(Article from Insurance Law Alert, January 2025)
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Holding
The Texas Supreme Court ruled that a follow-form excess policy did not include coverage for the policyholder’s defense costs, notwithstanding that the underlying policy did provide such coverage. Ohio Casualty Ins. Co. v. Patterson-UTI Energy, Inc., 2024 Tex. LEXIS 1123 (Tex. Dec. 20, 2024).
Background
Patterson, an oil and gas equipment provider, was named as a defendant in several suits following a drilling rig accident. The suits were ultimately settled, and Ohio Casualty, an excess insurer, funded portions of the settlements after lower-level policies had been exhausted. However, Ohio Casualty refused to indemnify Patterson for any defense costs.
In ensuing litigation, Patterson alleged that Ohio Casualty breached the insurance policy. A trial court granted Patterson’s summary judgment motion, ruling that defense costs were covered by Ohio Casualty’s policy because it did not expressly exclude such costs and because the underlying primary policy did encompass defense costs. An intermediate appellate court affirmed.
Decision
The Texas Supreme Court reversed, ruling that Ohio Casualty policy’s statement of coverage unambiguously indicated that defense costs were not covered, notwithstanding that it followed form to the underlying policy. The Ohio Casualty policy covered “loss,” defined as “those sums actually paid in the settlement or satisfaction of a claim which [Patterson is] legally obligated to pay as damages after making proper deductions for all recoveries and salvage.” While it was undisputed that Patterson “actually paid” defense costs and was “legally obligated” to do so, the court emphasized that defense costs are not “paid in the settlement or satisfaction of a claim . . . as damages.” In so ruling, the court noted the well-established principle that absent a specific contractual definition to the contrary, a party’s attorney’s fees “are not, and have never been, damages.”
The court rejected Patterson’s assertion that the follow-form nature of Ohio Casualty’s excess policy warrants a finding of coverage for defense costs because the underlying policy expressly included defense costs in its coverage provisions. The court stated:
Patterson attributes far too much to the excess policy’s “follow-form” status. . . . According to Patterson, the excess policy is bound by the underlying policy’s coverage choice unless the excess policy repudiates that choice rather than simply providing a different kind of coverage. This argument’s essence amounts to the approach we emphatically reject: starting with the underlying rather than the excess policy.
The court explained that while a follow-form excess policy is generally subject to the same terms and conditions of the underlying policy except where otherwise modified, a court must carefully examine the terms of the excess policy itself in determining the scope of coverage. It is “the excess policy’s text [that] governs the dispute,” so analysis must begin with the excess policy and then turn to consider adoptions or modifications of the underlying policy. Here, the underlying policy defined “ultimate net loss” to include defense costs, whereas Ohio Casualty’s excess policy defined “loss” in a manner that did not encompass such costs.
Comments
The Texas Supreme Court also rejected the contention that exclusions in Ohio Casualty’s policy that referred specifically to attorney’s fees indicated an intention to include defense costs in the coverage provisions. Patterson argued that the exclusionary language would be “surplusage” if the policy did not cover those fees to begin with. The court explained that even if the exclusions appeared “repetitive or otherwise unnecessary,” it would not alter its conclusion as to coverage. The court stated: “the excess policy’s specific references to attorney’s fees in the asbestos and pollution exclusions were understandable redundancies designed to eliminate any conceivable doubt—not surplusage that would alter our interpretation of the rest of the policy.”