July 5, 2005The newsletter this month reviews four recent decisions rendered by the Texas Supreme Court. The Court's opinion in Excess Underwriters at Lloyd's v. Frank's Casing Crew & Rental Tools, Inc. establishes the right of an insurance company to seek reimbursement from its insured for payment of non-covered claims. The decision in Humble Healthcare Center establishes the procedures that need to be followed to compel arbitration of a personal injury claim under the Federal Arbitration Act. The opinions in both Romero v. KPH Consolidation and General Motors Corporation v. Iracheta are important in that they show the strict review (and ultimate reversal) by the Supreme Court of personal injury cases that result in significant judgments. I. AN INSURANCE COMPANY IS ENTITLED TO REIMBURSEMENT FROM ITS INSURED FOR SETTLEMENT FUNDS PAID TO A THIRD PARTY FOR THE SETTLEMENT OF CLAIMS NOT COVERED UNDER THE POLICY OF INSURANCE The Supreme Court in Excess Underwriter's at Lloyd's, et al v. Frank's Casing Crew & Rental Tools, Inc. (decided May 27, 2005), changed the existing law on the right of an insurance company to seek reimbursement from its insured for payment of uncovered claims.
Frank's Casing Crew & Rental Tools, Inc. built a drilling platform for ARCO. The platform was installed in the Gulf of Mexico and unfortunately collapsed several months later. ARCO sued Frank's Casing for the collapsed platform. Frank's Casing had insurance and an excess insurance policy with Excess Underwriters at Lloyd's London (Excess Underwriters). During the course of the litigation ARCO attempted settlement with Frank's Casing which ultimately demanded that Excess Underwriters settle the case. Eventually Frank's Casing sent a Stowers demand to Excess Underwriters demanding that it settle ARCO's claims within Frank's policy of insurance. Excess Underwriters had been defending Frank's Casing under a reservation of rights claiming that certain of ARCO's claims were not covered under the policy of insurance. There were attempts by Excess Underwriters to have Frank's Casing contribute to the settlement, but Frank's Casing would not contribute to the settlement. Nonetheless, during the trial of the case, Excess Underwriters settled ARCO's claims against Frank's Casing for $7.5 million. Frank's Casing did not contribute to this settlement. Excess Underwriters then brought suit against Frank's Casing for reimbursement of approximately $7 million as Excess Underwriters claimed that the settlement was for claims clearly not covered under Frank's Casing's policy of insurance. While the reimbursement claim was pending in the trial court, the Texas Supreme Court issued its decision in Texas Association of Counties Government Risk Management Pool v. Matagorda County. In the Matagorda County case, the Texas Supreme Court found that the insurer was not entitled to a right of reimbursement for settlement monies paid for uncovered claims. The Court noted that there was no equitable right to reimbursement in the Matagorda County case because the county had not agreed to the settlement. As a result, in this case, the trial court found against Excess Underwriters on its claim for reimbursement. The inevitable appeal to the Supreme Court then followed.
In reaching its decision in favor of reimbursement for Excess Underwriters, the Supreme Court distinguished Matagorda County in two respects. First, Frank's Casing had, by and through the Stowers demand to Excess Underwriters, admitted that the settlement demand made by ARCO was reasonable. The Court noted that under Stowers a reasonable settlement demand would be one that an insured would pay even if it did not have any insurance. Additionally, Frank's Casing had agreed to the settlement with ARCO. Consequently, the Court found that by agreeing to the settlement with ARCO, Frank's Casing acknowledged that Excess Underwriters would essentially have an equitable right and/or a contractual right to reimbursement for payments of claims not covered under its policy of insurance. The Court noted that an insurer has a right to be reimbursed if it has timely asserted its reservation of rights, notified the insured that it intends to seek reimbursement, and paid to settle claims that were not covered. The actions of Frank's Casing in (1) demanding that its insurance company settle the claims within the Stowers demand (thereby admitting that the settlement demand was reasonable); and (2) subsequently agreeing to the settlement (after being notified that the insurance company was intending to seek rights of reimbursement) made it liable to the insurance company for reimbursement of settlement monies paid on its behalf. The Court found in favor of the insurance company's right to reimbursement for settling claims that were not covered under the policy of insurance.
