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Insurance Law
South Texas College of Law Houston
Platts Jr., Henry S.

          Insurance Law
A.        Basic Principles
            1. Two Basic Types of Insurance –First party and Third Party [liability insurance]            
            Ask yourself who’s damages are being covered? Then you’ll know 1st or 3rd.
* Duties of 3rd party: duty to defend, duty to indemnify (pay) either settle the case, or if a judgment is rendered they will pay it up to the limit of the policy.
            1st party Insurance:
            – life insurance, health, medical, fire insurance for the house, collision for the car
            3rd party Insurance:
            – liability insurance
– basically this type of insurance covers the insured when they cause damages to someone else.
            Insurance Policy is a basic contract
– the difference is that courts find that insurance K is a K of adhesion because insurance company writes the K
– so that means that the K is construed against the drafter [insurance co.] – in TX, the legislature tells the insurance co what to put in the K’s
– in TX what is covered is controlled by what the policy says
            2. Rules of Insurance Policy (contract) Construction
            *courts apply the rule of “construe against” the drafter
            *if there is an ambiguity, it will construe the ambiguity against the insurance co.
            *ambiguity = it can have two reasonable interpretations
            *courts treats policies as K’s of adhesion
            *Texas Department of Insurance tells ins co. what to put in the policies.
            Barnet v. Aetna Life Ins.
            – first the plaintiff broke his heel in the navey
            – Aetna issued policy for Amoco
            – then he hurt his knee while working for Amoco
            – Aetna wanted to subtract the VA benefits he was getting
– “carve out provision” happens when more than one insurance is insuring the person
1.      court said ins policy is a K
2.      court says if policy is plainly written you don’t have to refer to rules of construction
3.      when language is susceptible to more than one reasonable construction it is ambiguous
4.      “justum jeneris” general words applied to things mentioned
5.      each part of policy should be given effect
6.      construe the language against the ins co and in favor of insured
– Aetna not allowed to “carve out” because policy did not say that
– exclusion should be in plain language
            National Union Fire Ins. Hudson
            – claim for damages caused to plane, physical damages to the plane
            – 1st party insurance
            – ins co denied coverage because the policy said that the pilot had to be licensed
            – because plaintiff and instructor were piloting the plane this was key issue
                        -ins was saying there had to be sole control not dual control
                        – court said instructor was the licensed pilot even though both had control
Two Types of Ambiguity:
Tainted: appears on the face of policy as written
Latent: read sentence and looks straight forward but when applied, more than one way to interpret it: Hudsoncase
B.        General Liability Insurance
1. Two liability Insurer Contractual Duties –Duty to Defend and Duty to Indemnify
            3rd party insurance has to duties;
1.      duty to indemnify: to pay
2.      duty to defend: provide lawyer
2. ISO Commercial General Liability Coverage Form
* identifies info specific to this policy, who is being insured, policy period, amount of policy
            -Insuring Agreement:
            * that is the broad grant of coverage, what the ins will cover, general policy
            * narrow the broad grant of coverage, i.e. motor vehicle exclusion
* things the insured must do, like pay your premium, give notice of claim, forward suit paper if you are sued.
* define special terms of the policy, terms that are shown in bold or quotes, these definitions control
            * If word is undefined, the court will give it it’s normal meaning, in Websters
3. Notice of Claim
* notice of an accident is so ins co can go get fresh statements from witness, this can come from anyone.
* notice of a lawsuit, is supposed to come from the insured, this could come from someone else, but you have to show that the insured has been properly served.. Harwell
Struna v.Concorde Ins. Serv. Inc.
            – auto accident
            – rule: in order for insurance co to deny coverage for lack of failure to notify, they have to
            show they were prejudiced
            – if you can’t show prejudice then you can’t deny coverage
Chiles v. Chubb Lloyds Ins.
            – homeowner’s policy at issue in this case
            – damages for divorce, husband wanted to make claim to his homeowner’s to pay them
            – Issue: did husband provide appropriate notice to ins co.
