Texas Supreme Court to Reconsider Decision in Insurance Case

January 17, 2006

On Jan. 6, the Texas Supreme Court agreed to rehear an insurance case watched closely by policyholders nationwide.

In Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools Inc., the Court’s decision (now to be revisited) grants insurance companies the right, after first funding a settlement of third-party claims against its policyholder, to later attempt to recoup the settlement payments from its policyholder in a subsequent litigation seeking a “no coverage” determination. According to the law firm of Anderson Kill & Olick P.C., the Court will hold oral argument on Feb.16, 2006.

The May 27, 2005 decision, authored by Priscilla Owen shortly before she left the Texas Supreme Court for the U.S. Court of Appeals, held that an insurance provider’s “right of ‘recoupment’ can arise even absent an insured’s express agreement to reimburse settlement payments made by an insurer if there is no coverage.” The insurance company does not have to advise its policyholder that it intends to seek recoupment in advance of doing so.

Policyholders have argued that the court’s ruling in Frank’s Casing undercuts the purpose of the insurance transaction, shifting risk back onto the policyholder’s shoulders at a time when it is most vulnerable and in need of certainty. According to Anderson Kill & Olick, the policyholder is forced to gamble on whether it should accept the insurance company’s offer to settle under the undisclosed threat of recoupment of the settlement monies paid by the insurance company, or whether it should assume control of the litigation on its own, later seeking a bad faith claim against its insurance company. Frank’s Casing was named one of 2005’s ten most significant insurance coverage decisions by Mealey’s Litigation Report.

The Texas Court’s reconsideration of its earlier ruling could signify the Court’s recognition of the potential adverse impact of Frank’s Casing on large segments of the business community. A new decision in the case may also relieve insurance defense counsel of potential conflicts of interest between their clients and the insurance companies who pay them, arising from uncertainty with regard to the insurance company’s responsibility to pay the settlement.

Representing Frank’s Casing, Warren Harris of Bracewell & Guiliani filed a motion for rehearing on June 30, 2005. Anderson Kill & Olick P.C., a national law firm, which regularly represents policyholders in insurance coverage disputes submitted an Amicus brief on behalf of United Policyholders in support of Frank’s Casing’s position. John N. Ellison, managing partner of the firm, and Jocelyn Gabrynowicz, a junior associate in the firm’s Philadelphia office were responsible for filing the brief with the Texas Supreme Court.

Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools Inc. is Case No. 02-0730, 2005 WL 1252321 (Tex. May 27, 2005) (“Frank’s

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