Coverage Analysis
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TEXAS
 (5th Circuit)

  ACCIDENTS OR OCCURRENCES

  Insured must intend resulting injury, although certain conduct is "so extreme or outrageous that intent to harm can be inferred as a matter of law."  S.S. v. State Farm Fire & Cas. Co., 808 S.W.2d 668, 670 (Tx. App. 1991)(courts finds "occurrence" where insured intended to have sex with girlfriend but didn't mean to transmit herpes). 

  However, the Supreme Court has refused to find that purposeful conduct was an "accident" where the injuries resulting from the insured's actions could be reasonably anticipated to have occurred. Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819 (Tex. 1997)(no coverage for emotional distress that plaintiff suffered as the result of darkroom operator's surreptitious copying and circulation of "candid" photos). 

  In such cases, an intent to injure will be inferred as a matter of law as the insured's conduct is inherently injurious or where harm is otherwise substantially certain to result from the conduct.  Commercial Union Ins. Co. v. Roberts, 815 F.Supp. 1006 (W.D. Tex. 1992); C.T.W. v. B.C.G., 809 S.W.2d 788 (Tex. App. 1989)(sexual molestation) and  Old Republic Ins. Co. v. Comprehensive Health Care Associates, 786 F.Supp. 629, 632 (N.D. Tex. 1992)(sexual harassment).  Similarly, in Houston Petroleum v. Highlands Ins. Co., 1992 WL 210642 (Tx. App. 1992), the Court of Civil Appeals ruled that a liability insurer had no duty to defend claims based on fraudulent promises and representations.  In Columbia Mut. Ins. Co. v. Fiesta Mart, Inc., 987 F.2d 1124 (5th Cir. 1993), reh'g denied, 992 F.2d 326 (5th Cir. 1993) the "conditions" that the claimant was exposed to as the result of the insured's fraudulent Ponzi scheme were not an "occurrence."  See also State Farm Lloyds v. Kessler, 932 S.W.2d 732 (Tex. App.--Ft. Worth 1996, n.w.h.)(intentional misrepresentations made during the sale of a home do not constitute an "occurrence").  But see  Epic Casualty & Surety Company v. Metropolitan Baptist Church, 1996 WL 905936 (S.D.Tex. December 16, 1996) (allegations that the insured had negligently misrepresented that coverage would remain in place as it had in the past described an "occurrence" that an insurer had a duty to defend).

  Under Texas law, when an insured's acts are voluntary and intentional, the results or injuries, even if unexpected, are not caused by an "accident" and the event is not an "occurrence" under the policy.  GATX Leasing Corp. v. National Union Fire Ins. Co., 64 F.3d 1112, 1117 (7th Cir. 1995).

  In Grapevine v. GEI Insurance Company, 197 F.3d 730, 732 (5th Cir. 1999, the Fifth Circuit held that the District Court had erred in refusing to find that the insured’s negligent failure to carry out its obligations under a contract was not an “occurrence,” holding that this line of authority was limited to cases in which Texas courts have refused to allow coverage for intentional torts.  Further, the court declared that the contractual liability exclusion did not apply, even though the insured had entered into a hold harmless agreement with the underlying plaintiff, since the insured’s negligence had been an independent cause of the plaintiff’s injuries.

  Allegations that a "peeping Tom" spied on the plaintiff failed to allege an "occurrence" in Metropolitan Property & Casualty Co. v. Murphy, 833 S.W.2d 257 (Tex. App. 1992).

  "Willful and wanton" conduct or other forms of gross negligence are still an "occurrence."   Travelers Ins. Co. v. Reed Co., 135 S.W.2d 611 (Tx. Civ. App. 1939).

  Allegations of negligent hiring and supervision have not been held to give rise to coverage where the injuries resulted from intended actions. Old Republic Ins. Co. v. Comprehensive Health Care, 786 F.Supp. 629 (N.D. Tex. 1992).  In GATX Leasing Corporation v. National Union Fire Insurance Company, 64 F.3d 1112, 1118 (7th Cir. 1995), the U.S. Court of Appeals for the Seventh Circuit, applying Texas law, ruled that the insured’s negligent failure to prevent employee’s intentional act not transform claim into one for an “occurrence.”  Likewise, Texas courts have ruled that allegations of negligent conduct will not give rise to a duty to defend where the claimed negligent conduct was interdependent on and related to intentional acts.American States Insurance Company v. North River, No. 96-10779 (5th Cir. January 30, 1998); New York Life Ins. Co. v. Travelers Ins. Co., 92 F.3d 1336 (5th Cir. 1996) and Columbia Mutual Ins. Co. v. Fiesta Mart, Inc., 987 F.2d 1124 (5th Cir. 1993)(fraud claims).  Thus, allegations that the insured failed to protect the plaintiff from an assault were held excluded inasmuch as the claimant's injuries could not have occurred but for the fact of the assault.  Acceptance Ins. Co. v. Bhugra Enterprises, Inc., 1996 WL 683745 (N.D. Tex. November 8, 1996)(sexual misconduct exclusion) and American States Insurance Company v. North River, No. 96-10779 (5th Cir. January 30, 1998).

  Allegations of sexual molestation against a physician fell within the "intentional injury" exclusion in a homeowner's policy.  Although the underlying complaint also alleged that the insured had been negligent in failing to seek treatment for his pedophilia, the court held that this negligent conduct would not have resulted in any injury to the plaintiff without intervening intentional acts and therefore did not create coverage under the doctrine of concurrent causation.  Commercial Union Ins. Co. v  Roberts, 7 F.3d 86 1993).  See also  Acceptance Ins. Co. v. Walkingstick, 887 F.Supp. 958, 962 (S.D. Tex. 1995)(no coverage for negligent supervision).

  Pollution resulting from an oil driller's intentional discharge of oils onto unlined surfaces and other intentional conduct was not an "occurrence" since it foreseeably and inevitably resulted in pollution to sub-surface and groundwater.  Meridian Oil Production, Inc. v. Hartford Acc. & Ind. Company, 27 F.3d 150 (5th Cir. 1994). However, the court subsequently ruled in Bituminous Casualty Corp. v. Vacuum Tubes, Inc., 75 F.3d 1048 (5th Cir. 1996) that the insured's intentional transportation of hazardous materials did not preclude the possibility of an "accident",  holding that intentional conduct did not mandate an inference of intended injury.  Furthermore, the court ruled that under the analysis adopted by the Texas Court of Appeals in Union Pacific, the secondary migration of pollutants from a landfill might constitute an unintended "occurrence." 

  Allegations against a landlord for not providing adequate security to protect tenants against attacks, while sounding in negligence, failed to allege an "occurrence" since the plaintiffs would not have suffered any bodily injury but for the assailant's assault.  Century Sur. Co. v. Glen Willows, Inc., 924 F.Supp. 76 (S.D. Tex. 1996).  Similar allegations were held to be subject to an exclusion for claims arising out of an assault and/or battery caused by or at the instigation of, or at the direction of, or omission by the insured or its employees" in United National Ins. Co. v. Imperial Courtyards, LTD., 1997 U.S. Dist. LEXIS 4992 (N.D. Tex. March 31, 1997).

  The Fifth Circuit ruled in State Farm Fire & Cas. Co. v. Fullerton, 1997 WL 408265 (5th Cir. July 22, 1997) that an insured's plea of guilty to a double murder estopped his heirs from seeking coverage for the resulting wrongful death action.  Judge Higginbotham opined that the plea served as a full and fair litigation of the operative facts and should be binding on his heirs, whose claims were derivative of the murderers.

  An intentional assault was not converted into an "accident" due to the insured's voluntary intoxication in Wessinger v. Fire Ins. Exchange, 1997 WL 401325 (Tex. App. July 18, 1997).  See also  Metropolitan Property & Casualty Co. v. Murphy, 833 S.W.2d 257 (Tex. App. 1992) (insured's sexual and alcohol addiction did not creat coverage for incidents of voyeurism).
 

  ALLOCATION AND SCOPE ISSUES

  To date, the Texas Supreme Court has not spoken clearly on the issue of allocation.  In the one case in which it had an opportunity to address this issue, the court merely stated in Physician Ins. Exchange v. Garcia, 876 S.W.2d 842 (Tx. 1994)(medical malpractice claims), the court ruled that the mere continuation of harm over successive policy periods did not permit the insured to "stack" limits.  Even assuming that each policy was triggered, the court held that the most the insured could recover was the highest single "occurrence" limit during that period (which amount must then be allocated among the potentially affected insurers).

  The Texas Court of Appeals has declared that Texas requires an insurer to provide a “full defense” to any case in which any part of the underlying process of injury occurs during the insurer’s policy period.  In Texas Property and Casualty Insurance Guaranty Association v.  Southwest Aggregates, Inc., 982 S.W.2d 600 (Tex.  App. 3d Dist-Austin1998), the court expressly rejected the insurer’s contention that its defense obligation should be pro-rated to reflect its overall “time on the risk.”  See also Union Pacific  Resources v.  Continental Ins.  Co., Johnson County No.  249-23-98 (Tex.  Dist.  Ct. December 17, 1998)(adopting “all sums” approach for toxic tort claims) and Highlands Insurance Company v. Temple-Inland, Harris County 98-42939 (Tex. Dist. Ct. August 4, 1999)(rejecting insurer’s contention that asbestos losses should be pro-rated among multiple years).

  Earlier federal courts decisions had declared that defense costs are to be shared based on: (1) the allegations in the  underlying suits; (2) the time period during which the plaintiffs allege exposure for which the insured is liable; and (3) the amount of effort required to defend the insured against the claims.  Pending the determination of these factors, the insured and each implicated carrier should each pay an "equal share."  Gulf Chemical Corp. v. Associated Metals & Minerals Co., 1 F.3d 365 (5th Cir. 1993).  Accord, Wash Care Corp. v. Maryland Casualty Co., 1997 U.S. Dist.  LEXIS 23093 (S.D. Tex. November 10, 1997)(pollution clean up claim).

  In Carpenter, a U.S. District Court took note of Keene but found that it could not justify applying this "peculiar interpretation" of policy language to a construction accident.

  The Texas Court of Appeals ruled in In Re Continental Insurance Company, No. 10 99 066 CV (Tex. App. March 14, 1999) that an excess insurer was entitled to learn how much the policyholder had obtained through settlements with other insurers as this discovery as it bore materially on whether the insured had already obtained full reimbursement for its claims and/or the extent to which any remaining claims against Continental might be offset by said payments.

  An insurer has no implied or express right to repayment by its policyholder.  Ending months of speculation, the Texas Supreme Court announced on June 24, 1999 that it would accept further review of the Court of Appeals’ ruling in Matagorda County v.  Texas Association of Counties Risk Management Pool, 975 S.W.2d 782 (Tex.  App.  1998) in which the Court of Appeals had vindicated an insurer’s right to compel a policyholder to reimburse it for a settlement that the insurer had funded and which had later been found to be outside the scope of the insurer’s policy obligations.  On December 21, 2000, the state Supreme Court released its decision, ruling 7-2 that a liability insurer does not have a contractual or implied right to obtain reimbursements for liability settlements that it pays on behalf of its insured that are subsequently determined not to be covered under its policy.   The Supreme Court ruled on December 21, 2000, that the insurer’s unilateral assertion of a right to obtain reimbursement in the event of a favorable outcome in the coverage suit did not create a right to reimbursement, nor should such a right be implied from the insured’s failure to context the insurer’s claim.   In Texas Association of Counties v. Matagorda County, No. 98-0968 (Tex. December 21, 2000),   the court declared that the insurer also had no right of recovery on theories of equitable subrogation or quasi-contract, the theory upon which the California Supreme Court had ruled in Buss.  The court found that any alternative analysis would place the insured in the difficult position of having to choose between rejecting a settlement within policy limits or accepting a possible financial obligation to pay an amount which may be beyond its means.  “Rather than place the insured in this position, we hold that, when coverage is disputed and the insurer is presented with a reasonable settlement demand within policy limits, the insurer may fund the settlement and seek reimbursement only if it obtains the insured’s clear and unequivocable consent to the settlement and the insurer’s right to seek reimbursement.”  While acknowledging that its analysis instead placed the insurer in a similarly difficult position, the court suggested that a possible resolution would be for the insurer to bring an action for declaratory relief to resolve issues of indemnity even while the insured’s liability had not yet been determined.  In any event, the court found that “requiring the insurer, rather than the insured, to choose a course of action is appropriate because the insurer is in the business of analyzing and allocating risk and is in the best position to assess the viability of its coverage dispute.”  Two dissenting judges argued that the Texas Supreme Court should have followed the California Supreme Court’s lead in Buss in finding an implied obligation to reimburse where the insurer’s payment would otherwise confer a windfall on the policyholder.

