Insurance Law (Tx)

Front 1

Policy Interpretation: General Rule

Back 1

ROL: "If the insurance policy is expressed in plain and unambiguous language, a court cannot resort to the various rules of construction."

Front 2

ejusdem generis

Back 2

ROL: "Where specific and particular enumerations of persons or things … are followed by general words, the general words are not to be construed I their widest meaning or extent but are to be treated as limited and applying only to persons or things of the same kind or class as those expressly mentioned."

Plaintiff argues that since the policy specified the Soc. Sec. Act and the RR Retirement Act, then those are the only acts under which benefits may be offset.

However, the general language in the policy says that such language applies only to that class of statutes which is similar to those examples. Agreeing with Barnett would ignore the fundamental rule.

ROL: "Each part of a contract should be given effect when it will not do violence to rules of law or construction."

Front 3

Rule of construction strictly enforcing the contract against the drafter and liberally in favor of the insured

Back 3

Presence of exceptions or limitations in policy: "We must adopt the construction of an exclusionary clause urged by the insured as long as that construction is not itself unreasonable, even if the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties intent."

Front 4

j. Facts Applied:
The purpose of the SS/RR Acts and the VA are different. SS/RR is based on employment and VA is based on disability while serving.

SS/RR require claimant to show both disability and employment, but VA only requires a showing of the disability. This shows that both programs were designed to pay for different things: compensation due to lost earnings vs. payment for injury itself alone.

VA benefits were unique and should have been specifically provided for in the insurance policy.

Back 4

k. ROL: "For an insurance company to be authorized to deduct such benefits, it must plainly and unambiguously provide for such in the insurance contract."

Front 5

National Union Fire Ins. Co. of Pittsburgh, PA v. Hudson Energy Company, Inc.

Facts: Hudson and Bishop were on an instruction flight in an aircraft insured by National Union. It flipped and was damaged upon landing. Hudson owned the plain and sued its insurer, National Union. Trial court awarded actual damages, exemplary damages, and attorney's fees. Court of Appeals and Tex. Sup. struck exemplary damages but affirmed the rest.

Bishop had taken control of the plane in this instance because of air traffic, but then returned control to Hudson. When it became rough, they both had the controls.

Hudson Energy wanted to recover damage to the plain, but National Union denied coverage asserting that the policy did not cover simultaneous pilots and that Hudson was not qualified as a private pilot.

Hudson claimed that National Union breached the duty of good faith and fair dealing.

Policy Language: Exclusion stated that the policy did not apply to any insured while aircraft is in flight if piloted by someone other than pilot/s in the Declarations.

Endorsement No. 1 said that the plane could be piloted by Hudson if he is a private pilot or any certified FAA pilot (see textbook).

Back 5

ROL: (See rule of construction for exclusions above.) "Exceptions or limitations on liability are strictly construed against the insurer."

Hint 5

Facts Applied: The language "or" shows either Hudson as a private pilot or Bishop could be flying. Also, it is reasonable to conclude that Bishop, as instructor, was essentially in charge of the plain and that only one person was therefore in control.

Front 6

Prompt Notice of Claims

Back 6

ROL: Insurance company has to show prejudice/harm before they can assert that the insured's late notice of a claim as grounds for breach of the policy.

Hint 6

This is normally a fact question, but there are some that are a matter or law.

Front 7

Harwell: The failure to notify an insurer of a default judgment against its insured until after the judgment has become final and non-appealable prejudices the insurer as a matter of law.

Notice required: service

Back 7

Even if insurance knows about the suit but the insured did not properly notify them, they are not still not obligated to defend.

An insurer who covers another company is not required to defend one of their employees even though coverage extends to them unless employee himself properly notifies the insurer.

Front 8

First-Party Insurance

Back 8

Insures the insured's own loss

Hint 8

Example: fire ins., collision coverage, health ins. (insures you for expenses you have to pay Dr. for illness or injury).

Front 9

Third-Party Insurance

Back 9

Insures the insured's loss to a third party.

Liability insurance: If an injured third party sues the insured for an event covered under the policy, the Insurer covers the insured's loss to the third party.

Front 10

Rules of Interpretation

Back 10

Insurance policy is a contract, so same contract rules of construction apply.

Policy is generally drafted by insurance company. As the drafter of the policy, if there is an ambiguity in the language, that ambiguity will be construed against the drafter/insurer.

contra proferentem - construe against the drafter

Some authorities consider an insurance policy to be a contract of adhesion (take it or leave it); more strictly construed against the drafter because no bargaining.

Front 11

Police Regulation

Back 11

Insurance policies are usually heavily regulated, and in Texas the policy must be approved by the Texas Board of Insurance. Many types of policies are not entirely written by insurance companies. Endorsements at the end of the policy are ways of changing some of the language, but they also have to be approved.

Some states allow for coverage to exist if a the "reasonable expectations of the insured" would have led insured to believe coverage existed, whether or not it did. This is NOT the rule in Texas.

Front 12

Texas Policy Interpretation

Back 12

In Texas we follow the rules of contract construction.

Front 13

Barnett v. Aetna Life Insurance

Facts: In the first clause of the provision, the court employed ejusdem generis. SS and RR were specific Acts followed by more general words.

Clause (1): court said that employment was at the heart of the RR/SS Acts, but not in VA. However, isn't there an argument that you have to have been employed in the armed services? Doesn’t matter because Supreme Court is right.

Back 13

ROL: Insurance polices are contracts and as such are controlled by rules of contract generally.

If the insurance contract is expressed in plain and unambiguous language, a court cannot resort to the various rules of construction.

Front 14

Patent Ambiguity

Back 14

When a the policy is subject to more than one reasonable interpretation, then the policy is patently ambiguous

Hint 14

ROL: Each part of the policy should be given effect when it will not do violence to rules of law or construction.

We do not want to adopt a construction of a part of the policy that changes the meaning of another part.

Courts must avoid construction of policy which odes not give all portions of policy meaning and effect.

ROL: If these fail, use contra proferentem.

Front 15

Different Interpretation Rule for Exclusions

Back 15

ROL: There is a super strict rule that says when we are construing an exclusion in the policy, we have to adopt a meaning urged by the insured as long as it's not unreasonable.

