Everything’s Bigger in Texas, Except Coverage Under Excess Policies
The Texas Supreme Court recently held that an excess policy’s coverage did not extend to legal defense costs.
Patterson-UTI Energy, Inc., Patterson-UTI Management Services, LLC, and Patterson-UTI Drilling Company LLC (collectively, “Patterson”) provides oil and gas equipment and services. Patterson covers its risks by buying multiple layers of excess coverage on top of its primary policy. Central to the dispute in the case, Patterson obtained an umbrella policy from Liberty Mutual Insurance Europe, Ltd., as its underlying policy. One of its many excess insurers was Ohio Casualty Insurance Company (“Ohio Casualty”).
After a drilling rig incident, Patterson was subject to a myriad of lawsuits which incurred heavy costs in several settlements and litigation defense spend. The associated expenses from this incident triggered the Ohio Casualty excess policy after the coverage limits of the lower-level policies were exhausted. Ohio Casualty covered portions of the settlements but did not indemnify Patterson for any defense expenses. Patterson sued for breach of contract and violations of the Texas Insurance Code.
The excess policy in the case was a standard “follow-form” contract which is a shorter and simpler policy compared to the underlying policy as the follow-form contract generally accepts several of the underlying policy’s terms. However, the Texas Supreme Court noted that “even for follow-form excess policies, the contract that governs a dispute about excess coverage is the excess policy, not the underlying policy.” Thus, the Court unsurprisingly followed the logic to first analyze the excess policy and look to the underlying policy only to the degree that both parties agreed to incorporate its terms.
By its terms, the Ohio Casualty policy only agreed to cover a “loss” as defined in the Ohio Casualty policy. Loss was 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.” As a result, the Court found that coverage turned on whether the amounts Patterson was legally bound to pay in settlement or satisfaction of a claim would be considered damages. Ohio Casualty agreed that settlement amounts were damages and covered such losses. However, Patterson’s own attorneys’ fees were not considered losses because such fees were not damages. Under Texas law, a party’s own attorneys’ fees are not damages, unless the parties agree to such terms in the contract. The underlying policy did agree to include attorneys’ fees as part of the contract and therefore would be considered a loss, but because the excess coverage did not make any such representation, Ohio Casualty was not obligated to indemnify Patterson’s attorneys’ fees.
The case emphasizes the importance of understanding the terms of each executed insurance policy and how the terms interact with any other policy an insured may hold.
The case is Ohio Cas. Ins. Co. v. Patterson-UTI Energy, Inc. Marsh USA, Inc., 68 Tex. Sup. Ct. J. 176 (2024).