As insurance markets continue to harden, Texas courts have started seeing an increase in insurance litigation, and this year is no exception. This article highlights a few of the key decisions issued this year that any insurance coverage attorney should know about when advising clients on new developments in Texas insurance law.
Key Texas Insurance Cases in 2019
Anadarko Petroleum Corp. v. Houston Casualty Co. This case arises out of the Deepwater Horizon claims. Pursuant to a joint venture agreement, Anadarko had a 25 percent ownership interest in the Deepwater Horizon drilling rig, with BP as co‑owner. Following the now infamous explosion of the rig in 2010 and the ensuing oil spill, Anadarko incurred over $100 million in legal fees and related expenses defending against numerous civil actions. Those actions included multidistrict litigation in the Eastern District of Louisiana, in which the court granted a declaratory judgment that Anadarko and BP were jointly and severally liable for their injuries. Anadarko and BP later reached a settlement in which Anadarko agreed to pay BP $4 billion and transfer to BP Anadarko’s 25 percent ownership stake in the rig, and BP agreed to release any claims against Anadarko and indemnify Anadarko against all other liabilities arising from the accident.
Before the accident, Anadarko had purchased an excess liability policy that provided coverage limited to $150 million per occurrence. Following the settlement with BP, the underwriters on the policy paid Anadarko $37.5 million based on Anadarko’s 25 percent ownership interest in the joint venture that owned the rig. Anadarko sued, claiming that the policy required the underwriters to pay all of Anadarko’s defense expenses, up to the $150 million limit. The underwriters responded by arguing that a provision of the policy capped the excess coverage for all “liability”—including coverage for defense costs—at Anadarko’s 25 percent ownership interest in the joint venture. The trial court agreed with the underwriters’ contention but nonetheless ruled in favor of Anadarko in finding that another policy term provided coverage up to the policy limit. The court of appeals reversed, concluding that the “liability” term capped defense costs and that no other provision extended coverage beyond Anadarko’s share of the joint venture’s liability.
The dispositive issue on appeal to the Supreme Court of Texas was whether the term “liability”—which the policy did not define—was inclusive or exclusive of defense expenses. Specifically, the clause stated that “‘the liability of Underwriters under this Section III shall be limited to $37.5 million’ [ . . . ,] [b]ut that phrase immediately follow[ed] an introductory phrase: ‘as regards any liability of [Anadarko] which is insured under this Section III. . . .’” Anadarko argued that the clause limited coverage only for Anadarko’s “liability” and that “liability” did not include Anadarko’s defense expenses.
The court consulted a range of sources to discern the intended meaning of “liability” in the policy, including dictionaries, uses of the term in other policy provisions, and broader insurance industry custom. Ultimately, the court held that the parties intended a narrow meaning of “liability” that excluded defense costs, due to policy provisions consistently distinguishing between liabilities and other expenses, even in provisions extending coverage to both. Thus, while Anadarko’s share of the joint venture’s liability remained just 25 percent, the court concluded that the policy also covered defense expenses, extending coverage to the $150 million policy limit.
Key takeaway: While no contract is perfectly drafted, this case emphasizes the importance of thoroughly defining key terms (if you’re an insurer) and provides support for policyholders seeking coverage for defense costs in addition to indemnification for liability arising from ownership interests in joint ventures.
Barbara Technologies v. State Farm Lloyds. Barbara Technologies contracted with State Farm for property insurance covering Barbara Tech’s commercial property in San Antonio. A wind and hail storm damaged the property on March 31, 2013, and Barbara Tech submitted a claim for coverage of repair costs on October 17, 2013. State Farm inspected the property about two weeks later and denied Barbara Tech’s claim on November 4, 2013, stating that the property sustained only $3,153.57 in damages, less than the $5,000 deductible. Barbara Tech requested a second inspection and State Farm obliged but found no additional damage. Barbara Tech sued on July 14, 2014, alleging a violation of the Texas Prompt Payment of Claims Act (TPPCA), among other claims. On January 9, 2015, State Farm invoked the policy’s appraisal provision, which allowed either party to demand an appraisal following a dispute over the amount of loss. On August 18, 2015, independent appraisers agreed to an appraisal value of $195,345.63. State Farm received the award on August 19, 2015, and then paid Barbara Tech $178,845.25—the appraisal value minus depreciation and the deductible—within one week. Barbara Tech filed a motion for summary judgment on its TPPCA claim, asserting that State Farm had violated the TPPCA by failing to pay the claim within the 60-day statutory time limit, entitling Barbara Tech to damages. The trial court denied Barbara Tech’s motion and granted summary judgment to State Farm. Barbara Tech appealed, arguing that its TPPCA claim survived State Farm’s invocation of the appraisal process and payment of the appraisal award. The court of appeals affirmed, holding that an insured could not sustain a TPPCA claim when the insurer undisputedly had paid the appraisal award.