Front 16

National Union v. Hudson Energy

Facts: The policy provided that an insured is named in the Declarations which provided that Adam Hudson, provided he is a private pilot properly certified, or any private or commercial pilot certified by FAA.

At the time of the incident, Hudson was still a student pilot, so the other provision means that the only insured pilot could have been a properly FAA certified private or commercial pilot.

At the time of the accident both Hudson and Bishop had been flying the plane simultaneously.

Back 16

ROL: If the instrument is worded so that there can only be one construction, it will be construed as worded (another way of wording one of the rules in Barnett).

ROL: An intent to exclude coverage must be expressed in clear and unambiguous language. Otherwise, the exclusion will not be enforced.

Hint 16

The court also notes that the policy used the "or" qualifier but did not anticipate the simultaneous control, but the court construed it in favor of insured.

Front 17

Patent Ambiguity

Back 17

ambiguity is apparent from the face of the policy

Front 18

Latent Ambiguity

Back 18

ambiguity appears in the context of surrounding circumstances.

Hint 18

For example, applying the seemingly clear language to a specific set of facts that cause the language to be ambiguous.

Most coverage issues come from latent ambiguities.

Front 19

Most policies consist of five different parts.

Back 19

Declarations: first pages; set out information that is specific to this policy and this insured; contains policy no., policy period, name and address of insured, policy limits

Insuring Agreement: broad general grant of coverage ("This policy provides coverage for out of pocket expensed paid for illness or injury."). In the example CGL policy, it's under Section I-Coverages, "We will pay those sums…"

Exclusions: after the insuring agreement, these provisions lay out specific items from the broad grant, that are NOT covered.

Conditions: examples include duty after a loss, what happens when other policies apply, other provisions that define how policy works

Definitions: section that lays out what certain words in the policy mean ("Employee" includes a "leased worker" but does not include a "temporary worker."). These definitions are controlling even if the words, on their face, would mean something else. Words in the Definitions themselves may be subject to dispute. The words used in the actual definition of a word are given their plain and ordinary meaning.

Hint 19

ROL: Words used in an insurance policy are given their plain and ordinary meaning unless they have been defined in the policy to mean something else.

Front 20

Travelers Ins. Co. v. Volentine

Facts: (Interpretation of garage liability policy); Volentine was the owner of the garage and did work on Garrard's valves which ended up destroying the engine. Volentine was sued for property damage and then filed a claim with their insurance carrier asserting Coverage D.

Policy: occurrencce means an accident, including continuous or repated exposure to conditions, which results in Bodily injury or Prroperty damage neither expected not intended from the standpoint of the Insured.

Back 20

Accident: The court said that "accident" means an unexpected, unforeseen or undesigned happening or consequence from either a known or unknown cause (test question).

Although the defective work itself may or may not be an accident, the destruction of the entire engine was certainly unexpected and unintended and therefore an accident within this meaning.

Exclusion: limited coverage only to property that was damaged due to insured's own work, but coverage does not extend to the work itself. Here, the work was that done to the valves only.

Front 21

"Accident"

Back 21

Accident: The court said that "accident" means an unexpected, unforeseen or undesigned happening or consequence from either a known or unknown cause (test question).

Front 22

Arognaut Southwest Ins. Co. v. Maupin

Facts: Maupin owned a construction company who contracted with the state of Texas for a job. Maupin contracted with Kipper to borrow material from their land. As it turns out, the material taken from Kipper's land was not actually his land; he was a tenant and Meyer was the lessor. Meyer sued Kipper for property damage, and Argonaut refused to defend.

Damages resulting from negligence was covered, but here the act was not one of negligence because the cause of action was one in tort--trespass.

Back 22

Rule: An intentional tort is not covered as an "occurrence" or "accident."

Front 23

What about the fact that Kipper thought he had permission? For insurance purposes it does not matter.

Back 23

ROL: "Where acts are voluntary and intentional and the injury is the natural result of the act, the result was not caused by accident even though that result may have been unexpected, unforeseen and unintended.

Hint 23

Difference between Maupin and Voluntine: Voluntine was a negligence case and Maupin is an intentional tort.

Front 24

Trinity Universal Insurance Company v. Cowan

Facts: Gage worked at a photo lab when he came across revealing pics of a customer, Nicole Cowan. Cowan eventually found out and asserted mental anguish as a physical injury and that Gage's reproduction of the pictures was an "occurrence."

Back 24

Even though the actor did not intend to harm anybody, the act itself was intentional and therefore not an accident or occurrence under the policy.

As in Maupin, Gage's acts were not an accident as he did exactly what he intended to do--develop the pictures and show them to his friends. The fact that he did not intend for her to find out is irrelevant because invasion of privacy is an intentional tort.

The conduct was showing the photos without authorization and the injury was showing the photos without authorization. In Maupin the damage was a natural result of the conduct.

Hint 24

Just keep in mind the natural result test.

Front 25

State Farm Lloyd's v. Kessler

Facts: The Fannin's bought a house from Kessler who apparently misrepresented the property.

Are misrepresentations an accident or occurrence?

Back 25

The damages pleaded for in this case were economic damages resulting from an intentional misrepresentation of the property.

In this situation, the Fannin's did not assert a cause of action for negligent misrepresentation but instead asserted intentional misrepresentation which induced the Fannings to buy property they otherwise would not have bought.

This is not an accident or occurrence under the policy. Courts have generally found that intentional misreprestnation is not an accident or occurrence and is not covered. There are not cases on point for negligent misrepresentation.

Hint 25

Also, misrepresentation is not a question of property damages. The misrepresentation did not cause the damage; the damage was pre-existing. This is a question of economic damage.

Front 26

Misrepresentation

Back 26

ROL: When the injury pre-exists the misrepresentation, there can be no covered property damage as the injury was not an accident or occurrence resulting from the misrepresentation.

Hint 26

Misrepresentations are usually not an accident or occurrence, but under the right facts, it could possibly be an accident or occurrence. For example, bank loan officer recommends a crappy contractor who then causes property damage to plaintiff's home.

