES           by Luther H. Soules III and Robinson

               C. Ramsey, of Langley & Banack, Inc.




                           INSURANCE
                          & LITIGATION
                               ✯
116                                                     ADVOCATE   ✯ WINTER 2006




                                                  THE
                                                   EVIDENCE UPDATE
                                   BY LUTHER H. SOULES III & ROBINSON C. RAMSEY




                 Supreme Court Of Texas                                “Proof other than expert testimony will constitute some
RULE 702 – EXPERT OPINIONS                                             evidence of causation only when a layperson’s general
Mack Trucks, Inc. v. Tamez, 2006 WL 3040534, *1, 5–9 (Tex.             experience and common understanding would enable the
2006) After excluding expert testimony “as to what caused a            layperson to determine from the evidence, with reasonable
post-accident fire that burned the truck and the driver” on            probability, the causal relationship between the event and
the ground that the testimony was not reliable, the trial court        the condition. Expert testimony is required when an issue
granted a summary judgment against the plaintiffs.                     involves matters beyond jurors’ common understanding. . .
                                                                       . . Whether expert testimony is necessary to prove a matter
The defendant had moved to exclude the testimony of the                or theory is a question of law.”
plaintiffs’ expert on “post-collision, fuel-fed fires” as unreliable
and had moved for summary judgment on the basis that the               “A lay juror’s general experience and common knowledge do
plaintiffs “could present no evidence that any alleged defects         not extend to whether design defects such as those alleged
caused the fire.”                                                      in this case caused releases of diesel fuel during a rollover
                                                                       accident. . . . Nor would a lay juror’s general experience and
The expert did not testify at the Robinson hearing to “a               common knowledge extend to determining which of the fire
methodology by which he reached the conclusions as to the              triangle’s fuel sources, diesel from the tractor or crude from
fire having been caused by defects in the tractor’s fuel and           the tanker, would have first ignited, or the source for the
battery systems.” The Supreme Court ruled that “In order               first ignition. That part of [the expert]’s testimony that was
for [the expert’s] testimony on causation to be reliable, he           properly before the trial court and the testimony of other
was required to present some methodology that reliably                 experts as to the amount of time they spent in studying,
supported his opinions that the ‘fuel’ and ‘ignition’ parts of         investigating, and working in the field of post-collision, fuel-
the fire triangle were supplied, respectively, by the tractor’s        fed fires demonstrated the intricacies of such subject matter.
alleged fuel system defects and battery system. He did not             Issues such as those regarding the fire’s cause(s) present
do so. The mere fact that the fuel system had a design that            matters beyond the general understanding and common
could cause the hoses to separate is not evidence that the             knowledge of lay jurors. Proof of causation in this case also
hoses separated in this case.”                                         required expert testimony.”

Under these circumstances, the Court concluded that the                Because the summary-judgment evidence that the plaintiffs
expert’s testimony “did no more than set out ‘factors’ and             presented “did not contain proof that any of the possible
‘facts’ which were consistent with his opinions, then con-             sources of diesel fuel was more likely than any other, or more
clude that the fire began with diesel fuel from the tractor.           likely than the crude oil cargo, to have been the source of
The reliability inquiry as to expert testimony does not ask            liquids that first caught fire,” there was “no evidence that the
whether the expert’s conclusions appear to be correct; it asks         source was one of the alleged fuel system defects.”
whether the methodology and analysis used to reach those
conclusions is reliable. . . . The trial court was not required                            Courts Of Appeals
to accept his opinions at face value just because [the expert]         RULE 103 – RULING S ON EVIDENCE
was experienced in examining post-collision fuel-fed fires.”           Langley v. Commission for Lawyer Discipline, 191 S.W.3d
Therefore, “the trial court did not abuse its discretion when          913, 915 (Tex. App.—Dallas 2006, no pet. h.) In this lawyer-
it excluded [the expert’s] testimony on causation.”                    discipline case, the appellant argued that the trial court
                                                                       erroneously excluded his testimony regarding a particular
                                                       ADVOCATE   ✯ WINTER 2006                                                     117