– court said that ins did not have burden to show prejudice it just had to show that notice was not prompt
– this case has not been overruled but it is WRONG
– TX says all general policies must contain clause that before ins co must show prejudice before denial of claim
Liberty Mut. Ins. Co. v. Cruz
            – court said that ins co was prejudiced because they were not notified of suit
            – default judgment prejudices as a matter of law
Harwell v. State Farm Mut.
            * Hubbard died, Leatherman was injured
* Attorney Groce was hired by Leatherman, Harwell was appointed by Groce to be the administrator of Hubbard.
* Groce gave State Farm petition, police report, The court gave State Farm notice of intent of default or dwop
* Groce did contact State Farm by phone but no more documents
* When Groce served Harwell, she was not yet the administrator, so service was no good
* Harwell never forwarded papers to State Farm
* TC renders judgment for 74k for Leatherman
* Groce waits 31 days before informing State Farm got actual notice of the suit, the court said that all the prior contact were notice of claim but not suit.
* to give notice to the ins co the insured has to forward the actual suit papers to the ins co.
* the insured, but can be the plaintiff’s lawyer, has to give the insurance co. actual notice that proper service has been effectuated, when you send the petition send a copy of the service receipt
            * the ins should get notice of proper service of the insured, the insured should forward
            copy of notice to ins, the plaintiff’s attorney can send to ins that it has been properly
            * the ins may rely on non-cooperation defense if the insured does not help with suit
            * there are some cases where it does not matter if the insured helps or not, because there
            are many witnesses, so the ins has no defense
A.        What is an “occurrence” ?
* in the insuring agreement, of Commercial General liability Policy, usually says “we will all sums …as damages….caused by an occurrence”
* usually a defined term
Travelers Ins. Co. v. Volentine
* the insured performed valve service on a car and the engine was ruined, the insured was sued
            * insured asked ins co to defend him in suit
            * the insurance policy did not cover property damage to work performed by insured
* the court said the insured only did work on valves, so this exclusion only covered the valve work, not the rest of the engine, so the rest of the engine is covered.
* occurrence as defined in the policy includes an accident.
* what does accident mean? The court said an unexpected, undeseigned, unforeseen, happening from either a known or unknown cause
* the destruction of the entire engine was unexpected from the valve service
* accident: unforeseen, unexpected event this is the normal meaning
Argonaut Southwest Ins. Co. v. Maupin        
* insured made K with state of TX, insured Maupin made K with Kipper to dig dirt from his property, but Kipper does not own property, Meyer does.
* Meyer sues Maupin for trespassing and taking the dirt.
* ins co refuses to defend because they said this was an intentional tort, not an accident,
* the court focused on the issue if the duty to defend even arose.
* maupin did not intend to damage meyers, but he intended to take the dirt, it was the action that mattered, not the result.
* TEST: voluntary and intentional act and the damage or injury is natural result then it is not an accident.
* the act was taking the dirt, the injury was taking the dirt
* in Volentine the act was valve job, the injury was engine ruined, not natural result.
Dorchester Dev. Corp. v. Safeco Ins. Co.
            * the insured performed for construction of apartment complex.
            * insured got sued for bad workmanship, and turn to ins co to defend them
* the court said that damage occurred after the policy expired, so there was no occurrence insured admitted this
* When is it occurence: the actual damage has to occur during the policy period, not when the act was committed.
Trinity Universal Ins. Co. v. Cowan
            * cowan sued gage and h.e.b., gage made some extra copies of revealing pictures
* she sued for negligence, gross negligence, mental anguish…this is really an invasion of privacy
* court said this was not an occurrence, used Maupin [natural result] and determined that his act was an intentional act, he copied the pictures and showed him to his friends, the injury was making extra copies of her pictures and showing them to his friends.
* Gage argued that he did not expect that Cowan would find out about it, so he wanted this to be considered an accident.
* if it is an intentional tort it will not be an accident “charged with producing” the result
* the court did say that not all intentional conduct is not an accident, a hunter intentionally shoots at a deer, but it turns out that it was person.