Front 27

King v. Dallas Fire Insurance Co.

Facts: The policy provided that the injury has to be caused by an accident or occurrence to be covered. When somebody gets into a fight, the bodily injury is not caused by an accident.

Back 27

Separation of Insured's Provision: You have to look at this situation from whose standpoint?

Except with respect to certain provisions for the Named insured, these provisions apply separately from the Named Insured.

Basically there is a separate insurance for each person/employee that was in the fight.

We have to look at the situation from the Insured's standpoint, but there are multiple insureds with a Separation-for-Insureds provision. Therefore we have to look at each insured individually and determine if they intended the fight.

From the employer's point of view, however, the event is uninteneded and unexpected and does constitute and accident or occurrence.

Hint 27

There can be different outcomes for different insureds as one employee may have started the fight but the employer did not intend to hire someone who would start fights.

Front 28

What about respondeat superior liability?

Back 28

The employer is obligated to pay under vicarious liability,but the issue of whether an insurance company has to defend employer has not been before the court.

Front 29

Trinity Universal Ins. Co. v. Cowan

Policy: Bodily injury is defined as bodily harm, sickness or disease.

Bodily injury: Nicole Cowan claims that the suffered mental anguish, fear, emotional distress, fear, etc.

(In general, most liability policies promise to cover personal property damages and bodily injury. )

Back 29

ROL: Purely mental or emotional injury is not a bodily injury.

Hint 29

Exceptions:

So severe that it results in physical manifestations (i.e., headaches, stomachaches.)

Mental anguish due to bodily injury (If they happen to be emotional or mental anguish damages, they are covered when they are due to the bodily injury).

Front 30

What is the duty to defend based on?

Back 30

The duty to defend is based on the pleadings.

Hint 30

Cowan's case was one of purely emotional damages and mental anguish. If she had alleged [in her pleadings] bodily injury as a result from mental anguish, she might have a cause of action.

Front 31

Property Damage

Back 31

Definition:

Physical injury to tangible property; or

Loss or use of tangible property

Front 32

Loss of Use

Back 32

You have to lose a use that you already had.

ROL: Econonic losses do not constitute property damage/loss.

Hint 32

The expenses to acquire the assignment from the landowner due to Lay's negligence were not covered as property damage; purely economic loss.

Front 33

Tangible Property

Back 33

Commonly understood to be property that is capable of being handled or touched.

Front 34

Houston Petroleum Co. v. Highlands Ins. Co.

Facts: Investors in an oil well were upset when the well did not hit causing them to lose their investment. The loss is a purely economic loss as there is not physical damage or loss of use of tangible property.

Back 34

ROL: Exposure to "fraudulent promises, false representations, and untrue statements" does not, as a matter of law, fall within the plain meaning of the definition of "occurrence."

Hint 34

Economic loss: does not fall within the plain meaning of loss of use of tangible proeprty, nor does it constitute physical loss of property.

Front 35

When does the duty to defend arise?

Back 35

The duty to defend arises when a third party sues the insured on allegations that, if taken as true, potentially state a cause of action within the terms of the policy.

Front 36

Diminution in value

Back 36

Terra International, Inc. v. Commonwealth Lloyds Ins.

Facts: Terra alleged violations of the DTPA, fraud, and negligence and sough declaratory relief. The plaintiff buyer of the property is claming that the property was made worthless by the seller because after the sale the seller caused the property to be included in a flood control district. The flood control district used bonds to erect flood control structures, and these bonds increased property taxes of property in the district. Plaintiffs claim property damage due to decrease in value and loss of use because of the high taxes.

Hint 36

ROL: Diminution of value is a purely economic loss.

The court said this was a purely economic loss and was not a loss of use because the property cojuld still be 'used" for whatever they wanted even though they may not be able to sell the land for as much as they bought it for.

Front 37

Is a loss of value of to one's property because a neighbor has violated deed restrictions considered property damage or loss of use to tangible property?

Back 37

No.

Hint 37

Clemons v. State Farm Fire & Cas.

Facts: The President of the neighbrhood association approved construction of a garage that violated the deed restrictions (too close to the street).

Plaintiff neighbors claimed that by violating the deed restrictions they were undermining its purpose-to keep everybody's property value high. By letting one house build a garage past the set-back line, it blocks the view of another neighbor and takes away from the aesthetic appeal of the neighborhood. They said the value of their property had been diminished because one of their neighbors built to close to the street.

Front 38

General Rule for Property Damage (once again)

Back 38

General Rule: Property damage does not include purely economic losses.

Front 39

What are the exceptions to the general rule for property damage?

Back 39

Exception 1: Purely economic losses can be covered if they are a measure of damage for loss of use of tangible property. For example, homeowner cannot use his property on which his business is located because of defendant's negligence. Economic loss will be used to measure homeowner's loss of use.

Exception 2: Purely economic losses can be covered because of other covered injury. For example, out-of-pocket expenses due to bodily injury or injury to tangible property such as hospital bills are covered.

Front 40

Punitive Damages

Back 40

Fairfield Ins. Co. v. Stephens Martin Paving, LP

Facts: Employee was killed on the job at road paving site. The court said there is no public policy against indemnifying the insured against damages.


Freedom of contract
vs.
Purpose of punitive damages

Front 41

Why would allowing insurance coverage for punitive damages undermine the purpose?

Back 41

Because the purpose of punitive damages is to punish and if the insurance company is paying them, then the wrongdoer is escaping their responsibility. It prevents the punishment purpose of damages to begin with.

Hint 41

However, it was not against public policy in this case.

Two Policies at Work: worker's compensations & employer's liability policy

Front 42

Worker's Compensation Policy

Back 42

Owned by employer; exclusive remedy for injured employee; cannot sue employer

Hint 42

Exception: death caused by gross negligence

Front 43

Employer's Liability Policy:

Back 43

Covers the one exception to worker's comp (death caused by gross negligence); basically, punitive damages for gross negligence.

Hint 43

So this is the only type of situation where the insurance for punitive damages is not against public policy as the legislature has expressly authorized it.

Also, the court said there may be instances wehre a corporation may be able to insure for punitive damages in extreme circumstances (i.e., damage or injury caused by rogue employees.).

