Texas Appellate Lawyer & Attorney : D. Todd Smith Law Firm : Appeals, Sanctions, Summary Judgment : Austin, Texas

The Third Court of Appeals has released its opinion in the lead State Farm rate case, Geeslin v. State Farm Lloyds (No. 03-05-00067-CV).  So much for any concerns that the recent panel-switch would delay the decision—although the Court did not decide all the cases together, as Chief Justice Law indicated it might.  Here is the opening paragraph (footnote omitted):

This appeal concerns the validity of a rate order issued by the commissioner of insurance.  The rate order was based on now-expired article 5.26-1 of the insurance code, which provided the procedure by which Texas homeowners insurance providers were to file their initial homeowners insurance rates with the Texas Department of Insurance (“TDI” or the “department”) as required by Senate Bill 14 in 2003.  Tex. Ins. Code Ann. art. 5.26-1 (West Supp. 2004-2005).  The rate order required State Farm Lloyds to reduce its filed homeowners insurance rates by twelve percent.  State Farm Lloyds sought review in district court.  Finding that article 5.26-1 was unconstitutional and that State Farm Lloyds’s due process rights had been violated, the district court vacated the rate order.  Appellants now seek reversal of the district court’s judgment.  We conclude that the portion of section 4 of article 5.26-1 setting out what insurers are required to prove on appeal to the commissioner (“the proof provision”) is unconstitutional on its face and as applied to State Farm Lloyds.  Therefore, we affirm the judgment of the trial court in part as to its findings that the provision of former Article 5.26-1, section 4, which requires an insurer to prove that a rate reduction would produce inadequate rates, is unconstitutional and that State Farm Lloyds’s due process rights were violated.  Because we further hold that the unconstitutional proof provision is severable, we sever that provision, reverse the trial court’s judgment as to the constitutionality of the remainder of the statute, and remand to the department for further proceedings consistent with this opinion.

Lots of juicy issues here.  This dispute seems far from over.

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The Texas Supreme Court issued one opinion with this week's orders.  In Grimes Construction, Inc. v. Great American Lloyds Insurance Co. (No. 06-0332) (per curiam), the Court reversed after concluding that the court of appeals' decision conflicted with Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex. 2007).

In Lamar Homes, the Court determined that allegations of unintended construction defects might constitute an accident or occurrence under a commercial general liability policy and that allegations of damage to or loss of use of the home itself might also constitute property damage sufficient to trigger the duty to defend.  Grimes presented similar issues, but the court of appeals concluded that defective work involved a contract claim outside the CGL policy's scope.  The supreme court remanded the case to the trial court for further proceedings consistent with its opinion.

The Grimes opinion bears the noteworthy delivery date of February 29.  I'm no historian, but based on a quick Westlaw search, the Court seems to have issued only nine other opinions on February 29.  They are:

• Jensen v. Jensen, 665 S.W.2d 107 (Tex. 1984);
• Brownlee v. Brownlee, 665 S.W.2d 111 (Tex. 1984);
• Gappelberg v. Landrum, 666 S.W.2d 88 (Tex. 1984);
• Ex parte Ratliff, 3 S.W.2d 406 (Tex. 1928);
• Monger & Henry v. Delaware Ins. Co., 79 S.W. 7 (Tex. 1904);
• Western Union Tel. Co. v. Arnold, 79 S.W. 8 (Tex. 1904);
• Houston E. & W.T. Ry. v. Hardy, 61 Tex. 230 (1884);
• Astugueville v. Loustaunau, 61 Tex. 233 (1884); and
• Perkins v. Dunlavy, 61 Tex. 241 (1884).

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Of all the Texas Supreme Court decisions issued last week, Fairfield Insurance Co. v. Stephens Martin Paving, LP (04-0728) is arguably the most significant.  In that case, the Court answered "no"—sort of—to the Fifth Circuit's certified question, "Does Texas public policy prohibit a liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence?"

More accurately, the Court reframed the question narrowly and answered it this way:  "Pursuant to article V, section 3-c of the Texas Constitution and rule 58.1 of the Texas Rules of Appellate Procedure, we answer that Texas public policy does not prohibit coverage under the type of workers' compensation and employer's liability insurance policy at issue in this case."

That answer begs the question, "How about other types of insurance policies?"  More on that in a minute.

Citing three out-of-state cases, the Court first described a two-step analysis for determining whether exemplary damages are insurable.  The Court decides (1) whether the policy's plain language covers the exemplary damages sought in the underlying suit against the insured; and (2) if so, whether Texas public policy allows or prohibits coverage under the circumstances, considering any express statutory provisions regarding the insurability of exemplary damages.

