Shidlofsky Law Firm was lead counsel in Lamar Homes vs. Mid-Continent Casualty Company, Texas’s groundbreaking case addressing coverage for construction defects. Not long ago the firm was again before the Texas Supreme Court as counsel for Ewing Construction in its case against Amerisure. Here the Texas high court held that allegations that a general contractor failed to perform its work in a good and workmanlike manner, that results in “property damage” caused by an “occurrence,” does not fall within the “contractual liability” exclusion of a standard-form CGL policy. I can’t overstate how significant this decision – or, to put to more accurately, not getting the opposite decision – was for contractors. These guys have had the weight of every person in Texas who works with a hammer on their shoulders.

Lee H. Shidlofsky is the founding member of Shidlofsky Law Firm PLLC. The firm handles a wide variety of insurance coverage cases (D&O, E&O, commercial property, business interruption, pollution and commercial auto) and Lee’s practice has a particular emphasis on coverage for construction defect and product liability claims. In addition to his insurance coverage practice, Lee mediates multi-party construction defect cases as well as insurance coverage matters. When Lee is out mediating cases, Douglas P. Skelly heads up the Insurance Coverage group and has been working side-by-side with Lee since 2007.

I reached out to Lee and asked him to tackle My Hometown for Texas. He’s the first policyholder-side coverage lawyer to participate in this new Coverage Opinions column. A Texas size thank you to Lee for agreeing to do so.

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Hello from Texas, the home of “The Most Important Liability Insurance Coverage Judge” – Justice Don Willett of the Texas Supreme Court -- well, at least according to Randy’s “incredibly subjective and unscientific” methodology (his words, not mine). Randy has always said that a lot of coverage law is made in Texas and he’s right. As a result, Texas courts oftentimes get cited across the country. The Supreme Court of Texas hears more coverage cases on an annual basis than any other state’s highest court (and, for the record, I agree that Judge Willett is extremely influential in this area of law; he made President Trump’s list for potential Supreme Court nominees). Moreover, although they issue a multitude of coverage decisions each year, the Fifth Circuit Court of Appeals has also shown a tendency in recent years to certify insurance cases of first impression to the Supreme Court of Texas rather than make Erie guesses.

Hopefully the below summary will provide at least a little insight into Texas coverage law⎯rumor has it there is a good 50-state survey that goes into more detail. Substantive issues aside, I want to make an observation. While practicing law in a state where the slogan is “Everything is Bigger in Texas” may seem daunting, the fact is that the coverage bar is a relatively tight knit group of professionals that, for the most part, share a collegial relationship. Many cases are settled, at least initially, with a phone call, text, tweet or handshake and the trust factor is high among the lawyers that actively practice in the Texas coverage bar. Simply put, despite the vastness of the state, most in the coverage bar are well known to each other and that has fostered an excellent environment for coverage lawyers. We are pretty nice to outsiders as well. It has truly been an honor to practice in the Lone Star State.

For years, Texas has been “perceived” to be a pro-insurer state. Let’s just call that an “alternative fact.” The reality is that, while Texas law is generally hostile to bad faith and other extra-contractual causes of action, the law is quite favorable to insureds in many respects. Moreover, in my humble opinion, Texas judges do their best to apply insurance policies as written.

That being said, “[t]he maxims of contract interpretation regarding insurance policies operate squarely in favor of the insured.” See Lubbock County Hosp. Dist. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA., 143 F.3d 239, 242 (5th Cir. 1998). If a policy provision is ambiguous, the court must adopt the insured’s construction of the provision “as long as that construction is not unreasonable, even if the construction urged by the insurer appears more reasonable or a more accurate reflection of the parties’ intent.” See Nat’l Union Fire Ins. Co. of Pittsburgh, PA. v. Hudson Energy Co., 811 SW.2d 552, 555 (Tex. 1991). If a policy provision is susceptible to only one reasonable interpretation, the court must enforce the provision as written. See id. And, as noted by the Texas Supreme Court, “Texas law . . . requires that insurance policies be written in English, preferably plain English, not code.” Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 13 (Tex. 2007).