                                                 THE
exhibit. However, the record did not reflect that he had offered      lead negotiators regarding one of the collective-bargaining
the exhibit into evidence. Furthermore, he made “no bills of          agreements offered the same opinion.
exceptions, formal or informal. No offer of proof was made
of the excluded evidence in any form.” Because the excluded           The trial court sustained the appellee’s objection that
evidence was not in the record, the appellant “waived his             this testimony was “opinion testimony by a person never
complaint by failing to properly preserve error.”                     designated as an expert witness on this topic by the [Fund]
                                                                      under the controlling provisions of [the] Court’s Scheduling
RULE 509 – PHYSICIAN/PATIENT PRIVILEGE                                Order . . .” The appellant did not claim that it had designated
In re Toyota Motor Corp., 191 S.W.3d 498, 502 (Tex. App.—             these persons as expert witnesses. Instead, it argued that “it
Waco 2006, orig. proceeding) The physician/patient privilege          was not required to designate them ‘as experts in order [for
does not apply to “a communication or record relevant to              them] to give [their] opinion on matters which involve lay
an issue of the physical, mental or emotional condition of a          testimony,’” citing Texas Rule of Evidence 701, which provides:
patient in any proceeding in which any party relies upon the          “If the witness is not testifying as an expert, the witness’
condition as a part of the party’s claim or defense.”                 testimony in the form of opinions or inferences is limited to
                                                                      those opinions or inferences which are (a) rationally based
“As a general rule, a mental condition will be a ‘part’ of a          on the perception of the witness, and (b) helpful to a clear
claim or defense if the pleadings indicate that the jury must         understanding of the witness’ testimony or the determination
make a factual determination concerning the condition itself.         of a fact in issue.”
In other words, information communicated to a doctor or
psychotherapist may be relevant to the merits of an action,           “‘The perception underlying the lay witness’s testimony
but in order to fall within the litigation exception to the           may be what was seen, heard, smelled, tasted, touched or
privilege, the condition itself must be of legal consequence          felt.’ . . . Thus, ‘Rule 701’s requirement that the testimony
to a party’s claim or defense.”                                       be based on the witness’s perception presumes the witness
                                                                      observed or experienced the underlying facts, thus meeting
“A claim for mental anguish or emotional distress will not,           the personal-knowledge requirement of [R]ule 602.’ . . . ‘A
standing alone, make a plaintiff’s mental or emotional condi-         speculative opinion, such as an opinion on what someone else
tion a part of the plaintiff’s claim.” Therefore, the allegation      was thinking at a specific time, does not help the jury to either
in the plaintiff’s petition that he suffered “emotional shock”        (1) understand the witness’ testimony better, or (2) decide the
was “not a sufficient basis to make his mental or emotional           question of the other person’s intent. Mere conjecture does
condition an issue on which the jury will be required to make         not assist the jury.’ . . . ‘Speculate’ means ‘to take to be true
a factual determination.”                                             on the basis of insufficient evidence.’”

RULE 701 – LAY OPINION TESTIMONY                                      The court of appeals determined that the witnesses’ causa-
Board Of Trustees of Fire and Police Retiree Health Fund              tion testimony did not meet the Rule 701 test because this
v. Towers, Perrin, Forster & Crosby, Inc., 191 S.W.3d 185,            testimony “was based not on their perceptions but on their
193–94 (Tex. App.—San Antonio 2005, pet. denied) In this              speculative conclusions regarding what the City’s negotia-
actuarial-malpractice case, the firefighters’ union’s chief           tors, the members of the . . . City Council, and hundreds
negotiator in the collective-bargaining process testified that        of members of the firefighters’ union would have done if
he was “familiar with the history of the negotiations with the        [the appellee] had recommended a higher pre-funding rate.”
[city] over the funding of the . . . Fund” and that the union         Therefore, the court of appeals held that the trial court did
and the City relied upon the appellee’s recommendations in            not abuse its discretion in sustaining the appellee’s objections
negotiating the collective-bargaining agreements. He went on          to this testimony.
to state that “given the long history” of relying on the appellee’s
recommended contribution rates, as well as the history of the         RULE 702 – EXPERT TESTIMONY
union and the city’s adopting the rates, his opinion was that                     Surber
                                                                      Brandt v. Surber, 194 S.W.3d 108, 130–31 (Tex. App.—
“there is a reasonable certainty that [the union] and the [city]      Corpus Christi 2006, no pet. h.) “When determining whether
would have adopted higher contribution rates in the 2002              proffered expert testimony is reliable, the trial court must
Firefighters CBA if it had been known that the contribution           evaluate’”the methods, analysis, and principles relied upon
rates recommended in [the appellee]’s . . . study were too            in reaching the opinion . . . to ensure that the opinion
low.” The president of the firefighters’ union and one of its         comports with applicable professional standards outside the
118                                                    ADVOCATE   ✯ WINTER 2006




