Recent Texas Appellate Rulings Affect Insurance Coverage, Contractual Agreements, Reimbursement Claims At The State And Federal Level

Thursday, May 1, 2008 - 01:00
Kevin J. Keith

Editor: What are the current trends or areas of interest and activity in Texas civil appellate law?

Keith: A few notable areas of interest to civil appellate lawyers in Texas include the apparent decrease in state appellate courts permitting oral argument, the increasing length of time it takes for a growing number of cases to make their way through the Texas Supreme Court, and significant changes in Texas insurance law.

Editor: Can you describe your responsibilities as head of the firm's Appellate Section?

Keith: I am responsible for handling every aspect of all state and federal court appeals for the firm as well as providing litigation support services. The litigation support duties cover a wide range of assignments, including substantive motion practice - particularly summary judgment practice and discovery matters which could give rise to a mandamus petition. At the trial stage I can assist trial counsel by handling the preparation and argument of the jury charge, preparing trial briefs on important evidentiary issues and attending trial to handle preservation of error issues as they arise. Post-verdict duties can include asserting or defending motions for judgment notwithstanding the verdict, for new trial, preparation of the judgment and providing counsel regarding superseding the judgment.

Editor: What are the most notable recent changes in insurance law in Texas?

Keith: The Texas Supreme Court has issued several notable decisions in favor of policyholders during the last year. For example, the Texas Courts of Appeals had been widely split on whether the prompt-payment statute applied when an insurer failed to provide a defense to a policyholder. The Texas Supreme Court resolved this split in Lamar Homes, Inc. v. Mid-Continent Casualty Company. The Court held that the insured's right to recover defense costs is a first-party claim subject to the requirements of the prompt-payment statute and its 18 percent penalty and right to attorneys' fees.

In Excess Underwriters at Lloyd's London v. Frank's Casing Crew & Rental Tools , the Texas Supreme Court rejected an insurer's claim for reimbursement of a settlement payment it had made on behalf of its insured with respect to an uncovered claim. The Court originally issued an opinion on May 27, 2005 in favor of the insurer's right to reimbursement, but subsequently granted Frank's Casing a Motion for Rehearing, withdrew its previous opinion and issued its new opinion affirming the judgment of the 14th Court of Appeals rejecting any right of reimbursement under the policy.

The insurer argued that it had an equitable right to reimbursement because the insured took an active role in procuring the settlement offer, in demanding that the insurer settle the claim and also participated in the drafting and negotiation of the settlement agreement. However, in rejecting these arguments the Court declared that to recognize an equitable right to reimbursement would require the Court to rewrite the parties' insurance contract, which did not provide for a right of reimbursement in favor of the insurer.

A related issue is whether an insurer can recoup defense costs for defending an uncovered claim. In Madagorda County v. Texas Association of Counties Government Risk Management Pool, the Court of Appeals held that the insured had not reserved the right to recoup defense costs and the insurer did not appeal this ruling to the Supreme Court. Subsequently, applying what it believed to be Texas law, a federal Court held that an insurer can recoup defense costs under quantum meruit in its ruling in St. Paul Fire and Marine Insurance Company v. Compaq Computer Corp. However, given the Texas Supreme Court's rejection of the equitable quantum meruit theory for reimbursement of a settlement payment in Frank's Casing, it appears that unless the insurer has a contractual right to reimbursement of defense costs, it probably does not have a right to reimbursement.

Editor: Based on these significant rulings in property and casualty coverage cases, how is the insurance marketplace responding?

Keith: I am unaware of any broad-based changes insurers have made in response to the Lamar Homes prompt payment decision. Presumably it will result in insurers providing a defense to the insured under reservation of rights or seeking a declaratory judgment of no coverage more often than they have in the past.

I think that the response of the insurance industry to Frank's Casing and Matagorda County in the near term will be to avoid making any settlement payments or providing the cost of defense on behalf of any insured for what it believes is an uncovered claim. Again, this should result in a more frequent use of the Declaratory Judgment Act with respect to the duty to defend and duty to indemnify which remedies are available under both state and federal practice. In addition, an insurer should attempt to contract with its insured reserving its right to be reimbursed for any settlement payment or defense costs it expends on behalf of the insured for an uncovered claim. Absent a contractual right to reimbursement of such a settlement payment or defense costs, the insurer properly makes such payments without a right of reimbursement.