The Supreme Court of Texas reversed, holding that the insurer’s payment based on the appraisal was neither an acknowledgment of liability under the policy nor an award of actual damages for purposes of determining whether the insurer complied with the TPPCA. The court interpreted Chapter 542 of the Texas Insurance Code in concluding that “[n]othing in the TPPCA would excuse an insurer from liability for TPPCA damages if it was liable under the terms of the policy but delayed payment beyond the applicable statutory deadline, regardless of use of the appraisal process.” Likewise, State Farm was also not strictly liable for failing to pay within 60 days of Barbara Tech’s claims: The appraisal award was not an adjudication of State Farm’s liability from the date of Barbara Tech’s policy claim; the award did not establish, as a matter of law, that State Farm was liable for the amount, or that the amount was “due and owing” to Barbara Tech, as of the date of Barbara Tech’s initial claim; finally, the appraisal award did not constitute an award of “actual damages” for purposes of awarding interest and fees under the statute. In sum, the appraisal process is a contractual remedy that neither subjects an insurer to, nor insulates it from, liability under the TPPCA. Because genuine issues of material fact remained regarding Barbara Tech’s entitlement to TPPCA prompt payment damages and the specific date from which the 60-day payment window under the TPPCA would be counted, the court remanded the case.
Key takeaway: An appraisal award governed by a policy provision is a contractual remedy, rather than an adjudication of liability or an award of damages; as such, an appraisal award neither subjects an insurer to, nor insulates it from, liability under the TPPCA.
Ortiz v. State Farm Lloyds.Ortiz had a homeowner’s policy with State Farm Lloyds, under which he submitted a claim for storm damage to his home. State Farm sent an adjuster, who estimated the damage to be $723.53, below the policy’s $1,000 deductible. In response, Ortiz provided an estimate from a public adjuster valuing Ortiz’s loss at $23,525.99. State Farm then conducted a second inspection with the public adjuster present and revised the damage estimate to $973.94. Ortiz sued for breach of contract, violation of the TPPCA, and statutory and common-law bad-faith insurance practices. State Farm filed a motion to compel appraisal, as required under the policy where the parties dispute the amount of loss, which the trial court granted. The appraisal award set the replacement cost at $9,447.52, with an actual cash value at $5,243.93, and State Farm paid Ortiz the award—minus the deductible—within seven days. State Farm then moved for summary judgment, arguing that its payment “resolves and disposes of all claims in this lawsuit.” The trial court granted the motion, the court of appeals affirmed, and the Texas Supreme Court granted Ortiz’s petition for review.
The issue on appeal was whether Ortiz could proceed with his claims following State Farm’s payment of the appraisal award. The Texas Supreme Court ultimately affirmed summary judgment for State Farm on Ortiz’s claims for breach of contract and bad-faith insurance practices, but reversed on Ortiz’s claim for violation of the TPPCA. Regarding the contract claim, the court concluded that the contractual nature of the appraisal process was significant; because State Farm invoked the agreed-upon procedure for determining a disputed amount of loss and promptly paid the binding amount, State Farm complied with its obligations under the policy and was entitled to summary judgment on Ortiz’s claim for breach. Likewise, because Ortiz’s breach of contract claim failed and the only “actual damages” he claimed were resolved by the paid appraisal amount, Ortiz’s bad-faith claims for actual damages and attorney fees failed under Chapter 541 of the Code, which requires that the claimant prevail on the underlying claim and recover damages in order to recover attorney fees. Finally, the court held—as in Barbara Technologies, discussed above—that an insurer’s payment of an appraisal award does not, as a matter of law, bar an insured’s claim under the TPPCA because the TPPCA imposes additional procedural requirements and deadlines that can be violated independently from an underlying breach-of-contract claim.
Key takeaway: An insurer’s compliance with an appraisal procedure defined in the policy—including prompt payment of the appraisal award—precludes insureds’ claims for breach of the policy and bad-faith insurance practices but not for TPPCA violations.
Spec’s Family Partners, Ltd. v. Hanover Insurance Co. Following two data breaches of Spec’s’ credit card payment system, First Data—the transaction service provider Spec’s used to process Visa or MasterCard transactions—demanded $9.5 million from Spec’s, alleging that Spec’s was “non-compliant with the Payment Card Industry Data Security (PCIDSS) requirements” and demanding that Spec’s upgrade its security systems. To satisfy its demand for reimbursement for damages caused by the breaches, First Data incrementally withheld an alleged $4.2 million from Spec’s’ daily payment card settlements and placed the funds into a reserve account. Spec’s never consented to this withholding, and First Data never filed suit or otherwise established its right to it. On April 8, 2014, Spec’s notified its insurer, Hanover Insurance, of First Data’s 2013 demand letter, and Hanover and Spec’s had a series of exchanges concerning Hanover’s duty to defend. Ultimately, Hanover and Spec’s entered into a Defense Funding Agreement (DFA) in which Hanover consented to the retention of defense counsel in litigation regarding the underlying claim. In December 2014, Spec’s initiated a lawsuit against First Data, and Hanover eventually refused to pay litigation expenses arising from this “affirmative” lawsuit.