                                                 THE
courtroom.’ . . . ‘Scientific evidence which is not grounded         Under these circumstances, the court of appeals concluded
‘in the methods and procedures of science’ is no more than           that “the differences in opinion expressed by the testifying
‘subjective belief or unsupported speculation.’ . . . However,       experts resulted not from the application of any flawed
the role of the trial court ‘is not to determine whether an          methodology, but on their differing conclusions as to the
expert’s conclusions are correct, but only whether the analysis      underlying factual situation” and that “[t]he resolution of these
used to reach them is reliable.’ . . . ‘The party offering expert    factual disputes is within the province of the jury. . . . The
testimony bears the burden to prove that the witness is              jury’s resolution of those factual issues thereby determines the
qualified under rule 702.’”                                          probative value of the proffered expert testimony.” Therefore,
                                                                     the appellants’ arguments against the appellees’ expert testi-
Here, the trial court held a pre-trial hearing to determine          mony went “to the weight to be given the testimony, not its
whether the expert testimony that the appellees proffered            reliability,” and the trial court did not abuse its discretion in
was sufficiently reliable. After considering “(1) the curriculum     admitting the appellees’ expert testimony.
vitae of the experts showing their qualifications, (2) the
depositions of the experts containing the opinions they were         Luther H. Soules III is a shareholder with Langley & Banack, Inc.
to offer to the jury, and (3) the medical records and deposition     in San Antonio. Board-certified in Civil Trial and Civil Appellate
testimony upon which those opinions were based,” the trial           Law, he is a past chairman of the Texas Supreme Court Advisory
court concluded that “(1) the opinions offered by appellees’         Committee. He has authored books and numerous articles on
experts were closely related to their experience in the medical      evidence and procedure, and has lectured extensively on these
profession and their observations in the medical field, and          topics for the State Bar, including the Litigation Update Series and
(2) because the opinions were based on objective facts and           the Advanced Civil Trial, Civil Appellate, Personal Injury, and
not speculation, there was a sufficient connection to make           Discovery Courses. He has also published law-journal articles and
the opinions reliable.”                                              lectured frequently on evidence and civil procedure for law-school
                                                                     sponsored seminars.
The record revealed that “appellees’ experts are all highly
qualified and have extensive experience in their respective          Robinson C. Ramsey is a shareholder with Langley & Banack, Inc.
fields, and that the experts for both appellees and appellants       in San Antonio. Board-certified in Civil Appellate Law, he has
based their opinions on the objective data contained in the          written and spoken on the topics of evidence and civil procedure
medical records of the deceased.” However, although all the          for the Texas Bar Journal, the State Bar of Texas Litigation Update
experts “were all working with the same objective data, they         Course, and the Advanced Civil Appellate, Civil Trial, and Expert
differed in their interpretations of that data. Appellees’ experts   Witness Courses, as well as the University of Houston Law Center
understood [the]medical records to illustrate an underlying          Evidence/Discovery and Litigation/Trial Tactics Series. ✯
factual situation different from that deduced by appellants.”
                                                      ADVOCATE   ✯ WINTER 2006                                                  119




                                                THE
                                               PROCEDURE UPDATE
                                 BY LUTHER H. SOULES III & ROBINSON C. RAMSEY




                   Supreme Court Of Texas                           the baby was sitting unrestrained on the front seat while
SUMMARY JUDGMENTS                                                   [the plaintiff] fed him.”
LMB, Ltd. v. Moreno, 2006 WL 2506030, 2–3(Tex. 2006)
In this personal injury case, the Supreme Court held that           Two weeks before the trial, the Consumer Products Safety
a physician’s assertion in his affidavit that “in my opinion,       Commission “announced a provisional settlement with [the
the conduct of [the defendant] substantially caused [the            defendant] imposing a $4 million civil penalty – the largest
plaintiff’s] injuries and death” did not constitute “evidence       in the agency’s history – for failing to report defects in
that some premises condition or an act or omission of [the          more than a dozen products, including high chairs, swings,
defendant] was causally related to the accident and [the            strollers, toddler beds, and infant carriers. The announcement
plaintiff]’s resulting injuries.” This statement “fail[ed] to       listed defects such as swing trays that came unlocked, infant
address any particular condition of the premises, conduct           carrier handles that broke, high chair legs that failed, and
of [the defendant], or underlying facts” on which the expert        bed slats that could entangle an infant’s limbs. None of the
based his conclusion. His affidavit did not contain “specific       products had five-point harnesses. None mentioned defective
facts from which a jury could reasonably infer that [the            harness buckles. While an infant carrier was included, the
defendant] knew or should have known of some unreasonably           defect cited was a carrying handle used only when walking,
dangerous condition of the premises which was involved              not driving.”
in the accident. Nor [did] his affidavit amount to more
than a bare conclusion that some unknown conduct of [the            The plaintiff’s attorneys “immediately served a notice of
defendant] was a substantial cause of the occurrence, or that       deposition and a Fourth Request for Production on [the
absent the conduct, the incident would not have occurred.”          defendant], seeking 20 categories of documents including
Therefore, the Court concluded that “the affidavit does not         anything that mentioned or referred to any of the defects,
contain competent summary judgment evidence of either               products, complaints, or people who might have been
cause-in-fact or foreseeability.” Because there was no sum-         involved with those products or the investigation.” The
mary-judgment evidence that the defendant proximately               defendant objected on the ground that “the announcement
caused the incident in which the plaintiff suffered injury,         had nothing to do with the carrier or defect alleged in [the
the Court held that the court of appeals erred in reversing         plaintiff]’s suit, and would involve about 20,000 pages of
the trial court’s granting the summary judgment.                    documents located in Pennsylvania, Ohio, and Illinois.” The
                                                                    trial court nevertheless ordered the defendant “to produce
DISCOVERY                                                           two representatives for deposition as well as all the docu-
In re Graco Children’s Products, Inc., 2006 W L 3040580,            ments [the plaintiff]’s requested.”
*1–3 (Tex. 2006) In this products liability case, the plaintiff’s
car “veered off the road, overcorrected, and caused her Jeep        “‘Generally, the scope of discovery is within the trial court’s
Liberty to roll over.” Although she and her 13-year-old             discretion,’ but ‘the trial court must make an effort to impose
brother “suffered no permanent injury as they were wearing          reasonable discovery limits.’. . . ‘[An] order that compels
seatbelts,” her five-week-old son “was found on the front seat      overly broad discovery well outside the bounds of proper
floorboard with fatal head injuries.”                               discovery is an abuse of discretion for which mandamus is
                                                                    the proper remedy.’”
The plaintiff sued the defendant seatbelt manufacturer
“alleging that defects in the harness clip of the baby’s car seat   The plaintiff argued that “she is not required to take [the
failed to restrain him in the rollover.” The manufacturer’s         defendant]’s word that its swings, high chairs, and other
defense was that “immediately after the accident investigating      products did not have harnesses like the one at issue here.”
officers found the harness unbuckled” and that the plaintiff’s      However, the Supreme Court pointed out that “even if that
brother “reported at the scene and later at the hospital that       were not obvious from the pictures and descriptions in the
120                                                    ADVOCATE   ✯ WINTER 2006