The Supreme Court finds that an insurance company will be able to seek a right of reimbursement from an insured when it settles claims not covered under the policy of insurance. However, this right to reimbursement is only triggered when the insurance company has issued a timely reservation of rights letter and has notified the insured of its intent to seek reimbursement. The insured must also acknowledge that any settlement demands are reasonable by issuing a Stowers demand, thereby showing that the insured has agreed to the settlement. As a practical matter an insured should retain separate counsel in order to advise it as to its potential obligation to reimburse an insurance company for settlement of non-covered claims. II. PERSONAL INJURY CLAIMS ARE SUBJECT TO ARBITRATION UNDER THE FEDERAL ARBITRATION ACT IF A WRITTEN ARBITRATION AGREEMENT EXISTS AND THE EVENTS GIVING RISE TO THE CLAIM AFFECT INTERSTATE COMMERCE The Court held that a defendant can compel a plaintiff to arbitrate a personal injury claim if (1) there is a written arbitration agreement between the parties; and (2) the transaction between the parties affects interstate commerce. In Re Nexion Health At Humble, Inc. d/b/a Humble Healthcare Center (decided May 27, 2005). The Court found that if these conditions are met then the provisions of the Federal Arbitration Act preempt the provision of the Texas Arbitration Act requiring that a party's attorney sign an arbitration agreement in order to compel arbitration in a personal injury claim.
This claim arises out of a wrongful death case brought against Humble Healthcare Center by the wife of the decedent, John D. Lyman. In April 2003, Mr. Lyman was admitted to Humble Healthcare Center (HHC). Ms. Lyman signed an arbitration agreement with HHC when her husband was admitted to the hospital. Mr. Lyman died while a patient at Humble Healthcare Center. Ms. Lyman brought suit against HHC who then filed a motion to compel arbitration which was denied by the trial court.
The Court first noted that a party attempting to preempt the TAA by the FAA must show (1) the arbitration agreement is in writing; (2) the arbitration agreement involves interstate commerce; (3) the arbitration agreement can withstand scrutiny under traditional contract defenses; and (4) state law affects the enforceability of the agreement. In this case, the contract was definitely in writing and was enforceable. As a result, the only issues that needed be proven in order to compel arbitration under the FAA were that the contract involved interstate commerce and that Texas law affected the enforceability of the agreement. The Court noted that the FAA "extends to any contract affecting commerce, as far as the commerce clause of the United States Constitution will reach." The Court found that payment of Medicare benefits to HHC on behalf of Mr. Lyman was sufficient to show that Mr. Lyman's hospitalization affected interstate commerce to invoke the provisions of the FAA. The final issue to be decided by the Court was whether state law affected the enforceability of the agreement. The plaintiff resisted arbitration contending that the TAA prohibited arbitration in a personal injury action unless a party's attorney had signed the arbitration agreement. The Court found that this provision of the TAA affected the enforceability of the arbitration agreement. Therefore, the FAA provisions preempted the state law provisions allowing arbitration of a personal injury action to proceed.
The Court's decision in Humble Healthcare Center allows defendants to insert an arbitration provision in contractual documents so that a personal injury action between the parties is potentially subject to arbitration. As a result of the Humble Healthcare Center decision workers for a subcontractor can be compelled to sign an arbitration agreement that could result in a general contractor compelling arbitration in a suit brought by the subcontractor's employees. The possibilities of arbitration proceedings in all types of relationships are now endless. III. CONFLICTING TESTIMONY OF THE PLAINTIFF'S EXPERTS IS NOT SUFFICIENT EVIDENCE OF A PRODUCT DEFECT In General Motors Corporation v. Rita L. Iracheta (decided April 8, 2005), the Supreme Court announced that it was not going to tolerate multimillion dollar verdicts for the plaintiff without clear expert testimony to support the verdict.