  In a dispute between two professional liability insurers as to how to fund a joint settlement of a medical malpractice claim involving three successive policies, the Texas Court of Appeals ruled in CNA Lloyds of Texas v. St. Paul Ins. Co., 902 S.W.2d 657 Tex. App. 1995) that "other insurance" clauses may be applied to successive policies, not just concurrent ones.  Applying the "contribution by limits" language, the court ruled that St. Paul only owed the same fraction of the settlement as its policy bore to the total policies' limits.

  The Fifth Circuit has refused to permit a liability insurer to pro-rate defense costs to reflect the involvement of uninsured parties where the costs arose out of the same accident.  Lafarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389 (5th Cir. 1995).
 

  APPELLATE PROCEDURES

  Texas has both an intermediate appellate court and a state Supreme Court.  The Court of Appeals has several geographic divisions.

 
  BAD FAITH

  An insurer acts in bad faith if it denies coverage without any reasonable basis for its position. Arnold v. National County Mut. Ins. Co., 725 S.W.2d 603 (Tex. 1987).  Accord Aetna Cas. & Sur. Co. v. Joseph, 769 S.W.2d 603 (Tex. App. 1989). 

  In Universal Life Ins. Co. v. Giles, 1997 WL 378065 (Tex. July 9, 1997), four dissenting judges urged the abolition of the tort of bad faith.  Instead, four judges and a concurring justice elected to revise the standard so that bad faith will only be found when the insurer's liability was "reasonably clear."  Previously, Texas courts had applied a standard of whether there was "no reasonable basis" for denying or delaying a claim.

  Punitive damages may be awarded if the insurer does so with conscious indifference to the rights of the insured.  However, a mere mistake or erroneous denial of invalid or questionable claims will not subject an insurer to liability.  Aranda v. INA, 748 S.W.2d 210, 212 (Tex. 1988).  Compare, State Farm Lloyds, Inc. v. Polasek, 847 S.W.2d 279 (Tex. App. 1992)(insured must prove that insurer was unaware of any "reasonable basis" for disputing coverage) with State Farm Fire & Cas. Co. v. Simmons, 857 S.W.2d 126 (Tx. 1993)(criticizing Polasek as abrogating common law duty of good faith and fair dealing).  The Fifth Circuit adopted the Polasek analysis in Thrash v. State Farm Fire & Cas. Co., 992 F.2d 1354 (5th Cir. 1993), ruling that an alleged failure to investigate is only actionable if the insured can show that a more thorough investigation would have shown that the loss was clearly covered.  The test of "reasonableness" is whether a reasonable insurer acting in the same circumstances would have delayed or denied the insured's claim.  Aranda, 748 S.W.2d at 213. 
  Mere negligence on the part of the insurer will not support an award of trebled damage for a DPTA violation. St.  Paul Surplus Lines Ins.  Co., Inc.  v.  Dalworth Tank Co., Inc.,  96-0148 (Tex.  August 25, 1998).

  Unfair claims settlement practices are prohibited by Article 21.21 of Texas Insurance Code.  In Allstate Ins. Co. v. Watson, 885 S.W.2d 96 (Tx. 1993), the Texas Supreme Court ruled that third party claimants have no direct right of action against liability insurers under Article 21.21. The Supreme Court expressly stated there is only one tort duty in the third-party context: the Stowers duty to settle within policy limits.  The court held that Stowers, along with the insured's contractual rights, provides full protection against an insurer's refusal to defend or mishandling of a third-party claim. Further, the court ruled in 1996 that an insurer does not owe its insured a duty of good faith and fair dealing to investigate and defend claims by third parties against its insured.  Maryland Ins. Co. v. Head  Indus. Coatings and Servs. Inc., 938 S.W.2d 27 (Tex. 1996). 

  In 1995, the legislature amended Article 21.21, Section 4 of the Insurance Code so as to define an "unfair settlement practice" as including "failing to attempt in good faith to effectuate a prompt, fair and equitable settlement of a claim with respect to which the insurer's liability has become reasonably clear."  An insured may pursue a private right of action for violations of Section 4(10)(a)(ii) under Section 16 or Article 21.21. 

  Unfair or deceptive consumer practices are proscribed by Tex. Bus. & Com. Code Ann. § 17.41 (West 1987 & Supp. 1993).

  The Texas Supreme Court has since ruled that the duty of good faith and fair dealing does not exist independently of the insured's contract claim.  Accordingly, where the insurer had already made payment to resolve its contract claim, the court has ruled that an insured has no right of action against it under Article 21.21 of the Texas Insurance Code or the DPTA. Stewart Title Ins. Co. v. Aiello, No. 96-0097 (Tx. January 31, 1997).   Likewise, absent a finding of coverage, no basis exists for awarding bad faith damages.  Thom v. State Farm Lloyd’s, 10 F. Supp. 2d 693, 702 (S.D. Tex. 1997). 

  In Natividad v. Alexsis, Inc., 875 S.W.2d 695, 698 (Tex. 1994), the Texas Supreme Court held that an independent adjusting firm did not owe an insured an independent duty of good faith an fair dealing. 

  A claim for consequential damages resulting from damage to the insured’s creditworthiness could not support an award of damages absent evidence that the insured had actually been unable to obtain loans. St.  Paul Surplus Lines Ins.  Co., Inc.  v.  Dalworth Tank Co., Inc.,  96-0148 (Tex.  August 25, 1998).

  Consistent with Watson, only the insured and third party beneficiaries of an insurance contract have standing to sue an insurer to enforce coverage or to assert a claim for bad faith. Arnold v. National County Mut. Fire Ins. Co.,, 725 S.W.2d 165 (Tex. 1987); Transport Ins. Co. v. Faircloth, 898 S.W.2d 269 (Tx. App. 1995).  Accordingly, even where the third-party claimant is an additional insured under the policy, it has no right to assert extracontractual causes of action against a liability insurer.  Rumley v. Allstate Indemnity Co., 924 S.W.2d 448 (Tex. App. 1996).  However, Texas courts have found in some cases that victims of accidents are the intended beneficiaries of liability policies, particularly where provided for by statute (e.g. auto policies).

  Resolving a question had been left open by its ruling in Viles  v. Security National Ins. Co., 788 S.W.2d 566, 567 (Tex. 1990)(tort of bad faith independent of contractual basis for coverage), the Texas Supreme Court ruled in Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tx. 1995) that an insurer may not be held liable for bad faith if there is no contractual basis for coverage.  The Supreme Court reversed the Court of Appeals, which had found that a liability insurer had acted in bad faith by denying coverage on an erroneous basis, even though it later found an independent basis on which the court ultimately sustained the coverage denial.  See also Beaumont Rice Mill, Inc. v. Mid American Indemnity Ins. Co., 948 F.2d 950 (5th Cir. 1991)(Texas law) (absence of coverage defeats possibility of bad faith).  In view of Stoker, as a general rule, an insurer may not be sued in bad faith for promptly denying a claim that is, in fact not covered.  The court left open the possibility, however, that bad faith liability might arise if the insurer had utterly failed to carry out an investigation.  903 S.W.2d at 341.  See also Snydergeneral Corp. v. Central Ind. Co., 907 F.Supp. 991, 1006 (N.D. Tex. 1995) and Tivoli Corp. v. Jewelers Mut. Ins. Co., 1996 Tex. App. LEXIS 3616 (4th Dist. August 14, 1996).

  Generally, an insurer may not be held liable in bad faith where there is no coverage unless the insurer committed some act, so extreme that caused injury independent of the policy claim.  Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995). 

  Even where trebled damages are awarded, only simple interest should be added.  St.  Paul Surplus Lines Ins.  Co., Inc.  v.  Dalworth Tank Co., Inc.,  96-0148 (Tex.  August 25, 1998)(reversing lower court’s addition of interest before trebling).

  Texas has recognized the tort of bad faith in the first-party context.  Arnold v. National County Mutual Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987).  However, it has never explicitly recognized such a claim in the context of third party insurers.  Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312, 317 (Tex. 1994).  Recognizing this dicta in Soriano, the Texas Court of Appeals has refused to recognize any distinction between first and third party policies in permitting a cause of action for a breach of good faith and fair dealing.  Crum & Forster, Inc. v. Monsanto Corp., 887 S.W.2d 103 (Tex. App. 1994).
  In recent years, the Texas Supreme Court has taken a more conservative approach to such claims.  In Lyons v. Millers Casualty Ins. Co., 866 S.W.2d 597 (Tx. 1993), the court ruled that the issue of whether the insurer had any reasonable basis for disputing coverage must be based upon a factual record that is separate and distinct from the insured's evidence that a claim was covered.  In Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 18 (Tx. 1994), the court held that even if an insurer has acted in bad faith, punitive damages may only be awarded if the insured can also show that the insurer's conduct was "malicious, intentional, fraudulent or grossly negligent." the court further ruled that the damages recoverable in such an action must be independent of the policy proceeds that would be recoverable for a covered claim.  Finally, the plaintiff must show that "the insurer was actually aware that his action would probably result in extraordinary harm not ordinarily associated with breach of contract or bad faith denial of a claim--such as death, grievous physical injury or financial ruin.  Id. at 24.

  An insured may bring suit against a liability insurer for negligent failure to settle within policy limits.  Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544, 547 (Tex. 1929).  Subsequent rulings of the Texas Supreme Court have stated that a Stowers claim requires (1) that the underlying claim be one for which coverage is provided under the policy; (2) that an actual settlement offer within the policy limits be available to accept and (3) that the offer be one that an ordinarily prudent insurer would accept considering the degree of the insured's liability.  Soriano, supra; Physician Ins. Exchange v. Garcia, 876 S.W.2d 842 (Tx. 1994).  A demand for "policy limits" against a primary insurer was found not to be an "unconditional" offer of settlement where the insured and plaintiff were unaware of an excess policy. Insurance Corp. of America v. Webster, No. 01-92-01165 (Tex. App. August 24, 1995).  A primary insurer has no duty to solicit an offer within policy limits.  Birmingham Fire Ins. Co. v. American Nat. Fire Ins. Co., 1997 WL 2137217 (Tex. App. May 1, 1997).

  Even though an insured could have settled a claim within policy limits, thus avoiding a trial and a resulting judgment for both compensatory and punitive damages against its insured, its failure to do so did not require the insurer to pay the punitive portion of the award where its policy expressly excluded coverage for punitive damages.  The Fifth Circuit  ruled in St. Paul Fire & Marine Insurance Company v. Convalescent Services, Inc., 193 F.3d 340 (5th Cir. 1999) that an insurer’s Stowers liability for failure to settle a case within policy limits only extends to covered damages and did not require a liability insurer to settle a non-covered claim. 

  Under Texas law, an insurer is free to pay its policy limits to settle one of several claims against its insured notwithstanding the fact that extinguishing its policy limits will leave the insured exposed to other pending claims.  Texas Farmers Ins.  Co.  v.  Soriano, 881 S.W.2d 312, 315 (Tex.  1994).  The U.S. Court of Appeals for the Fifth Circuit extended this doctrine to situations involving multiple insureds in Travelers Indemnity  Co. v.  Citgo Petroleum Corp., 1999 WL 38804 (5th Cir.  January 29, 1999).  The court ruled that whether a settlement was reasonable must be considered in the isolated context of that specific settlement and that an insurer is not required to take into account the claims of additional insureds under the policy.

