Texas Supreme Court Reverses Frank’s Casing Ruling

The Texas Supreme Court on Feb. 1 handed down a long awaited ruling in a case that many believe to be one of Texas’ most significant insurance cases in recent history. The Court reversed its May 2005 decision in Excess Underwriters at Lloyd’s, London, et al. v. Frank’s Casing Crew & Rental Tools Inc., in which it held in a 7-0 ruling that in certain circumstances an insurance company has a right to seek reimbursement for settlement of uncovered claims.

The Court’s recent 5-3 decision, however, affirms a 2002 ruling by the Fourteenth Court of Appeals in Houston, which found that unless an insurance policyholder’s contract provides the insurer with the right to reimbursement of settlement proceeds following a coverage dispute, then the insurer cannot unilaterally create such a right, according to a statement by Warren W. Harris of Bracewell & Giuliani LLP (www.bgllp.com), who defended Frank’s Casing Crew & Rental Tools Inc. in the underlying case.

Insurance defense attorney Brian S. Martin of the Thompson, Coe, Cousins and Irons LLP and a frequent contributor to Insurance Journal, said the ruling, along with other recent decisions by the Court, will make it more difficult for insurers to reach settlements in cases where coverage is questionable. “It will lead to more coverage litigation, not less as the court errantly assumes,” Martin said.

The Frank’s Casing case stems from an incident in which a drilling platform fabricated by Frank’s Casing Crew & Rental Tools Inc. at its facility in Louisiana for ARCO collapsed several months after it was installed in the Gulf of Mexico.

In an article that appeared in Insurance Journal – South Central in March 2007, Martin wrote that Frank’s Casing “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 The case resulted in a landmark decision that sent shockwaves through the insurance bar, only to be unceremoniously withdrawn for further consideration.”

Beth D. Bradley, a partner in Tollefson Bradley Ball & Mitchell, LLP and also a frequent contributor to Insurance Journal, wrote in 2005 shortly after the original Supreme Court decision in Frank’s Casing that, “In what appeared to be a departure from prior law, the court held that an insurance company has a right to seek reimbursement for settlement of uncovered claims, at least in certain circumstances.

“The court distinguished its prior opinion in Texas Association of Counties County Government Risk Management Pool v. Matagorda County and held it does not foreclose an action for reimbursement. 52 S.W.3d 128 (Tex. 2000). In Matagorda County, the court previously held that an insurer could not seek reimbursement from its insured for settlement of non-covered claims unless the insured expressly agreed to the settlement and to the insurer’s right to seek reimbursement. In Frank’s Casing, the court held that a right of reimbursement may be implied, even without an express agreement.”

In the majority opinion in the current ruling, the Court explained:

“In Texas, an insurer that settles a claim against its insured when coverage is disputed may seek reimbursement from the insured should coverage later be determined not to exist if the insurer “obtains the insured’s clear and unequivocal consent to the settlement and the insurer’s right to seek reimbursement.” Tex. Ass’n of Counties County Gov’t Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128, 135 (Tex. 2000). In this case, which involves excess coverage, the insured consented to the settlement but not to the excess insurer’s asserted reimbursement right. We must decide whether to recognize an exception to the rule in Matagorda County and imply a reimbursement obligation 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 accept it. Because none of these distinctions alleviates the concerns that drove the Court’s analysis in Matagorda County, we decline to recognize such an exception.”

Not all justices agreed with the majority opinion, however. In his dissenting opinion, Justice Hecht wrote:

“By refusing to apply to insurers the same law of unjust enrichment that applies to everyone else, the Court hands Frank’s Casing Crew & Rental Tools Inc. $7 million for which it paid nothing and to which it has no contractual right. The court does not deny the injustice of this result but argues that such windfalls are necessary to avoid situations in which an insured might be prejudiced by having to pay its own liabilities. Never mind that Frank’s Casing claims no such prejudice in this case, or that no case can be found in which any insured ever claimed such prejudice, or that if any imagined prejudice ever actually did occur, it could easily be remedied.”

“For the Court to reconsider their original opinion and reverse a 7-0 ruling is virtually unheard of,” said Harris, who sought the Frank’s Casing rehearing on behalf of his client in January 2006. “It’s certainly been a long-awaited decision in the bar and is a significant victory. We are thrilled that the Court reaffirmed Texas law on this issue.”

The Supreme Court of Texas opinion in Frank’s Casing may be located online at: www.supreme.courts.state.tx.us/historical/020108.asp