* Test: ordinarily follows somewhat similar to Maupin
State Farm Lloyds v. Kessler
            * Kessler’s selling house to Fannings, foundation problems
            * State Farm said would defend, but would find out if they had duty
            * court said there was a duty to defend because there was property damage
* was there occurrence? CA says there was no occurrence because under TX law if the act was intentional [making false statements, nondisclosures] is not occurrence
* misrepresentations do not cause property damage, they cause financial damages, the defects were already there so there is no property damage
* if ever you sell a home disclose everything
King v. Dallas Fire Ins. Co
            – employee attacks other worker, employer wants ins to defend
            – ins says that act was intentional, but employer says that he did nothing
            – in deciding whether there is an “occurrence” you view it from the insured’s standpoint
– victim sues employer: negligent hiring, retention, supervision, training and respondent superior
            – ins says that the employee’s assault was not an occurrence because it was intentional
            – “separation of insureds” clause: means that the policy applies to each insured separately
            – how do we apply this clause to the “occurrence” requirement
            – if the insurance only wanted this clause to apply to exclusions, they would have said it
            – the court said that the separation clause applies to occurrence, then you ask if that
            insured intended the act to happen, therefore there is a duty to defend
            – what about respondent superior? The court does not say much, but usually this imputes
            the acts of the employee to the employer, all you have to show a master/ servant,
            when this is the only issue, professor says that ins has no duty to defend, so if you are
            a plaintiff you want to request relief for negligence so that you can get relief.
A.        What Damages are “Covered”?
– policy usually covers: bodily injury or property damage
– bodily injury: does not include mental anguish or emotional distress
– Exception 1: physical manifestations of mental anguish: if you have them and plead them, then you have bodily injury, so plead them; this is an exception
– Exception 2: mental anguish is covered when is “because of”: some other injury that is covered by the policy; like: bodily injury or property damage
– property damage: physical injury or loss of use tangible property
– property damage: does not include purely economic loss
            – Exception: 1. where your economic loss is because of property damage or bodily injury
            example; is a car wreck the damage is to your car but part of your damages is also to rent
            a car,
– Exception 2. economic loss is covered if it is a measure of damages for loss of use of tangible property: comes up like in loss of rent profits; the suit is for rents that were lost
            1. “Bodily Injury”
Trinity Universal Co. v. Cowan
            – h.e.b. pictures case
            – she sued him for bodily injury for mental anguish, she took an assignment from him to
            sue only the ins and not him
            – was mental anguish alone “bodily injury”
            – court says no. bodily injury and mental injuries are distinct
            – “bodily injury” does not include mental anguish or emotional distress
            – she did not plead: the stomach aches, nausea
– physical manifestations of mental anguish: if you have them and plead them, then you have bodily injury
            2. “Property Damage”
Lay v. Aetna Ins. Co.
            – Lay was hired to find oil well, he instructed wrong location of oil well, j.j. were owners
            of lease to drill
            – j.j went to the owner of the property to get the right to continue drilling
            – j.j sued lay for purchase of assignment, att fees, barrels of oil they did not get while they
            had to shut down to get the assignment
            – ins refused to defend, because this is not property damage, not tangible property
            – is this occurrence property damage?
            – purchase of an assignment was not ‘tangible property”            – j.j were subsequent purchasers, the cause of action for property damage does not pass to
            them for

Continuous Damage or Injury Claims – Which Policy (ies) Is (are) “Triggered”
– what happens when the damage or injury that is continuous that spans different policies who pays?
– damages can span over a year; so what policy pays? The old one or the new one? The old policy has expired and have moved on to the new one.
How do you know which theory to use:
– it is difficult to predict which theory the court will use
– are the facts of your case similar to any Texas case, if no Texas case is it similar to any federal case who rule on this?