  Texas procedure requires that bad faith claims be tried separately from contract claims.  In Texas Farmers Ins. Co. v. Stem, No. 10-96-027 (Tex. App. April 3, 1996), the Court of Appeals ruled that admitting evidence of the insurer's claimed bad faith would necessarily prejudice its defense of the contract claim.

  An insurer's duty of good faith and fair dealing extends to claims arising out of the cancellation of a health insurance policy. Union Bankers Ins. Co. v. Shelton, 889 S.W.2d 278 (Tex. 1994). 

  An insurer's "blind reliance" on an expert's unfounded opinion that structural damage to the insured's home had not resulted from a covered cause of loss did not protect the insurer from a bad faith award under the Texas Deceptive Trade Practices Act.  Nicolau v. State Farm Lloyds, 869 S.W.2d 543 (Tex. App. 1993), aff'd, 951 S.W.2d 444 (Tex. 1997).

  An award of punitive damages was improper where there was no clear differentiation between the portion of the award based on common law claims and the portion for treble damages based on violations of Article 21.21 and the DTPA. St. Paul Surplus Lines Ins. Co. v. Dal-Worth Tank Co., Inc., 917 S.W.2d 29 (Tex. App. 1995), aff’d,  96-0148 (Tex.  August 25, 1998).

  The fee award provisions of Section 38.006 of the Texas Insurance Code have been held not to apply to unfair claims settlement practices involving a stock property casualty company. Bituminous Casualty Corp. v. Vacuum Tubes, Inc., 75 F.3d 1048 (5th Cir. 1996).

  Claims for reverse bad faith have been recognized by several Texas trial courts.  Pioneer Floor Alkali Co. v. United Capitol Ins. Co., Harris County District Court No. 91-22014 (Tex. December 30, 1994) (insurer's bad faith in raising pollution claim under policy that it knew contained an "absolute" exclusion). 

  Texas courts have refused to recognize that insurers owe direct duties to each other.  Accordingly, an insurer may only sue another insurer for equitable subrogation.  The Fifth Circuit has ruled that aven though a primary insurer alleged in its complaint that the defendant insurer had breached a direct obligation to it through its negligent handling of and failure to settle the claims against their mutual policyholder, the Fifth Circuit has ruled in General Star Indemnity Co. v. Vesta Fire Ins. Corp., No. 98-20211 (5th Cir. May 6, 1999) that a U.S. District Court in Texas erred in dismissing the action since the complaint could have been construed as setting forth an action for equitable subrogation based upon the obligations of the insurers to their mutual policyholder. 
 

  "BODILY INJURY"

  Claims for "pure" emotional distress are not a "bodily injury."  Travelers Ind. Co. v. Wanda Holloway, 17 F.3d 113 (5th Cir. 1994); Maryland Cas. Co. v. Texas Commerce Bancshares, Inc., 878 F.Supp. 939 (N.D. Tex. 1995).  Although, coverage will be required if the mental distress produces physical symptomatology, it will not be assumed that such injuries are an implied part of any claim for mental anguish.  Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819 (Tex. 1997)(no duty to defend claim of mental anguish where facts concerning the plaintiff's headaches, stomachaches and loss of sleep, while the subject of later testimony, were not alleged in complaint).
 

  BREACH OF POLICY CONDITIONS

  State Board of Insurance has required all policies issued after May 1, 1976 to include an endorsement restricting application of late notice unless it results in prejudice.   Wheeler v. Allstate Ins. Co., 592 S.W.2d (Tex. Civ. App. 1979); Shelton v. Ray, 570 S.W.2d 419 (Tex. 1978).   However, the statute has been held inapplicable to policies issued outside of Texas or prior to the effective date of the statute. American States Ins. Co. v. Hanson Industries, 873 F.Supp. 17 (S.D. Tex. 1995).  Further, at least one court has ruled that this regulation does not apply to surplus or excess lines carriers.  Assicurazioni Generali v. Pipeline Valve Specialties Co., Inc., 1996 WL 408602 (S.D. Tex. March 21, 1996).

  The Fifth Circuit ruled in Bituminous Cas. Corp. v. Vacuum Tubes, Inc., 75 F.3d 1048 (5th Cir. 1996) that substantial compliance with notice provisions is sufficient to defeat an insurer's late notice defense.  Further, the insurer was deemed to have waived the defense if, having received notice of a possible claim, it failed to follow up with the insured to obtain the additional details that it required.

  An insured’s failure to forward suit papers in a timely manner did not preclude coverage where the insurer was not prejudiced by this breach as it already had actual notice of the lawsuit.  The Ohio Casualty Group v.  Rasinger, 960 S.W.2d 708 (Tex.  App. 1997). 
 

  "BROAD FORM COVERAGES"

  The Texas Court of Civil Appeals has ruled that coverage for the "invasion of the right of private occupancy" only encompasses landlord-tenant claims.  Decorative Center of Houston v. Employers Cas. Co., 833 S.W.2d 257 (Tex. App., 1992), rehearing overruled (Tx. App., July 30, 1992) and would not cover construction claims. 

 In 1986, this language was amended to limit the scope of “personal injury” coverage to such acts that involved a “room, dwelling or premises that a person occupies by or on behalf of its owner, landlord or lessor.”  Such exclusions have been held to be enforceable and unambiguous.  Patel v. Northfield Ins. Co., 940 F.Supp. 995 (N.D. Tex. 1996).  In Patel Judge Sanders refused to find that a sexual assault upon a guest at a motel by an unknown third party constituted a "wrongful invasion of the right of private occupancy."  the court noted that a wrongful entry takes place when someone other than the landlord claims a possessory interest in the room, dwelling or premises.  The court noted, in any event, that a guest in a hotel is a mere licensee, not a tenant, and therefore not one entitled to assert a claim for the "invasion of the right of private occupancy", a tort that is limited to actions by tenants against landlords as involving vested property rights. 

  Texas courts have relied on this language in finding that claims of trespass by neighboring property owners against polluters are not covered.  Bituminous Casualty Corp. v. Kenworthy Oil Co., 912 F.Supp. 238 (W.D. Tex. 1996), aff'd mem., 105 F.3d 656 (5th Cir.  1996)(oil drilling) and Northbrook Indemnity Ins. Co. v. Water District Management Co., Inc., 892 F.Supp. 170 (S.D. Tex. 1995).

  A federal district court in Texas has ruled that Lanham Act antitrust claims against a software developer for marketing a competing version of the plaintiff’s software program gave rise to “advertising injury” under a Sentry policy and were not subject to a policy exclusion for “professional services.”  Judge Kendall ruled in Sentry Ins. Co. v. Greenleaf Software Company, Inc., 91 F. Supp.2d 920 (N.D. Tex. March 25, 2000) that the underlying plaintiff’s allegation that the insured had displayed photographic advertisements of computer screens containing the software program that was identical in appearance to the plaintiff’s program constituted an unauthorized use of proprietary trade dress and therefore gave rise to “advertising injury” coverage notwithstanding Sentry’s claim that the allegations were based not on advertising but on underlying violations of copyright law and other theft of intellectual property.  Further, the District Court ruled that the act of taking photographs of a competing product was not the sort of expert conduct subject to a professional services exclusion.

  Allegations that an insured engaged in unlawful debt collection practices have been held sufficient to trigger an insured’s duty to defend under its “personal injury” coverage.  In St. Paul Fire & Marine Ins. Co. v. Green Tree Financial Corp., No. 00-10237 (5th Cir. April 23, 2001), the Fifth Circuit ruled that the scope of coverage for” invasion of privacy” was not limited to written or spoken material made public, nor did the policy expressly exclude losses resulting from the insured's deliberate unlawful conduct.
 

  BURDEN OF PROOF

  Under the common law, if an insurer pleaded an exclusion as a defense to coverage, the policyholder had the burden of proving the inapplicability of a policy exclusion.  Ideal Mut. Ins. Co. v. Last Days Evangelical Assoc., 783 F.2d 1234, 1240, n.8 (5th Cir. 1986); Burt v. Aetna Cas. & Sur. Corp., 720 F.Supp. 82 (N.D. Tex. 1989) and Griffith v. Continental Cas. Co., 506 F.Supp. 1332, 1334 (N.D. Tex. 1981).  However, since 1991, Article 21.58(b) of the Texas Insurance Code has placed the burden of proof on insurers with respect to exclusions and all other affirmative defenses.  This provision has been interpreted as not extending to exceptions to exclusions for which, as policy-reinstating terms, the insured still has the burden of proof. Telepak v. USAA, 887 S.W.2d 506 (Tx. App. 1994).  See also, Guaranty National Ins. Co. v. Vic Manufacturing Co., 143 F.3d 192 (5th Cir. 1998)(insured has burden of proving "sudden and accidental" discharge within exception to pollution exclusion).

  A party seeking to recover under an insurance policy has the burden of establishing the existence and terms of the alleged coverage.  Bituminous Cas. Corp. v. Vacuum Tanks, Inc., 975 F.2d 1130 (5th Cir. 1992).  In a follow up ruling, however, the Fifth Circuit ruled in Bituminous Casualty Corp. . Vacuum Tubes, Inc., 75 F.3d 1048 (5th Cir. 1996) that the District Court had not clearly erred in ruling that the insured had proven the terms of various missing policies based on evidence that the insurer's policies would have conformed to state filing requirements at the time.

  The Texas Supreme Court has ruled that an insured has the burden of presenting evidence that would permit a jury to allocate a loss between covered and excluded perils when it results from both.  Lyons v. Millers Casualty Ins. Co., 866 S.W.2d 597 (Tx. 1993).
 

  CHOICE OF LAWS

  In 1984, the Texas Supreme Court abandoned lex loci contractus in favor of a Restatement "most significant relationship" test.  Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 421 (Tex. 1984).

  Under Texas choice of law rules, insurance coverage disputes are governed by the law of the state with the most significant relationship.  In St. Paul Mercury Ins. Co. v. Lexington Ins. Co., 78 F.3d 202 (5th Cir. 1996), a federal court applied the law of Texas to a dispute involving the relative obligations of four liability insurers for an accident at a work site in Louisiana based upon the fact that three of the four policies were issued and delivered in Texas where the insured operated a place of business, notwithstanding the fact that the underlying claimants were Louisiana citizens and the accident arose in Louisiana.

  Article 21.42 of the Texas Insurance Code suggests that Texas law must be applied to any insurance policy issued to a Texas citizen or business. ("Any contract of insurance payable to any citizen or inhabitant of this State by any insurance company or corporation doing business within this State shall be held to be a contract made and entered into under and by virtue of the laws of this State relating to insurance, and governed thereby."  Snydergeneral Corp. v. Great American Ins. Co., 928 F.Supp. 674 (N.D. Tex. 1996), aff'd, 133 F.3d 373 (5th Cir. 1998). The U.S. Supreme Court has ruled, however, that Article 21.42 may not be applied to "regulate business outside the State of Texas, and control contracts made by citizens of other states."  Aetna Life Ins. Co. v. Druken, 266 U.S. 389, 399 (1924).  Similarly,  other courts have ruled that Article 21.42 does not apply to insurance contracts written by non-Texas insurers for non-Texas policyholders.  Austin Building Co.  v.  National Union Fire Ins.  Co., 432 S.W.2d 697, 701 (Tex.  1968); cited in Builders Transport, Inc,.  v.  Ford Motor Co., 1998 WL 798665 (E.D. Tex.  March 4, 1998).

  In Snydergeneral, the Fifth Circuit applied Texas law to policies issued to a Texas corporation but held that the law of Minnesota must be applied to claims involving its corporate predecessor, which was based in Minnesota at the time.

  Bad faith claims involving current claims handling conduct may be interpreted in accordance with Texas law, even if the law of some other jurisdiction would be applied to the substantive meaning of the insurance contracts.  In Snydergeneral Corp. v. Great American Ins. Co., 928 F.Supp. 674 (N.D. Tex. 1996), aff'd 133 F.3d 373 (5th Cir. 1998), the court ruled that Texas had a significant interest in seeing that its insurance laws were adhered to.  See also Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 891 (5th Cir. 1991). 

