The Texas Supreme Court has issued a new opinion we see creating more consent judgments and settlements by insureds to whom coverage has been denied.

On rehearing, in Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc three issues were involved: (1) whether an additional insured clause provided coverage; (2) whether an insurer which rejects coverage is bound by a settlement reached by the insured; and (3) whether the prompt pay statute applies to an insurer’s failure to pay a settlement funded by the insured.

In its original opinion, issued May 5, 2006, the Court addressed only the first issue, and unanimously held that ATOFINA did not qualify as an additional insured for its own, sole negligence under an Evanston umbrella policy issued to Triple S, which had two somewhat inconsistent additional insured provisions. Because of its resolution of the first issue, the Court’s original opinion did not reach the other questions.

In its new opinion, the Court completely changed its analysis, and added discussion of the two other issues. On the additional insured issue, the Court approved the broad “arising out of” additional insured analysis adopted by the Courts of Appeal in Admiral Ins. Co. v. Trident NGL, Inc., 988 S.W.2d 451 (Tex. App. – Houston [1st Dist.] 1999, pet. denied); McCarthy Bros. Co. v. Cont’l Lloyds Ins. Co., 7 S.W.3d 725 (Tex. App. – Austin 1999, no pet.); and Highland Park Shopping Vill. v. Trinity Universal Ins. Co., 36 S.W.3d 916 (Tex. App. – Dallas 2001, no pet.). It then concluded that where two additional insured provisions provided different scopes of coverage, the one providing broader coverage to the insured should be adopted. Thus, ATOFINA was held to be an additional insured under the Evanston policy.

The Court then turned to the issue of whether Evanston was bound by the settlement of the underlying suit made by ATOFINA, after Evanston declined to provide coverage.

This issue required the Court to choose between language in two prior opinions of the Court, Employers Casualty Ins. Co. v. Block, 744 S.W.2d 940 (Tex. 1988) and State Farm Fire & Casualty Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996). In Block, a case involving an agreed judgment rendered after a denial of insurance coverage to the insured, the Court stated that the insurer “was barred from collaterally attacking the agreed judgment by litigating the reasonableness of the damages recited therein” (although the insurer could re-litigate any issues relating solely to coverage). However, in Gandy, a case involving a consent judgment and an assignment of the insured’s claims to the plaintiff, the Court commented that a consent judgment “rendered without a fully adversarial trial [is not] binding on defendant’s insurer or admissible as evidence of damages in an action” by the assignee against the insurer. The Court came down on the side of Block, holding that Gandy was limited to the precise circumstances presented in that case. The key difference appears to be the fact that ATOFINA settled its liability, with its own funds, without knowing whether it would prevail in its coverage battle. Thus, the issues presented by “set up” judgments were arguably not present. Justices Hecht and Johnson expressly dissented from this portion of the Court’s decision.

Our judgment is that we will see more consent judgments and settlements by insureds to whom coverage has been denied, now that Block has been given new life. In this case, Evanston was held liable for the $5.75 million portion of the settlement which exceeded the primary insurance coverage. (One other interesting aspect of this case was that Evanston’s policy did not obligate it to assume the defense of the insured. Thus, Evanston had not breached the policy by refusing to defend. The Court went out of its way to characterize Evanston’s conduct as an unconditional and wrongful denial of coverage so as to trigger the Block analysis.)

Finally, the Court held that Texas’ prompt pay statute (formerly TEX. INS. CODE art. 21.55, now TEX. INS. CODE §§542.051 –.061) did not apply to ATOFINA’s claim for recoupment of the settlement amount. The Court noted that payment for injuries sustained by a third party was a “classic third-party claim” and the prompt pay statute applies only to first-party claims. Thus, while the Court held in Lamer Homes, Inc. v. Mid-Continent Cas. Co., 239 S.W.3d 236 (Tex. 2007) that the prompt pay statute did apply to a claim for the insured’s defense costs incurred in a third-party liability claim, it clarified in this case that the statute does not apply to the actual damages portion of the claim.

By Sid Davis

Sidney H. Davis, Jr. passed away on October 26, 2009. If you are seeking legal help, or have a question about this article or a pending legal matter, please contact Dawn Woelfel Hansen at (214) 741-1166.

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