The Court skipped the first part of its newly announced analytical standard and proceeded to the second step.  After reviewing the relevant statutes, the Court concluded that "[t]he Legislature's expressed intent is that Texas public policy does not prohibit insurance coverage for claims of gross negligence in this context."

That's it.  Certified question answered.  Opinion over at page 10, right?

Wrong.  This is where it gets interesting—so much so as to spark concurring opinions from Justice Hecht and Justice Johnson.

Recognizing "the import of this issue," the Court went on to discuss the "considerations relevant to determining whether Texas public policy prohibits insurance coverage of exemplary damages in other contexts in the absence of a clear legislative policy decision."  What follows over the next 17 pages is an impressively researched explication of how every other state has treated the issue, as well as a discussion of key cases outlining both sides of the debate and the critical policy concerns:  freedom of contract and whether, based on the specific circumstances, the purpose of imposing exemplary damages is served.

Folks who were hoping for ultimate resolution of whether punitive damages are insurable in Texas are undoubtedly disappointed.  Although the Court said more than was needed to answer the Fifth Circuit's certified question, it stopped well short of adopting a bright-line rule.  Indeed, just about everything other than worker's compensation coverage remains open for further debate under the framework announced in this case.

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With today's orders, the Texas Supreme Court issued a new opinion in Excess Underwriters at Lloyd's, London v. Frank's Casing Crew & Rental Tools, Inc. (No. 02-0730), possibly the oldest case on the Court's docket.  The Court originally decided the case in May 2005, but granted respondent's motion for rehearing in January 2006 and heard re-argument a month later.

In its original opinion (authored by then-Justice Owen, joined by Chief Justice Jefferson and Justices Hecht, Medina, and Green) the Court held that excess insurance carriers who correctly disputed coverage, but nevertheless settled third-party claims against their insured, were entitled to recoup the settlement payments from their insured.  The new opinion (authored by Justice O'Neill, joined by Chief Justice Jefferson and Justices Medina, Johnson, and Willett) does an about-face and holds that no reimbursement obligation is implied when the policy involves excess coverage, the insurer has no duty to defend under the policy, and the insured acknowledges that the claimant's settlement offer is reasonable and demands that the insurer accepts it.

Justice Hecht (joined by Justice Green) and Justice Wainwright each delivered dissenting opinions.  Justice Brister did not participate in the decision.

Expect considerable media attention to this case. It may receive more coverage than any other decision the Court makes this year.

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The Texas Supreme Court released four opinions with this week's orders:

In PAJ, Inc. v. Hanover Insurance Co. (No. 05-0849), a five-member majority (Justice O'Neill, joined by Chief Justice Jefferson and Justices Brister, Medina, and Green) held that an insured's failure to timely notify its insurer of a claim does not defeat coverage if the delay caused the insurer no prejudice.  In doing so, the Court treated the policy's prompt-notice requirement as a covenant, rather than a condition precedent.  Justice Willett dissented (joined by Justices Hecht, Wainwright and Johnson) and would have reached the opposite conclusion.

In Houser v. McElveen (No. 06-0504) (per curiam), the Court determined that an inmate who deposited his notice of appeal in the prison mail 35 days after the trial court signed a dismissal order was entitled to an extension of time.  Thus, the court of appeals erred by dismissing the inmate's appeal.

In Levine v. Shackelford, Melton & McKinley, L.L.P. (No. 06-0553) (per curiam) (opinion on denial of rehearing from petition for review), the Court emphasized that "conscious indifference" is not the same as negligence when applying the test for setting aside a no-answer default judgment.

In AIG Aviation (Texas), Inc. v. Holt Helicopters (No. 06-0484) (dissent from denial of rehearing of petition for review) Justice Willett indicated that he would have granted review to overrule Puckett v. U.S. Fire Insurance Co., 678 S.W.2d 936 (Tex. 1984), distinguish it, or "explain forthrightly why we insist on applying a hazy, public policy-based interpretive standard to aviation insurance contracts . . . ."

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The Texas Supreme Court handed down six decisions with this week's orders.

In Mid-Century Insurance Co. v. Ademaj (No. 05-0016), a declaratory judgment action, the Court held that insurers may lawfully collect Texas Automobile Theft Prevention Authority fees from auto insurance policyholders without including such fees in rate filings required under Article 5.101 of the Insurance Code.  Because the trial court and court of appeals concluded otherwise, the supreme court reversed and rendered judgment that plaintiff take nothing.  Justice O'Neill (joined by Justice Medina) issued a concurring opinion.