  The Texas Supreme Court has held in Maxus Exploration v. Moran Brothers, Inc., 817 S.W.2d 50, 53 (Tex. 1991) that contract issues are to be resolved in accordance with the local law of the state that has the most significant relationship to the transaction in accordance with Section 6 of the Restatement of Conflicts of Law.

  In W.R. Grace v. Continental Cas. Co., 896 F.2d 865, 873 (5th Cir. 1990), the Fifth Circuit applied New York law to an asbestos coverage dispute between a large manufacturer headquartered in New York and its various insurers based on evidence that most of the policies in question were solicited, negotiated and delivered in New York and that the insured had given notice for these claims to its insurers in New York.

  A U.S. District Court in Mississippi relied in part upon Article 21:42 in ruling that Texas law should be applied to a Mississippi gas well blow out.  Broadhead v. Hartford, 773 F.Supp. 882, 893 (S.D. Miss. 1991).  See also Sandefer Oil & Gas, Inc. v. AIG Oil Rig of Texas, 846 F.2d 319 (5th Cir. 1988)(Texas law applicable to claims arising out of Louisiana gas wells where policies were contracted for and issued in Texas).

  In Transco Exploration Co. v. Pacific Employers Ins. Co., 869 F.2d 862 (5th Cir. 1989), the 5th Circuit applied Texas law to a maritime accident off the coast of Louisiana involving a Texas insured, holding that Texas had the greatest interest in coverage issues involving a policy that had been delivered to and insured a Texas business. 

  In St. Paul Mercury Ins. Co. v. Lexington Ins. Co., 78 F.3d 202 (5th Cir. 1996), the Fifth Circuit expanded on its adoption of the most significant relationship test, holding that it is the contacts the state has with the insurance dispute that matter, not with the location of the underlying lawsuit.
 

  CONFLICTS OF INTEREST

  Where a conflict of interest exists, an insurer is required to pay for independent defense counsel of the insured's choosing. Steel Erection Co. v. Travelers Indemnity Co., 392 S.W.2d 713, 716 (Tex. App. 1965). 
 

  "DAMAGES"

  The Fifth Circuit has predicted that the Texas Supreme Court would limit liability insurance to damages that the insured is legally obligated to pay because of its tortious conduct.  In Data Specialties, Inc. v. Transcontinental Ins. Co., 1997 WL 626910 (5th Cir. October 27, 1997), the court held that claims for breach of contract were outside the scope of liability insurance. 

  Under Texas law, actions that seek only equitable relief are not claims for "damages."  See The Feed Store v. Reliance Ins. Co., 774 S.W.2d 73 (Tex. App. 1989)(suit to enjoin restaurant operator from further infringement of plaintiff's trademark not covered).  However, in the pollution context, the Fifth Circuit has ruled that Superfund clean up costs should be treated as being akin to "damages."  Snydergeneral Corp. v. Century Indemnity Co., 113 F.3d 536 (5th Cir. 1997); Bituminous Casualty Corp. v. Vacuum Tubes, Inc., 75 F.3d 1048 (5th Cir. 1996).  Cf. W.R. Grace & Co. v. Continental Cas. Co., 682 F.Supp. 1403 (E.D. Texas 1988)(asbestos abatement expenses) and Broadhead v. Hartford, 773 F.Supp. 882, 893 (S.D. Miss. 1991)(Texas law)(costs incurred by the insured to evacuate citizens after its gas well blew out are covered "damages" since the insured had a statutory obligation to undertake the evacuation and did not voluntarily incur these costs).
 

  DECLARATORY JUDGMENT ACTIONS

  In Farmers Texas County Mutual Ins. Co. v. Griffin, 955 S.W.2d 81 (Tex. 1997), the Texas Supreme Court held for the first time that an insurer was entitled to a declaration that it had no duty to indemnify the insured even though the underlying tort action against the insured was still pending and no declaration of liability had as yet been determined in the tort suit.  Noting its earlier statement in Gandy, that an insurer should make a good faith effort to fully resolve coverage before the plaintiff's claim is adjudicated, the Supreme Court noted that it would be inconsistent to impose such an obligation on an insurer while preventing it from obtaining a determination of its claimed indemnity obligations.  In some cases, it may be impossible to obtain an adjudication of indemnity questions in advance of the resolution of the underlying suit, as where coverage depends on facts to be proven in the underlying suit.  In some cases, however, a court may appropriately resolve the issue of indemnity without the risk of inconsistent factual findings.

  The Texas Supreme Court has ruled that trial courts do not have jurisdiction to rule on the liability of insureds for intentional acts or other issues that will be adjudicated in a separate third party suit.  Firemen's Ins. Co. v. Burch, 442 S.W.2d 331, 333 (Tex. 1968).  See also State Farm v. Taylor, 832 S.W.2d 645 (Tex. App. 1992). 

  Since a tort plaintiff has no interest in the proceeds of a liability policy until it obtains a final judgment against the insured, no actual case or controversy exists between it and a liability insurer to support jurisdiction under the federal Declaratory Judgement Act. Standard Fire Ins. Co. v. Sassin, Civ 3:94-CV-0964 (N.D. Tex. August 2, 1995).

  The Texas Supreme Court has ruled that where a policyholder had previously sued the reinsurer of his automobile liability insurer for coverage claims arising out of an automobile accident, its contract claims against the auto insurer itself were barred by res judicata and collateral estoppel but that the insured should still be permitted to pursue claims for theories of extra-contractual liability that were not litigated in the original case and which pertain solely to the insurer. State and County Mutual Fire Insurance Company v. Miller, No. 99-0501 (Tex. January 18, 2001). 

  On a certified question from the Fifth Circuit, the Texas Supreme Court has declared that insureds are entitled to recover attorney’s fees in a DJ.  In Grapevine v. GEI Insurance Company, 2000 WL 890386 (Tex. Jul 06, 2000), the Supreme Court declared that

We hold that in a policyholder’s successful suit for breach of contract against an insurer that is subject to the provisions listed in section 38.006, the insurer is liable for reasonable attorney’s fees incurred in pursuing the breach-of-contract action under section 38.001 unless the insurer is liable for attorney’s fees under another statutory scheme.  Accordingly, we answer the certified question from the Fifth Circuit Court of Appeals yes.
 

  DISCOVERY ISSUES

   --Claims Manuals

  Such discovery has been held to have no probative value in determining the mutual intent of the parties as reflected in the insurance contracts. Snyder-General Corp. v. Continental Ins. Co., No. 3-90-2396-T, Order at 2-3 (N.D. Tex. May 1, 1991), modified on other grounds, Order (N.D. Tex. June 4, 1991).   However, insurers were order to turn over such documents by a state trial court in Union Pacific  Resources v.  Continental Ins.  Co., Johnson County No.  249-23-98 (Tex.  Dist.  Ct.  July 8, 1998).

   -Drafting History

  Permitted in Union Pacific, supra.
 

   --Other Policyholder Claims
 

   --Reinsurance Information

  Permitted in Union Pacific, supra.

   --Reserves

 Permitted in Union Pacific, supra.

 
  DUTY TO DEFEND

  The Texas Supreme Court has declared that an insurer's duty to defend is solely based upon the allegations in the underlying lawsuit and the language of its insurance policy.  National Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997) and Fidelity & Cas. Co. v. McManus, 633 S.W.2d 787, 788 (Tex. 1982).  See also Potomac Ins. Co. of Illinois v. Jayhawk Medical Acceptance Corp., 198 F.3d 548, 551 (5th Cir. 2000);  Gulf Chemical Corp. v. Associated Metals & Minerals Co., 1 F.3d 365 (5th Cir. 1993)("The court cannot consider evidence outside the policy an pleadings even if such evidence would tend to show that the suit was specious").  Gomez v. Hartford, 803 S.W.2d 438, 441 (Tx. App. 1992), quoted in Old Republic Ins. Co. v. Comprehensive Health Care Associates, 786 F.Supp. 629 (N.D. Tex. 1992).  However, in cases where the underlying allegations have been amended, the duty to defend is determined by examining the latest amended pleading upon which the insurer based its refusal to defend.  Rhodes v. Chicago Ins. Co., 719 F.2d 116, 120 (5th Cir. 1983) (Texas law). 

  Under the "eight corners" rule, courts must first look to the factual allegations in the pleadings to ascertain whether the alleged conduct potentially requires coverage.  St. Paul Ins. Co., 999 S.W.2d at 884.  [A]n insurer’s contractual duty to defend must be determined solely from the face of the pleadings, without reference to any facts outside the pleadings.  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. Houston Petroleum Co. v. Highlands Ins. Co., 830 S.W.2d 153, 155 (Tex. App.–  Houston [1st Dist.] 1990, writ denied)(citations omitted).  The focus of this inquiry is on the facts alleged, not on the actual legal theories.  See Maayeh v. Trinity Lloyds Ins. Co., 850 S.W.2d 193, 195 (Tex. App.–  Dallas 1992, no writ).  "Where the complaint does not state facts sufficient to clearly bring the case within or without coverage, the general rule is that the insurer is obligated to defend if there is, potentially, a case under the complaint within the coverage of the policy."  National Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997).  The factual allegations in a third party’s complaint must be liberally construed in favor of the insured.  See Terra Int’l, Inc. v. Commonwealth Lloyd’s Ins. Co., 829 S.W.2d 270, 272 (Tex. App.–  Dallas 1992, writ denied).

  In assessing whether an insurer has wrongly refused to defend, a court should look to the factual allegations set forth in the action against the insured rather than the legal theories upon which liability is claimed.  Id., cited in Farmers Texas County Mutual Ins. Co. v. Griffin, 955 S.W.2d 81 (Tex. 1997).  In Griffin, the Texas Supreme Court ruled that an automobile liability insurer was relieved of any duty to defend based upon an exclusion for anyone who "intentionally causes bodily injury or property damage" notwithstanding the fact that the underlying suit alternatively sought relief on theories of negligence and gross negligence in a drive by shooting case.  See also  Paradigm Ins. Co. v. Texas Richmond Corp. d/b/a The Mens Club of Houston,  942 S.W.2d 645 (Tx. App. 1997)(allegations based on negligent hiring or supervision did not trigger duty to defend where actual cause of plaintiff's injuries was excluded).

  An insurer that receives the tender of a defense has four options: (1) it may reject a claim outright; (2) it may seek a declaratory judgment as to its rights and obligations; (3) it may defend under a reservation of rights or non-waiver agreement; or (4) it may assume the insured's unqualified defense.  E&L Chipping Co., Inc. v. Hanover Ins. Co., 962 S.W.2d 272 (Tex. App. 1998).

  Unlike the duty to defend, the duty to indemnify is based on proven facts, not mere allegations in pleadings.  American Alliance Insurance Company v. Frito-Lay, Inc., 788 S.W.2d 152, 154 (Tex. App.-Dallas 1990).  Thus, the duty to defend is broader than the duty to indemnify.  There may be an obligation to defend even if there is no indemnity obligation.  Farmers Texas County Mutual Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 1997). 

  A liability insurer has no duty to reimburse an insured for defense costs incurred prior to the date that the claim is tendered to the insurer for a defense. Lafarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389 (5th Cir. 1995).  See also Cruz v. Liberty Mut. Ins. Co., 853 S.W.2d 714, 717 (Tex. App. 1993).  Nor may an insured recover such sums on a quantum meruit basis where the insurance contract contains a "voluntary payment" clause that specifically prohibits reimbursement for sums paid by the insured without the knowledge or consent of the insurer.  Nagel v. Kentucky Central Ins. Co., 894 S.W.2d 19 (Tex. App. 1994).  See also E&L Chipping Co., Inc. v. Hanover Ins. Co., 962 S.W.2d 272 (Tex. App. 1998)(insurer had no duty to reimburse costs for suit that never been tendered to it). 