Spec’s then filed a lawsuit against Hanover, asserting breaches of the Hanover policy and the DFA, while also seeking a declaratory judgment regarding Hanover’s duty to defend, damages under Chapter 542 of the Code, and attorney fees. Hanover moved for judgment on the pleadings, which the trial court granted, holding that First Data’s claim against Spec’s arose out of the contract between Spec’s and First Data and therefore fell within a policy exclusion. On appeal, the Fifth Circuit reversed, holding that First Data’s claims against Spec’s “implicate[d] theories of negligence and general contract law that imply Spec’s’ liability for the assessments separate and apart from any obligations ‘based upon, arising out of, or attributable to any actual or alleged liability under’ the Merchant Agreement.” Therefore, the Fifth Circuit concluded that the exclusion did not excuse Hanover from its duty to defend Spec’s against First Data’s claims.
On remand, Spec’s and Hanover filed cross-motions for partial summary judgment on the contested issue of Hanover’s liability on Spec’s’ claims. In granting in part and denying in part Spec’s’ motion, the court concluded that Hanover had a duty to defend that required it both to defend against claims made in First Data’s demand letter and to fund Spec’s’ lawsuit against First Data. The court held that even though Spec’s initiated litigation against First Data, that litigation was merely an “extension” of the claims made in First Data’s demand letter, rather than an independent claim by Spec’s. Specifically, the court held that Hanover’s duty to defend was triggered by Spec’s’ suit against First Data because costs from that offensive suit were still incurred in “defense of the contention of liability.” While the court acknowledged that it was unusual for an insured to file such a suit, the unique ability of First Data to withhold funds from Spec’s without first adjudicating Spec’s’ liability necessitated the lawsuit by Spec’s to recover withheld funds. Thus, Hanover was required to pay Spec’s’ fees as part of its duty to defend, and no exclusion applied because that duty was triggered by First Data’s demand letter to Spec’s. Having established Hanover’s duty to defend Spec’s in the parallel litigation against First Data, the court denied both parties’ motions on Spec’s’ remaining claims against Hanover.
Key takeaway: A lawsuit initiated by an insured against a third party can still qualify as being in “defense of the contention of liability,” thereby triggering the insurer’s duty to defend, including the duty to fund the insured’s lawsuit against the third party.
ADI Worldlink, LLC v. RSUI Indemnity Co. This case involved the defendant-insurer RSUI Indemnity Company’s denial of plaintiff-insured ADI Worldlink’s claims under a directors’ and officers’ (D&O) liability policy. The trial court held that ADI had learned of a related claim while the previous year’s policy was in effect and that the first policy was the one to cover all related claims. The trial court also held that RSUI had properly denied all of ADI’s claims for reimbursement because ADI had failed to give timely notice of the initial claim, even though ADI’s notice of later related claims was timely. ADI appealed, arguing that the later claims were not related to the initial claim and that all claims therefore had been timely noticed and were covered.
Applying Texas law, the Fifth Circuit affirmed the trial court’s grant of summary judgment for RSUI. As an initial matter, the court concluded that a Texas intermediate appellate court opinion in another case—Gastar Exploration Ltd. v. U.S. Specialty Insurance Co.—was controlling. The Gastar court had resolved a similar issue by construing a conflict between interrelatedness provisions in two identical sequential policies and an endorsement in favor of coverage. As the trial court and the Fifth Circuit in ADI agreed, there was no similar conflict in the RSUI policies, with the latter policy containing an exclusion that “[t]he Insurer shall not be liable [for any claim made against any insured arising out of] any litigation involving any Insured that was commenced or initiated prior to, or pending as of [the commencement date of the latter policy’s policy period], or arising out of or based upon, in whole or in part, any facts or circumstances underlying or alleged in any such prior or pending litigation.” The court summarized it as follows:
The Gastar court relied on an inconsistency in two provisions. That inconsistency is not in play here. Instead, we have the operation of several provisions that must be read in sequence. The final step in the sequence, a step never discussed in Gastar, convinces us there is no coverage because notice of the claim under the controlling policy for these related claims was not timely given.
Key takeaway: An insurer can be justified in denying coverage for all related claims under a D&O policy where an insured fails to give timely notice of an initial claim received during a prior policy period, even if the insured gives timely notice of related claims received after the commencement date of the renewed policy.
