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Excess Underwriters At Lloyd's, London, et al. v. Frank's Casing Crew & Rental Tools
A Roundtable Discussion
Sponsored by Cook & Roach
There's no question about it: the Texas Supreme Court's decision in Excess Underwriters At Lloyd's, London, et al. v. Frank's Casing Crew & Rental Tools in 2005 is one of the most important insurance coverage cases in recent history. There are questions as to what the justices were thinking, especially considering Stowers Mahon, et al. v. Stowers, et al. And Texas Association of Counties County Government Risk Management Pool v. Matagorda County. On Dec. 22, 2005, a panel of four talked about the ruling and just what it means for insureds and insurers in the Lone Star State. What follows is a transcript of that discussion, edited for length and style.
ROBERT "RANDY" ROACH JR., partner, Cook & Roach, Houston: The thought for this roundtable essentially was that the  Frank's Casing case [Excess Underwriters at Lloyd's, London, et al. v. Frank's Casing Crew & Rental Tools] out of the Texas Supreme Court, in my judgment, is the single most important insurance coverage case to come down the pike in the 24, 25 years I've been practicing. The amount of attention that this decision has gotten in the form of amicus briefs and in the form of law journal articles and in continuing legal education programs is something I don't recall any other insurance coverage opinion ever generating. It's an extremely important case to both insurance companies and to insureds, and it was kind of my view that the importance of this case deserved having a proper airing.
I have assembled four people who I believe are outstanding lawyers in their particular fields and people who are knowledgeable about the practical implications of the Frank's Casing matter. Just to go around the table, starting on my right, John W. Newton III, who is a defense lawyer most of the time . . . someone who understands the practical dimensions from a defense lawyer's view of what decisions such as Frank's Casing can mean to defense lawyers. Tom Wright . . . is a nemesis of mine representing insurance carriers in cases in the Supreme Court and elsewhere in Texas. I consider Tom to be one of the foremost coverage lawyers representing carriers. Randall "Randy" Owen Sorrels . . . is one of the most accomplished plaintiffs lawyers in town. I knew that Randy would have a perspective on this case both as a trial lawyer and as someone who is familiar with Texas Supreme Court appellate law. I should also mention that Randy is the current president of the Houston Bar Association. Last, but not least, is Gerard J. Sonnier. . . . Gerard has experience both in coverage matters, as his experience as a private lawyer in New Orleans dealing with insurance matters, and now running one of the most sophisticated litigation departments anywhere in the country, handling matters all over the United States. I knew Gerard would be able to bring a perspective both as someone who is confronted by coverage questions when insurance companies reserve their rights and also the practical aspect of settling cases when there are insurance coverage disputes.
Perhaps just for completeness, why don't we start with a very brief description of what the Frank's Casing matter essentially says. In Frank's Casing, the policyholder, Frank's, was sued in connection with the collapse of an offshore platform, and Excess Underwriters disputed coverage. Frank's forwarded the plaintiff's offer to Excess Underwriters with a demand either to pay the settlement in full or risk exposure to liability beyond policy limits under the [1974 U.S. Supreme Court decision] Stowers [Mahon, et al. v. Stowers, et al.]. Initially, Excess Underwriters responded that it would pay the settlement amount only if Frank's agreed that all coverage issues could be resolved later. Frank's refused. Excess Underwriters then advised Frank's that it would pay the full settlement demand and seek reimbursement for noncovered claims. A take-nothing judgment was then entered for Frank's and was affirmed on appeal, because Frank's had not given a clear and unequivocal consent to reimbursement under the [Texas Supreme Court's 2000 decision in Texas Association of Counties County Government Risk Management Pool v. Matagorda County]. The Texas Supreme Court reversed. The Supreme Court held that recoupment is now available when an insurer has asserted its reservation of rights and notifies the policyholder that it intends to seek reimbursement in one of two situations: first, where the policyholder agrees that the settlement amount is reasonable, whether or not consent to settlement or to reimbursement is also given; or, in a second circumstance, where the policyholder has control over whether to settle and expressly agrees that the third-party settlement offer should be accepted and the insurer has notified the policyholder that it intends to seek reimbursement. The majority reasoned initially that when a policyholder demands that its insurer accept a settlement offer within policy limits, the settlement offer is deemed reasonable. The insurer should be entitled to settle for that amount that the policyholder has agreed is reasonable and then seek recoupment from the policyholder for claims that were not covered. This portion of the opinion does not address the Matagorda County holding that the policyholder must also expressly consent to the insurer's right to seek reimbursement. The court held, second, reasoning broadly, that an insured who agrees to the settlement and benefits from having claims against it extinguished cannot complain that it must reimburse its insurer if the claims against the insured were not covered by its policy. Significantly, the court indicated that the insurer's right to seek reimbursement need not appear in the insurance contract. Rather, reimbursement may be "implied in law. It is quasi-contractual." The majority rejected concurring opinions by [Texas Supreme Court Justice Dale] Wainwright and [Texas Supreme Court Justice Harriet] O'Neill, arguing for a more narrowly tailored rule. The court even stated, "There are additional circumstances that will give rise to a right of reimbursement," but the court offered no specifics.