The facts of this case are particularly egregious from the standpoint of the facts of the accident, the manner of death of the decedents, and the conflict in testimony of the plaintiff's experts in attempting to establish liability against General Motors. Three people were killed in the accident that was the subject of this suit. The accident was caused by Silvadria Iracheta when she drove her 1988 General Motors Oldsmobile Toronado into the oncoming lane of traffic and hit an 18-wheeler. The accident occurred near Laredo, Texas. As a result of the impact the 18-wheeler rolled over the car, ripping off the hood and roof of the Toronado. The fuel system to the 18-wheeler was ruptured in the collision. Diesel fuel was then "splattered" over both the Toronado driven by Ms. Iracheta and the 18-wheeler. Both vehicles then exploded in flames. The testimony established that Ms. Iracheta died instantly in the collision. Ms. Iracheta's four-year old son, David, was also, in all probability, killed instantly. Ms. Iracheta's nine-year old son, Edgar, was belted in the passenger seat and survived the initial collision and diesel fire. However, after the Toronado came to rest and while Edgar was still conscious in the passenger seat, a second fire erupted approximately ten minutes after the collision. The second fire was fueled by gasoline from the car. Bystanders were unable to extricate Edgar from the vehicle before the second fire erupted. As a result, Edgar burned to death in the second fire fueled by gasoline from the car. The Supreme Court first pointed out in its opinion that suit was brought by the grandmother of David and Edgar as the father of the two boys could not be found to bring a wrongful death action. Despite the fact that Ms. Iracheta caused this accident by veering into the oncoming lane the jury did not assess any negligence against her. The jury refused to find any liability against any of the parties who caused David's death; however, the jury found that a design defect in the car allowed gasoline to escape from the fuel system which resulted in the second fire causing Edgar's death. The jury awarded $10 million for Edgar's pain and anguish prior to his death. The plaintiff presented two expert witnesses. The first expert witness, Eduardo Sanchez, was designated as an expert to testify on the cause and origin of the fires resulting from the collision. Mr. Sanchez admitted that he was not an expert in determining whether the car's fuel system could leak. The plaintiff's second expert, John Stilson, provided expert testimony on reconstruction of the accident. Mr. Stilson was a mechanical engineer who also testified as to the probable source of the leak in the fuel tank causing the second fire that allegedly resulted in Edgar's death.
The evidence in the case indicated that after the Iracheta vehicle came to rest approximately ten minutes elapsed from the time of the collision to the time leaking gasoline from the rear of the Toronado ignited. In order to prove liability against General Motors, the plaintiff needed to establish through expert testimony that the rupture in the fuel line occurred at the rear of the Toronado which is what all eye witnesses stated was the source of the second ignition fire. The problem with the testimony at trial was that the plaintiff's expert for the fuel line system, John Stilson, testified that gasoline leaked at the fuel line near the front of the engine and did not leak at the fuel line near the rear of the vehicle. In order to attempt to get around the devastating testimony of the plaintiff's own expert that gasoline did not leak from the rear of the vehicle the attorneys for the plaintiff attempted to have the cause and origin expert, Eduardo Sanchez, testify that the leak occurred at the rear of the car. Sanchez testified at trial that the leak occurred at the rear of the car even though he had conceded in the discovery process that the determination whether the fuel system could leak was not within his scope of expertise. The Supreme Court held that Mr. Sanchez's testimony was not competent evidence and therefore reversed the judgment. The Court further held that the plaintiff could not "mix and match" the testimony of Mr. Stilson and Mr. Sanchez in an attempt to support the verdict rendered in the case:
The Supreme Court also found that the actions of the plaintiff's counsel during final summation to the jury was improper. Ms. Iracheta's counsel advised the jury, prior to starting his final argument, that "Ms. Iracheta has asked for the opportunity simply to stand and thank you for your time as well." Ms. Iracheta then immediately stood and, speaking in Spanish, stated to the jury, "Thank you very much to the jury on the part of my grandchildren and my daughter and on my part." General Motors moved for a mistrial which was denied. The Supreme Court held that the conduct of the plaintiff's attorney and the plaintiff in addressing the jury in this manner was improper. The Court found that:
The Court's opinion in Iracheta is important to show that the current Texas Supreme Court will reverse an unsupported plaintiff's verdict. The Supreme Court in the Iracheta case did not establish any new rules of law but did establish the principle that the Court will strictly review the facts in a case to determine if the jury has sufficient evidence on which to award a significant verdict. IV. THE PLAINTIFF MUST PRODUCE SEPARATE PROOF ON EACH OF HIS LIABILTY CLAIMS TO SUPPORT A VERDICT In Romero v. KPH Consolidation (decided May 27, 2005), a hospital was sued for malicious credentialing of a surgeon and negligence in delivering blood to a patient who suffered severe brain damage after significant blood loss during an operation. The Supreme Court reversed a judgment that had been rendered for the plaintiff for approximately $11.4 million and remanded the case for a new trial.