  An insurer that breaches its defense obligation is bound, in subsequent proceedings, by a settlement or judgment rendered against its insured.  Columbia Mut. Ins. Co. v. Fiesta Mart, Inc., 987 F.2d 1124 (5th Cir. 1993); Rhodes v. Chicago Ins. Co., 719 F.2d 116, 120 (5th Cir. 1983).  While the insurer cannot dispute the factual basis for liability, its breach of the defense obligation does not estop it from showing that no basis for indemnity exists.  Employers Cas. Co. v. Block, 744 S.W.2d 940, 943 (Tex. 1988).  Moreover, an insurer is not bound by self-serving terms in a "judgment" or settlement agreement between its insured and a third party claimant where the terms are incidental to the insured's liability.  In Columbia Mut. Ins. Co. v. Fiesta Mart, Inc., 987 F.2d 1124 (5th Cir. 1993), reh'g denied, 992 F.2d 326 (5th Cir. 1993), the Fifth Circuit ruled that the insurer was free to contest the factual basis for the insured's claim.

  The Texas Supreme Court addressed this issue in State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996).  In Gandy, the court declared that a policyholder's assignment of his claims against his insurer to the tort claimant is invalid if:  (1) it is made prior to an adjudication of the plaintiff's claims against the defendant in a fully adversarial trial, (2) the defendant's insurer has tendered a defense, and (3) the defendant's insurer has either (a) accepted coverage or (b) has made a good faith effort to adjudicate the coverage issues prior to adjudication of the plaintiff's claim.  A judgment for plaintiff against a defendant, rendered without a fully adversarial trial, is not binding on the defendant's insurer or admissible as evidence of damages in an action against the defendant's insurer by plaintiff as the defendant's assignee.

  Consistent with Gandy, the Texas Supreme Court ruled on February 13, 1998 that a judgment creditor had no right to enforce an action against the liability insurer based upon a judgment that was obtained following an uncontested trial.  State Farm Lloyds Insurance Co. v. Maldonado, 1998 WL 59048 (Tex. 1998). 

  The duty to defend was held not to extend to the prosecution of third party claims in Mustang Tractor and Equipment Company v. Liberty Mutual Ins. Co., C.A. No. H-91-2523 (S.D. Tex. October 8, 1993), aff'd on other grounds, 76 F.3d 1996 (5th Cir. 1996).

  A Bankruptcy Court has ruled that a liability insurer may not demand reimbursement from the insured's estate for defense costs that were incurred in defending a tort suit, inasmuch as the doctrine of restitution should not apply where the insurer's defense was to protect its own interests, not those of its insured.  In re Hansel, No. 92-41642 (S.D. Tex. August 27, 1993).
 

  ESTOPPEL AND WAIVER

  Waiver is the intentional relinquishment of a known right or intentional conduct inconsistent with claiming that right.  FDIC v. U.S. Fire Ins. Co., 956 F.Supp. 701, 705 (N.D. Tex. 1996).  Whereas waiver and estoppel may operate to avoid forfeiture of a policy and may prevent an insurance company from avoiding payment because of a failure on the part of the insured to comply with some requirement of the policy, waiver and estoppel cannot enlarge the risks covered by a policy and cannot be used to create a new and different contract with respect to the risk covered and the insurance extended.  Minnesota Mutual Ins. Life Ins. Co. v. Morse, 487 S.W.2d 317, 320 (Tex. 1972) and Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir.1999).

  Texas courts have recognized that estoppel and waiver cannot be used to expand policies to cover risks that were not contracted for.  However, an exception to this general rule has been created for situations where an insurer takes over the defense of its insured without reserving rights.  Farmers Texas County Mut. Ins. Co. v. Wilkinson, 601 S.W.2d 520, 522 (Tex. Civ. App. 1980).  The Wilkinson exception only applies if the insured suffers prejudice as the result of the insurer's defense effort.  Pennsylvania Nat. Mut. Cas. Ins. Co. v. Kitty Hawk Airways, Inc., 964 F.2d 478 (5th Cir. 1992).  See also Paradigm Ins. Co. v. Texas Richmond Corp. d/b/a The Mens Club of Houston, 942 S.W.2d 645, 652 (Tx. App. 1997)(although insurer did not issue reservation of rights until two weeks after it agreed to provide a defense, delay did not result in prejudice).  Furthermore, an estoppel under such circumstances only runs to the policyholder; it does not preclude the defending insurer from seeking contribution from other insurers.  St. Paul Mercury Ins. Co. v. Lexington Ins. Co., 78 F.3d 202 (5th Cir. 1996).

  An insurer will only be deemed to have waived a right if he intentionally surrenders a known legal right which belongs to him.  State Farm Lloyds, Inc. v. Williams, 791 S.W.2d 542 (Tex. App. 1990). 

   Under Texas law, a breach of the duty to defend will not estop the insurer to dispute its claimed indemnity obligation.  Enserch Corp. v. Shand Morah & Co., 952 F.2d 1485, 1493 (5th Cir. 1992) and Hartford Casualty Co. v. Cruse, 938 F.2d 601, 605 (5th Cir. 1991). 

  The Texas Court of Appeals has ruled in Katerndahl v.  State Farm Fire & Casualty Co., 961 S.W.2d 518 (Tex.  App.  1997), that an insurer is not estopped to withdraw from the defense of a lawsuit on a basis that was not articulated in its earlier reservation of rights letter but that it does so at its peril in the event that the suit is found to fall within the scope of its coverage. 

  The Texas Supreme Court has ruled that an insurer that wrongfully refuses to defend a claim is estopped from disputing the reasonableness of any subsequent settlement that its insured decides to enter into.  Employers Cas. Co. v. Block, 744 S.W.2d 940 (Tex. 1988).   However, the insurer does not lose its right to contest indemnity questions if it agrees to provide a defense under a reservation of rights, even if the insured rejects the terms of the defense.  U.S. Aviation Underwriters, Inc. v. Olympia Wings, Inc., 896 F.2d 949 (5th Cir. 1990). 
  Where the insurer was not a party to a trial, the resulting verdict is not binding on it and does not collaterally estop it from questioning whether the basis for liability fell within the scope of its coverage.  However, the insurer is estopped to relitigate the issue of whether the insured was liable at all.  St. Paul Fire & Marine Ins. Co. v. American International Surplus Lines Ins. Co., 1997 U.S. Dist LEXIS 4956 (N.D. Tex. March 31, 1997). 

  The Court of Appeals has also ruled that an insurer that receives notice of a suit but fails to either defend or notify its insured of coverage concerns is estopped to deny coverage for the ensuing default judgment against its policyholder. St. Paul Surplus Lines Ins. Co. v. Dal-Worth Tank Co., Inc., No. 07-93-0197-CV (Tex. App. August 29, 1995).

  The Supreme Court of Texas has ruled that an insurer is only bound by its agent's misrepresentations concerning the scope of coverage if the agent had actual or implied authority to make such representations.  However, in Celtic Life Ins. Co. v. Coats, 885 S.W.2d 96 (Tex. 1993), the court ruled that a health insurer was not bound by misstatements concerning policy limits since its agent only had authority to "explain" coverage.
 

  EXCESS INSURERS

  Excess insurers' policy obligations are not triggered until the applicable primary coverages are first exhausted.  Emscor Mfg., Inc. v. Alliance Ins. Group, 879 S.W.2d 894 903 (Tex. App. 1994).  To do otherwise would be to undermine the very reason that excess insurance is otherwise affordable.  St. Paul Mercury Ins. Co. v. Lexington Ins. Co., 78 F.3d 202 (5th Cir. 1996). 

  Earlier, a federal district court had reached the opposite conclusion in Builders Transport, Inc.  v.  Ford Motor Co., 1998 WL 798665 (E.D. Tex.  March 4, 1998), declaring that an excess insurer was obligated to contribute a pro rata share of defense costs corresponding to its share of a settlement and could not limit its payment obligation to costs incurred subsequent to the exhaustion of the underlying coverages. 

  A primary insurer has not been permitted to recover defense costs from an excess carrier on an equitable theory.  In Texas Employers Ins. Assoc. v. The Underwriting Members of Lloyds, 836 F.Supp. 398 (S.D. Tex. 1993), the U.S. District Court ruled that excess insurers are only responsible for defense costs incurred after the exhaustion of primary limits, rejecting the primary insurer's argument that they had a reciprocal and equitable duty to pay a pro rata share of costs where the case plainly had an excess potential.  The District Court also ruled in Texas Employers that the primary insurer's offer to make its policy limit “avaiilable” did not constitute exhaustion of the sort that would trigger the excess carrier's policy duties.

  The Texas Court of Appeals ruled in In Re Continental Insurance Company, No. 10 99 066 CV (Tex. App. March 14, 1999) that an excess insurer was entitled to learn how much the policyholder had obtained through settlements with other insurers as this discovery as it bore materially on whether the insured had already obtained full reimbursement for its claims and/or the extent to which any remaining claims against Continental might be offset by said payments.

  The Texas Supreme Court has ruled that an excess insurer has no duty to defend until such time as the primary limits are exhausted but must not take steps prior to that date to affirmatively disrupt or harm the defense being provided by the primary insurer. Keck Mahin & Cate v. National Union Fire Insurance Company of Pittsburgh, No. 98-0034 (Tex. May 25, 2000).

   The U.S. Court of Appeals for the Fifth Circuit held that excess insurers have no duty to "drop down" over insolvent primary insurance in Harville v. Twin City Fire Ins. Co., 885 F.2d 276 (5th Cir. 1989).  However, where the excess coverage is written in terms of "collectible" insurance, it may be required to drop down.  Mission National Ins. Co. v. Duke Transportation Co., 792 F.2d 550 (5th Cir. 1986).  But see Transco Exploration Co. v. Pacific Employers Ins. Co., 869 F.2d 862 (5th Cir. 1989)(no drop down where policy was written excess of a stated policy or "other" collectible insurance). Accord TXO Production Corp. v. Twin City Fire Ins. Co., 685 F.Supp. 156 (E.D. TX 1988).

  An umbrella policy that promised to “continue coverage for all occurrences covered by the primary insurance” was held to follow form based upon certain endorsements adding coverage for “saline contamination” and damage to “underground resources” even though similar endorsements were not included in the umbrella policy.   Mesa Operating Co v. California Union Ins. Co.,  986 S.W.2d 749 (5th  Dist.  Dallas 1999), review denied, No. 99-0452 (Tex. August 26, 1999). 

  The Texas Supreme Court has recognized an excess insurer's right to bring an action against a primary insurer for negligent claim handling on a theory of equitable subrogation.  American Centennial Ins. Co. v. Canal Ins. Co., 843 P.2d 480 (Tex. 1992).  In such circumstances, however, the subrogating insurer is subject to the same sort of coverage defenses that could have been raised against the policyholder. St. Paul Mercury Ins. Co. v. Lexington Ins. Co., 78 F.3d 202 (5th Cir. 1996).

  A lower layer excess insurer had no duty to protect the interests of a higher layer carrier against an excess verdict where the insured's policy gave it exclusive control over the defense and disposition of claims.  National Union Fire Ins. Co. v. CNA Ins. Co., 28 F.3d 29 (5th Cir. 1994).

  An umbrella carrier has no duty to "drop down" to pay a loss that would have been covered by the primary insurance but for the fact that the insured cancelled the primary policy in violation of a "maintenance of underlying limits" condition.  Dalton's Best Maid Products, Inc. v. Houston General Ins. Co., 855 S.W.2d 272 (Tx. App. 1993).

  An excess policy that followed form to the "terms and conditions" of the primary policy, including certain enumerated items, was held to incorporate by reference the primary policy's "other insurance" clause, even though it was not among the enumerated items.  In St. Paul Mercury Ins. Co. v. Lexington Ins. Co., 78 F.3d 202 (5th Cir. 1996), the court ruled that the enumeration was not meant to be all inclusive.

  An excess insurer may pursue a malpractice claim against the defense counsel appointed by the primary insurer. American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (Tex. 1992).
 