Front 44

What happens when continuing injury spans the course of more than one policy period? Which of the multiple polices provides coverage?

Back 44

Trigger Theories:

1.) Manifestation Theory

2.) Continuous Theory

3.) Exposure Theory

4.) Injury-In-Fact Rule

Front 45

Manifestation Theory

Back 45

Coverage is not afforded unless a damage or injury manifests itself or becomes apparent during the policy period. Date of the wrongful act does not establish a claim for coverage. For example, homeowners who claim Hurricane Ike damage over a year later must bring a claim under the policy in effect for that period, not in September when the storm hit.

Hint 45

Policy in effect when the damages happen!

Front 46

Continuous Theory

Back 46

As long as the damages are ongoing, all polices in effect during that period are triggered.

Front 47

3rd party insurance has two duties:

Back 47

Duty to indemnify: to pay

Duty to defend: provide lawyer

Front 48

Notice of a Claim

Back 48

Notice of an accident: so ins co can go get fresh statements from witness, this can come from anyone.

Hint 48

Notice of a lawsuit: supposed to come from the insured, this could come from someone else, but you have to show that the insured has been properly served (Harwell).

Front 49

Texas rule for notice of claim

Back 49

TX says all general policies must contain clause that before ins co must show prejudice before denial of claim.

Front 50

Default Judgments

Back 50

prejudice as a matter of law

Front 51

Failure to Follow Contract Specifications

Back 51

Failure to follow contract specifications does not fall under general liability policy and may fall within business risk exclusions.

Hint 51

Brown-McKee:

Facts: Grain elevator collapsed causing loss of use for the insured.

Front 52

"PCOH"

Back 52

"P.C.O.H." - all property damage occurring away from insured's own premises that arises out of insured's own product or work except for work that is still in progress or has not been completed. (away from insured's property + after work is done).

Front 53

Houston Building Service v. Amer. Gen. Fire & Cas.

Facts: Employee of janitorial service incorrectly applied linseed oil to doors.

Issue: Does the policy clearly exclude coverage of the property damaged caused by HBS's employees?

Policy: Under the CGL policy one of the exclusions to property damage liability stated that no coverage exists for "property damage" that occurs after the work was completed. In other words, it does not cover "property damage" that falls within the definition of PCOH within the policy.

Back 53

"Work complete"

Hint 53

Here, they were three months into a one-year contract. The policy defined "work complete" as all work under the contract must be complete (just know this one); when all work done at the site is complete if contract calls for more than one site; and when part of work at job site has been put to its intended use.

Front 54

"Performing Operations"

Back 54

The next exclusion provided for no coverage to property damage to that part of real property on which you are performing operations. PCOH did not cover this exclusion. Since the work was not yet complete, the court said that the insured was still not covered. They argued that they were not performing operations when the "stickiness" occurred, which was discovered the next day. The court said they still had not completed work.

The phrase, "performing operations" is effectively the same thing as PCOH (work not complete).

Hint 54

Look at the sample policy in Chapter 2 (j5, j6, k, and l). Basically, property damaged before work was complete and after work was completed are not covered, unless (exception in l) the work was performed on insured's behalf by a subcontractor (rationale is because employer cannot control the details of sub's work and if they did cover it, it would effectively make him an employee).

NOTE: None of these exclusions apply to bodily injury; they only apply to property damage.

So if somebody is hurt while they are working, the business risk exclusions does not cover it (something else might cover it though).

Front 55

Therefore, the business risk exclusion...

Back 55

The business risk exclusions only apply to insured's "own work."

Front 56

When does an occurrence occur? (manifestation theory)

Back 56

Actual damage has to occur during the policy period, not when the act was committed.

Hint 56

Dorchester Dev. Corp. v. Safeco Ins. Co.

Facts: The insured performed for construction of apartment complex. Insured got sued for bad workmanship, and turn to ins co to defend them. The court said that damage occurred after the policy expired, so there was no occurrence insured admitted this.

Front 57

Gar-Tex Construction v. Employers Casualty Company

City of Emis hired company to construct clearwell: underground storage to store water. Plaintiff was hired to build the clearwell but it was damaged when it rained. Tthere were supposed to be pumps to take care of the rain damage; but it did not work

Were they conducting operations?

Back 57

Court said yes because they were still working on completing the clearwell, so the exclusion does apply; not covered.

Hint 57

The contract required them to prevent just this type of accident from happening

Front 58

When is your work complete?

Back 58

The contract is complete or you finish your part and turn it over to someone else

Front 59

Complaint Allegation Rule

Back 59

Base the duty to defend on the complaint allegation rule. Put "blinders" on and look at the complaint, even if plaintiff later says something to shows there is not coverage.

Liberal interpretation of plaintiff's allegations are given (See HN4).

Hint 59

Note: It is actually the plaintiff's lawyer that may or may not trigger the Insurer's duty to defend.

Front 60

Fidelity & Guarantee v. McManus

Facts: McManus bought a bike for his son who let his friend ride it. The friend crashed into Garcia who sued McManus for negligent entrustment.

Does Fidelity have a duty to defend under the liability provision in McManus' homeowners policy?

Back 60

The exclusion stated that there was no duty to defend a claim that arose out of ownership, maintenance, operation, use, loading or unloading of any recreational motor vehicle. The policy excluded coverage for injury arising out of the use of such vehicle away from the property.

Since the plaintiff alleged negligent entrustment, the question was whether negligent entrustment arises out of the "ownership, maintenance, operations, use, loading or unloading of a recreational motor vehicle away from the residence.

Front 61

Nat'l Union Fire Ins. v. Merchants Fast Motor Lines

Facts: Truck driver accidentally discharged a gun which killed passenger in another vehicle. The trucker's employer is seeking coverage under their auto policy. The policy required a causal connection between the use of the covered injury and auto.

Does the Insurance company have a duty to defend?

Back 61

Here, there was no duty to defend and no coverage because the allegations did not state that there was a causal connection between the injury and the ownership language in the policy.

Plaintiff only alleged that the injury occurred and that Merchants Fast owned the truck driven by Hart. They did not allege that the injury was a result of such ownership.