Because Texas courts strive to apply insurance policies as written, Texas law does not recognize the “reasonable expectations” or similar doctrines. See Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 145 (Tex. 1994). Further, Texas courts oftentimes do not let equitable considerations override the actual policy language. By way of example, in Fortis Benefits v. Cantu, the Supreme Court of Texas refused to apply the “made whole” doctrine to subrogation recoveries where the policy language did not support it. See Fortis, 234 S.W.3d 642 (Tex. 2007). Occasionally, however, Texas courts will interpret policy language in a practical manner or to stay within the mainstream and, in doing so, may stray from otherwise strict contract interpretation principles. See, e.g., McGinnes Industrial Maintenance Corp. v. Phoenix Ins. Co., 477 S.W.3d 786 (Tex. 2016) (holding that EPA enforcement proceedings under CERCLA are considered a “suit” within the meaning of a CGL policy even though the definition of “suit” may not technically reach that far).

The duty to defend in Texas is determined based on a standard where any potential for coverage triggers a complete duty to defend. In this regard, although some tension exists between federal courts and state courts, the Supreme Court of Texas has never recognized a formal exception to the “eight corners” rule. Accordingly, facts outside of the pleadings, even those easily ascertained, are ordinarily not material to the determination of a liability insurer’s duty to defend and allegations against the insured are liberally construed in favor of coverage. Simply put, in most cases, the duty to defend is determined by the plaintiff’s pleadings, considered in light of the policy provisions, and without regard to the truth or falsity of those allegations. See GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006). As one judge on the Fifth Circuit aptly described it: “When in doubt, defend.” See Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365, 369 (5th Cir. 2008).

Texas courts do not recognize a pro rata or allocated defense. If an insurer owes a defense, even if only a single allegation triggers a potential for coverage, the insurer owes a complete defense. See Tex. Prop. & Cas. Ins. Guar. Ass’n v. Sw. Aggregates, Inc., 982 S.W2d 600, 604–07 (Tex. App.⎯Austin 1998, no pet.). Likewise, absent a specific policy provision or agreement of the insured, Texas courts have not recognized an insurer’s unilateral right to recoup defense costs or indemnity payments. See Texas Ass’n of Counties County Gov’t Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128 (Tex. 2000); Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42 (Tex. 2008). While the duty to defend is based on allegations and thus presents a question for courts to determine as a matter of law, the duty to indemnify is based on the “actual facts” as established in the underlying lawsuit. See D.R. Horton-Texas, Ltd. v. Markel Int’l Ins. Co., Ltd., 300 S.W.3d 740 (Tex. 2010). To that end, even though the duty to defend is broader than the duty to indemnify, Texas courts have recognized that a duty to indemnify may exist even in the absence of a duty to defend. See id.

A popular saying in Texas is that “if you don’t like the weather, just wait an hour.” With that in mind, I am somewhat hesitant to set out “black letter” principles of Texas coverage law. But, as of the date of this publication, the following—in my opinion—is an accurate sampling of certain key issues:

Trigger – Injury in Fact (See Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20 (Tex. 2008)).

Allocation – Joint and Several, such that for any one occurrence the insured is permitted to select a single policy period among triggered policy periods in any manner so as to maximize its insurance recovery (See Lennar Corp. v. Markel Am. Ins. Co., 413 S.W.3d 750 (Tex. 2013)).

Stacking – Not permitted to stack a single occurrence over consecutive policy years (See RLI Ins. Co. v. Philadelphia Indem. Ins. Co., 421 F. Supp. 2d 956 (N.D. Tex. 2006)).

Exhaustion – Vertical (See Trammell Crow Residential Co. v. St. Paul Fire and Marine Ins. Co., 2014 WL 12577393 (N.D. Tex. Jan. 21, 2014)).

Policy Conditions – Treated as conditions precedent and insurer must establish that it has been prejudiced by a material breach (See PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630 (Tex. 2008)).