Since that time, Frank's Casing has been subject to a large number of critical commentary. There are no less than six law journal articles that have been written on Frank's Casing. And, according to an appendix attached to the Frank's Casing reply to motion of rehearing, there are seven different CLE programs that have focused on Frank's Casing. I have in front of me the current edition of Texas Lawyer, which is its summary of the year in review for 2005. The section on insurance law written by Blake Hyde focuses exclusively on Frank's Casing and what it means practically speaking to defense lawyers and to policyholders and to carriers. The section on appellate law for 2005 focuses on two cases, one of which is Frank's Casing. The article on Justice Priscilla Owen, now of the . . . [5th U.S. Circuit Court of Appeals] and the author of the Frank's Casing opinion, as one of the impact players for 2005, is probably two-thirds of a discussion of her opinion in Frank's Casing.
What I'd like to do now, with those preliminaries in place, is to talk about some of the issues that have been covered in the law journal articles and the CLE presentations. And perhaps the first topic for discussion is the effect of Frank's Casing on settlement. Is there somebody who would like to start off with their thoughts about what Frank's Casing means for settlement in a post-Frank's Casing world?
EFFECT ON SETTLEMENTS
TOM WRIGHT, partner, Wright Brown & Close, Houston: I think the Supreme Court believed that their ruling would facilitate settlements. I'm not sure that's true. I do think the decision has changed the landscape significantly and has taken away the ability of the insured, the policyholder, to put the insurance company on the horns of a dilemma between possibly having to pay for an excess judgment under Stowers or having to pay for a noncovered claim that they didn't contract by their insurance policy to have to pay. I think this case will change the conduct of players with regard to settlement. I think that a savvy insured, where there is a reservation of rights, will no longer be demanding that the insurance company settle the claim unless they are, in fact, prepared to pay it out of their own pocket if there's no coverage. I think it's going to affect the conduct of lawyers, plaintiffs lawyers and defense lawyers, with regard to how they approach settlement and with regard to how they approach pleading their case even. I think the defense lawyer is going to have to focus more on defending the case, which is what they are hired to do. If it's a defense counsel hired by an insurance company to defend the claim, they are not really hired to facilitate settlement in many ways, although that's traditionally come within their work. But I think one thing we ought to talk about is some of these amicus briefs that talk about how defense lawyers aren't going to know what to do or they are not going to be able to provide evaluations and so forth.
JOHN W. NEWTON III, senior partner, Orgain, Bell & Tucker, Beaumont: From a defense lawyer's standpoint, I think the opinion puts the defense lawyer in a very precarious situation. Traditionally, the insurance company evaluated the claim based on the information and reporting requirements from the defense lawyer. The defense lawyer developed the case, took the depositions, summarized the depositions, interviewed witnesses, and reported his opinions as to the value of the case and whether the claims pled, whether they were covered claims or noncovered claims, the validity of those claims. Now I believe the defense lawyer, because of potentially binding his client or her client by opinions expressed to the insurance company, is in a very precarious situation as to what to report or what not to report. And I do not think, just based on the opinion alone, that those ramifications have been fully fleshed out. The second area that I think a defense lawyer needs to be aware of is not initially when the case is filed and the claim developed, but toward the end when settlement negotiations are taking place. For example, in the mediation process, traditionally, you have an insurance adjuster. Many times the insured is not present to evaluate and negotiate the claim. Now the insured, no question, must be present. And there is a conflict potentially that can arise when the adjuster, who should be representing the interest of his policyholder, now bargains against his policyholder in an attempt to get the claim settled. That puts the attorney in a very uncomfortable position, advising both his client, the policyholder, and also having the adjuster base his arguments on the very information that the attorney gave him through the reporting process. I think it's a very unusual situation for the lawyer to be in and potentially one that can have terrible ramifications for not only the insurance company and the policyholder, but for the attorney himself.
RANDALL "RANDY" OWEN SORRELS, senior partner, Abraham Watkins, Houston: I think, from the plaintiffs perspective, the court and the majority opinion attempt to articulate a rationale that this decision will facilitate settlements, but I think, practically speaking, that's not true. Insurance companies are in the business of evaluating and paying claims. Individuals and businesses are not in the business of evaluating and paying claims, and it is much more difficult to extract money out of an individual or a business's account than it is out of an insurance company's account. Practically speaking, I believe it's not going to facilitate settlement and may, in fact, have a detrimental effect on settlement. And I think the majority's opinion ignores the practicality of the issues truly involved.
GERARD J. SONNIER, vice president and senior general counsel, Waste Management, Houston: I tend to think that we'll see a couple of things as a result of this decision. I think you will see a lot fewer Stowers demands being made on underwriters, because, in light of this decision, there's much less risk for the underwriters to accept a demand for payment within policies, because they get to reserve their rights to litigate the coverage questions later simply by paying the settlement demand. That has a much more significant impact, I think, on less sophisticated and smaller insureds than it does on companies like Waste Management and even Frank's Casing. For the most part, smaller insureds don't spend the time evaluating cases independently. They rely significantly on their outside counsel's opinions about the risks associated with the case, as well as issues surrounding potential coverage disputes. They don't typically have the money and the wherewithal to fund large settlements, but the risk to them now is that they will later have to litigate the very issues that they had bought insurance to cover them for and to provide them a defense against in the context of coverage litigation, with the risk being that money that was paid in settlement to settle an underlying dispute that may or may not have been covered. They may be at risk for that in addition to the legal fees that they have to pay to defend that action, because, in all likelihood, the coverage dispute will not be funded by underwriters, even though the factual issues upon which the coverage questions will hinge are the same factual disputes that underwriters would have had to defend under their duty to defend in the underlying litigation. There's much less risk, I think, today on the insurers in settling the case or responding to a Stowers demand, because they do get to reserve and now litigate the issues of coverage rather than having to make the decision about whether the claims presented a risk to coverage that was worth the settlement that they were being asked to pay.
