A few months ago we reported on a Houston [14th] Court of Appeals case in which the court rejected the insurer’s argument that an excess policy with a “following form” provision incorporating the terms and conditions of the primary policy clearly and unambiguously excluded defense costs. As we thought would be the case, the insurer has filed a petition for review with SCOTX. Yesterday TCJL submitted an amicus letter in support of the petition.
The Ohio Casualty Insurance Company v. Patterson-UTI Energy, Inc.; Patterson-UTI Management Services, LLC; Patterson-UTI Drilling Company, LLC; and Marsh USA, Inc. (No. 23-0006) arose from a personal injury action against the Patterson companies. Patterson had obtained an excess policy from Ohio Casualty that provided coverage after the primary policy and two other excess policies were exhausted. They were exhausted, and Patterson made a claim on the Ohio Casualty policy for damages awarded against them and defense expenses (over $4 million). Ohio Casualty paid the indemnity for the damages but declined to reimburse Patterson’s defense expenses on the basis that its policy excluded defense costs. Patterson sued for breach of contract and bad faith under Chapter 542, Insurance Code. The trial court awarded summary judgment to Patterson. Ohio Casualty appealed.
The court of appeals affirmed. The decision turned on whether the defined term “ultimate net loss” in the primary policy, which explicitly included defense expenses, was incorporated into the excess policy by virtue of the excess policy’s “following form” provision. That provision, according to the court, “states that the excess policy will ‘follow’ the ‘first underlying insurance’ [except] for the terms, conditions, definitions, and exclusions of this policy.” While conceding that its policy generally incorporated the primary policy under the following form provision, Ohio Casualty contended that the excess policy unambiguously excluded defense expenses based on the policy’s divergent definition of “loss,” which supplanted the term “ultimate net loss” contained in the primary policy. In the excess policy, “loss” was defined as “those sums actually paid in the settlement of satisfaction of a claim which you are legally obligated to pay as damages after making proper deductions for all recoveries and salvage” (emphasis added). In the absence of a definition of “damages” in the excess policy, the court looked to the primary policy, which appears to include “defense expenses” as damages covered by the policy. The dispute, then, is whether the term “damages” should be given its common meaning in the excess policy (in which case it would not include defense costs) or the meaning assigned in the primary policy’s definition of “ultimate net loss.”
The court of appeals held that the “following form” language in the excess policy controlled in the absence of “clear and unambiguous language” excluding defense costs, despite the policy’s use of different terminology to describe a covered “loss.” The court appealed to public policy concerns, worrying that “Ohio Casualty’s argument . . . could conceivably open the door for vague language in excess policies to implicitly diverge from primary policies in “follow form” excess policies with far-reaching financial consequences for insureds.” It seems equally conceivable, however, that the court’s reasoning could lead to excess policies dropping “follow form” provisions altogether if those provisions can be interpreted to override other conditions of coverage in the policies.
TCJL’s letter asks SCOTX to accept review and clarify two issues: (1) whether the court of appeals properly grafted the underlying policy’s definition of “ultimate net loss” onto the excess policy’s plain meaning use of the terms “loss” and “damages,” and (2) whether the ordinary meaning of “damages” includes defense costs and attorney’s fees. The latter issue transcends insurance contracts and is of general interest to the business community. We hope that SCOTX sees it that way and takes the case.