                                                 THE
agency announcement, there are ways to find out without               this forcible detainer case, the appellant complained about the
producing 20,000 documents. As her requests were not                  evidence supporting her eviction. In particular, she argued
reasonably tailored to the relevant product defect, they were         that “the trial court erred in admitting evidence of [the
impermissibly overbroad.”                                             appellant]’s misconduct that was not disclosed in response
                                                                      to proper discovery requests.”
                       Courts Of Appeals
JURY SELECTION                                                        The interrogatory at issue asked: “In the Plaintiff’s Complaint
Brooks v. Armco, Inc., 194 S.W.3d 661, 664–65 (Tex.                   For Forcible Detainer in this cause, [the appellee] alleged
App.—Texarkana 2006, pet. denied) In this wrongful-death              that [the appellant] breached her lease by engaging in, ‘Un-
case, the plaintiffs complained that three jury panel members         desirable tenant behavior.’ Please identify each such act of
“expressed a bias as to the burden of proof and were there-           ‘un-desirable tenant behavior’ upon which [the appellee] relies
fore subject to challenge for cause.” However, “expressions           as a reason for evicting [the appellant] in this lawsuit. This
indicating a bias that are equivocal at most are not absolute         request requires the [appellee] to tell, for each such act, what
grounds for disqualification. And an initial leaning toward a         was done, by whom and when in breach of the lease.”
particular view is not disqualifying if it represents skepticism
or uncertainty rather than an unshakeable conviction. . . .           The answer to this interrogatory was: “[The appellant]
For a bias to disqualify a juror, it must appear that the state       breached her lease by violating the rules of [the appellee]
of mind of the juror leads to the natural inference that he           and by violated [sic] the [addendum]. It was reported that
will not or cannot act with impartiality. . . . Statements or         [the appellant] mooned another tenant.”
indications of bias may be the result of inappropriate leading
questions, confusion, misunderstanding, or ignorance, and             The appellee did not amend or supplement this answer before
veniremembers are not necessarily subject to challenge for            to trial. At trial, the judge admitted the appellee’s evidence
cause when they indicate a bias so long as the rest of the            that “(1) [the appellant] and one of her guests were the victims
record shows that is not the case.”                                   of two separate assaults; (2) [the appellant] loitered on the
                                                                      apartment’s premises in violation of the lease; and (3) [the
In reviewing trial courts’ decisions regarding challenges for         appellant] rode a four-wheeler or tractor on the apartment
cause, appellate courts “must consider the entire examination,        sidewalks, nearly hitting children on one occasion. At all
not just answers that favor one side over the other.” Moreover,       relevant times, [the appellant] objected to the admission of
“[t]rial judges are better able to evaluate a juror’s sincerity and   this evidence on the ground that these acts were not disclosed
capacity for fairness, and they have the discretion whether to        in response to [the appellant]’s interrogatory.”
strike a panel member for cause when bias is not established
as a matter of law.”                                                  The appellant’s interrogatory “clearly asked [the appellee]
                                                                      to identify the acts of [the appellant]’s undesirable tenant
Here, the court of appeals found that a reasonable construc-          behavior by indicating what that act was, who was involved,
tion of the entire record revealed that “the prospective jurors       and when it occurred.” The court of appeals could not see
in question simply stated what they thought the law ought             how the response that the appellant violated the apartment’s
to be on the burden of proof requirement, but when the trial          rules and the addendum addressed any of these questions:
court explained that it would instruct them as to the burden          “[The appellant]’s question sought specific information,
of proof required in this case, they indicated to counsel for         and [the appellee]’s answer did not provide that specificity.
both sides that they had no problem applying the burden of            Further, when responding to written discovery, a party must
proof the court said they must use and that they would not            make a complete response, based on all information reason-
try to apply any higher burden of proof. None indicated they          ably available to the responding party at that time that the
could not or would not follow the law on the burden of proof          response is made. . . .”
as given to them by the trial court.” Therefore, the court of
appeals affirmed the judgment.                                        Because the appellee failed to amend or supplement its
                                                                      discovery responses prior to trial, it was “subject to Rule
DISCOVERY                                                             193.6(a) of the Texas Rules of Civil Procedure,” which provides
Interrogatories                                                       that “a party who fails to make, to amend, or to supplement
Nealy v. Southlawn Palms Apartments, 196 S.W.3d 386,                  a discovery response in a timely manner may not introduce
393–95 (Tex. App.—Houston [1st Dist.] 2006, no pet. h.) In            in evidence the material or information that was not timely
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                                               THE
disclosed, unless the court finds that there was good cause        allegations that the requested discovery is unduly burdensome
for the failure to make, to amend, or to supplement the            or unnecessarily harassing. The party must produce some
discovery response timely, or that the other parties will not      evidence supporting its request for a protective order.”
be unfairly surprised or prejudiced by the failure to make, to
amend or to supplement. . . . . The party seeking to introduce     Here, an expert witness testified that the plaintiffs, who were
the evidence carries the burden of establishing good cause         minors, “would be unduly traumatized by oral depositions.”
or lack of unfair surprise or unfair prejudice. . . . A finding    The defendant countered that the fact that the minors had
of good cause or lack of unfair surprise or unfair prejudice       already undergone questioning by a psychiatrist about the
must be supported by the record.”                                  collision indicated that they could be questioned on this
                                                                   topic “without undue trauma.” The defendant also suggested
EXPERT TESTIMONY                                                   that “reasonable restrictions could be imposed on an oral
In re Toyota Motor Corp., 191 S.W.3d 498, 501 (Tex.                deposition to minimize the potential for trauma.”
App.—Waco 2006, orig. proceeding) In this products-liability
case, the defendant complained that the trial judge abused his     The court of appeals rejected the defendant’s arguments,
discretion in allowing a witness to testify “even though she       finding that the trial judge “may well have concluded that
had not been disclosed as an expert witness in the plaintiffs’     questioning by a psychiatrist about a traumatic event may
discovery responses.”                                              be significantly different than adversarial interrogation by an
                                                                   attorney seeking to discover relevant facts about that event.”
“Rule of Civil Procedure 193.6 provides that an expert witness     The court of appeals further concluded that “[a] trial court
who is not timely identified during discovery will not be          may impose reasonable restrictions on discovery methods
permitted to testify unless the court finds good cause for the     if the party opposing discovery presents evidence to justify
proponent’s failure to timely identify the expert or finds that    such restrictions. It is within the discretion of a trial court
the opposing party is not unfairly surprised or prejudiced by      to determine what restrictions on discovery are required.
the expert’s testimony. However, Rule 193.6 does not exclude       An appellate court will not interfere with the trial court’s
an undisclosed expert’s testimony from all hearings. Rather,       exercise of discretion in this regard unless the party opposing
it excludes an undisclosed expert’s testimony from a hearing       discovery failed to present evidence to support the ruling.”
on the merits.”
                                                                   The trial judge here ordered the defendant’s attorney “not
Because Rule 193.6 “does not operate to exclude an undis-          be present when the depositions on written questions are
closed expert’s testimony from a preliminary hearing not           conducted.” Although the defendant contended that it had
on the merits,” the court of appeals held that the trial judge     the right to attend, it “[did] not does not explain how it will
did not abuse his discretion “by refusing to exclude [the          be harmed by not being allowed to attend as the deposition
witness]’s testimony from the hearing on the motion to quash       officer reads the questions to [the minors] and records their
the deposition notices.”                                           answers.”