RESERVATION OF RIGHTS
ROACH: Tom, in typical situations you have a reservation of rights position taken by the carrier, which we know legally creates a conflict of interest, which I think under the case law allows the insured to reject the qualified defense now being provided by the carrier and to bring in independent counsel. I'm wondering if Frank's Casing won't increase the frequency with which that occurs.
WRIGHT: Well, you gave me a loaded question, Randy. I'm not sure that every reservation of rights creates the kind of conflict of interest you're talking about. There are many reservation of rights that have nothing to do with how the underlying case is going to be tried. And, in that circumstance, the lawyer that's hired by the insurance company can defend the insured, and nothing that's litigated in the underlying suit is going to affect the coverage issues. So, there really isn't that kind of a conflict.
ROACH: I'm wondering – and I think John was making this point – I know this position was taken by the Texas Association of Defense Counsel [TADC] in their amicus brief filed in this case – that just the possibility that later in the trial of the case where there's a reservation of rights early on that the insurer may say, frankly, "We're not going to be funding the entire settlement if there is one, and you're going to have to contribute some money, insured, to the plaintiff in order to settle this case." That right of reimbursement has created a conflict that has to be discussed with the insured and the defense lawyer at the very beginning of the representation just because of the possibility that that may occur later on down the line.
NEWTON: Tom, I am of the opinion that the mere possibility that a reimbursement action may follow settlement is enough to create the conflict to require separate counsel or disqualify the insurance-hired lawyer.
WRIGHT: The insurance-hired lawyer ought to clarify what his role is up front. If he is to defend the suit enough to get involved in the coverage matter, I think that that's something that both the insured and the insurance company ought to have very clear. You're talking about whether you, as defense counsel, ought to ask or advise the insured to hire separate coverage counsel to work on that issue. Randy is talking about whether the insured ought to reject the defense and the defense lawyer offered by the insurance company and hire a different lawyer to defend the case and then presumably hire still another one to work on coverage. Those are two different issues.
ROACH: But I'm dovetailing both of them.
NEWTON: And I am as well.
WRIGHT: I think that if there is a reservation of rights on a serious issue – if it's on something that's not going to come up in the underlying case or if it's one of these situations where the plaintiff has pleaded punitive damages in a case where nobody really thinks it's possible and it's not going to come up – that might affect the lawyer's decision about what to do. But I do think that if there's a reasonable possibility, let's say, that there's going to be a request for reimbursement, then the defense lawyer needs to advise the insured that that's out there and that he needs separate counsel on it. I also think you need to take into account who the insured is. You probably don't need to tell Waste Management about these issues. They are probably fully aware of that, but if you're talking about a small company that doesn't have a legal department, or an individual, I think these things need to be explained to them.
NEWTON: Let me follow one thought, Tom, and just take as an example the punitive damage claim. Traditionally, in ordinary negligence and strict liability lawsuits, plaintiffs plead punitive damages. The burden of proving and recovering punitive damages, as we know now, is rather high. Nevertheless, they are pled for any number of reasons, including opening up discovery and possibly putting leverage on companies to settle. Lawyers may agree that a punitive damages finding is unlikely, but – not to say that there are unscrupulous insurance companies or insurance companies who may unfairly take advantage of the Frank's Casing business – what happens down the road at a mediation, for example, when the adjuster says, "We will pay the $1 million, but I am afraid of the punitive damages, and $250,000 of that or $200,000 of that I'm assigning to the punitive damages, and that's what I'm assuming you can recover for." I think that's where the routine conflict that not too many people paid attention to, frankly, before now becomes just a burning, burning issue.
WRIGHT: On that particular issue, there's two other things that come into play. First of all, the plaintiff is not going to want to accept punitive damage dollars, because they are taxable. And I think a good plaintiffs lawyer is going to say, "No, we're not agreeing to your allocation of that to punitive damages." The second thing is insurance companies have an incentive not to pay punitive damages in a settlement. The insurance companies that I know of do not want to do that, because they want to send the message that, "We're not paying punitive damages in these ordinary car wreck cases where nobody had been drinking or had any intention of causing it; it's just an accident, and we're not going to pay punitive damages in these circumstances and get the reputation that we're an easy mark." I do think there are things that can come up. If that kind of thing comes up in a mediation and the insured doesn't have separate counsel, I think you just need to say, "We're leaving; this has created a conflict; they need separate counsel." And I think the mediators need to be attuned to that. I think the settlement can happen under those circumstances.
SONNIER: Even from a company like Waste Management's standpoint, I think the risk that defense counsel has now is, where there is a reservation of rights issued by the underwriters, it's no longer just a matter of defending the case. Everybody has been clear forever that the duty that the defense counsel has is to the insured, but the duty now is bigger. It's not just defending the case. In defending the case, they have to also analyze the risk to the insured of any potential settlement. You can't make a settlement recommendation where there is a reservation of rights without also advising the insured, the client, what the risks are associated with that subsequent coverage litigation. I mean, otherwise, the insured would be entering into a settlement without understanding what all of the risks are, because it doesn't end anymore at the settlement. It now goes on to phase two. I think both the skill set and the responsibility of defense counsel has been broadened significantly.
WRIGHT: Well, I don't mean to kind of throw cold water on the discussion, but I don't think the court has held that a defense lawyer's recommendation to the insurance company that hired that defense lawyer is going to bind the insured about whether that's a reasonable settlement. Now, it can be evidentiary perhaps in a subsequent suit. I don't think they've decided that a demand by the excess carrier on the primary is going to bind the insured.
RIGHT OF REIMBURSEMENT
ROACH: I think you've raised an interesting issue with Gerard about what under Frank's Casing can trigger some sort of binding right of reimbursement. How little does it take to be said by either a defense lawyer or by an excess carrier to trigger this right of reimbursement? I think you're right that the Supreme Court has not expressly written on that question. The way that the language is written currently – we don't know what's going to happen on rehearing – but the way that it's written currently, all that's required, literally, for the right of reimbursement to be triggered is for the insured to agree that settlement amount is reasonable.
WRIGHT: Right, but that goes into agency law and whether the defense lawyer is the agent of the insured for purposes of reporting to the insurance company, and I don't really think they are. People talk about, "You've only got one client, no duty other than to the insured." I'll leave the one client thing alone, but the defense lawyer does have some duty to the insurance company. They hire you. They ask for reports. Otherwise, why are you sending them reports?
ROACH: Of course, you can't do that anymore, can you, because of the conflict situation that John was describing? We all agree, I assume, that the current law is well settled that the insurance-appointed defense lawyer can't send reports to the insurance company that would compromise the insured's coverage position.
WRIGHT: Exactly. That's why you need to know what the coverage position is. You're not going to do that, but you're going to talk about –
ROACH: – we've got a conflict at that point, don't we? Now the defense lawyer, simply by sending a letter, could arguably be triggering a right of reimbursement.
WRIGHT: Yes, if you assume your major premise that the defense lawyer sending a letter to the insurance company who has hired him and who demands a report from him about settlement complies with that demand and says, "OK. I think you ought to settle for $250,000." If that is a statement on behalf of the insured that that's reasonable under Frank's Casing, then, yes, you have put the defense lawyer in a conflict situation. And I think if reasonable minds are reading the Frank's Casing opinion that way, the Supreme Court ought to clarify that.
SONNIER: But whether the defense counsel, who is representing the interest of the insured, writes a letter, whether it's asked for or not, is really not the point, because at some point in the case that lawyer is going to be asked, "Is this settlement reasonable?" They have to give that advice before any settlement offer is made or any demand is considered.
Going back to practicalities, in our business, the plaintiffs business, it is very, very rare that there is an unreasonable settlement offer being made by an insurance company to plaintiffs. And I'm sure you all could count on one hand in all of your careers where an insurance company offered to pay an unreasonably high amount of money to settle a case. So, practically speaking, the majority of all settlements are reasonable.
ROACH: Let's talk about that tempest in a teapot. I wonder if just correcting the majority opinion's suggestion or assumption that the insured Stowerizes the insurance company by making a demand, as Frank's did, on the insurance company to settle, whether eliminating that incorrect statement about that's what Stowers is -- going with the correct view that, no, Stowers occurs when the plaintiff makes a proper Stowers demand on the insured and doesn't require any comment pro or con by the insured -- whether that might eliminate what would otherwise be the teapot exploding.
WRIGHT: Well, I think that would be a good step. I still think that, because of what's been raised here today about what the defense lawyer is supposed to do, the court would be well advised to make some statement about that or at least rewrite their opinion. That would be helpful, because even though I do have the views that I have, when the TADC and John Newton come here and say, "We've got this serious concern about what we're supposed to do," I think the court ought to take that into account. And, frankly, the insurance company would want that resolved, because what they don't want to do is have the John Newtons of the world and the TADC say, "We're sorry; we can't send this report." Nobody wants that. I think it would be good to have that addressed.
SORRELS: Since you brought up the Stowers issue -- I want to, and I know this is a battle mostly between insurance companies and their insureds and doesn't necessarily involve the plaintiffs lawyers – I think plaintiffs lawyers would be well advised to do a couple of things, though. No. 1, each and every time, obtain the reservation of rights or non-waiver letters that are out there in discovery and demand that they be produced. No. 2, I think plaintiffs lawyers should try to develop a relationship with the insurance defense lawyer to understand those coverage issues in depth. No. 3, I think there are going to be the same number of Stowers letters written, but I think plaintiffs lawyers would be well advised in their Stowers letter to set out the covered facts and make a demand within the policy limits for only those facts which support an award for damages for a covered amount and also agreeing to give a release for all noncovered claims, just as you must also say this demand will cover all liens and subrogation interests. The plaintiffs lawyers should be careful to craft their Stowers letters in just the covered areas but agree to release all claims for the amount to be paid.
ROACH: I would have thought that the court's jurisprudence over the last 20 or 30 years would have been fairly described as taking action to discourage the multiplicity and replication of litigation and would instead have been in favor of terminating litigation, that a settlement would end the litigation. I'm thinking of the contribution cases where, once upon a time, a defendant could pay the plaintiff, fully settle all of the plaintiff's claims and then have a subsequent contribution action against a nonsettling co-defendant. The [U.S.] Supreme Court eliminated that in [1988 in] Beech Aircraft Corp. v. Jenkins and then the [Texas] Civil Practice & Remedies Code codified that decision and said a settlement with the plaintiff ends the litigation, and precludes any subsequent contribution actions between defendants.
A number of commentators on Stowers have said that this opinion in <Stowers will generate a lot of additional litigation after a case is settled, 180 degree opposite of what Jenkins and other Texas jurisprudence would have suggested. What's going on there?
WRIGHT: I think it's yet to be decided exactly how these reimbursement actions are going to be tried and what the real issue is. Is the issue going to be whether there really was coverage, or is the issue going to be whether the settlement was made for covered claims or noncovered claims? I do think that this has the potential of creating further litigation. I think the Supreme Court has decided that creating further litigation or further opportunity for people to resolve their differences, whether they want to do it through arbitration or mediation or litigation, is better than making the insurance company pay for claims that weren't covered. They are going to charge premiums to other policyholders to make up for the fact that they had to pay one policyholder something that person didn't bargain for.
NEWTON: Well, I see kind of a different problem where the litigation explosion can occur. There are certainly cases where there are genuine disputes about whether a claim is covered or not covered and a declaratory judgment action is filed and, in a perfect world, decided before the case is settled so parties know at the time of settlement what's covered and what's not covered. What I'm concerned about are those situations where, in getting back to the punitive damage example, where the adjuster or the insurance company representative making the settlement decision subjectively assigns 25 percent of the million dollars he pays to the punitive damage claim and then turns around and seeks reimbursement for that $250,000 and either is able to get half of it through settlement or take it to trial and say, "I had a good-faith belief that we were going to get hit for $250,000 and that formed the basis of my thought process to pay the million dollars." So, that's where I see a potential for litigation to explode.
ROACH: And with no duty to defend, with no money from the insurance company to defend the insured. If the defense lawyer is in an impossible situation because there is a reservation of rights and a conflict because of the possibility of a reimbursement action being triggered by something the lawyer says or does, whether in order for the insurance company to get the information that they need to decide whether to settle the case and for how much and what claims are or aren't covered in reaction to the plaintiff's settlement offer, then the insurance company will have no choice but to incur this huge additional expense in every case like this where they have to have their own independent counsel? Now if the insurance company hired its own independent counsel on liability and coverage, then maybe the defense lawyer wouldn't have the same conflict because the defense lawyer wouldn't be reporting to the insurance company. But we're talking about something that is so far from what our current tripartite defense system works like that I wonder whether it would make any sense to the insurance industry to have to live with Frank's Casing if that's what Frank's Casing requires as a practical matter.
WRIGHT: If that's what Frank's Casing requires, I don't think the insurance companies are going to want to go along with that and have to basically hire two lawyers for every case where they've got a reservation of rights. I think it would be much easier for the insurance company to say to the defense lawyer that they have hired, "We want your evaluation. We promise we're not going to use this against the insureds in any reimbursement action. This will be just an evaluation. It won't come into evidence. We won't claim that this is a representation by the insured." And until the insured company does that, maybe the defense lawyers need to say in their report, "We can't give you this unless you make this agreement, or we're giving you this, but this is not from the insured," so forth.
SORRELS: All this begs the question, why doesn't the insurance company just put in the policy, "We retain the right of reimbursement for uncovered claims"? And that pretty much eliminates the whole argument.
WRIGHT: They can do that on policies that are not governed by state law, and the forms are dictated by state law but CGL [commercial general liability] policies are not, to my understanding, and homeowners' and auto insurance policies are. I'm not a regulatory expert, but, yes, a lot of this could be resolved by changing the forms, but these forms are used across many states and are developed sometimes by carriers, sometimes by independent organizations. It's not quite as easy as everybody thinks to just change the form.
ROACH: Let's follow up on Randy's thought, though. As I understood your point, you weren't just talking about the regulatory forms, you were talking about the fact that since the 2000 decision in Matagorda County – where the insurance industry was told quite clearly by the Supreme Court, albeit a different Supreme Court, that if they wanted a right of reimbursement, they were going to have to either put it in their insurance policy or obtain an express unequivocal written consent to both settlement and to reimbursement in order to generate the right of reimbursement. I also note that whether it was the Texas Civil Justice League amicus brief or the Shell [Oil Co., et al.] amicus brief, they made the point of saying that, as far as they knew, that the insurance market had not reacted with new provisions providing for reimbursement in the policies that had been issued since the Matagorda County decision in 2000. I think the Texas Civil Justice League went on to say that it's really in the interest of all Texas business and Texans for there to be predictability and stability in the law of Texas. Specifically, with the right of reimbursement and the huge amount of money that could be transferred because of reimbursement rights, it made more sense to let the free market operate and have the insurance companies, if they want a right of reimbursement, to put it in their policies and to, frankly, collect less premiums from their policyholders, because the policy is worth less if there's an express right of reimbursement than the larger amount of premium dollars they get when there is no right of reimbursement specifically provided for in the contract.
Let's talk about another issue that has been raised here by us, and it was the lead point in the amicus brief filed by Shell Oil Co. and Temple-Inland [Inc.] and Burlington Resources [Inc.], and that is the suggestion that the worst problem of the Frank's Casing opinion for Texas business is that it will give insurance companies a huge club to be used during mediation to try to force their insureds into contributing significant amounts of money to settle the case. These companies made the point that that is already going on routinely in Texas, just without the right of reimbursement, being implied by law under Frank's Casing. They say that this is a business strategy by which insurance companies are trying to lessen the amount of money that they have to pay in settlement and instead shifting the cost of settlement back onto the insured, who already paid the premiums. I wonder if that comment spoke to anybody around this table and what your reactions may be to it.
