Insurance Law
Interpretation of an Excess-Insurance Policy
Do We Look to the Underlying Policy?
Texas Law
On Petition for Review from the Court of Appeals for the Fourteenth District of Texas
We must decide whether the excess-insurance policy in this case covers the insured’s legal-defense expenses. Excess policies provide coverage that becomes available when an underlying insurance policy’s limits have been exhausted. Logically enough, therefore, the underlying policy often features prominently in excess-coverage disputes, especially when the excess policy is a “follow-form” contract—one that can be shorter and simpler than the underlying policy because it embraces many of the underlying policy’s terms. But even for follow-form excess policies, the contract that governs a dispute about excess coverage is the excess policy, not the underlying policy. As in any contractual case, therefore, we begin with the excess policy’s text and look to the underlying policy only to the extent that the parties consented to incorporate its terms. The court of appeals inverted this process: “We start from the ground up, first examining the terms of the underlying policy and then looking to the excess policy to determine coverage.” 656 S.W.3d 729, 734 (Tex. App.—Houston [14th Dist.] 2022). This mistaken approach led to an erroneous result: while the underlying policy covered the insured’s defense expenses, the excess policy does not. We therefore reverse the court of appeals’ judgment, render judgment in part, and remand to the trial court for further proceedings.
Each year, Patterson buys insurance to protect itself from costs arising from any incident that might occur during drilling operations involving its rigs. Patterson covers its risk by building an “insurance tower,” which consists of a primary policy that underlies multiple layers of excess coverage. For the 2017–2018 policy year, Patterson bought several lines of insurance through its broker, respondent Marsh USA, Inc. One of those lines—the “underlying policy” in this case—was an umbrella policy from Liberty Mutual Insurance Europe, Ltd. Patterson also obtained various additional excess policies through Marsh, including the one from Ohio Casualty at issue here.
(…) Patterson then sued Ohio Casualty and Marsh. In its live petition, Patterson alleged that Ohio Casualty’s refusal breached the contract and violated the Insurance Code. In the alternative (and assuming that the excess policy did not cover defense expenses), Patterson alleged that Marsh violated the Insurance Code and committed negligence, negligent misrepresentation, fraud, and breach of contract by failing to procure an insurance policy that did cover defense expenses.
The parties filed competing motions for summary judgment regarding whether the Ohio Casualty policy covers defense expenses. The trial court granted Patterson’s motion and denied Ohio Casualty’s. The court determined that “the defense costs sought by Patterson are covered under the Ohio Casualty policy at issue in this case because the Ohio Casualty policy did not clearly and unambiguously exclude the coverage for defense costs provided by the underlying primary policy.” To expedite resolution of the case, the parties jointly moved for entry of an agreed final judgment, which the trial court signed. Ohio Casualty appealed.
The court of appeals affirmed. It noted the parties’ agreement that the underlying policy covers defense expenses. Id. at 734–35. The excess policy, the court then noted is a “follow form” policy that does not unambiguously exclude defense expenses. Id. at 735–37. Therefore, the court reasoned, the excess policy necessarily also covers those expenses. Id. at 738. We granted Ohio Casualty’s petition for review and now reverse.
“As early as 1886, this Court recognized as ‘a cardinal principle of...insurance law’ that ‘the policy is the contract; and if outside papers are to be imported into it, this must be done in so clear a manner as to leave no doubt of the intention of the parties.’” ExxonMobil Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 672 S.W.3d 415, 418 (Tex. 2023) (quoting Goddard v. E. Tex. Fire Ins. Co., 1 S.W. 906, 907 (Tex. 1886)). In other words, “we begin with the text of the policy at issue; we refer to extrinsic documents only if that policy clearly requires doing so; and we refer to such extrinsic documents only to the extent of the incorporation and no further.” Id. at 418–19. We have applied this principle in the context of follow-form excess-insurance policies. See RSUI Indem. Co. v. Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015).
At all times, the excess policy itself remains the contract that governs a dispute about its coverage. The court of appeals should have first “looked to the excess policy to determine coverage” rather than “first examining the terms of the underlying policy.” 656 S.W.3d at 734.
(…) “damages”—a term that, without more, does not include defense expenses. See Corral-Lerma, 451 S.W.3d at 387.
In other words, the excess policy confines its coverage to sums paid to an adverse party, like the personal-injury claimants who sued Patterson after the drilling-rig incident. Cf. In re Farmers Tex. County Mut. Ins. Co., 621 S.W.3d 261, 270–71 (Tex. 2021) (stating that either a judgment or a settlement may trigger a duty to indemnify). Attorney’s fees could fall within that scope. For example, if a fee-shifting statute led to a judgment requiring Patterson to pay the adverse party’s attorney’s fees, Ohio Casualty would presumably be obligated to indemnify Patterson for that amount because Patterson would be legally obligated to pay it as part of the satisfaction of a claim. But the excess policy does not cover fees that Patterson paid its own attorneys.
(Supreme Court of Texas, Dec. 20, 2024, The Ohio Casualty Insurance Company v. Patterson-UTI Energy, Inc.; and Marsh USA, Inc., Docket No. 23-0006)
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