The Supreme Court of Texas ruled that a commercial insured’s legal expenses are not covered “damages” within the meaning of an excess liability policy. The case is Ohio Cas. Ins. Co. v. Patterson-Uti Energy, Inc., Marsh USA, Inc., 703 S.W.3d 790 (Tex. 2024).
The Underlying Claim
Patterson-Uti Energy, Inc. (Patterson) was a company performing oil and gas operations in Texas. Each year, the company’s insurance broker, Marsh USA, Inc. (Marsh) helped create “an insurance tower,” constructed of a variety of general and excess liability policies to cover the risk of bodily injury to those working on the rigs. One day, an incident at one of Patterson’s rigs spawned multiple lawsuits against the company. The ensuing litigation costs and settlements exhausted Patterson’s first-level priority policies, triggering the obligations of the excess insurers, including Ohio Casualty Insurance.
Ohio Casualty indemnified Patterson for parts of the different settlements but denied coverage for defense-related costs. This denial prompted Patterson to file suit against Ohio Casualty for breach and violations of the Texas Insurance Code. Alternatively, Patterson claimed Marsh had been negligent for procuring a policy that did not cover defense expenses.
Each party moved for summary judgment in its favor. The trial court determined that Ohio Casualty was obligated to pay the requested defense costs because its “policy did not clearly and unambiguously exclude coverage for defense costs provided by the underlying primary policy.” This verdict was affirmed upon appeal. According to the appellate court, Ohio Casualty’s excess policy “[was] a ‘follow form’ policy that [did] not unambiguously exclude defense expenses.” Ohio Casualty appealed to the Supreme Court of Texas.
Contours of a “Follow Form” Policy
Patterson pointed to the underlying policy from Liberty Mutual, which stated that an “ultimate net loss” meant “the amount [Patterson] is obligated to pay, by judgement or settlement, as damages resulting from an ‘Occurrence’ to which this Policy applies, including the service of suit, institution of arbitration proceedings and all 'Defence Expenses' in respect of such ‘Occurrence’” (alternate spelling original). The “Defence Expenses” specifically included “defence and appeal costs and expenses.” Since these expenses were considered part of the “ultimate net loss” in the underlying policy, argued Patterson, the excess policy also considered “Defence Expenses” because it was a “follow form” policy.
Under RSUI Indem. Co. v. Lynd Co., 466 S.W.3d 113 (Tex. 2015), the Supreme Court of Texas had held that “a follow-form excess policy will implicate the underlying policy” (emphasis added). The trial and appellate courts had applied this precedent to the case at bar in “all-or-nothing” terms. Even though the Liberty Mutual policy did not define “damages,” the court noted that the policy’s definition of “ultimate net loss” specifically referred to “defence expenses” as within the scope of the policy. Since the Ohio Casualty policy was a “follow form” policy, it had to follow the entire form of the underlying policy from Liberty Mutual, including the treatment of legal expenses as damages.
The justices said the attachment of the Ohio Casualty policy to the underlying policy was not such a cut-and-dried issue. Though the trial and appellate courts weren’t necessarily incorrect in determining Ohio Casualty had issued a “follow form” policy, the coverage it provided was more nuanced. Instead of analyzing the excess policy in terms of the underlying policy, the appellate court should have analyzed the underlying policy in terms of the excess policy.
Defining “Loss” and “Damages”
The Supreme Court of Texas began its analysis with an examination of the excess policy. The coverage agreement in the Ohio Casualty policy stated that the insurer would cover “the amount of ‘loss’ covered by this insurance in excess of the ‘Underlying Limits of Insurance[.]’ . . .” (emphasis added). Therefore, Patterson’s legal expenses would have to be considered a “loss” in order to come within the scope of the excess policy’s coverage.
Further down, the justices noted that the insuring agreement also stated that “except for the terms, conditions, definitions and exclusions of this [excess] policy, the coverage provided by this policy will follow the [underlying policy]” (emphasis added). The highlighted text indicated that the excess policy defined some terms differently than the underlying policy. One such term was “loss.” Rather than incorporate the underlying policy definition of “ultimate net loss,” the excess policy stated that a “loss” referred to “those sums actually paid in the settlement or satisfaction of a claim which [Patterson is] legally obligated to pay as damages…” (emphasis added).
This definition indicated that the excess policy contemplated a much narrower scope of coverage than the underlying policy. The excess policy agreed to cover only those damages that Patterson had a legal duty to pay “in the settlement or satisfaction of a claim” (emphasis added).
Ohio Casualty did not dispute coverage for the sum of the settlements Patterson had negotiated with the underlying plaintiffs, agreeing the payments qualified as damages within the meaning of the excess policy. Patterson’s legal expenses, however, were not damages and therefore were not covered. Patterson, on the other hand, argued that “the excess policy is bound by the underlying policy's coverage choice unless the excess policy repudiates that choice rather than simply providing a different kind of coverage” (emphasis original). The excess policy did not “repudiate” the underlying policy, so the expenses should be covered.
The justices were skeptical of Patterson’s argument. In two earlier cases, In re Nalle Plastics Fam. Ltd. P'ship, 406 S.W.3d 168 (Tex. 2013) and In re Corral-Lerma, 451 S.W.3d 385 (Tex. 2014), the Supreme Court of Texas had determined that “a party's own attorney's fees ‘are not, and have never been, damages.’” But the justices did acknowledge that, if a policy gave a different definition to a term–i.e. defining “damages” to include attorney’s fees–the court would enforce that definition. However, neither the underlying nor the excess policy gave a special meaning to the term “damages,” so the justices applied “the usual definition” to the situation, which did not expand to include a party’s attorney’s fees. Therefore, Patterson’s legal expenses were not considered “damages” within the meaning of the excess policy.
Conclusion
Since Patterson’s legal expenses in the underlying suits were not damages, they could not be considered a “loss” under the Ohio Casualty excess policy. The ruling in favor of Patterson was reversed, and judgment was entered in favor of Ohio Casualty.
Editor’s Note: Excess policies must attach to an underlying policy and therefore cannot stand on their own. However, as this case shows, that doesn’t mean an excess policy is simply an extension of the underlying policy. An excess policy could adopt all of the same definitions used in the underlying policy. Had the excess policy at issue in this case done so, the justices may have made a different decision. By assigning a specific meaning to the term “loss,” Ohio Casualty specifically limited its scope of coverage to damages Patterson was legally obligated to pay in order to settle or otherwise satisfy a claim.
Read More: