The Court issued two decisions today in argued cases with today’s order list. This set of orders did not contain any normal “conveyor belt” petition denials.

I will follow a little later today with a summary of today’s second case, DaimlerChysler Corporation v. Inman, which looks to be a potentially significant case about Texas standing law.

This post focuses on the first case, in which the Court revisits on rehearing — and withdraws — a previous holding about an insurer’s right to seek reimbursement from its insured after the insurer settles a case. This is, needless to say, also an example of a very successful motion for rehearing.

  • Excess Underwriters at Lloyd’s v. Frank’s Casing Crew & Rental Tools, Inc., No. 02-0730.

    Frank’s Casing had two layers of insurance — a primary layer and an excess layer. The excess layer was provided by Lloyd’s. When one of Frank’s Casings customers sued it over a drilling platform collapse, Frank’s Casing notified its insurers. Today’s opinion explains:

    The excess policy did not require the underwriters to assume control of the defense or the settlement of any claims, but did give them the right to associate with defense counsel retained by Frank’s Casing or the primary insurer if it was reasonably likely that the excess coverage layer would be reached. After Frank’s Casing notified the excess underwriters of ARCO’s claims, the underwriters issued reservation-of-rights letters asserting that coverage for ARCO’s claims was “limited or negated” under the policy’s terms.

    As that case proceeded, it became clear that the insurers wanted to settle the case to cap their own exposure and then to seek reimbursement later from Frank’s Casing on the theory that there was actually no coverage:

    Frank’s Casing forwarded ARCO’s demand to the excess underwriters …. The letter reiterated Frank’s Casing’s disagreement with the underwriters’ coverage position, and stated that Frank’s Casing was looking to the underwriters to fund the settlement. In their response two days later, the underwriters agreed that the case should be settled, but noted that coverage issues remained. The underwriters offered to fund the entire settlement if Frank’s Casing would agree to reserve those issues for resolution later. Frank’s Casing rejected the underwriters’ proposal, contending that the excess insurance policies obligated the underwriters to fund the settlement. In response, the excess underwriters advised Frank’s Casing that they would pay $7.5 million to settle the claim, less any contribution from the primary carrier, and then seek reimbursement from Frank’s Casing. Within hours, the underwriters contacted ARCO and orally accepted its settlement offer, and the primary carrier tendered its remaining policy limits of approximately $500,000. A written settlement agreement among ARCO, Frank’s Casing, and the excess underwriters preserved “any claims that exist presently” between Frank’s Casing and the underwriters. Before that agreement was executed, the excess underwriters filed this suit.

    In 2005, the Court issued a decision in this case in which all the Justices of the Court agreed that an excess insurer could seek reimbursement in these circumstances. ( original majorityoriginal Hecht concurrenceoriginal O’Neill concurrenceoriginal Wainwright concurrence ) The Texas Supreme Court’s judgment was that the court of appeals be reversed and the cause remanded to the trial court to enter judgment for the excess insurers.

    The losing party filed a motion for rehearing that was eventually granted. (( The Court’s opinion also mentions a number of policy arguments advanced by amici as weighing on its decision. From the majority opinion at pages 7-8:

    Several amici further warn that implying a reimbursement right would create a significant conflict for defense counsel during settlement discussions. According to the amici, if an insured’s acknowledgment of a settlement offer’s reasonableness were to expose the insured to an extra- contractual reimbursement obligation, as the underwriters here contend it should, defense counsel’s traditional role in evaluating and recommending settlement could end up advancing the insurer’s interest over that of the insured, necessitating the insured’s retention of its own coverage counsel during what may be a critical point in the proceedings. Indeed, the amici argue, with defense counsel thus hindered from encouraging settlement, both the insured and the insurer will likely feel the need to hire their own “settlement counsel” to evaluate the case and formulate a strategy for the anticipated reimbursement litigation. Whether or not the concerns the amici voice are real or imagined, we believe they do portend significant distrust in the insurer/insured relationship during the settlement process should an equitable reimbursement right be implied.

    Several amici also warn that recognizing a reimbursement right risks weakening the insurer’s incentive to negotiate a settlement most favorable to its insured. Knowing that the insured will likely bear the ultimate payment obligation could incentivize the insurer to curtail attorney’s fees and litigation expenses early in the proceedings by negotiating a quick settlement, with the added benefit of extinguishing any risk of Stowers liability. See Stowers, 155 S.W.2d at 547. The potentially protracted coverage/reimbursement litigation likely to follow would be at the insured’s expense, even though the insured purchased insurance for the very purpose of hedging the risk and expense of future litigation.))

    Today, the Court withdrew its original opinion and substituted one that reached the opposite result. Now divided 5-3, ((Justice Brister has always been recused. He was Chief Justice of the Fourteenth Court while the case was pending below.)) the Court holds today that an excess insurer does not have a right to seek reimbursement when “The policy language says nothing about the underwriters’ reimbursement rights should they decide to negotiate a settlement of the claim.” (Majority opinion at page 12.) The Court rejected the insurers’ suggestion that it use equitable principles to add such a term to the contract or that it overrule its prior decision in Matagorda County and instead follow the example of other States that are more permissive about such insurer claims.

    Justice O’Neill delivered the opinion of the Court affirming the judgment below, in which Chief Justice Jefferson, Justice Medina, Justice Johnson, and Justice Willett joined. Justice Hecht delivered a dissenting opinion, in which Justice Green joined, arguing that equitable principles supporting finding a right for insurers to bring such a suit. Justice Wainwright delivered a dissenting opinion in which he argued that the record in this case supports finding such a right because the excess insurers made it a condition of their settlement offer.

    For those counting heads between the original opinion and this new opinion on rehearing….

    The original decision was 7-0 on the merits (although fragmented into four opinions), with Justice Brister recused and Justice Johnson not sitting. ((This was shortly after Justice Johnson joined the Court. New Justices often will choose not to join the voting on cases in which they did not hear argument and in which their vote is not necessary to a decision.))

    Of those seven, three of them joined today’s majority —Chief Justice Jefferson, Justices O’Neill, and Justice Medina. Three of them stayed with their original judgment and today joined dissents — Justice Hecht, Justice Wainwright, and Justice Green. That 3-3 tie was broken by two Justices who were not on that original panel — Justice Johnson and Justice Willett.