Editor: What is happening with respect to appellate oral argument and the length of time to decide an appeal?

Keith : Rule 39.8 T.R.A.P. empowers the Texas Courts of Appeals to decide a case without oral argument if it believes that argument would not significantly aid the Court in determining the legal and factual issues presented in the appeal. While this Rule has been in effect for many years, until recently, if a party filed a brief and timely requested oral argument, it could expect to be allowed to present oral argument.

In the last few years we have seen a trend of Courts of Appeals deciding an increasing number of cases without the benefit of oral argument. Depending on local rules, an entire oral argument can last between 35 minutes and 75 minutes. While this amounts to a substantial allocation of the Courts' time when you consider the number of cases that request oral argument, I think that it is time well spent because it provides a party the opportunity to emphasize and possibly clarify vital aspects of the case and provides both parties with the sense that they "had their day in Court" and participated in a fair judicial process. Although in recent years we observed a marked increase in the denial of oral argument requests, it appears that the Courts of Appeals are listening to the practicing bar and permitting oral argument with more frequency.

A more alarming problem is the increasing length of time for some cases to make their way through the Texas Supreme Court. Clients always want to know how long an appeal will take because it can impact their business decisions, the settlement value of a case and their litigation costs.

Despite the fact that petition for review filings in the Texas Supreme Court for each of the past four years has decreased about 20 percent from what had been the norm, the length of time for cases to be decided has increased. Currently, it takes about six months for a decision to accept or deny a petition for review, which is about a month longer than it took three years ago. The issuance of opinions takes substantially longer. During the September 2006-2007 term, the average time from initial filing to issuance of an opinion in an argued case was about two and one-half years, ranging from a low of 16 months to a high of 47 months.

Furthermore, each year a number of cases are ordered to full briefing on the merits, but instead of being voted up or down, they simply remain pending on the Court's docket for extensive periods of time without action. As of July 31, 2007, 63 cases fit this category and include some cases which have been on the Texas Supreme Court's docket since 2003. Having cases disappear for two years or more without any action causes uncertainty and costs for the parties in interest, but also affects other upstream litigation in which the same or similar issues are presented.

Editor: There seems to be increased public attention and negative media coverage of this perceived backlog in the Court. Is this criticism just part of the election year cycle or is it pressure that is likely to spur any procedural changes on the part of the Court?

Keith: There does seem to be increased media coverage of the Texas Supreme Court's perceived docket backlog. In response to this criticism, the Court's public relations officer recently held a press conference to contend that the Court's docket is not backlogged and that it is doing its work as it has in the past. I do not believe that the current criticism of the Court has anything to do with the election year cycle because election of members of the Court is staggered and this perceived backlog has been noticed and commented upon for several years. Given the Supreme Court's public response, I do not anticipate any formal procedural changes with the Court, however, I would expect the Court to be more sensitive to deciding cases in the future where the petition has been pending for more than 12 months or the case is still pending 24 months after oral argument.

Editor: Can you outline some of the more compelling or significant cases that may be pending in the state appellate courts?

Keith: Two significant insurance law cases pending before the Texas Supreme Court are Don's Building Supply, Inc. v. OneBeacon Ins. Co., (No. 07-0639) and Pine Oak Builders, Inc. v. Great American Lloyds Ins. Co., (No. 06-0867). The petitions for review were granted in these cases on August 24, 2007 and August 31, 2007, respectively and they are likely to be decided together. At the core of each case is the question of what the correct rule should be for determining when property damage occurs for purposes of an occurrence-based liability policy. The Dallas, San Antonio and Austin Courts of Appeals have adopted the "manifestation rule" in holding that property damage occurs at the time the damage manifests, which they further define as when the damage becomes apparent or identifiable. In contrast, the Houston Courts of Appeals have rejected the manifestation rule in favor of the "exposure rule" for injuries "caused by continuous or repeated exposure to conditions during a policy period." These two opposing views are squarely presented to the Texas Supreme Court for determination in the Don's Building Supply and Pine Oak Builders cases and their outcome will significantly impact coverage in property damage cases.

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