SONNIER: That dynamic existed before Frank's Casing. I can tell you from being in-house for eight years that those sorts of discussions regularly occur in significant cases when settlements are being discussed. The difference that Frank's Casing makes to those discussions are that the game of chicken has different risks associated with it now. Before Frank's Casing, the burden really was on the insurers, because, if they didn't blink, then the case would go to trial and they would find out whether their coverage defenses were right or wrong – the risk being that they then could potentially respond to a judgment far in excess of what their contractual limits were. Now they can settle for their contractual limits or within their contractual limits and reserve the right to litigate the coverage questions possibly in another and more favorable forum. And the pressure is now on an insured faced with that and faced with the risk of defense costs in that coverage case that in all likelihood won't be paid for by the insurance policy. That's a cost that they would have to consider contributing towards settlement and that's not an insignificant cost. Coverage disputes typically are very, very expensive disputes to resolve and litigate, probably second only to patent litigation. The costs are tremendous, and the discovery is very intensive, but in the context of some of the cases we're talking about here, you're basically litigating not only the underlying case, but also the technical coverage questions surrounding the reservation.
INSURANCE COVERAGE LITIGATION
ROACH: You've raised several good points, but one I'd like to follow up on is the cost of insurance coverage litigation you said was second only to IP litigation. Tom and I do this for a living. Tom probably doesn't get paid his best rates by insurance companies, but, generally speaking, I do get paid my best rates for policyholder insurance coverage. And I will tell you that for firms like ours and the few other firms that specialize in policyholder litigation, the costs of defense are seven figures and above. And I doubt, frankly, that the Supreme Court and other courts in this state have any idea that the coverage litigation that they are basically generating as a result of Frank's Casing and other cases are costing businesses maybe as big as Waste Management or as small as mom and pop that kind of financial exposure to prosecute or defend either a coverage action. Of course, mom and pop can't possibly afford that.
SONNIER: That's why they bought insurance coverage in the first place.
NEWTON: What happens, though, is that at the mediation mom and pop, we've got $100,000 in our bank account for development costs for next year's product and we can't afford extended litigation, so we'll kick in $50,000. And what I see, getting back to the potential danger, is that there will be extortion toward the mom and pops to contribute something just to foreclose future litigation, because they cannot afford the future litigation.
SONNIER: . . . [W]hether you're talking about mom and pops or big companies, it doesn't change the fact that the burden of analyzing the risks associated with coverage issues is no longer on the insurer the way it was before Frank's Casing.
ROACH: I wonder if this is a place where we might segue into a discussion that's been in the law journal articles and some of the CLE papers as well about this strange use of California and the California bad-faith system in a Texas court opinion when the two systems are so completely different. I guess the point concerning California law is that a number of the commentators have all pointed out that the California bad-faith system is so fundamentally different from Texas, because the key issue of coverage is not a factor in California bad-faith cases. To establish bad faith, all you have to establish in California is that the settlement demand was reasonable and should have been taken by the insurance company; the question of coverage is not part of bad faith in California. Our system is precisely the opposite. We're all focused on coverage as the big issue. It seems to me that that has some kind of denuding effect on the power of Stowers to import this right of reimbursement based just on reasonableness and some notion that reasonableness is no longer a dispute where the insured says, "This is a settlement that you should take, insurance company, otherwise, we're going to hold you responsible." It makes it, frankly, inapplicable to the Texas system. Does anybody have any thoughts about that?
SONNIER: I do. I think that Frank's Casing effectively takes Stowers to the California analysis. I mean, it's no longer necessary for the insurer to analyze whether or not the demand is reasonable for a covered claim, because the issue of covered claims versus noncovered claims can be decided later as opposed to having to make that decision in responding to the settlement demand. The issue of reasonableness is, is it a reasonable settlement as to all of the claims, covered and noncovered, which is what California law is today? It does fundamentally change the concept of a Stowers demand from one that only applies to reasonableness of covered claims.
NEWTON: Frank's Casing is inconsistent with the prior law. First of all, there never has been a duty in Texas for an insurance company to pay a claim that's not covered. There has never been. Now, traditionally, in cases where there were covered claims and questionable covered claims and noncovered claims pled, an insurance company may settle the entire case and may insist on a release of all claims, but they are settling not only on the objective standard that the Supreme Court says constitutes a reasonable standard, the likelihood that the insured will be found liable and the range of potential damages for which the insured may be potentially found liable, which is an objective standard for the insurance company. In reality, they are settling away the cost of future litigation, and they are settling away, in many cases, a bad precedent, because they don't want this particular case to go to trial. There are so many external factors that go into whether the insurance company wants to pay the money that whether it's an objectively reasonable settlement or not that throws this whole system askew. When they are settling a claim, whether there's a Stowers letter written by the plaintiff's attorney or whatever, there are so many other nonlitigation factors that go into it that I think was not well thought out by the court, saying that very respectfully.
ROACH: John, that point leads me to segue into another maybe final topic and maybe we end where the opinion begins. My reading of Frank's Casing is that the linchpin threshold assumption that the majority opinion makes is that the availability of insurance is an irrelevant factor in deciding whether a settlement is reasonable. That allows the court to go off implying reasonable consent and implying reasonable rights of reimbursement. I'd like to see if this table believes that that premises that availability of insurance is irrelevant is a true or false proposition.