PROTECTIVE ORDERS                                                  Under these circumstances, the court of appeals concluded
In re Toyota Motor Corp., 191 S.W.3d 498, 502—03(Tex.              that “no abuse of discretion is shown by Respondent’s order
App.—Waco 2006, orig. proceeding) “Rule of Civil Procedure         quashing the oral deposition notices and requiring depositions
192.6(b) provides in pertinent part: To protect the movant         on written questions.”
from undue burden, unnecessary expense, harassment,
annoyance, or invasion of personal, constitutional, or property    PRODUCTION
rights, the court may make any order in the interest of justice                                                 Tyler
                                                                   In re University of Texas Health Center at Tyler, 198 S.W.3d
and may–among other things–order that: (1) the requested           392, 396–97 (Tex. App.—Texarkana 2006, orig. proceeding)
discovery not be sought in whole or in part; (2) the extent or     “Discovery from nonparties is governed by Rule 205. . . . Rule
subject matter of discovery be limited; (3) the discovery not      205.1 allows oral depositions, depositions on written ques-
be undertaken at the time or place specified; (4) the discovery    tions, and requests for production of documents or tangible
be undertaken only by such method or upon such terms and           things. . . . Rule 205.3 provides for production of documents
conditions or at the time and place directed by the court.”        and tangible things from a nonparty. . .. Any objections to
                                                                   discovery under Rule 205.3 must be in accordance with
“A party resisting discovery . . . cannot simply make conclusory   Rule 176.6.”
122                                                  ADVOCATE   ✯ WINTER 2006