Hint 61

The court states that although we give the allegations a liberal interpreation, we will not facts which might trigger coverage. Here, the court could not add the "fact" that the ownership and use of the truck was the cuase of the injury and death.

Front 62

Possible Exceptions to the Eight Corners Rule

Back 62

Texas Supreme Court may recognize an exception if:
(1) It is a coverage-only fact (cannot affect insured's liability in any way); and (2) does not contradict the what the plaintiff has plead.

Hint 62

Additional facts to the pleadings are allowed as long as there is not contradiction.

Front 63

Multiple Claims

Hartford Cas. Co. v. Cruse: J&J defectively performed foundation work on Cruse's home. Hartford held the CGL policy for J&J and refused to defend J&J in their suit against Cruse.

Policy: J&J's own work damaged the foundation and the cost to fix it was not covered. However, damaged caused by their work to other property (sheetrock, window frames, etc.)

Back 63

ROL: If ANYTHING alleged is covered, the insurance company has to defend the whole case.

Even if the bulk of the harm is covered, as long as even $1 of the harm alleged is covered, the insurance company has a duty to defend the entire case.

Front 64

Business Risk Exclusions in CGL Policies

Back 64

A comprehensive general liability policy with this "business risk" exclusion provides protection for personal injury or for property damage caused by the completed product but not for the replacement and repair of that product. The justification for treating these risks differently is that the insured can control the quality of the goods and services he supplies, while accidental injury to property or persons exposes him to almost limitless liability. Thus a contractor cannot recover from the insurer for his own failure to perform his contract, but can recover for damage other than to his own work, whether or not that work is defective.

Hint 64

My Hypothetical:
What if there are multiple policies at play? Who has the duty to defend if there is damage covering damage caused by the defective work and another policy (say the homeowner's policy) covering damage to, say, the windows. What if the windows were broken from flying debris during a hurricane, but just before the storm there was already a claim against the contractor for defective work causing foundation damage, and that plaintiff in the second lawsuit against their insurance company alleges damaged caused by the storm but also previously alleged damaged to windows caused by contractor's work?

There is a little bit of case law out there that says that the insurance company should only have to pay for the part that was covered.

Front 65

"Control"

Back 65

"Control," for purposes of an insurance exclusion, is limited to the particular object of the insured's work, usually personalty, and to other property which he totally and physically manipulates.

Hint 65

Policy coverage is triggered by an "occurrence," which means an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.

Considered in tandem with the business risk exclusion, the "occurrence" requirement illuminates the allocation of risk. Direct (as opposed to consequential) damages that naturally follow from a breach of contract are conclusively presumed to have been in the contemplation of the parties and may therefore constitute expected or intended damages. A comprehensive general liability policy does not cover this cost of doing business. A builder who fails to abide by the specifications of a contract, for example by substituting a weaker building material, may by that breach produce expected property damage to his or her work, and may thus fail to show a covered "occurrence." But an occurrence takes place where the resulting injury or damage was unexpected and unintended, regardless of whether the policyholder's acts were intentional. The requisite accident may inhere in the scope of damages.

Front 66

Injury-in-fact Theory

Back 66

We are going to extend coverage under all policies that plaintiffs were actually injured; policies are triggered if they are on the “risk” at any time the claimants suffered injury from; this follows policy language precisely .

Front 67

Manifestation Theory

Back 67

Only the policy in effect at the time damages manifest themselves; applies in almost every non-continuous damage; exposure, latency and injury are all triggered; not applied very often.

Front 68

Continuous (tripple trigger) Theory

Back 68

All policies in effect during the period of time when damages continue to occur are triggered.

Front 69

Exposure Theory

Back 69

Used a lot in bodily injury asbestos cases; problem is that it has very little to do with policy language; very easy to apply; the injury that occurs during the policy theory.

Hint 69

# of years [or months] [ins on the risk ]

[x] plaintiffs total damages

= # of years that the plaintiff was exposed

Front 70

Note on Trigger Theories

Back 70

All these theories only comes into play for long term exposure; continuous injuries; not used for a single injury.

You don’t know what theory the court will apply; but exposure theory is the most popular;

Texas SC has not approved any of these theories for use in this state.

Hint 70

Trick question on the final exam: Know the math for the exposure theory: how much will the plaintiff get.

Plaintiff’s total damages [times]: the number of year of the ins was on the risk
The total # of years the plaintiff was exposed
____________________

Front 71

Duty to Indemnify

Back 71

D.R. Horton-Texas, Ltd. v. Markel International Ins.

Facts: After Holmes moved into their new home built by DR Horton, they sued them because their home was infested with mold.

This is the subcontractor's policy and coverage is extended to claims against the ...

Duty to Defend: The plaintiff's pleadings sued DR Horton and said they were liable for the mold damaged but it did not assert that the damaged arose from liability of Ramirez's work. There was no duty to defend DR Horton under Ramirez's policy because it was not triggered in the pleadings.

Duty to Indemnify: Different from the eight-corners rule on which the duty to defend is based (pleadings + policy).

Hint 71

Even if there is no duty to defend, there could be a duty to indemnify based on the true facts proven at trial in the underlying liability case or the underlying coverage case; you can bring in any extrinsic evidence. This is a separate and distinct duty.

The duty to defend is broader than the duty to indemnify because we are going to defend what is alleged even if it is false or fraudulent but were are only going to pay for what is true.

Front 72

Employers Casualty Co. v. Tilley

Facts: Insurance company obtained a standard non-waiver agreement. Tilley was sued due to an accident on drilling site in which he provided equipment and labor. Tilley said he did not have notice of the claim and so that's why he didn’t give notice to the insurance company. However, the insurance company said that Grady Fore, Tilley's foreman on the job, knew about it and that therefore Tilley had imputed knowledge. However, Tilley's lawyer was hired by insurance company pursuant to the insurer's duty to defend. Despite his duty of loyalty to Tilley, the attorney provided to Tilley was, at the same time, collecting evidence for the insurance company to develop a defense for no coverage due to late notice of the claim.

Back 72

Did Employer's Ins. waive its right to assert its policy defense of late notice?

No.