  FIRST PARTY CLAIMS
 An insurer is entitled to subrogation only after the insured has recouped his loss and some or all of his litigation expenses.  Ortiz v. Great Southern Fire and Casualty Insurance Company, 597 S.W.2d 342, 343 (Tex. 1980). 
 

  INDEMNITY ISSUES

  Under Texas law, the duty to defend "is measured against the allegations of the pleadings but the duty to pay is determined by the actual basis for the insured's liability.  W.R. Grace and Co. v. Continental Casualty Co., 896 F.2d 865, 874 (5th Cir. 1990). 

  The Texas Supreme Court ruled in Embrey v. Royal Insurance Company of America, No. 99-0411 (Tex. April 20, 2000) that absent a contractual breach, a liability insurer’s indemnity obligation is capped by its policy limit and it  has no obligation to pay pre-judgment interest over and above the policy limits.  The court also refused to require the insurer to pay pre-judgment interest as a “supplementary payment.”
 

  KNOWN LOSS

  The Texas Supreme Court has ruled that “it is contrary to public policy for an insurance company...to knowingly assume the burden of a loss that occurred prior to making the contract.”  Burch v.  Commonwealth Country Mut.  Ins. Co., 450 S.W.2d 838, 840 (Tex.  1970).

  Fortuity arguments were rejecting in an advertising injury case, even though the claims were partially the subject of a judgment against the insured prior to the policy, where the insured did not believe that harm was continuing and where, despite knowledge of the claims, the insurer took no steps to add an exclusion to its policy.  Two Pesos, Inc. v. Gulf Ins. Co., 901 S.W.2d 495 (Tex. App. 1994).

  "Known loss" and loss in progress arguments were held not to bar a duty to defend in E&L Chipping Co., Inc. v. The Hanover Ins. Co., 962 S.W.2d 272 (Tex. App.  1998).  St. Paul had argued that it had no duty to defend claims arising out of a 1988 fire as its policy did not incept until 1989.  But see Carpenter Plastering Co. v. Puritan Ins. Co., 1998 WL 156829 (N.D. Tex. August 23, 1988)(“one cannot insure against something that has already begun”).
 

  NUMBER OF OCCURRENCES

  Earlier case law suggested that Texas would follow the "effect" test.  Anchor Cas. Co. v. McCaleb, 178 F.2d 322 (5th Cir. 1949)(coverage for oil well blow-outs measured by number of claimants).  However, subsequent decisions have followed the "cause" test.  Maurice Pincoff’s Co. v. St. Paul Fire & Marine Ins. Co., 447 F.2d 204, 206 (5th Cir. 1971).

  Nevertheless, Texas courts have not always applied the “cause” test consistently.  In particular, cases have diverged as to whether the “cause” is the immediate source of the plaintiff’s injuries or the “event” that created the insured’s liability.  In Pincoff’s, the insured had sold contaminated seed to eight dealers, who in turn sold the seed to bird owners.  Holding that the individual sales to the dealers were the cause of insured's liability, the Fifth Circuit found eight "occurrences."

 Diverse instances of misconduct were held to involve a single pattern or practice and therefore one “occurrence” under a “cause” test in Transport Ins. Co. v. Lee Way Motor Freight Co., 487 F.Supp. 1325, 1330 (N.D. Tx. 1980).  The federal district court held that forty-seven instances of race discrimination at four separate locations of insured over period of years arose out of a single "pattern and practice" of discrimination and thus involved one "occurrence."  Note that policy had a $25,000 "per occurrence" deductible.  See also Carpenter Plastering Co. v. Puritan Ins. Co., 1998 WL 156829 (N.D. Tex. August 23, 1988)(damage from installations of asbestos board wall panels in building involved exposure to same conditions and was therefore one "occurrence"); Broadhead v. Hartford, 773 F.Supp. 882, 893 (S.D. Miss. 1991)(under Texas law, various claims against arising out of a gas well blow out were a single "occurrence") and Goose Creek Consol. I.S.D. v. Continental Cas. Co., 658 S.W.2d 338 (Tx. App. 1983)(fires set by single arsonist at two schools several hours apart constitute separate "occurrences").   More recent state cases have distinguished Goose Creek on its facts, however.  See Texas Dept. of Mental Health v. Petty, 817 S.W.2d 707, 720 (Tex. App. 1991), aff'd (Tex. 1992)(mental patient's "institutionalization syndrome" was cumulative and inseparable effect of numerous acts of state employees over a period of years and was therefore one "occurrence") and Bethany Christian Church v. Preferred Risk Mut. Ins. Co., 1996 WL 613209 (S.D. Tex. August 26, 1996)(various thefts that had occurred over the course of several surety policies constituted a single "occurrence").  But see Cullen/Frost Bank v. Commonwealth Lloyd's Ins. Co., 852 S.W.2d 252 (Tex. App. 1993)(suggesting that continued exposure can result in new "occurrences").

  By contrast, Texas courts have typically found multiple “occurrences” in sexual molestation cases involving diverse instances of misconduct.  See Preferred Risk Mutual Ins. Co. v. Watson, 937 S.W.2d 148 (Tx. App. 1996)( allegations that three children were molested by an employee of the Baptist Church day care center were subject to a separate "occurrence" limit for each child).

  This has been held to be the case even where the allegations against the insured are based upon a negligent failure to supervise the perpetrator.  Commercial Union Ins. Co. v. Roberts, 7 F.3d 86, 88 (5th Cir. 1993).  For instance, the Fifth Circuit ruled in H.E. Butt Grocery Co.  v.  National Union Fire Ins.  Co. of Pittsburgh, 150 F.3d 526 (11th Cir.  1998) that two separate sexually assaults by a store employee were separate “occurrences” for the purposes of applying a self-insured retention.  Even though the claims were based on the insured’s negligent  failure to supervise the employee, the court declared that the “immediate cause” of the underlying injuries were the intervening intentional tort of the employee and therefore that each separate assault was a separate “occurrence.”  In addition to its refusal to find ambiguity in the meaning of “occurrence” in this context, the Fifth Circuit took note of the fact that the insured could have purchased an endorsement that would have aggregate such conduct as a single “occurrence.”   A concurring opinion took issue with Judge Garza’s “immediate cause” analysis, arguing instead that the number of “occurrences” should be based on the “event” giving rise to liability from the insured’s point of view.  Judge Benavides declared that the “event creating liability” test was more in keeping with cases such as Maurice Pincofffs.

  An incident in which the plaintiff separately shot and killed various family members was held to involve multiple “occurrences” based upon a claimed ambiguity in the meaning of “occurrence.”  State Farm Lloyds, Inc. v. Williams, 916 S.W. 2nd 781 (Tex. App. - Dallas, 1997). 

  Concluding that the number of “occurrences” under an employee dishonesty policy should be determined by the same “cause” analysis that courts have used for general liability policies, the Fifth Circuit  has ruled in Ran-Nan, Inc. v. General Accident Ins. Co., No. 00-11304  (5th Cir.  May 24, 2001) that each employee’s dishonest conduct was a separate “cause” of the insured’s loss.   The court rejected the insurer’s contention that there was only one “occurrence” being the overall loss of money through the combined thefts.
 

  POLLUTION EXCLUSION

  As yet, the Texas Supreme Court has not ruled on the “sudden and accidental”-type exclusion.  However, the state Court of Appeals has ruled in Mesa Operating Co v. California Union Ins. Co.,  986 S.W.2d 749 (5th  Dist.  Dallas 1999) and Gulf Metals Industries, Inc. v. Chicago Ins. Co., 993 S.W.2d 800 (3rd Dist. Austin1999), review denied (Tex. April 18, 2000) that “sudden was not ambiguous and that gradual pollution was not covered.  The Mesa court further refused to find that there was a “metaphysical moment” when, for a brief period of time, pollutants were initially released.  The court agreed that a brief discharge did not cease to become “sudden” merely because pollution continued to occur as a consequence of that discharge.  However, more wastes are discharged over an extended period of time, the mere fact that they begin at a certain point in time does not make the overall discharge “sudden.”

  Other Texas cases finding that “sudden” has a temporal meaning include  St. Paul Surplus Lines Insurance Company v. GEO Pipe Company, 25 S.W.3d 900 (Tex. App. 2000)(gradual corrosion of pipe not “sudden”); Guaranty National Ins. Co. v. Vic Manufacturing Co., 143 F.3d 192 (5th Cir. 1998) ; Mustang Tractor and Equipment Co. v. Liberty Mut. Ins. Co., 76 F.3d 1996 (5th Cir. 1996); Snydergeneral Corp. v. Century Indemnity Co., 907 F.Supp. 991 (N.D. Tex. 1995), aff'd in part, rev'd in part, 112 F.3d 536 (5th Cir. 1997)(dicta) and American States Ins. Co. v. Hanson Industries, 873 F.Supp. 17 (S.D. Tex. 1995). 

  The Fifth Circuit has suggested that courts should use a “secondary discharge” analysis in assessing whether a release is “sudden and accidental.”  Thus, in Snydergeneral, the Fifth Circuit affirmed the lower court's temporal interpretation of "sudden" but held that, whether considered under the law of Minnesota or Texas, whether the spill had been "sudden and accidental" must be considered by the point in time at which the pollutants escaped from a place of containment. Even though the initial overflow might have been unexpected, the court found that the very purpose of dry wells is to leach waste liquid into the surrounding environment.   Similarly, in Union Pacific Resources Co. v. Aetna Cas. & Sur. Co., 894 S.W.2d 401 (Tex. App. 1994), writ denied No. 95-0473 (Tex. September 18, 1995), the Texas Court of Appeals ruled that the "triggering event" for the exclusion was the escape of pollutants from a landfill, not the initial dumping of wastes into a landfill. 

  A federal court has also ruled that discharges were not "accidental" when the insured paid to have its known toxic waste placed on the ground at the landfill.  Kinark Corp. v. Home Ins. Co., C.A. No. H-93-1651 (S.D. Tex. July 7, 1994).  However, a state trial court has refused to preclude the possibility of "sudden and accidental" releases of pollutants merely because the insured's electroplating facility was "pollution prone." Capital Metal Finishing, Inc. v. Aetna Casualty & Surety Co., Travis County District Court No. 91-3286, Hearing Transcript (Tex. May 26, 1993). 

   A federal District Court earlier ruled in National Standard Ins. Co. v. Continental Ins. Co., No. CA-3-81-1015-D (N.D. Tex, October 4, 1983) that the exclusion was only intended to apply to the release of chemicals into the "ambient environment"  and did not bar coverage for injuries who were exposed to toxic substances inside their factories.  By contrast, a U.S. District Court has since ruled in Clarendon America Ins. Co. v. Bay, Inc., 10 F.Supp.2d 736 (S.D. Tex.1998) that the exclusion is not limited to environmental contamination, nor are words such as “discharge, dispersal, release or escape” environmental terms of art. 

  In Mesa Oil, the Court of Appeals rejected the insured’s argument that damage to an aquifer is not a discharge into a “body of water.” 

  The applicability of such exclusions depends on whether the claimed injuries are alleged to have been caused by pollutants, rather than the specific theory of liability alleged. Bituminous Casualty Corp. v.Kenworthy Oil Co., 912 F.Supp. 238 (W.D. Tex. 1996), aff'd mem., 105 F.3d 656 (5th Cir. 1996)

  Earlier, the Texas Court of Civil Appeals ruled in Circle "C" Ranch Co. v. St. Paul Fire & Marine Ins. Co., No. 3-91-388-CV (Tex. App. May 5, 1993), opinion withdrawn (Tex. App. May 19, 1993) that the exclusion did not apply to the insured's aerial spraying of herbicides that drifted onto neighbors' crops because the insured did not "expect or intend" the resulting injuries.  The decision was subsequently withdrawn due to settlement, however.  The dissenting justice in In Re Texas Eastern Transmission, 15 F.3d 1249 (3d Cir. 1994) noted that "Circle C" does not preclude coverage where pollution occurs gradually and is therefore not "sudden."  Circle C has more recently been ignored by a state trial court, who dismissed it as an "old dog of a case."  Gulf Metal Industries, Inc. v. Chicago Ins. Co., Travis No. 96-04673 (Tx. Dist. Ct. September 10, 1997), aff’d, 993 S.W.2d 800 (Tex.  App. 1999).