                                               THE
The relator here argued that “the production contemplated          the trial court’s pretrial order.” However, the record did not
by Rule 176.6(d) is limited to ‘inspection or copying of           show that the appellant “ever propounded any discovery on
designated documents and things.’” However, the court of           the Commission. A party cannot be compelled to produce
appeals disagreed: “That reading is too limited. Rule 176.6(d)     that which it has not been requested to produce.”
refers to an order ‘to produce and permit inspection or
copying of designated documents and things.’ . . . The quoted      SANCTIONS
language from the rule does not define ‘production.’ Further,      In re Carnival Corp., 193 S.W.3d 229, 236–37 (Tex.
the [relator]’s narrow interpretation would subvert explicit       App.—Houston [1st Dist.] 2006, orig. proceeding) The Texas
portions of Rule 205.3.”                                           Rules of Civil Procedure “require a party to answer written
                                                                   discovery with ‘a complete response, based on all information
“The plain language of Rule 205.3(b)(3) includes ‘testing’         reasonably available to the responding party or its attorney
as one legitimate purpose of production of an item from a          at the time the response is made.’ . . . If a party later learns
nonparty. . . . Specifically, the rule provides that a notice to   that the response was incorrect or incomplete when made
produce tangible things must state ‘the items to be produced       or is no longer correct and complete, the party has a duty to
or inspected by individual item or by category, describing         amend or supplement the response.”
each item and category with reasonable particularity, and,
if applicable, describing the desired testing and sampling         Here, in response to the plaintiff’s requests for disclosure of
with sufficient specificity to inform the nonparty of the          “any person with relevant information,” the defendant provided
means, manner, and procedure for testing or sampling.’ . . .       the name, address, and phone number of a potential witness,
By requiring notice of proposed testing and the manner and         whom the plaintiff later named as a codefendant. The plaintiff
means of the proposed testing, the rules clearly indicate          contended that the defendant gave a false address for this person
production is available to test tangible objects beyond simple     because six months later the plaintiff tried to serve him at the
inspection. . . . The [relator]’s proposed interpretation would    address provided, but could not find him there. At the sanc-
be contrary to the plain language of the rules and render          tions hearing, that person’s attorney explained that his client’s
certain portions of Rule 205.3 meaningless. Certainly, a party     girlfriend was living at the address and that, although the client
has the right to do its own testing.”                              “was frequently gone,” the address for him was correct.

“The question really is whether that testing may be done only      Five months after its initial response, the defendant supple-
while the item remains in the possession of the owner or           mented its answers to provide the name and address of
original custodian. The rule is not so limited. Much testing       another person, whom the plaintiff also later named as a
would either be impossible or extremely limited if the tangible    codefendant. The record did not show that the plaintiff tried
object could be tested only in the custody of the owner or         to serve this person “at the address given and provide[d] no
original custodian. The rules expressly provide for production     other support for [the plaintiff]’s contention that the address
of a tangible item for testing, and one contemplated method        was purposefully false when provided to her.”
by which that production may be accomplished is physically
delivering possession of the item to the requesting party or       Under these circumstances, the court of appeals concluded
that party’s agent. . . . Because the production rules are broad   that “neither of the trial court’s findings provides a basis for
enough to include transfer of possession of a tangible item        the sanction imposed. The order precludes [the defendant]’s
for the purpose of testing it, the trial court’s order [did] not   ability to present the merits of its case. Discovery sanctions
exceed the scope of the Texas Rules of Civil Procedure.”           may not ‘adjudicate the merits of a party’s claims or defenses
                                                                   unless a party’s hindrance of the discovery process justifies
Langley v. Commission for Lawyer Discipline, 191 S.W.3d            a presumption that the party’s claims or defenses lack merit’
913, 915 (Tex. App.—Dallas 2006, no pet. h.) In this lawyer-       or ‘absent a party’s flagrant bad faith or counsel’s callous
discipline case, the appellant complained of the trial court’s     disregard for the responsibilities of discovery under the rules.’”
admitting three of the Commission’s exhibits at the revocation     The court found that “the record here does not warrant such
hearing. Citing Texas Rule of Civil Procedure 193.6, the appel-    a presumption.”
lant argued that the trial court should have excluded these
exhibits because “(1) they were not previously produced in         Furthermore, the plaintiff “did not offer evidence at the
response to requests for disclosure and (2) the Commission         hearing that her case has been prejudiced by relying upon
did not produce these exhibits prior to trial in violation of      ‘false’ addresses. . . . To the contrary, at the time of the hearing
                                                       ADVOCATE   ✯ WINTER 2006                                                      123