NEWTON: It is very relevant . . . I believe it's the driving force behind most settlements. Texas freely allows the plaintiff's attorney to discover the extent of coverage. That expressly, under our rules, allows the plaintiff's attorney to know the policy limits. The settlement demand is also tailored on the policy limits and the extent of coverage. A demand in one case where there's a $1 million policy will be much higher than if there's a $250,000 policy, practically speaking. In getting back to what I said earlier, the decision that the insurance company makes to settle is based on the risk of an excess verdict, but also other factors such as costs and what they are contractually obligated to pay to defend the case. I think the premise that the Supreme Court states in this case is incorrect and not realistic.
SORRELS: I do agree that the value of the claim takes into consideration many factors, one of which being the amount of insurance coverage available, a second being the amount of assets or money the defendant has over and above insurance. And for most people in a CGL policy, they buy insurance because they don't have adequate assets to satisfy a catastrophic event or occurrence. The demand is typically tied into the amount of insurance coverage.
ROACH: Let me be pointed with you. There are a lot of defense lawyers who believe that if the case is one where insurance is unlikely to be available, plaintiffs lawyers will demand far less money for the case because you don't have the easy pot of insurance money available.
SORRELS: I will put it this way: When an insurance defense lawyer does an evaluation of a case, they are going to look at the venue, look at the facts, look at the plaintiffs lawyer involved and look at the injuries. When plaintiffs lawyers make an evaluation, one of the factors to consider is the amount of insurance coverage available. You are right; it is a component of the valuation of the case.
ROACH: Gerard, does Waste Management think that whether you've got insurance for this mega loss is relevant or irrelevant?
SONNIER: Of course it's relevant. The whole contractual relationship between an insured and an insurer is built around the risks that are being transferred from the insured to the insurer. And the burden to determine what risks were contractually transferred or accepted by the insurer has now been pushed back to the insured as opposed to remaining with the insurer. It creates uncertainty from the standpoint of the insured as to availability of coverage and allows the insurers to now make payments that they effectively acknowledge through their reservation they may not be contractually obligated to pay, but they can nevertheless pay and reserve the right to litigate who actually has to fund it.
ROACH: Tom, in the back of my head, I hear you saying again, "Yes, but you only pay premiums for covered claims." Is that the mantra of the insurance carriers on this issue and related issues?
WRIGHT: When you buy an insurance policy, you pay for two things. You pay for a defense obligation, which is somewhat broader than the indemnity obligation, and you pay for the indemnity obligation on covered claims. I think, on a small insured that can't afford to pay for noncovered claims, the plaintiffs lawyer will probably figure out a way to drop some of their noncovered claims or do whatever is necessary to make the settlement work out. I think it's unfortunate that this wedge is being driven between the insured and the insurance company. They ought to be on the same team in trying to defeat or minimize the claim of the plaintiff.
ROACH: But isn't the right of reimbursement the wedge? Isn't that what the insurance companies ask for and what the insureds are resisting?
WRIGHT: It can be a wedge. The right of reimbursement is a wedge, but the coverage uncertainty can also be used as a negotiating tool with the plaintiff as long as it's a legitimate argument that there might be coverage. I do think what this case means is that people are going to have to pay a lot more attention to the coverage issues. They are going to have to get out front and try to get that understood by the insured and the insurance company before going to a mediation, and hopefully people will figure out a way to resolve the entire case at one time in an equitable fashion. There is a saying that hard facts make bad law. You look at what Frank's Casing did, and they rejected every opportunity to participate somewhat in this settlement and demanded that the insurance company pay the whole thing. The result after all of that might seem a little harsh that they lose the coverage and they have to pay the whole thing. They could have gotten out of this, at least according to the Supreme Court's opinion, for $2.5 million early on rather than being stuck with an entire $7 million bill at the end.
ROACH: That raises an interesting question that I don't know the answer to, but as I read the opinion, the way this insurance policy actually worked, it was a reimbursement policy. The insurance company had absolutely no obligation whatsoever to pay the initial settlement amount. By definition, this being a reimbursement policy, it was Frank's obligation to pay the initial settlement and then if Excess Underwriters thought it was covered, then they reimbursed Frank's. If they don't think it's covered, then they don't reimburse. This happened exactly the opposite way. You point out that Frank's made the demand, but why does the insurance company have to accede to that demand when their own contract doesn't require them to reimburse until after the fact?
SONNIER: The reason that consent is necessary is because that's also one of the contractual requirements is the insured cannot – even in the indemnity policy like Underwriters at Lloyd's typically write – settle a claim without obtaining the consent or approval of the insurers. Otherwise, they risk their coverage.
ROACH: That leads me to the next thought. The Supreme Court, I think, took your point, Gerard, and said because there was a consent requirement and because the demand by Frank's on the insurance company constitutes consent or impliedly constitutes consent, then they would hold as a matter of law that there was consent to the reasonableness and, thus, a right to reimbursement. Let me play devil's advocate for a second and say that sounds plausible if you're focusing on the insured, but what about focusing on the insurer instead and say, in a Stowers situation, the insurance company is under no obligation to pay a settlement unless three things are true. No. 1, it's within policy limits. No. 2, it's reasonable. And No. 3, it's covered. While I haven't seen this argument being made expressly, I'll make it now. When the insurance company in that situation pays affirmatively, why aren't they estopped from saying there was no coverage? Because the insurance company is under no obligation under Stowers to pay a dime unless all three, including coverage, are there.
