March 21, 2006

Our newsletter this month reviews three recent opinions by the Texas Supreme Court. The Court’s opinion in the mandamus proceeding of In re Lumbermens Mutual Casualty Company potentially limits the opportunity of an insured to take a position that is contrary to the interests of the insurance company. In ATOFINA (Fina) Petrochemicals, Inc. vs. Continental Casualty Co. the Court strictly interpreted the requirement to name the premises owner as an additional insured under a subcontractor’s liability policy. Finally, in another mandamus proceeding, In re Dillard Department Stores, Inc., the Court upheld an arbitration agreement contained in an employment contract and ordered the plaintiff to arbitrate her personal injury claim arising from the termination of her employment.

I. AN INSURANCE COMPANY CAN INTERVENE IN AN APPEAL TO ASSERT CLAIMS AND DEFENSES ALLEGEDLY RESOLVED BY ITS INSURED

The Supreme Court’s opinion in the mandamus proceeding of In re Lumbermens Mutual Casualty Company, (decided February 3, 2006) potentially limited the opportunity of an insured to "cut a deal" with the plaintiff to the detriment of an insurance company. The Court held that in limited circumstances an insurance company can intervene in a case, even on appeal, to raise issues that its insured had specifically agreed to waive in an agreement with the plaintiff.

A. FACTS OF CASE

Sonat Exploration Company and Cudd Pressure Control entered into a Master Service Agreement (MSA). The agreement "...provided that Cudd would conduct ’snubbing’ operations, which involved forcing pipe into Sonat’s high-pressure wells during well-servicing procedures." The MSA further provided that each company would defend and indemnify the other for claims brought by respective employees. Sonat also claimed that the MSA contained language requiring Cudd to provide Sonat with insurance coverage. At the time of the MSA, Lumbermens Mutual Casualty Company was Cudd’s excess-liability insurer.

An explosion occurred at a well in Louisiana in 1998. Seven people were killed, including four Cudd employees, and three were severely injured. Cudd refused to indemnify Sonat and Lumbermens did not provide coverage to Sonat when Cudd’s employees and their families brought wrongful death and personal injury suits against Sonat and Cudd in Texas. Sonat filed a cross-claim against Cudd for indemnity, as well as a separate breach-of-contract action against Lumbermens and Cudd. Sonat claimed that it was an additional insured under Cudd’s policy and, alternatively, that Cudd had breached a contractual obligation to procure insurance covering Sonat.

Sonat settled the personal injury suits and the indemnity action continued. One of the issues was whether Texas or Louisiana law should apply in interpreting the application of the indemnity agreement. The parties agreed that this was potentially dispositive of the entire case because under Texas law the MSA indemnity provision was valid while it was void under Louisiana law. The trial court granted partial summary judgment to Sonat, holding that Texas law applied and that Sonat was entitled to indemnity for the damages it had paid to settle the lawsuits by the Cudd employees and their families. The jury then returned a $20.7 million verdict in favor of Sonat on the indemnity claim. Cudd filed a notice of appeal and Lumbermens posted a $29 million appellate security.

After Cudd perfected its appeal in the indemnity case, Cudd and Sonat entered into an agreement in the breach of contract suit in which Sonat contended that Cudd had breached its contract to purchase insurance naming Sonat as an additional insured on its liability policy. Cudd agreed to forgo further challenge to the choice of law ruling in return for Sonat’s agreement to non-suit the breach-of-contract claim against Cudd. Pursuant to the agreement, Cudd did not raise the choice of law issue as a point of error in its appeal of the $20.7 million indemnity judgment in favor of Sonat. Lumbermens sought leave to intervene in the appeal to preserve the choice of law issue. The court of appeals denied the motion.

B. THE DOCTRINE OF VIRTUAL REPRESENTATION CAN BE INVOKED BY AN INSURANCE COMPANY TO INTERVENE IN AN APPEAL

The specific issue in this case was whether Louisiana law or Texas law applied in interpreting the enforceability of the indemnity agreement. If Texas law applied, then Lumbermens, as Cudd’s excess carrier, would be required to pay most of the $20.7 million jury verdict award against Cudd. However, if Louisiana law applied, the indemnity agreement was not enforceable so neither Cudd nor Lumbermens would have to pay the $20.7 million jury verdict. Lumbermens obviously wanted to argue that the Louisiana law applied, under which there would have been no obligation to defend and indemnify Sonat Exploration Company. However, the interests of Lumbermens and its insured, Cudd Pressure Control, were obviously in conflict concerning Sonat’s breach of contract claim against Cudd.

Cudd attempted to limit its exposure for additional damages on the breach of contract claim for failing to obtain insurance naming Sonat as an additional insured under its liability policy by refusing to raise the choice of law issue on appeal. The Court held that whether an insurance company can intervene in an appeal to raise issues allegedly settled by its insured would be examined on a case by case basis. In this case, even though Lumbermens was attempting to intervene in a post judgment action that was filed 10 weeks after Sonat non-suited its breach of contract claims was simply a factor to be considered in determining whether Lumbermens could intervene in the case.

While the Court acknowledged that problems will result when "...every disagreement between an insured and its liability insurer result in separate appeals," the Court stated that "...our procedural rules favor the resolution of cases based upon substantive principles." As a result, in this situation, the Court upheld the right of Lumbermens to appeal the applicability of Texas law under the virtual representation doctrine.