– Court have come with different theories to apply to each case
Four theories that apply to continuous injury:
1.      manifestation theory: only the policy in effect at the time damages manifest themselves; applies in almost every non-continuous damage; exposure, latency and injury are all triggered; not applied very often
2.      continuous (triple) trigger theory: all policies in effect during the period of time when damages continue to occur are triggered
3.      injury in fact theory: we are going to extend coverage under all policies that plaintiffs were actually injured; policies are triggered if they are on the “risk” at any time the claimants suffered injury from; this follows policy language precisely
4.      exposure theory: use a lot in bodily injury asbestos cases; problem is that it has very little to do with policy language; very easy to apply; the injury that occurs during the policy theory
Notes: all these theories only comes into play for long term exposure; continuous injuries; not used for a single injury
-you don’t know what theory the court will apply; but exposure theory is the most popular;
– Texas SC has not approved any of these theories for use in this state. Trick question on the final exam:
Know the math for the exposure theory: how much will the plaintiff get
Plaintiff’s total damages [times]: the number of year of the ins was on the risk
                                                      The total # of years the plaintiff was exposed
            1.         First Manifestation of Damages Theory
Dorchester Dev. Corp. v. Safeco Ins. Co
– 1st suit: B&L v. Dorchester because of defective workmanship in construction of apartment complex
– 2nd suit: Dorchester v. Safeco: ins will not defend because of exception: only care when the damage occurred;
            – Safeco: argued that there was no occurrence; because policy had expired
            – CA affirmed TC; no duty to defend because there was no occurrence
            2.         Continuous (or Triple) Trigger Theory
Cullen/ Frost Bank v. Commonwealth Lloyd’s Ins. Co.
            – bank sold condo’s
            – the condo owner’s sued the bank and the bank sought duty to defend from ins
            – condo’s claimed negligence in disbursing funds and not fixing the problems
– bank argued that it was a “continuous occurrence”; the ins argues that only one occurrence discovered in 1986; court held that there was more than one occurrence; why facts did the court look at? The court said that the repeated breakdown of the elevators; the condo owners alleged that they kept breaking down; so each time they broke down; it caused an additional loss of use of the property; this is the one the professor believes the court hung the repeated argument on;
            – tc: gave summary judgment to ins, but CA: reverse
            3.         Injury in Fact Theory
Dayton ISD v. National Gypsum Co.
            – school districts in Texas sue Grace the manufacturer of asbestos insulation
            – schools claimed property damage [to the buildings]; no claims of bodily injury
            – Policies: in effect from 1978 – 1985; suit filed in 1984
            – Grace settles w/ schools and wants ins to pay
            – DC grants summary judgment for Grace
– p. 6 the policies were triggered if they were on the risk at any time that the claimants suffered injury from asbestos through the time of their death or filing of their claim.
La Farge Corp. v. National Insurance Fire Ins Co.
            – sold cement to Lone Star
– Lone Star used the cement to manufacture RR cross ties; they began to crack prematurely and deteriorated    
– they settled; but National did not participate; this suit is to recover the part of the settlement that National owes to La Farge
– Texas law was applied because the policies were written and signed in Texas; Maryland court made an “Erie” guess as to what the Texas SC would do; they guessed that they would apply an Injury in Fact theory
– the holding was that National was on the risk somewhere on the time line; but they don’t have to pay the whole sum because the court prorated the time on the risk that National; the period of time that the injury in fact occurred;
– injury in fact occurred when the ties were manufactured until they found out about the damage occurring;
            4.         Exposure Theory
Insurance Co. of N. America v. Forty-Eight Insulations
            – people exposed to asbestos sued 48 for failure to warn about the product
1955                                        1972                1975    1976    1977                                 Present      
self insured                              
                        INA insured                 AFM       llnat            trav               Liberty Mutual
            – who will cover? When did the injury occur?
– court applied the exposure theory:
– exposure period: is the time the person was first exposed to asbestos until the end of the exposure:
            – example: goes to work in 1966 exposed and works there until 1974;
                        – INA would be responsible for 66 to 72 and
                        – AFM from 72 to 74
– basically the amount of time the ins was on the risk when the person was expos