State Farm Lloyds v. Richards. In the summer of 2017, a 10-year-old boy died in an all-terrain vehicle accident at his grandparents’ (the Richardses’) house. The boy’s mother sued the Richardses, and the Richardses requested that their insurer, State Farm, defend and indemnify them. State Farm refused and sought a declaratory judgment that it had no duty to defend or indemnify. Specifically, State Farm argued that two exclusions barred coverage: (1) the “motor-vehicle exclusion” exempting from coverage bodily injury arising from use of a motor vehicle, including an “all-terrain vehicle . . . owned by an insured and designed or used for recreational or utility purposes off public roads, while off an insured location”; and (2) the “insured exclusion” exempting from coverage bodily injury to any “insured,” defined to include “you and, if residents of your household: a. your relatives; and b. any other person under the age of 21 who is in the care of a person described above.” The Richardses argued in their summary judgment motion that, under Texas’s “eight-corners rule,” State Farm could not rely on extrinsic evidence to prove application of an exclusion. The district court disagreed, finding that it could consider State Farm’s extrinsic evidence and that that evidence was sufficient to prove that both exclusions applied. The court therefore granted summary judgment for State Farm.
The issue in the Fifth Circuit was whether, under Texas law, an exception to the eight corners rule applied, allowing State Farm to rely on extrinsic evidence to prove that exclusions precluded any duty to defend. The eight corners rule has been consistently applied under Texas law; it generally limits determination of an insurer’s duty to defend to two documents: the claims alleged in the petition and the coverage provided in the policy. Under the rule, the duty to defend is triggered if the petition states any claim that could potentially be within the coverage of the policy.
But many courts also apply extrinsic evidence exceptions “when it is initially impossible to discern whether coverage is potentially implicated and when the extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case.” Thus, the district court had cited a case applying such an exception to find that State Farm’s duty to defend under the policy at issue “arises only if suit is brought to which the coverage applies[,]” and that application of the exclusions could be proven by extrinsic evidence—including admissions from the Richardses that the accident occurred off an insured location and that the crash victim resided in their household.
After conducting a review of Texas case law, the Fifth Circuit found that the Texas Supreme Court had never determined whether the two-pronged exception to the eight corners rule quoted above applies under Texas law. The court therefore certified the following question to the Texas Supreme Court, noting that this issue will likely continue to be the subject of insurance litigation throughout the Fifth Circuit: “Is the policy-language exception to the eight-corners rule articulated in B. Hall Contracting Inc. v. Evanston Ins. Co., 447 F. Supp. 2d 634 (N.D. Tex. 2006), a permissible exception under Texas law?”
Key takeaway: The Texas Supreme Court has now been tasked with answering the long‑unanswered question of whether an exception to the eight corners rule applies in cases in which extrinsic evidence is used solely to establish a fundamental issue of coverage that does not overlap with the merits of the underlying case. The Texas Supreme Court accepted the certified question on September 13, 2019, and oral arguments are scheduled for January 8, 2020.
With the 2019 increase in coverage litigation addressing issues such as the interpretation of undefined policy terms like “liability,” the application of notice provisions, the admissibility of extrinsic evidence to assess insurer duties, and the ability to recover under the Texas Insurance Code, insurance attorneys should be aware of the cases discussed above and keep a close eye on their progeny so as to be able to properly advise their clients.
 Emily Buchanan is an insurance recovery associate at Haynes and Boone, LLP, in Dallas, Texas.
 Wes Dutton is a litigation associate at Haynes and Boone, LLP, in Dallas, Texas.
 Anadarko Petroleum Corp. v. Houston Cas. Co., 573 S.W.3d 187 (Tex. 2019), reh’g denied (May 31, 2019).
 Anadarko Petroleum Corp., 573 S.W.3d at 192 (quoting policy language).
 Anadarko Petroleum Corp., 573 S.W.3d at 192–96 (“We have found no policy provision that implies, indicates, or suggests that a reference to a ‘liability . . . insured’ includes expenses Anadarko itself incurs responding to or defending a ‘Claim.’”).
 See Tex. Ins. Code 542.055(a)(1)–(3), .056(a), .058(a), .060.
 Barbara Techs. Corp. v. State Farm Lloyds, 566 S.W.3d 294, 297 (Tex. App.—San Antonio 2017), rev’d, No. 17-0640 (Tex. June 28, 2019).
 ADI Worldlink, 932 F.3d at 371–73 (citing Gastar Expl. Ltd. v. U.S. Specialty Ins. Co., 412 S.W.3d 577 (Tex. App.—Houston [14th Dist.] 2013, petition denied)).
 State Farm Lloyds v. Richards, No. 18-10721, 2019 U.S. App. LEXIS 27221, at *1 (5th Cir. Sept. 9, 2019), certified question accepted (Sept. 13, 2019).
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