                                                 THE
on the motion for sanctions, the record show[ed] that [the            to administer oaths, and officially certified to by the officer
plaintiff] served [the first person] and had a default judgment       under his seal of office.’ . . . Thus, a verification declares that
in place; [the second person] remained a defendant.”                  the facts contained in a certain document are true while an
                                                                      affidavit contains facts stated under oath.”
“Under the second prong of the TransAmerican analysis,
sanctions must not be excessive and the trial court must              Although the court of appeals agreed with the appellees that
have considered whether lesser sanctions were available that          “Rule 165a(3) requires that [the appellant] or his attorney
would have fully promoted compliance. . . . Generally, before         swear that the factual statements made in the motion to
a sanction that prevents a decision on the merits is justified,       reinstate are true,” the court “fail[ed] to perceive why such
lesser sanctions must first be tested to determine their efficacy.    a statement could not be included in an affidavit attached to
In all but the most exceptional cases, the trial court must           the motion to reinstate.”
actually test the lesser sanctions before striking pleadings. . . .
In all cases, the record must reflect that the trial court            “At least two courts have found affidavits of counsel sufficient
considered the availability of appropriate lesser sanctions           to verify a Rule 165a motion to reinstate. . . . And other courts
and must contain an explanation of the appropriateness of             have impliedly held that an affidavit can verify a motion to
the sanctions imposed.”                                               reinstate even though these courts found that the particular
                                                                      affidavit in question did not verify the motion . . . . No court
“Here, the trial court never considered or imposed lesser sanc-       has held that a motion to reinstate cannot be verified by
tions prior to striking [the defendant]’s pleadings. Although         affidavit,” and the court of appeals declined to do so here.
the trial court indicated at the hearing and in its order that
[the defendant]’s conduct had been an ongoing issue and that          “The two-page affidavit attached to the motion to reinstate
the trial court had given [the defendant] prior opportunities         [set] forth numerous facts regarding how the case had been
to provide proper discovery responses, there [were] no prior          prosecuted. Counsel did not swear in his affidavit that the
orders in the record; nor [was] there any discussion indicating       factual statements in the motion were true, but the motion
the consideration of lesser sanctions or an explanation of the        expressly incorporated his affidavit. By incorporation, the
appropriateness of the sanctions imposed in the absence of            motion itself contained sworn factual statements establishing
prior orders.”                                                        that [the appellant] exercised due diligence in prosecuting
                                                                      the suit.” Therefore, “[u]nder the unique facts of this case,”
“In particularly egregious cases, a trial court may order death       the court of appeals concluded that the appellant’s motion to
penalty sanctions without first testing lesser sanctions, but no      reinstate was verified and that the trial court therefore erred
evidence demonstrate[d] that this [was] such a case.”                 in concluding that it lacked jurisdiction to consider it.

MOTION TO REINSTATE                                                   JURY VERDICTS
Andrews v. Stanton, 198 S.W.3d 4, 7–9 (Tex. App.—El Paso              Fire Ins. Exchange v. Sullivan, 192 S.W.3d 99, 105–06 (Tex.
2006, no pet. h.) Texas Rule of Civil Procedure 165a(3)               App.—Houston [14th Dist.] 2006, pet. denied) “The trial
provides: “A motion to reinstate shall set forth the grounds          court’s judgment must conform to the pleadings, the nature
therefor and be verified by the movant or his attorney. . . .”        of the evidence, and the jury’s verdict. . . . A trial court may
Although the language of the rule requires the motion                 not enter a judgment notwithstanding the verdict or disregard
to verified, “it is silent as to the form of the verification.”       jury’s findings that are supported by the evidence, except
Nevertheless, the appellees argued that “if the Supreme Court         upon motion and notice.”
had intended to permit verification of a motion to reinstate
by affidavit it would have included the language ‘verified by         Here, although the jury attributed fifty-five percent of the
affidavit’ in the rule.”                                              cause of the mold damage to excluded perils, the trial court
                                                                      “awarded the plaintiffs the full amount of damages awarded
“Black’s Law Dictionary defines verification as ‘[a] formal           in the corresponding question, 2(a), apparently disregarding
declaration made in the presence of an authorized officer,            the jury’s finding in Question 3A.” The plaintiffs did not file
such as a notary public, by which one swears to the truth of          a motion asking the trial court to disregard that finding.
the statements in the document.’ . . . An affidavit is statutorily
defined as ‘a statement in writing of a fact or facts signed by       “If a trial court sua sponte disregards a finding, the court’s
the party making it, sworn to before an officer authorized            action may be upheld only where the disregarded finding
124                                                    ADVOCATE   ✯ WINTER 2006




                                                 THE
is immaterial. . . . Similarly, only when an issue is material        outside the jury,’ or ‘matters or statements not occurring during
must the judgment conform to the jury’s finding. . . A ques-          the course of the jury’s deliberations.’ . . . However, a juror ‘may
tion is immaterial when it should not have been submitted             not testify as to any matter or statement occurring during the
or, though properly submitted, it is rendered immaterial by           course of the jury’s deliberations or to the effect of anything
other findings.”                                                      upon his or any other juror’s mind or emotions . . .’”