  In unrelated contexts, "arising out of" has been given a very broad meaning by Texas courts.  Canutillo Independent School District v. National Union Fire Ins. Co. of Pittsburgh, PA, 99 F.3d 695 (5th Cir. 1996)(adopting "but for" meaning).

  The scope of the "absolute" pollution exclusion was upheld by the Texas Supreme Court in CBI Industries, Inc. v. National Union Fire Ins. Co., 907 S.W.2d 517 (Tx. 1995) in a claim which resulted from a construction accident that caused a cloud of hydrofluoric acid gas to spread onto the property of abutting property owners.  Although the Court of Appeal ruled that the insured should have been permitted to conduct further discovery with respect to the drafting history of the exclusion to determine whether it contained any latent ambiguities, the Supreme Court ruled that extrinsic evidence of drafting intent was irrelevant to the meaning of an unambiguously worded exclusion. 

  More recently, the Supreme Court has refused to find that a contractor “occupies” a job site merely by being there and therefore reversed a ruling of the Court of Appeals which had declared that Section 1(a) of the exclusion barred coverage for a release at a job site on which the insured was performing operations.  Kelley-Coppedge, Inc.  v.  Highlands Ins.  Co., 980 S.W.2d 462 (Tex. 1998).   See also Gerling America Ins. Co. v. Lafarge Corp., No. H-96-3387 (S.D. Tex. August 27, 1997)("transient" presence of subcontractor did not constitute "occupancy" of job site where releases occurred). 

  The Fifth Circuit also affirmed the exclusion in Constitution State Ins. Co. v. Isotex, Inc., 61 F.3d 405 (5th Cir. 1995)(exclusion bars coverage for personal injury claims by individuals who alleged exposure to insured's radioactive medical waste) and Certain Underwriters at Lloyd's, London v. CA Turner Construction Co., Inc., 941 F.Supp. 623 (S.D. Texas 1996), aff'd, 112 F.3d 184 (5th Cir. 1997)(exclusion defeats coverage for personal injuries suffered by construction worker who inhaled phenol fumes at job site).  See also  Amoco Production Company v. Hydroblast Corporation v. Fireman’s Fund Insurance Company, 1999 WL 1457368 (N.D. Tex. December 10, 1999)(workplace exposures to solvents held excluded);  Northbrook Indemnity Ins. Co. v. Water District Management Co., Inc., 892 F.Supp. 170 (S.D. Tex. 1995) (rejecting insured's contention that claims based on insured's failure to warn are not excluded);  Crown Central Petroleum Corp. v. Rust Scaffold Builders, Inc., 1996 WL 774 142 (S.D. Tex. October 10, 1996)(no coverage for personal injuries suffered by construction worker after being exposed to hydrofluoric acid) and E&L Chipping Co., Inc. v. The Hanover Ins. Co., 962 S.W.2d 272 (Tex. App. 1998)(contamination of abutting property owner's water supplies by run off from firefighting efforts at wood chipping plant).

  The scope of the exclusion is not limited to "hazardous" or "toxic substances." Gerling America Ins. Co. v. Lafarge Corp., No. H-96-3387 (S.D. Tex. August 27, 1997)(cement dust was an "irritant" or "contaminant"); E&L Chipping (rejecting argument that contaminated water is not a "pollutant").

  In E&L Chipping, the Texas Court of Appeals also held that the "hostile fire" exception to the exclusion did not apply where the neighbors' groundwater became polluted by the run off from firefighting efforts on the insured's property.  In such circumstances, the court held that it was the presence of pollutants in the water that ran off the property that caused the plaintiffs' damage, not "heat, smoke or fumes" from the fire.   By way of contrast, the exception was held to reinstate coverage for allegations by private property owners that they suffered damage as a consequence of black smoke from a fire that broke out at the insured’s tire recycling facility fell within the “hostile fire” exception to the pollution exclusion.  In Mid-Continent Cas. Co. v. Safe Tire Disposal Corp., 16 S.W.3d 418 (Tex. App. 2000) the Court of Appeals rejected the insurer’s contention that only fires that were intentionally set but later get out of control are “hostile fires,” adopting instead the insured’s view that any unintended fire is “hostile.”  Further, the court refused to find that the claims were subject to sub-section (b) of the exclusion as involving a facility used by the insured for the processing of waste, declaring that shredded rubber and wire products that are the intended by-product of a recycling facility could not be “waste.”  This latter conclusion was disputed by Judge Gray in a dissenting opinion.

  In Allen v. St. Paul Fire & Marine Ins. Co., 960 S.W.2d 909 (Tex.  App.  1998), the Court of Appeals held that the exclusion barred coverage for a settlement arising out of the insured's contamination of the plaintiff's drinking water supply.  The court refused to find a duty to defend merely because there were separate assertions that the drinking water was "not potable" or "not of good quality,", holding that these were merely restatements of a claim based upon contamination.  See also Mid-Continent Casualty v. United States Fire Insurance Company,  1 S.W.3d 251 (Tex. App. 1999).

  However, in Round Rock Plaza Joint Venture v. Maryland Casualty Co., 1996 Tex. App. LEXIS 581 (1996), the Texas Court of Appeals reversed a lower court's ruling that such exclusions would preclude coverage for suits against a shopping center for damages resulting from flooding when the insured's sewer line backed up, causing restroom toilets to overflow, finding that  it was not clear that raw sewage was the sort of "waste" that was intended to fall within the purview of the pollution exclusion. 

  Under earlier forms of the exclusion, discharges must be from the insured's premises.  Interpreting the 1985 form, the Court of Appeals ruled in Pro-Tech Holdings, Inc. v. Union Standard Ins. Co., 897 S.W.2d 885 (Tex. App. 1995) that the exclusion did not apply to suits against a product manufacturer for injuries allegedly caused by inhaling vinyl dust from its products as the discharges had not occurred on or from the insured's premises.

  The exclusion was also challenged on regulatory grounds in Navajo Refining Co. v. CIGNA Ins. Co., No. 3:95-CV-0441 (N.D. Tex. June 8, 1995).  While refusing to rule on a later exclusion due to questions as to whether proper notice was given to the insured at the time of renewal, the court rejected the insured's argument that earlier forms were invalid as not having been approved by the Insurance Department. the court held that the requirements of Texas Insurance Code Section 5.13-2 had not yet taken effect and that the effect of any such omission was in any event harmless since the endorsement in question was approved by insurance regulators a few months later in any event.  Further, the court noted that the claim would in any event be excluded under the earlier form that was superseded by this endorsement. 

  More recently, insurers have adopted endorsement forms that grant back limited pollution coverage subject to the requirement that losses begin and end within a short period of time and that losses be reported within a 30 day period.  In Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir.1999), the Fifth Circuit affirmed a lower court’s ruling that the insured's 38 day delay was fatal to coverage, finding that this was in the nature of a basic coverage element and not merely a condition for which proof of prejudice would be required to defeat coverage.
 

  PROPERTY DAMAGE

  Claims for economic loss were held not covered in Snug Harbor Ltd. v. Zurich Ins. Co., 968 F.2d 538, 542 (5th Cir. 1992) (insured's misplacement of condominium deed resulting in foreclosure against plaintiff, did not result in "property damage"); Selective Ins. Co. of Southeast v. J.B. Mouton and Sons, Inc., 954 F.2d 1075, 1079 (5th Cir. 1992) (plaintiffs who were induced by insured to part with title to their property suffered loss of investment and profits but no "property damage" since there was no damage to the property itself); Terra International, Inc. v. Commonwealth Lloyd's, 829 S.W.2d 270 (Tx. App. 1992)(loss of investment not "property damage"); Maryland Cas. Co. v. Texas Commerce Bancshares, Inc., 1995 WL 11400, No. 3:94-CV-0960-X (N.D. Tex. March 13, 1995)(loss of lease income and diminution in market value not covered).

  The incorporation of a defective component in a building is not itself "property damage" unless it causes damage to the surrounding property.  General Manufacturing Co. v. CNA Lloyd's of Texas, 806 S.W.2d 297, 299 (Tex. Ct. App. 1991). 
 

  PUBLIC POLICY

 On a certified question from the Fifth Circuit, the Texas Supreme Court has responded that it is not against public policy for an insurer to limit coverage for a therapist’s non-sexual misconduct because sexual misconduct is alleged to have occurred in the same or related course of professional treatment, even though the sexual misconduct is immaterial to the non-sexual misconduct claims asserted.  American Home Assurance Co. v.  Billy Carl Stevens, 1998 WL 831250 (Tex.  December 3,1998) and 164 F.3d 956 (5th Cir. 1999). The case involved the applicability of sub-limits in an errors and omissions policy for a mixed malpractice case.
 

  PUNITIVE DAMAGES

  The purpose punitive damages is to “reimburse for losses too remote to be considered an element of strict compensation” and to otherwise compensate the injured party.  Hofer v. Lavender, 679 S.W.2d 470, 474 (Tex. 1984).

  Texas courts have generally ruled that the “all sums” language in a liability policy encompasses punitive damages. Ridgeway v. Gulf Life Ins. Co., 578 F.2d 1026 (5th Cir. 1978);  Manriquez v. Mid-Century Insurance Company of Texas, 779 S.W.2d 482, 484 (Tex. App. 1989);  American Home Assurance Company v. Safeway Steel Products Company, 743 S.W.2d 693 (Tex. App. 1987) and Dairyland County Mutual Insurance Company v. Wallgren, 477 S.W.2d 341, 343 (Tex. App. 1972).     In American Home Assur. Co. v. Ridgeway Corp., 743 S.W.2d 693 (Tx. App. 1987), the Texas Court of Appeals ruled that coverage was not barred by public policy or where the damages were based on gross negligence and not the insured's intentional acts.  Absent an express exclusion for punitive awards, the Texas Court of Appeals declared in Manriquez that an average policyholder would assume that such claims are covered.
 

  REINSURANCE ISSUES

 Absent an agreement creating direct liability in a reinsurer, all claims under the policy must be asserted against the original insurance company.  State and County Mutual Fire Insurance Company v. Miller, No. 99-0501 (Tex. January 18, 2001).  See Texas Insurance Code Article 5.75-1(g)(“A person does not have any rights against a reinsurer that are not specifically set forth in the contract of reinsurance or in a specific agreement between the reinsurer and the person.”) The Texas Supreme Court has similarly ruled that a policyholder has no direct right of action against a reinsurer unless such rights are provided for in the reinsurance contract itself.  Malaysia British Assurance v. El Paso Reyco, Inc., 830 S.W.2d 919, 921 (Tex. 1992).

  STANDARDS FOR POLICY INTERPRETATION

  In general, a court's purpose in construing an insurance contract is to give effect to the true intent of the parties as expressed in the written instrument.  National Union Fire Ins. Co. of Pittsburgh v. CBI Industries, Inc., 907 S.W.2d 517, 520 (Tex. 1995).

  Texas courts construe insurance policies liberally in favor of the insured and strictly against the insurer, especially when dealing with exceptions and words of limitation.  Harbor Ins. Co. v. Trammell Crow Co., Inc., 854 F.2d 94, 99 (1988); Kelly Associates Ltd. v. Aetna Cas. & Surety Co., 681 S.W.2d 593, 596 (1984). 

  Insurance policies are controlled by the rules of construction that are applicable to contracts generally.  Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex. 1987). 

  The determination of whether a contract is ambiguous in light of its wording and the surrounding circumstances is a question of law, although once the contract is found to be ambiguous, the determination of the parties' intent through extrinsic evidence is a question of fact, J.B. Watkins v. Petro-Search, Inc., 689 F.2d 537, 538 (5th Cir. 1988).  As a general rule, however, extrinsic evidence may not be relied on to create an ambiguity, only to clarify one.  National Union Fire Ins. Co. of Pittsburgh v. CBI Industries, Inc., 907 S.W.2d 517, 520 (Tex. 1995)(rejecting argument that so-called drafting history of absolute pollution exclusion demonstrates a latent ambiguity where words of exclusion are plain on their face).  It is only when the intent of the parties cannot be determined from their writing and an ambiguity remains that the courts should look to extrinsic evidence of intent.  Sun Oil Co. v. Madeley, 626 S.W.2d 726, 731 (Tx. 1981).  Nevertheless, the court agreed to consider drafting history to interpret policy language in Balandran v.  Safeco Ins.  Co.  of America, 972 S.W.2d 738 (Tex.  1998).

