Like waiting for a Buss: The Texas Supreme Court and Frank’s Casing

Every five years or so, the Texas Supreme Court issues an opinion that makes insurance companies and coverage lawyers rethink basic principles of claims handling, strategy or policy interpretation. In recent years we have had Merchants Fast Motorlines set out stringent new guidelines for evaluating the duty to defend and State Farm v. Gandy changed both when and why carriers file declaratory judgment actions as well as dramatically reconfiguring how insureds go about working out deals with underlying claimants.

One coverage case in recent years has generated more interest, and less certainty, than any other pending before the Texas Supreme Court. The case resulted in a landmark decision that sent shockwaves through the insurance bar, only to be unceremoniously withdrawn for further consideration. This much anticipated decision, that deals with reservation of rights and reimbursement from insureds, is Excess Underwriters at Lloyds London v. Frank’s Casing Crew & Rental Tools, ___ S.W.3d ___, No.02-0730, 2005 WL 1252321 (Tex. May 27, 2005) (rehearing granted). It remains pending before the Texas Supreme Court. Since May 2005 …

The claim
To make sense of the heightened interest in the case, a little background is in order. Frank’s Casing Crew & Rental Tools Inc. (Frank’s Casing) fabricated a drilling platform at its facility in Louisiana for ARCO. The platform was installed in the Gulf of Mexico and collapsed several months later. ARCO sued Frank’s Casing. Frank’s Casing had a primary liability policy with $1 million limits and excess coverage of up to $10 million from Certain Excess Under-writers at Lloyd’s London (Lloyds).

Lloyds issued a reservation of rights letters asserting that ARCO’s claims against Frank’s Casing were precluded from coverage. ARCO made a pre-trial settlement offer of $9.9 million, which Frank’s Casing rejected. Later, ARCO made another offer to settle to all defendants that would require Frank’s Casing to contribute about $7.55 million. Lloyds proposed that the underwriters pay two-thirds of that amount and Frank’s Casing pay one-third. In the alternative, Lloyds proposed that they pay $5 million and then all coverage issues be resolved in arbitration. Frank’s Casing rejected both alternatives.

The case went to trial, and by the second day it was readily apparent that Frank’s Casing was the target defendant. ARCO and Frank’s Casing entered into additional settlement negotiations, which resulted in ARCO making a $7.5 million settlement demand. This demand was within the limits of the excess policy, and Frank’s Casing sent a Stowers demand of $7.5 million to Lloyds. Lloyds agreed to fund the settlement, but preserved its insurance claims against Frank’s Casing to be resolved at a later date.

In the ensuing coverage case, the trial court determined that none of ARCO’s claims against Frank’s Casing were covered (carriers can be right, you know) and ordered Frank’s Casing to reimburse Lloyds over $7 million. But shortly thereafter, the Texas Supreme Court issued the decision in Texas Association of Counties Country Government Risk Management Pool v. Matagorda, in which the Court determined that the insurer was not entitled to reimbursement. This contrasted the much praised California case, Buss v. Superior Court, 16 Cal. 4th 35 (Cal. 1994), which had previously found that carriers were entitled to reimbursement for costs where it was determined there was no covered claim.

Accordingly, the trial court directed Frank’s Casing to file a motion for new trial on the issue of reimbursement. In light of the Matagorda opinion, the trial court signed a take-nothing judgment against the Excess Underwriters. Id.

The court of appeals affirmed and noted:

“We recognize this carries Matagorda County to a logical conclusion that is somewhat disquieting — Frank’s Casing was able to resolve the parties’ coverage dispute in its own favor simply by sending a Stowers demand to the Underwriters … But this is a matter that the Underwriters must take up with the superior court.”

The first opinion
The Texas Supreme Court accepted the case and decided that under both Texas and Louisiana law an insurer is entitled to reimbursement, at least under the Frank’s Casing facts. The Court distinguished Frank’s Casing from the facts in Matagorda County because in Matagorda County the insured did not have to consent to the settlement and there was no “implied-in-fact” agreement that the insurer could seek reimbursement from the insured. Thus, in that case, the Court was concerned that “when an insurer has the unilateral right to settle, an insurer could accept a settlement that the insured considered out of the insured’s financial reach, and the insured could be required to reimburse the insurer for that amount.”

The Court concluded that those concerns were eliminated in situations like Frank’s Casing where:

(1) An insured has demanded that the insurer accept a settlement offer that is within policy limits, or

(2) An insured expressly agrees that the settlement offer should be accepted.

This is a very common situation, and this new rule greatly complicates the settlement analysis of insureds and their defense counsel. For carriers, however, it offers the possibility to recover settlement payments on uncovered claims. Then potential impact was dramatic. The Court ultimately concluded that in these situations, “the insurer has the right to be reimbursed if it has timely asserted its reservation of rights, notified the insured it intends to seek reimbursement, and paid to settle claims that were not covered.”

But that did not end the matter.

Waiting, waiting …
The Texas Supreme Court unexpectedly withdrew the opinion and agreed to rehear the case, even ordering a second oral argument, a rare occurrence. The oral arguments were held on Feb. 15, 2006, and the justices’ questions ranged from whether right to reimbursement provisions could be added to policies to whether allowing a right to reimbursement would be a disincentive to early settlement. The insurer’s counsel argued that reimbursement has always been a remedy, and no new right to reimbursement is being created. Frank’s Casing’s counsel, on the other hand, argued that the insurer should not be allowed to put off its coverage decision, pay to settle a claim to avoid bad faith liability, and then sue the insured for reimbursement. Frank’s Casing also argued that an implied right to reimbursement would arguably create additional leverage for the insurer to put pressure on the insured at a critical time to either contribute to settlement or face a reimbursement claim.

The stakes are exceedingly high, and given the extraordinary attention this case has received from the Texas Supreme Court, it appears the Court probably intends to alter its original opinion to some degree. However, the direction it takes is still to be seen. We will just have to wait, and wait, while carriers hope for a Buss.

Brian S. Martin is a partner in the Insurance and Coverage section of the Houston office of Thompson, Coe, Cousins & Irons L.L.P. He has extensive experience in insurance coverage and defense matters, specializing in environmental, toxic tort and products cases.