Front 73

Non-waiver agreement

Back 73

Agreement between ins. co. and insured saying that insured agrees that insurance company does not waive any rights under the policy by handling the claim in some aspect (i.e., investigation).

Front 74

Effect of Non-Waiver Agreement

Back 74

Such attorney becomes the attorney of record and legal representative for the insured and owes the insured the same type of loyalty as if he had been originally employed by the insured.

If insured attorney hired by insured becomes aware of any potential conflict, attorney is required to advise insured of such conflicts.

Hint 74

Non-waiver agreements have to be specific about what it is that is being waived to be enforceable. Here, the non-waiver was broad and general (i.e., blank not filled in and it said "I agree that insurance company doesn’t waive any rights).

Therefore, insurance company was estopped from denying Tilley a defense or coverage despite insurer's defense that ntoice of the claim was late.

What should the non-waiver agreement have said?

Front 75

Rhodes v. Chicago Insurance Co. (no longer good law; used in casebook because there are some good points made).

Facts: Rhodes sued modeling company and Shirley for sexual misconduct during counseling sessions committed by Shirley. Insurance company denied coverage and a defense asserting that it was not covered under the policy. Shirley defended suit and demanded payment form insurance company.

Back 75

General Rules:

The pleadings can be amended and the duty to defend can come and go. A complaint that does not initially state a cause of action can be amended to create a cause of action. Likewise, an amended pleading can terminate a cause of action.

ROL: Reservation of rights is proper if the insurer believes in good faith that the complaint alleges conduct which may not be covered under the policy.

When the complaint pleads a cause of action not within coverage, insurer must still provide a defense if at least one cause of action falls within coverage.

Hint 75

Why did the insurance company deny providing a defense after the first pleading but then agreed to a defense with a ROR after the second?

The first pleading stated the facts, but the second pleadings was vague and said it was just based on "negligence." The court said this was proper.

Front 76

Consequences of Insurer's Breach of Duty to Defend

Back 76

Insured is free to proceed as he sees fit once insurer breaches duty to defend.

Inability to enforce against the insured any conditions in the polciy; the insured is not longer constraoned by the "no action" or "no voluntary assumption of laibility" clauses.

Just because insurance company breaches duty do defend, it does not mean that they have to pay the entire judgment. They have to pay what they originally would have paid.

Hint 76

No action claiuse: There can by no action by insured against insurer unless insured has complied with policy conditions.

No assumption of liability clause: Insured will not volutnary assume liability to the claimant without insurer's consent (Insured cannot settle without insurance company's consent).

Front 77

General Rules for Reservation of Rights (ROR)

Back 77

ROR is proper if the insurer believes in good faith that there may not be coverage. The flipside is that insurance company should not fire off ROR in every case. They should believe there is a reason to reserve rights, that there is something in the case that may not be covered.

ROR is not a breach of the duty to defend. It's just as good as an unqualified defense. However, notice of intent to reserve rights must be sufficient (say why the are reserving rights), and it has to be timely.

When ROR is made, insured may properly refuse tender of defense and pursue his own defense counsel. Insurance company is still liable for attorney's fees and may not insist on conducting defense.

Insurance company can also withdraw the reservation and choose to defend the insured unqualifiedly so that they can then choose their own lawyer.

Bad Law: The insurer is also barred from enforcing the no action and no assumption of liablity clauses in a ROR.

Front 78

Motiva Enterprises, LLC v. St. Paul Fire & Marine Ins. Co.

Facts: Plaintiff, Motiva Enterprises, settled an action brought against it for damages without nituce to insurance company and without obtaining consent. Insurance company's representation was kicked out of the mediation and Beaver's lawyer and Motiva's lawyers settled the case for $16.5 million dollars.

Back 78

Just because insurance company is defending under ROR, insurer still needs to obtain the consent to settle. They can't settle for whatever amount they want. Otherwise, imagine if two people could "fake" a car accident and then kick out the insurance company like they do here and then settle for millions of dollars, which is ultimately going to be paid for by the insurance company, which really should have been a portion of that amount.

Front 79

Ideal Mutual Ins. Co. v Myers

Facts: Myers was flying a plane in which him and Strothers died. Strothers sued Meyers estate who then turned it over the insurance company. The insurandce company hired an attorney to defend the claim brought by the Strother's survivors with a ROR letter based on that at the time of the accident, Myers had an isnturment flight rating when he only had a visual fight rating (whatever that means). The factual issue was whether the pilot needed to have an instrument flight rating or just a visual flight rating, which means that if the pilot can see on a sunny day, he is qualiofied to fly. If the weather is not clear (i.e., fog) requiring insturments, pilot needs to have the license which qulaifies him to fly (i.e., he knows how to use intruments; this is harder to get).

Back 79

Defendants made three arguments that ROR was ineffective:

1.) Didn't show all thigns it needed to show. The court disagreed and points out all the things that in page 5 of the case that are typically included in a ROR.

2.) Defendnats argue that ROR was untumely because it was 2 years agter suit had arose. Corut said this was ok because any potential conflcit of interest did not arise until Storthers filed an action against the estate.

3.) Defendants lastly asserted that the attorney provided to them never discussed the potential conflicts of interest arising from Ideal's representation of the Myers Estate. The Court said it was harmless and that there was no evidence that the lawyer even worked to help the insurance company establish their defense.

Hint 79

The purpose of ROR is to allow the insurance omcpany to defend without being accused of not defending or asserting its rights under the polciy.

The reason insuran e companies reserve their rightys is because it may miselead the insrued into thinking that they will provide a lawyer even though there might be a question of coverage. Without an adequate ROR (i.e., non-specific) insurance company might have an estippel issue.

Front 80

Texas Farmers Ins. Co. v. McGuire

Facts: Plaintiff was in an accident while driving his employer's truck. Plaintiff made a second statement that provided defendant with information it needed to solidify its own defense of noncoverage under the policy. The judgment was rendered against plaintiff by a third party and defendant refused to satisfy the judgment on the ground of noncoverage. Plaintiff argued that defendant was estopped to deny coverage because defendant failed to advise plaintiff to obtain an attorney before securing his second statement. The trial court rendered judgment for defendant, and the court of appeals reversed on the ground that defendant was estopped to deny coverage and that defendant's acts were deceptive.