In Houston Municipal Employees Pension System v. Ferrell (No. 05-0587), the Court held that 29 members of the Pension System could not bring a declaratory judgment action to adjudicate their rights under the statute that created the System.  Because the statute expressly provides that the administrative agency's interpretation is "final and binding on any interested party," the Court held that the trial court lacked jurisdiction over the case, reversed the court of appeals' judgment, and dismissed for want of jurisdiction.  Justice Brister (joined by Justice O'Neill) concurred.

In Montgomery County, Texas v. Park (No. 05-1023), the Court defined an "adverse" personnel action under the Texas Whistleblower Act (which provides no definition) as one that "would be likely to dissuade a reasonable, similarly situated worker from making a report under the Act."  Concluding thatplaintiff failed to meet that definition, the Court reversed the court of appeals' judgment and rendered judgment for the County.

In Ogletree v. Matthews (No. 06-0502), the Court determined that a defendant in a health-care liability action has no right to an immediate interlocutory appeal when the trial court denies a motion to dismiss and grants the claimant a 30-day extension of time to cure defects in otherwise timely served expert reports.  Because the court of appeals reached the same conclusion, the supreme court affirmed the lower court's judgment.  Justice Willett delivered a concurring opinion.

In Best Buy Co. v. Barrera (No. 07-0028) (per curiam), a class action in which plaintiffs sought return of restocking fees, the Court followed its recent decision in Stonebridge Life Insurance Co. v. Pitts andconcluded that individual issues will predominate over common issues of proof.  Holding that plaintiffs thus failed to satisfy TRCP 42(b)(3)'s predominance requirement, the Court reversed the court of appeals' judgment affirming the class-certification order and remanded the case to the trial court.

In In re McKee (No. 06-0055) (orig. proceeding) (per curiam), the Court denied a mandamus petition seeking to invalidate an administrative judge's assignment of one trial judge to hear a recusal motion involving another trial judge when the administrative judge had previously recused himself from the case.  Noting that it had previously declined mandamus relief from the denial of a recusal motion, the Court applied the updated Prudential standard and concluded that there would be no significant benefit to granting relief in this case.

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The Texas Supreme Court issued four opinions with this week's orders.

In In re U.S. Home Corp. (No. 03-1080) (per curiam), a dispute between a homebuilder and purchasers, the Court conditionally granted mandamus relief from a trial court order refusing to compel arbitration, holding that no evidence supported any of the asserted defenses to enforcement of the arbitration clause.  The Court declined the defendants' invitation to reverse the trial court's class certification order because the court of appeals had not yet ruled on that request.

Answering certified questions from the Fifth Circuit in Mid-Continent Insurance Co v. Liberty Mutual Insurance Co. (No. 05-0261), the Court held under the facts of the case that one insurer owed a second insurer no duty (directly or by subrogation) to compensate the second insurer for paying more than its proportionate share of a settlement to which both contributed.  Justice Willett delivered a concurring opinion providing his additional thoughts on why Texas law should not recognize such a claim.

In In re SCI Texas Funeral Services, Inc. (06-0385) (per curiam), the Court conditionally granted mandamus relief from discovery and sanctions orders in a putative class action because the court of appeals' reversal of class certification "render[ed] the class-wide discovery superfluous and the class-wide sanctions incongruous."

In BFI Waste Systems of North America, Inc. v. North Alamo Water Supply Corp. (No. 06-0602) (per curiam), the Court denied both petitions for review, but indicated that the court of appeals (in footnote 6 of its opinion) had improperly commented on the validity of a discharge permit, an issue not before that court.  The supreme court agreed with petitioners' argument that the court of appeals' comments should not prejudice future litigation over the discharge permit.

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As reported in Blawgletter, the Fifth Circuit handed down two more Katrina-related insurance decisions yesterday, reaching the same basic result as the case discussed here last week.  Arias-Benn v. State Farm Fire & Casualty Insurance Co. involved damage to refrigerators and freezers from post-storm putrefaction of their contents.  Chauvin v. State Farm Fire & Casualty Co. dealt with exclusion of "flood" damage from homeowner policies.  Insurance companies 3, insureds 0.

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In In re Katrina Canal Breaches Litigation, the Fifth Circuit has rejected several insurance policyholders' attempts to obtain coverage for water damage caused by Hurricane Katrina, despite exclusions for damages caused by "flood," based on allegations that the inundation of water into the City of New Orleans resulted from the negligent design, construction, and maintenance of the levees along three canals.  The plaintiffs argued that the policies were ambiguous because the flood exclusions did not clearly exclude coverage for water inundation caused by negligence.  The circuit court held that, aside from any negligence, the policy exclusions unambiguously precluded recovery.

Update:  Here is a list of all counsel involved in the Fifth Circuit appeal.  See the WSJ Law Blog for some interesting coverage and comments, as well as a YouTube video set to Led Zeppelin's When the Levee Breaks.

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