Does Excess Policy Cover Legal Defence Expenses? The Case of Ohio Casualty Insurance Company v. Patterson | USA

On 20 December 2024, Justice Young of the Texas Supreme Court issued an opinion on a Petition for Review from the Court of Appeals for the Fourteenth District of Texas addressing excess insurance policies and the interpretation thereof (Ohio Casualty Insurance Company v. Patterson-UTI Energy, Inc., Patterson-UTI Management Services, LLC, Patterson-UTI Drilling Company, LLC, and Marsh USA, Inc., 2024 Tex. LEXIS 1123, *1 (Tex. 2024)). Namely, the Supreme Court was presented with the issue of whether the excess insurance policy in the case covered the insured’s legal defence expenses.

The litigation dispute stemmed from a drilling rig incident that occurred during the policy terms (Ohio Cas. Ins. Co. v. Patterson-UTI Energy, Inc., 656 S.W.3d 729, 732 (Tex. App.- Houston [14th Dist.] 2022)). Several lawsuits were filed subsequent to the incident and Patterson settled after extensive litigation. Notably, the settlement and legal defence expenses triggered the excess policy after the coverage limits of all lower-level policies were exhausted. The insured, Ohio Casualty, refused to indemnify Patterson for any defence expenses, but did provide funds for portions of the settlement. As a result of Ohio Casualty’s refusal to cover defence expenses, Patterson sued Ohio Casualty and Marsh, alleging breach of contract and violations of the Insurance Code. In the alternative, Patterson alleged that Marsh violated the Insurance Code and committed negligence, negligent misrepresentation, fraud and breach of contract for failing to procure an insurance policy that did cover the legal defence expenses (id. at 731-33).

After competing motions for summary judgment were filed by the parties as to whether the Ohio Casualty policy covered litigation expenses, the trial court granted Patterson’s motion, concluding that the defence costs were covered under the policy at issue because the policy “did not clearly and unambiguously exclude the coverage for defence costs provided by the underlying primary policy.” (Id. at 731). Subsequently a final judgment was entered and Ohio Casualty appealed.

The court of appeals affirmed, finding that the underlying policy covered defence expenses and, given that the excess policy was a “follow-form” policy that did not unambiguously exclude defence expenses, the excess policy necessarily also covered defence expenses (id. at 734-38). Ohio Casualty filed a petition for review. The Texas Supreme Court reversed (Ohio Cas. Ins. Co., 2024 Tex. LEXIS 1123, at *1).

Hinged on the construction of the excess policy, the Texas Supreme Court clarified that case precedent requires insurance policy interpretation to begin with the excess policy at issue, not the underlying policy for determination on whether legal defence costs are covered (id. at *4). In other words, the Court states, “we begin with the text of the policy at issue; we refer to extrinsic documents only if that policy clearly requires doing so; and we refer to such extrinsic documents only to the extent of the incorporation and no further.” (Id. at *4-5 (citing ExxonMobil Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 672 S.W.3d 415, 418-19 (Tex. 2023) (quoting Goddard v. E. Tex. Fire Ins. Co., 1 S.W. 906, 907 (Tex. 1886)))).

The Court recognised that it is the expectation that a contractual dispute about a “follow-form” excess policy will naturally implicate the underlying policy, but the extent of the underlying policy’s implication can take a variety of routes – ie, the excess policy might adopt the underlying policy in its entirety, exclude specific provisions or exclusions, or change the scope entirely in its own terms (id. at *5 (citing RSUI Indem. Co. v. Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015))). Since the “follow-form” policy only means the excess policy incorporates the underlying policy to “some degree”, the Court explained that the degree of incorporation will be governed by the excess policy’s text in this case (id. at *5-6). As a result, the court of appeals “should have first ‘look[ed] to the excess policy to determine coverage’” and not to the underlying policy (id. at *6).

Considering the excess policy’s language first in this case, the relevant excess policy provisions stated: “We will pay on behalf of [Patterson] the amount of ‘loss’ covered by this insurance in excess of the ‘Underlying Limits of Insurance[.]’… Except for the terms, conditions, definitions and exclusions of this policy, the coverage provided by this policy will follow the [underlying policy]”. “Loss” is 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”.

All parties were in agreement that the settlement amounts were covered “losses” under the definition and, in accordance with such, Ohio Casualty indemnified Patterson for the amounts Patterson owed the plaintiffs through the settlements (id. at *6-7). However, the Court agreed with Ohio Casualty that Patterson’s own legal expenses did not qualify as a “loss” because they were not “damages” under the excess policy (id. at *7). Even though the underlying policy defined “damages”, the excess policy did not provide any definition for “damages”. For any deviation from the normal interpretation of “damages”, that excludes defence expenses as damages, the parties must have agreed by contract to give “damages” a specialised meaning within the excess policy (citing In re Corral-Lerma, 451 S.W.3d 385, 387 (Tex. 2014) (a party’s own attorney’s fees “are not, and have never been, damages.”)). Because the excess policy left “damages” undefined, the Court was bound to use the usual definition of “damages” under precedent, which excludes defence expenses, resulting in no coverage for Patterson’s defence expenses.