Back 80

`On appeal, the court reversed, holding that the doctrine of estoppel could not be used because the kind of insurance coverage sought by plaintiff did not exist by the terms of the policy. Plaintiff failed to carry his burden of persuasion as to his claim that defendant's acts were deceptive.

Front 81

Farmers Texas County Mut. Ins. v. Wilkinson

Facts: Automobile liability insurer appealed from judgment entered in the 22nd Judicial District Court, Hays County, Terry L. Jacks, J., finding that insurer had coverage of alleged insured for the automobile accident in which he was involved, and that insurer had a duty to defend insured in a negligence action brought against him by person injured in the accident. The Court of Civil Appeals, Smith, J., held that where insurer extended unconditional coverage to insured in the first letter, which was accompanied by a separate second letter offering to defend subject to a reservation of rights, the two letters, taken together, expressed an ambiguous reservation of rights, and thus, provisions of the purported reservation of rights had to be construed strictly against the insurer and liberally in favor of the insured, and insurer had waived the defense of noncoverage.

Back 81

While doctrines of waiver and estoppel may operate to avoid conditions that would cause forfeiture of an insurance policy, they will not operate to change, rewrite or enlarge the risks covered by the policy.

If insurer assumes insured's defense in automobile negligence action without obtaining reservation of right or a nonwaiver agreement and with knowledge of the fact indicating noncoverage, all policy defenses, including those of noncoverage, are waived or the insurer may be estopped from raising them.

“Reservation of rights” by insurer is means by which, prior to determination of liability of the insured, insurer seeks by agreement to suspend operation of doctrines of waiver and estoppel; when coverage is in doubt, insurer defending insured under such agreement reserves to itself all of its policy defenses in case the insured is subsequently found liable.

Where automobile liability insurer extended unconditional coverage to alleged insured in first letter, which was accompanied by a separate second letter from insurer offering to defend subject to a reservation of rights, the two letters, taken together, expressed an ambiguous reservation of rights, and thus, provisions of the purported reservation of rights had to be construed strictly against insurer and liberally in favor of the insured, and as insurer assumed alleged insured's defense with knowledge of facts indicating possible noncoverage but with no effective reservation of rights agreement, it waived the defense of noncoverage.

Front 82

If an insurance contract covers certain risks but the policy contains exclusions or limitations of coverage, when the insured makes a claim for loss from a covered risk, the insurer must assert any applicable exclusion or limitation to avoid liability.

Back 82

When an insurance policy covers risks for a certain time period, the time of the event allegedly triggering coverage is a precondition to coverage and is not considered a defensive matter to be pleaded and proved by the insurer.

Hint 82

An insurer has neither a “right” nor a burden to assert noncoverage of a risk or loss until the insured shows that the risk or loss is covered by the terms of the policy; once the insured does so, then it becomes incumbent on the insurer, that is the insurer has the “right,” to assert any exclusions or limitations as affirmative defenses.

Front 83

“Waiver” is the intentional relinquishment of a right actually known, or intentional conduct inconsistent with claiming that right.


The elements of waiver include (1) an existing right, benefit, or advantage held by a party, (2) the party's actual knowledge of its existence, and (3) the party's actual intent to relinquish the right, or intentional conduct inconsistent with the right.

Back 83

“Estoppel” generally prevents one party from misleading another to the other's detriment or to the misleading party's own benefit.

Hint 83

If an insurer defends its insured when no coverage for the risk exists, the insurer's policy is not expanded to cover the risk simply because the insurer assumes control of the lawsuit defense; however, if the insurer's actions prejudice the insured, the lack of coverage does not preclude the insured from asserting an estoppel theory to recover for any damages it sustains because of the insurer's actions.

Front 84

G.A. Stowers Furniture Co. v. American Indemnity Co.

Issue: Does the insurer owe a duty to the insured in the matter of settlement?

Back 84

The court created a new extra-contractual duty stating that if the insurance is presented with an offer to settle that is within the policy limits, the insurance company is obligated to handle the settlement as a reasonable prudent person would in the management of their own business.

If the insurance company has the opportunity to settle the case within the policy limits, when the settlement is within the insurance company's exclusive control, they will have to pay damages if they do not act as a reasonable prudent businessman.


Damages: "Excess judgment", which is the amount over the policy awarded by the jury.

The purpose of requiring the insurance company to pay over the limit in this case is that they are acting as the insured's agent in the litigation and are actually putting the insured's own money at risk.

Front 85

Elements of a Valid Stowers Demand

Back 85

1.) Claim is within the scope of coverage

2.) Unconditional demand within the available policy limits.

3.) In exchange for a full release, including any liens (plaintiff should promise to take care of any liens if they exist)

4.) The terms of the demand are such that an ordinarily prident insurer would accept it, considering the likelihood and degree of the insured's potential exposure to an excess judgment (Likelihood of an excess judgment vs. Degree of the excess judgment)

Front 86

More Stower's

Back 86

A demand above the policy limits, no matter how reasonable, does not trigger the Stowers duty to settle.

There is no duty for an insurance company to offer to settle; they have the duty to respond to settlement demands.

When facing a settlement demand arising out of multiple claims and inadequate proceeds, an insurer may enter into a reasonable settlement with one of the several claimants even it exhausts or diminishes the proceeds available to satisfy other claims.
--Promotes settlement of claims
--Encourages claimants to make their claims promptly

a) The Stower's doctrine requires an unconditional demand (i.e., "We will settle for this amount of money", but not "We will settle if the Rockets beat the Lakers.")

Hint 86

Farmers also settled with Lopez, who also died in the accident, so Farmer's reduced the amount of insurance available to satisfy Medina's claim, which also reduced Soriano's liability.

Front 87

Time Limits

Back 87

Time limit for acceptance is not a condition and does not make the offer invalid under Stowers.

Front 88

Hospital Fees

Back 88

If a patient goes to the hospital but cannot pay, the hospital is entitled to the proceeds of an insurance policy of someone who caused that person to be in the accident.