WRIGHT: You raise a plausible argument. The problem with it is that it will discourage, if not kill, settlements because then the insurance company is not going to settle the claim if they are estopped from raising a coverage issue later. As a matter of public policy, at least the Supreme Court seems to be wanting cases to settle, as that benefits the system, it benefits the plaintiffs, it benefits the insureds.
SORRELS: Tom, I don't necessarily agree because the idea behind Stowers is so that an insurance company does not have to pay for extra contractual damages that they never received any premium for. If they have a $250,000 amount of coverage and the claim is $1 million and they are uncertain whether or not the actual damages or the punitive damages are going to be increased because of the aggregating facts, I think a reasonable, ordinary, prudent insurance company would pay the policy limits as opposed to trying to figure out if the enhanced damages are going to be on the actual side or the punitive side.
WRIGHT: I think I agree with you in that example. It's mostly because a good plaintiffs lawyer like you, when you get to trial, you're probably going to try to get the actual damages enhanced rather than the punitives, because the standard to retain the punitive damages on appeal has gone up so much and, of course, the punitives are capped two times actual, roughly. And I don't need to tell you your business. What we have seen over time is while the punitive damage claims remain in the case, sometimes they are either dropped at the jury charge stage or some stage, because the plaintiffs are hoping to get actual damages increased. But I do think that if you went to Randy's example, and say that if you pay a Stowers claim or pay a Stowers demand, then you have conceded that it's covered [and] that's going to give the insurance company reverse incentive. That's going to give them an incentive not to settle. Of course, they've got the Stowers demand. If they don't settle, they may be exposed for in excess, but I think that's the downside to what you are suggesting.
ROACH: Tom, isn't that, though, the situation that existed in this state and most of the country before Frank's Casing, where if the insurance company paid the claim in response to a Stowers demand the case went away and there was no reserved coverage fight? That's the way it's always been until Frank's Casing.
WRIGHT: There was no right of reimbursement.
ROACH: That's right. And no way to fight
coverage if you had affirmatively paid the money.
SONNIER: Randy, you're exactly right. That's the situation that existed before Frank's Casing. It didn't seem to be much of an impediment to settlement before. What it did was place the risk of not settling on the insurer if it's a covered claim. There was never any expansion of the risk to insurers pre-Frank's Casing that they would be liable for non-covered claims.
The whole purpose of Stowers was to allow
them – if they had a legitimate coverage question and the amount that was being demanded for the covered claims was, in their view, not reasonable . . . their risk to take, but they could deny the settlement, not fund the settlement, and have that issue litigated. The risk being that, if they were wrong, they may owe more than they contractually provided for but not for uncovered claims, just for additional amounts. What we have today, though, with Frank's Casing is the risk that they can settle even noncovered claims voluntarily and then litigate how much of the settlement should be apportioned to the noncovered claims or whether all of it should be apportioned to the non-covered claims. Stowers doesn't have any teeth any more. I mean, there's no risk to underwriters today in light of Frank's Casing.
WRIGHT: Again, I think you're really sort of adopting [Texas Supreme Court] Justice [Nathan] Hecht's view of the law, which is not what the majority did. I think you are either right under Justice Hecht's opinion or you are right if the insured acquiesces or demands that it be settled, but if under the majority opinion you don't do one of those two things that's necessary to trigger the right of reimbursement, then the insurance company doesn't have a right of reimbursement.
SONNIER: But an insured can't ask an insurer to pay for things that it is not contractually obligated to pay. The whole purpose of Stowers and the whole purpose of making demand on underwriters to pay a reasonable settlement demand is the belief that the settlement demand is reasonable for the covered claims and underwriters should not respond to amounts that they don't believe are either reasonable or covered.
What Frank's Casing does, though, is change
the risk from underwriters are either right or wrong -- wrong being they now have to pay potentially far in excess of what they contractually agreed to pay for covered claims -- to, well, "I can cap it now at my coverage, but I don't have to accept the entire liability. I can litigate that with the insured later." You're not going to see an insured object to a reasonable settlement demand and say, "Don't pay it if you have a reservation of rights on record."
WRIGHT: Why not?
SONNIER: Because the risk is that you go to trial, and, for all the reasons that you settle cases, you now bear the risk of the trial. The whole purpose of settlement is to avoid some of the risks of the case, the decisions that might come out of a jury. And the insured and the insurer have the same interest in avoiding those risks as does the plaintiffs lawyer, otherwise there would be no settlements. But the ultimate risk, that is, the contractual risk that insurers assumed in exchange for a premium, they now get to litigate that after the fact. They get to cap their exposure and litigate that risk later.
WRIGHT: Under two conditions: if the insured has demanded a settlement or if the insured has said the settlement amount is reasonable. I say all this means is the insured has to alter their statements a little bit. "Dear Insurance Company, here is a demand from the plaintiffs. We leave it to you to protect our interests. Sincerely yours, Policyholder."
ROACH: Mum is the word.
SONNIER: Typically, the insured is either
silent or would respond, "We believe you should pay everything you are contractually obligated to pay. Period. Don't pay any more." So the question arises: Does Frank's Casing allow, without an objection, the insurer to go ahead and settle where you've got a demand from the plaintiff and you've got silence, or at least acquiescence, but no demand from the insured to pay? Can the insurer preserve its reservation and litigate that issue? Because if that's the case, then Stowers has been changed.
ROACH: If we're just agreeing to the dismissal of the lawsuit or putting on the record what the settlement is, if that constituted consent, similarly, Stowers would be changed if that's all it takes to consent.
SONNIER: Right. Because that's how it happens more often than not.
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