C. SIGNIFICANCE OF CASE

The Court acknowledged that Lumbermens might have a breach of contract action against Cudd for failing to cooperate under the Lumbermens’ policy due to Cudd’s actions in "cutting a deal" with Sonat to the detriment of Lumbermens. Nevertheless, the Court’s decision provides a basis for an insurance company to prevent its insured from reaching an agreement with the plaintiff that will limit the defenses that can be raised in an action, contrary to the interests of the insurance company.

II. ADDITIONAL INSURED AGREEMENTS WILL BE GIVEN EFFECT BASED UPON THE PAST AND CURRENT CONDUCT OF THE PARTIES

The Court in ATOFINA (Fina) Petrochemicals, Inc. vs. Continental Casualty Co. (decided December 16, 2005) enforced an additional insured requirement on a subcontractor hired by Fina, even though the certificate of insurance confirming coverage was not issued until four days after the plaintiff’s accident.

A. FACTS OF CASE

A&B Builders, Inc. was hired for construction work on property owned by ATOFINA Petrochemicals, Inc. A&B carried worker’s compensation coverage and general liability insurance provided by Continental Casualty Company. Through a clause in the liability policy, A&B was required to add the premises owner to its coverage while working at a site making the premises owner an additional insured. In a written proposal to Fina, A&B committed to provide insurance and Fina orally accepted the proposal on August 12, 1997. Also on this day, A&B requested a certificate of insurance naming Fina as additional insured on its liability policy. The additional insured certificate was issued on August 18th.

On the first day of work, August 14th, Don Wisdom was injured and brought suit alleging negligence on the part of Fina. Continental intervened in the suit to recover worker’s compensation benefits paid to Wisdom. Fina then filed a counter-claim against Continental contending that it was entitled to defense and indemnity as an additional insured under the Continental comprehensive general liability policy.

B. AN ORAL AGREEMENT ACCEPTING A WRITTEN PROPOSAL CONSTITUTED A CONTRACT

The Court found that when Fina orally accepted A&B’s written proposal, a written contract existed that required A&B to provide insurance covering the Fina property. Because there was a standing requirement that Fina be added to A&B’s policy, the extent of coverage and the amount of the policy limits were provided for the policy. The contract therefore was sufficiently definite for the parties to understand their obligations.

C. A CERTIFICATE OF INSURANCE DOES NOT HAVE TO BE ISSUED PRIOR TO STARTING WORK FOR INSURANCE COVERAGE TO BE EFFECTIVE

The Court acknowledged that the prudent practice on Fina’s behalf would have been to obtain the certificate of insurance prior to A&B beginning work. The Court nevertheless concluded that a delay in the issuance of the certificate of insurance did not preclude Fina from being an additional insured on the Continental policy. There was nothing in the liability policy requiring the issuance of a certificate prior to the start of the work. The certificate was requested before the accident so there was no reason to think Fina and A&B attempted to manufacture coverage after the accident.

D. THE ALLEGATIONS CONTAINED IN THE PETITION DETERMINE THE DUTY TO DEFEND

The policy limited the insurance for additional insured to all matters arising out of A&B’s work. Fina’s sole negligence was excluded from coverage. The pleadings contained factual allegations of injuries caused by A&B’s negligence while working at Fina’s facility, which were covered by the policy. Accordingly, Continental had a duty to defend the claims due to the allegations in the pleadings.

E. ANALYSIS OF OPINION

The Court held that Texas courts are to broadly interpret additional insured status in contracts to strictly invoke the obligation to name a party as an additional named under an insurance policy.

III. ARBITRATION PROVISIONS WILL BE UPHELD IN PERSONAL INJURY CASES

The Court held in In re Dillard Department Stores, Inc. (decided January 27, 2006) that arbitration agreements in employment contracts will be enforced to compel arbitration in personal injury cases.

A. FACTS OF CASE

Andrea Martinez had been an employee with Dillard Department Stores, Inc., for 20 years, when she signed an employment arbitration agreement on August 25, 2000. The arbitration agreement applied to personal injuries arising from an employee’s termination; however, workers’ compensation claims were excluded from the arbitration agreement. Dillard Department Stores terminated Ms. Martinez’s employment on November 15, 2002. She subsequently filed suit against Dillard Department Stores and its district manager, Grizelda A. Reeder, alleging a cause of action for defamation. Dillard Department Stores moved to compel arbitration which was denied by the trial court.

B. DEFAMATION CLAIMS CONSTITUTE PERSONAL INJURY CLAIMS WHICH ARE SUBJECT TO ARBITRATION

Martinez argued that a defamation claim was not a personal injury claim. She therefore claimed that her defamation suit should not be arbitrated. However, the Court held that Texas courts have interpreted "personal injuries" to include damages for reputation. As a result, the Court held the term "personal injuries" not only applied to bodily injuries but also to defamation actions.

The Court furthermore gave no credence to Ms. Martinez’s arguments that her claims did not rise from her termination of employment. The Court held that Ms. Martinez’s claims were tied to her termination. As a result,

...any damages in this case could be viewed as intertwined with her employment and termination, and any ambiguity as to what whether "arising from" should be intertwined, or occurring as a direct result from, is resolved in favor of arbitration.

C. ANALYSIS

The Court’s opinion confirms its continued enforcement of arbitration agreements.