  The Court of Appeals sought to reconcile Balandran with CBI in Gulf Metals Industries, Inc. v. Chicago Ins. Co., 993 S.W.2d 800 (3rd Dist. Austin 1999), concluding that a court might probably consider the “surrounding circumstances” relating to the formation of the contract itself but should not consider “those present when a regulatory body promulgates the form of the contract.” 

  The Fifth Circuit ruled in Sharp v. State Farm Fire & Casualty Ins. Co., 115 F.3d 1258 (5th Cir. 1997), that a policyholder could not compel first party insurance based on a statement by the Texas Department of Insurance that the policy wordings were ambiguous or might afford coverage for such claims.

  Under Texas law, when the terms of an insurance policy are unambiguous, they must be interpreted in accordance with their plain and ordinary meaning.  Gulf Chemical and Metallurgical Corp. v. Associated Metals and Minerals Corp., 1 F.3d 365, 369 (5th Cir. 1993).
 
  Ambiguity is only deemed to exist where there are two reasonable but conflicting meanings that can be given to the same term in a policy.  However, if the term in question is susceptible of only one reasonable construction, the rule of contra proferentum does not apply.  Puckett v. U.S. Fire Ins. Co., 678 S.W.2d 936, 938 (1984).  See also Grain Dealers Mut. Ins. Co. v. McKee, 911 S.W.2d 775, 781 (Tex. App.--San Antonio 1995).  The courts will neither create an ambiguity in an insurance policy where none exists nor make a new contract for the parties; if the policy language is clear, unequivocal, and hence unambiguous, its terms will be enforced.  Yancey d/b/a The Yancey Agency v. Floyd West & Co., 755 S.W.2d 914 (1988).  The courts will not strain to find an ambiguity if to do so would defeat the probable intentions of the parties, "even when the result is an apparently harsh consequence to the insured."  Calcasieu-Maine Nat. Bank, Etc. v. American Empire Ins., 533 F.2d 290, 295 (5th Cir.) cert. denied, 429 U.S. 922 (1976). 

  Nor should the mere existence of a split in judicial authority be a basis for finding ambiguity.  Gulf Metals Industries, Inc. v. Chicago Ins. Co., 993 S.W.2d 800, 805-06 (3rd Dist. Austin 1999)(noting that if this was to be the rule, “courts would no longer be free to reach their own conclusions regarding contract interpretations once other courts have developed differing interpretations”) .  The Texas Court of Appeals further stated that:

While dictionaries may be helpful to the extent they set forth the ordinary, usual meaning of words, they provide an inadequate test for ambiguity.  To allow the existence of more than one dictionary definition to be the sine qua non of ambiguity would eliminate contextual analysis of contractual terms; any time a definition appeared in a dictionary of whatever credibility or usage, that definition could be said to be “reasonable” and thus render many, if not most, words ambiguous.  Dictionaries define words in the abstract, while courts must determine the meaning of terms in a particular context, here a specific insurance policy.

  The lack of a policy definition does not mandate a finding of ambiguity if the term otherwise has a certain, definite meaning.  USAA v. Pennington, 810 S.W.2d 777, 779 (Tex. App. 1991).  Further, the inclusion of multiple "senses" or definitions in a dictionary does not provide a basis for creating ambiguity.  Associated Freezers, Inc. v. Fireman's Fund Ins. Co., 1996 Tex. App. LEXIS 98 (Tx. App. January 11, 1996)(unpublished).

  Terms in an insurance policy are to be construed together and in context and should not be looked at in isolation.  Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 134 (Tex. 1994).

  Texas courts will not apply the general rule that an insurance policy is construed against the insurer in the commercial insurance field when the insured "is not an innocent but a corporation of immense size, managed by sophisticated businessmen, and represented by counsel on the same professional level as counsel for the insurer."  Eagle Leasing Corp. v. Hartford Fire Ins. Co., 540 F.2d 1257 (5th Cir. 1976).

  A "following form" excess policy was held to incorporate the primary policy's "other insurance" term in St. Paul Mercury Ins. Co. v. Lexington Ins. Co., No. 95-20544 (5th Cir. March 27, 1996).
 

  THEORIES OF ALTERNATIVE LIABILITY

  None adopted to date. The Texas Supreme Court has rejected the application of market share, alternative liability, concert of action and enterprise liability theories for asbestos personal injury claims.  Gaulding v. Celotex Corp., 772 S.W.2d 66 (Tx. 1989).  Earlier, a federal district court had predicted that the Texas Supreme Court might adopt some form of Sindell liability in asbestos-related injury cases. Hardy v. Johns-Manville Sales Corp., 509 F.Supp. 1353 (E.D. Tx. 1981), rev'd on other grounds, 681 F.2d 334 (5th Cir. 1982). See also Gray v. United States, 445 F.Supp. 337 (S.D. Tex. 1978)(rejecting "market share" for DES claims).
 

  TRIGGER OF COVERAGE

  There is no consensus on the appropriate trigger for latent injury claims in Texas.  In the absence of controlling state law, the Fifth Circuit has ruled that a “manifestation” trigger should be used for property damage claims but that an “exposure” trigger is appropriate for bodily injuries arising out of long-tail exposures such as asbestos.  Contrariwise, the Texas Court of Appeals has more recently ruled that “exposure” should apply to both BI and PD claims.

  The Texas Court of Appeals ruled in Pilgrim Enterprises v. Maryland Cas. Co., 24 S.W.2d 488 (Tex. App. 2000) that coverage for personal injury and property damage claims resulting from underground discharges of perchloroethylene are not limited to the year in which the harm was “discovered.”   In contrast to the Fifth Circuit’s recent Azrock case, the court declared that “exposure” should apply to both bodily injury and property damage claims, finding that the Fifth Circuit’s refusal to adopt “manifestation” with respect to property damage claims was owing to prior Fifth Circuit precedent that was not binding on the state appellate courts.  Examining the allegations in the underlying suits, the court ruled that each alleged bodily injury and property damage throughout the period of Maryland’s coverage.  Further, the court found that even in cases where the dry cleaning operations were alleged to have ceased prior to the Maryland policies, coverage was triggered inasmuch as it is the date of exposure and injury that triggers coverage, not the release of pollutants or chemicals.

  A few months earlier, the Fifth Circuit had declared in  Guarantee National Insurance Company v. Azrock Industries, Inc., 205 F.3d 253 (5th Cir. 2000), the Fifth Circuit adopted an “exposure” trigger based upon dates of employment must be utilized for bodily injury asbestos claims.  In rejecting the District Court’s adoption of a “manifestation” trigger for asbestos bodily injury claims, the Court of Appeals ruled that the terms “occurrence” and “bodily injury” are ambiguous under Texas law and that coverage may be triggered based upon sub-clinical tissue damage that results on inhalation of a toxic substance such as asbestos even if symptoms or a diagnosable condition have not yet developed.  The court acknowledged that the “injury in fact” approach was more intellectually honest and truer to the wording of the CGL policy but declared that the cost of determining the dates of injury in any given case were too extensive to make such an approach practical.  The court also found that the use of an “exposure” trigger was consistent with earlier cases in which it had analyzed similar claims under Louisiana law.  In applying this “exposure” analysis, the court noted that Guarantee National would only have a duty to defend for those suits that expressly alleged employment or dates of exposure during its policy period and would have no duty to defend when the dates of exposure terminated prior to its policy or where there were no allegations concerning the date of injury or employment at all. 

  Azrock is consistent with an earlier case in which the 5th Circuit had also adopted an "exposure" trigger for long tail bodily injury claims.  Clemtex, Inc. v. Southeastern Fidelity Ins. Co., 807 F.2d   1271 ((5th Cir. 1987)(silicosis).
 
  Such cases are in contrast to earlier state and federal rulings that had generally applied a “manifestation” trigger for long tail claims. See    American Home Assur.  Co.  v.  Unitramp, Ltd., 146 F.3d 311 (5th Cir. 1998)(damage is “manifest” or “apparent” when it is “capable of easy perception); Aetna Casualty & Surety  Co.  v.  Vino Naran, No.  05 96 01486 CV (Tex.  App.  February 10, 1999)(fire loss resulting from a defectively installed catalytic converter);    Vanguard Underwriters Insurance Company v. Forist, 04-97-00806 (Tex. App. San Antonio July 14, 1999)(construction defects); Dorchester Development Corp. v. Safeco Ins. Co., 737 S.W.2d 380 (Tex. App. 1987)(defective construction of apartment complex) and Carpenter Plastering Co. v. Puritan Ins. Co., C.A. No. 3-87-2435-R (N.D. Tex. August 23, 1988)(installation of asbestos board wall panels). 

  Indeed, the Texas Court of Appeals recently extended this “manifestation” analysis to claims under a first party policy in Closner v. State Farm Lloyd’s, No. 04-99-00883 (Tex. App. March 21, 2001)(damage from plumbing leaks did not trigger coverage since loss did not first become apparent until after policy expired).

  Texas courts have ruled that property damage "manifests itself" when it is "actually sustained", not when the underlying acts occur.  Cullen/Frost Bank of Dallas v. Commonwealth Lloyds Ins. Co., 852 S.W.2d 252, 257 (Tex. App. 1993).  The Fifth Circuit has rejected arguments that latent damage may trigger coverage when it is “identifiable,” declaring instead that coverage only arises when the damage is “capable of easy perception..”  the court refused to find any obligation to inspect for hidden, latent damage.  In Unitramp, the Fifth Circuit declared that a District Court had erred in focusing on when property damage could reasonably have been discovered.  The court made clear that, in its view, “manifestation” meant the point in time when damage was actually discovered.  While a claimant cannot delay the point of discovery by ignoring the obvious, neither is the plaintiff presumed to have some duty of inspection.

  In contrast to these recent “exposure” and “manifestation” cases, earlier rulings adopted diverse trigger theories.   Two federal courts have adopted a Keene-type "continuous" trigger for other toxic tort claims in W.R. Grace & Co. v. Continental Cas. Co., 682 F.Supp. 1403 (E.D. Texas 1988) and National Standard Ins. Co. v. Continental Ins. Co., No. CA-3-81-1015-D (N.D. Tx. October 4, 1983).  Most recently, the Fifth Circuit has ruled, with little analysis, that allegations that disposal activity took place during the period of the insurer's coverage was sufficient to trigger its coverage obligations. Bituminous Cas. Corp. v. Vacuum Tubes, Inc., 75 F.3d 1048 (5th Cir. 1996).  See also Wash Care Corp. v. Maryland Casualty Co., 1997 U.S. Dist.  LEXIS 23093 (S.D. Tex. November 10, 1997)(pollution from dry cleaner's discharge of perc occurred when pollutants were discharged even though problem did not manifest until a decade later); E&L Chipping Co., Inc. v. The Hanover Ins. Co., 962 S.W.2d 272 (Tex. App. 1998)(1989 policy held triggered by allegations of continuous injury from homeowners' whose property became contamination by run-off from 1988 fire on insured's premises) and  Union Pacific  Resources v.  Continental Ins.  Co., Johnson County No.  249-23-98 (Tex.  Dist.  Ct. December 17, 1998)(adopting “actual injury” approach for toxic tort claims).

  Under any trigger theory, an insured cannot obtain coverage for liabilities acquired through merger or acquisition of a tortfeasor subsidiary under policies that expired before the date of the corporate transaction.  Bristol-Myers Squibb Co. v. Highlands Ins. Co.,  1997 WL 674765 (Tx. App. October 30, 1997)(unpublished).

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