The plaintiffs argued on appeal that “the trial court properly        “
                                                                      “An outside influence ‘must emanate from outside the jury and
disregarded Question 3A because it is immaterial in light of          its deliberations.’ . . . An outside influence does not include
the jury’s answer to Question 1-A, asserting the excluded             “information not in evidence, unknown to the jurors prior to
perils were covered under the policy by virtue of the ensuing         trial, acquired by a juror and communicated to one or more
loss provision or the exclusion repeal provision.” However,           other jurors between the time the jurors received their instruc-
the jury “expressly attributed only forty-five percent of the         tions from the court and the rendition of the verdict;’ nor does
cause of the mold damage to accidental discharge in Question          it include ‘[i]nformation gathered by a juror and introduced
3A.” Furthermore, “although ensuing loss was referenced in            to the other jurors by that juror, even if the information were
the breach question, the jury was not asked to allocate any           introduced specifically to prejudice the vote. . . .’”
percentage of the mold damage to an ensuing loss. Because
the ensuing loss provision is an exception to an exclusion,           Here, in support of their allegation of juror misconduct, the
it was up to the [the plaintiffs] to request that element be          appellants relied solely upon the affidavit of a juror, in which
included in the causation question.” Therefore, the court             he stated that “(1) during the trial of the case, he witnessed
of appeals could not conclude that “by simply finding a               some of the jurors reading newspapers, and (2) during delib-
breach, causation findings are then rendered immaterial.”             erations two jurors mentioned that they had read something
The plaintiffs “had the burden to prove their damages were            in the newspaper related to the case.”
attributable to a covered cause.”
                                                                      This affidavit “stating that other jurors discussed newspaper
The court of appeals also could not conclude “that Question           articles during deliberations was not evidence of any outside
3A should not have been submitted or was otherwise immate-            influence, but only described matters on the minds of other
rial.” The main focus of the parties’ dispute was “the cause          jurors during deliberations. The affidavit [was], therefore,
of the damages to the home and thus, the causation question           incompetent to serve as evidence of juror misconduct.” As
was a controlling issue.” The defendant “sought to establish          a result, the court of appeals concluded that the trial court
that at least some of the mold damages were due to excluded           did not abuse its discretion in determining that no juror
perils and presented evidence in support of its contentions.          misconduct took place.
The trial court must submit a jury question raised by the
evidence and pleadings.”                                              Luther H. Soules III is a shareholder with Langley & Banack, Inc.
                                                                      in San Antonio. Board-certified in Civil Trial and Civil Appellate
“The trial court’s judgment should have conformed to the              Law, he is a past chairman of the Texas Supreme Court Advisory
jury’s findings, including those in Question 3A. The trial court      Committee. He has authored books and numerous articles on
erred by awarding all of the damages found by the jury in             evidence and procedure, and has lectured extensively on these
Question 2(a), because in Question 3A not all of those dam-           topics for the State Bar, including the Litigation Update Series and
ages were found to be caused by covered perils.” Therefore,           the Advanced Civil Trial, Civil Appellate, Personal Injury, and
in keeping with the jury’s causation findings in answer to            Discovery Courses. He has also published law-journal articles and
Question 3A, the court of appeals held that the trial court           lectured frequently on evidence and civil procedure for law-school
should have reduced the plaintiffs’ potential recovery based          sponsored seminars.
on the jury’s answer to question 2(a).
                                                                      Robinson C. Ramsey is a shareholder with Langley & Banack, Inc.
JUROR MISCONDUCT                                                      in San Antonio. Board-certified in Civil Appellate Law, he has
          Surber
Brandt v. Surber, 194 S.W.3d 108, 133–34 (Tex. App.—Corpus
                                          –34
                                          –                           written and spoken on the topics of evidence and civil procedure
Christi 2006, pet. filed) In cases alleging juror misconduct, juror   for the Texas Bar Journal, the State Bar of Texas Litigation Update
testimony “is limited to ‘whether any outside influence was           Course, and the Advanced Civil Appellate, Civil Trial, and Expert
improperly brought to bear upon any juror.’. . . Under this rule,     Witness Courses, as well as the University of Houston Law Center
a juror may testify about ‘improper contacts with individuals         Evidence/Discovery and Litigation/Trial Tactics Series. ✯
125                                          ADVOCATE   ✯ WINTER 2006




                                       THE
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