Hospital liens: anybody that touches the money (lawyers, plaintiffs, injured people) will be paid after the hospital. Hospital is paid first.

Front 89

Insured's Assignment of Rights Too Soon May Be Invalid

Back 89

Balancing the various considerations we have mentioned, we hold that a defendant's assignment of his claims against an insurer are invalid IF:

(i) It is made prior to an adjudication of plaintiff's claim against defendant in a fully adversarial trial;

(ii) Defendant's insurer has tendered a defense, and

(iii) Either, (a) Defendant's insurer has accepted coverage, or (b) Defenandt's insurere has made a good faith effort to adjudicate coverage issues prior to the adjudication of plaintiff's claim.

Hint 89

The court did not address what happens when one of these elements is lacking. As a matter of practice, it is unwise to assign rights before trial.

Front 90

Breach of Good Faith and Fair Dealing (Bad Faith Claims)

The Standard:

Back 90

The Standard: denial of payment of insurance company knew or should have known that it was covered. Giles.

Front 91

Can There Be Bad Faith If There is No Coverage?

Back 91

There can be no breach of duty of good faith if, in fact, the claim is not covered, even if insurance company did not include a valid reason. There just has to be a valid reason.

Front 92

Recovering Mental Anguish Damages and Punitive Damages

Back 92

In order to get punitive for grossly negligent breach of duty of good faith and fair dealing you have to have an injury that is qualitatively different from … Here, there were no damages as result of any tort. Davis.

Front 93

Two prong test for gross negligence: Moriel.

Back 93

(i) D was aware of risk but nevertheless proceeded despite risk of D's welfare (subjective: D aware of risk and proceeds with conscious indifference)

(ii) Objective: Risk was extreme involving serious injury.

Front 94

No Cause of Action for Third Party Claimant

Back 94

There is no duty of good faith and fair dealing to a claimant (3rd party). The duty does extend to the insured. Faircloth.
5. No Duty of Good Faith and Fair Dealing to Settle Third-Party Claims: The only duty is the Stower's duty.

Front 95

Policy Voidable for Misrepresentation by Insured in Application

Back 95

1. Ins. Code 705.003 applies when you misrepresent claim.
2. 705.004 - If insurance policy has a provision that says policy is void and unenforceable if there is a misrepresentation in the application, the provision has not effect and is not a defense in a suit brought on the policy.
a) Unless,
(i) Misrepresentation was material to the risk; or
(ii) Contributed to the contingency or event on which policy became due and payable.
b) Misrepresentation material to the risk is a question of fact.
3. 705.005 -
4. Union Bankers Ins. Co. v. Shelton: Plaintiff applied for health insurance without indicating skeletal disorder of necrosis. Insurance company says he must have known of the disorder because necrosis happens over time and he would have had to have surgery. The issue was whether the insurance company had to show that plaintiff actually intended to deceive the insurance company. In other words, was it ok if it was an innocent mistake? The court concluded that the intent to deceive is necessary.
5. Rule: There are five elements required for an insurance company to cancel a policy.
a) Material
b) Misrepresentation
c) Insurer must rely on that misrepresentation (usu. in charging premiums and calculating limits)
d) Insured must have had an intent to deceive (tough for insurance companies to show)

Within 90 days of learning of the misrepresentation, the insurance company has to give notice that they intend not to be bound by the policy.

Front 96

U. Policy Voidable for Misrepresentation by Insured in Application

Back 96

1. Ins. Code 705.003 applies when you misrepresent claim.
2. 705.004 - If insurance policy has a provision that says policy is void and unenforceable if there is a misrepresentation in the application, the provision has not effect and is not a defense in a suit brought on the policy.
a) Unless,
(i) Misrepresentation was material to the risk; or
(ii) Contributed to the contingency or event on which policy became due and payable.
b) Misrepresentation material to the risk is a question of fact.
3. 705.005 -
4. Union Bankers Ins. Co. v. Shelton: Plaintiff applied for health insurance without indicating skeletal disorder of necrosis. Insurance company says he must have known of the disorder because necrosis happens over time and he would have had to have surgery. The issue was whether the insurance company had to show that plaintiff actually intended to deceive the insurance company. In other words, was it ok if it was an innocent mistake? The court concluded that the intent to deceive is necessary.
5. Rule: There are five elements required for an insurance company to cancel a policy.
a) Material
b) Misrepresentation
c) Insurer must rely on that misrepresentation (usu. in charging premiums and calculating limits)
d) Insured must have had an intent to deceive (tough for insurance companies to show)

Within 90 days of learning of the misrepresentation, the insurance company has to give notice that they intend not to be bound by the policy.

Front 97

V. Prompt Payment of Claims

Back 97

1. Chapter 542 of TX Ins. Code
2. Deadlines:
3. Liability:
a) Amount of the claim
b) 18%/yr. interest on the claim amount
c) Reasonable attorney's fees
4. Cater v. USAA: Plaintiff made foundation claim caused by plumbing leak which insurance company denied. This went to mediation and claim settled for $40,000. The insurance company had a good faith basis for not paying claim and argued that they shouldn't have to pay penalty. The court said that for penalty purposes, this didn't matter. Rule: There is no good faith exception to PPOC penalties. It's a strict liability statute.
5. Lamar Homes v. Mid-Continent Cas. Co: Does Article 21.55 of the TX Ins. Code apply to CGL insurer's breach of the duty to defend? Yes, because the legislature did not intend to limit the statute to only first party claims. However, Professor disagrees because the PPOC statute refers to deadlines for payments of claims. The provision just seems unworkable under duty to defend, but the Texas Supreme Court disagreed. The deadlines have not been applied to duty of defend as of yet because this is a fairly recent case.
6. Application of State:
a) First party defense
b) Third party (duty to defend)

Front 98

W. Unfair Practices

Back 98

State Farm Life Ins. v. Beaston: Plaintiff missed annual premium for life insurance policy and missed the 30-day grace period. Three days later, Beaston died. A finding of knowing conduct is a prerequisite to the recovery of mental anguish damages under Chapter 541 of the Texas Ins. Code. Note that the statute provides to recovery of actual damages which generally includes mental anguish, so they are adding a common law requirement of knowing conduct.