This was an action against a hospital for negligently delaying a blood transfusion for the plaintiff while he was in surgery. The hospital was also sued for malicious credentialing of the surgeon. Dr. Merrimon Baker applied to Columbia Kingwood Medical Center in February 1993 for privileges to practice as an orthopedic surgeon. Dr. Baker's application was considered by Columbia's Peer Review Committee and the Medical Executive Committee. These committees were comprised of doctors on Columbia's staff whose responsibility was to determine the qualifications and performance of all physicians permitted to practice at Columbia. During the subsequent litigation, Columbia asserted the peer review privilege preventing the deliberations of the committee in granting privileges to Dr. Baker from being disclosed in discovery or introduced into evidence. It was nevertheless readily apparent in the testimony at trial that Dr. Baker had numerous problems before he was allowed to practice at Columbia. From 1988 to 1993 he had been sued ten times for malpractice. One lawsuit alleged that Dr. Baker had operated on the wrong hip of a patient in 1990. Dr. Baker was accepted for practice at Columbia and subsequently numerous allegations of Dr. Baker's drug abuse arose. At one point he even entered rehabilitation but soon relapsed into drug use again. This drug use was reported to Columbia. On May 15, 1998, another hospital suspended Dr. Baker from practice after he operated on the wrong leg of a patient (a mistake similar to one he was alleged to have made in 1990). On July 15, 1998, along with a Dr. Huie, Dr. Baker performed elective back surgery on Ricardo Romero, a 40-year-old longshoreman, whom Dr. Baker had been treating for approximately a year. During the surgery, Romero lost a considerable amount of blood before Dr. Baker or anyone else noticed. In the 45 minutes it took to prepare a transfusion, Romero lost almost all of the blood in his body. As a result, Romero went into cardiac arrest, and though he was resuscitated, he suffered severe and permanent brain damage that left him profoundly disabled and unable to care for himself. There was no direct evidence that Dr. Baker was under the influence of drugs during the surgery, but an expert witness for Romero, Dr. John Eichhorn, testified that for a surgeon to allow so great a loss of blood during relatively routine back surgery was unheard of and was consistent with impairment. Romero's wife, individually and on behalf of Romero and their three minor children, sued Columbia, Dr. Baker, and others, but settled with all of the defendants except Columbia for $2,386,000. The plaintiffs alleged that Columbia's negligence resulted in a delayed blood transfusion for Romero during surgery. The plaintiffs further alleged that Columbia acted with malice in credentialing Dr. Baker to practice in the hospital. The jury found that Romero's injury was caused by the negligence of Columbia, Dr. Baker, and Dr. Huie, and by the Hospital's malice in credentialing Dr. Baker. The Romeros requested that the finding of malicious credentialing be made by clear and convincing evidence. The jury was instructed that if they found liability under either theory, they should apportion responsibility for the injury, which they did as follows: 40% to Columbia, 40% to Dr. Baker, and 20% to Dr. Huie. The jury found actual damages of $28.6 million and punitive damages of $12 million. Based on the verdict, the trial court determined awards for each plaintiff against Columbia that totaled a little over $25 million, including prejudgment interest, but under a high-low settlement agreement, the trial court rendered judgment for $11,440,000 in actual damages.
This case underlines the importance of the peer review privilege. Texas law provides that with certain exceptions the proceedings and records of a peer review committee are confidential and communications to it are privileged from disclosure. Columbia asserted the peer review privilege in this case. Because of the application of the peer review privilege the plaintiffs were not able to produce evidence of what information the committee did or did not obtain regarding Dr. Baker. The peer review privilege also prevented the plaintiffs from discussing any deliberations the peer review committee may or may not have had concerning Dr. Baker's professional competence. Given the lack of direct evidence, the Court found that there was no evidence in the record to support the jury finding of actual malice.
Columbia did not challenge the negligence finding on appeal concerning the blood loss. It argued that the jury should not have been permitted to consider Columbia's alleged malicious credentialing in apportioning responsibility. The Supreme Court agreed, finding it simply "inconceivable that the jury would find liability based on the two different acts, but not attribute some responsibility to both acts." Because the jury would probably have apportioned responsibility differently had it been restricted to considering only Columbia's negligence, the Supreme Court concluded that judgment could not be rendered on the verdict. Accordingly, the Court remanded the case for a new trial on negligence. |
- Insurance Defense and Litigation
- Commercial Trucking Accidents Defense and Litigation
- Professional Malpractice
- Healthcare Malpractice
- Employment Law
- Constitutional Torts and Civil Rights
- Environment and Toxic Torts - Medical Devices
- Construction Defects
- Oilfield and Offshore Platform Accidents
- Business and Commercial Litigation
Volume V, No. 3
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