Utica Nat. Ins. v. Texas Property & Cas.

• Decision Date: 25 October 2001
• Docket Number: No. 03-01-00045-CV.,03-01-00045-CV.
• Citation: 110 S.W.3d 450
• Parties: UTICA NATIONAL INSURANCE COMPANY OF TEXAS/Texas Property & Casualty Insurance Guaranty Association, Appellants, v. TEXAS PROPERTY & CASUALTY INSURANCE GUARANTY ASSOCIATION and American Indemnity Company/Utica National Insurance Company of Texas, Appellees.
• Court: Texas Court of Appeals

Page 450

110 S.W.3d 450

UTICA NATIONAL INSURANCE COMPANY OF TEXAS/Texas Property & Casualty Insurance Guaranty Association, Appellants, v. TEXAS PROPERTY & CASUALTY INSURANCE GUARANTY ASSOCIATION and American Indemnity Company/Utica National Insurance Company of Texas, Appellees.

No. 03-01-00045-CV.

Court of Appeals of Texas, Austin.

October 25, 2001.

Released for Publication August 14, 2003.

COPYRIGHT MATERIAL OMITTED

Alexander N. Beard, Michael A. Hummert, E. Thomas Bishop, Bishop & Hummert, P.C., Dallas, Douglas W. Alexander, Dana C. Livingston Cobb, J. Woodfin Jones, Scott, Douglass & McConnico, LLP, Austin, for UTICA.

Daniel W. Jordan, Jordan & Carmona, PC, Austin, for Texas Property.

Thomas D. Caudle, Arter & Hadden, LLP, Dallas, for American Indemnity.

Before KIDD, B.A. SMITH and PATTERSON, JJ.

MACK KIDD, Justice.

Utica National Insurance Company of Texas ("Utica") appeals the judgment of the trial court declaring that Utica had a duty to defend and a duty to indemnify its policyholders and ordering Utica to pay damages on behalf of its insureds. The Texas Property & Casualty Insurance Guaranty Association ("the Association") appeals the trial court's decision to apportion Utica's defense costs on a pro rata basis and the trial court's refusal to charge additional damages to Utica based on article 21.55 of the Texas Insurance Code. Tex. Ins.Code Ann. art. 21.55 (West Supp. 2001). American Indemnity Company ("American Indemnity") joins the Association as an appellee with regard to Utica's appeal. We will affirm the judgment of the trial court.

FACTUAL AND PROCEDURAL BACKGROUND

This appeal involves an insurance coverage dispute arising out of an underlying personal injury lawsuit involving forty-four plaintiffs and several defendants. Mid-Cities Anesthesiology, P.A. and its member anesthesiologists (collectively "the Anesthesiology Group") were defendants. The Anesthesiology Group had obtained professional liability insurance coverage from Insurance Corporation of America ("ICA"). Additionally, the Anesthesiology Group purchased general liability insurance coverage from Utica for the period between May 18, 1991 and May 18, 1992, and from American Indemnity for the period between May 18, 1992 and May 18, 1995.

Upon the filing of the underlying lawsuit, ICA began to defend the Anesthesiology Group. During the course of providing the defense, ICA became insolvent. On April 1, 1997, the Commissioner of Insurance declared ICA to be an impaired insurer. Pursuant to the Texas Property and Casualty Insurance Guarantee Act, Tex. Ins.Code Ann. art. 21.28-C (West Supp. 2001), the Association assumed ICA's responsibilities to the Anesthesiology Group under the professional liability policy.

A. The Underlying Lawsuit

The forty-four plaintiffs were exposed to hepatitis-C as a result of contaminated anesthesia administered to them by the Anesthesiology Group during out-patient surgeries that occurred between December 1991 and March 1992. The plaintiffs alleged that an employee of the hospital, who had previously been infected with hepatitis-C, caused the contamination in his attempts to steal drugs from the Anesthesiology Group for his personal use. The hospital employee apparently broke open sealed glass ampules of fentanyl and extracted an amount of the drug using a contaminated syringe. He then replaced that amount with saline and resealed the ampules, thereby concealing his theft. The Anesthesiology Group then administered the contaminated fentanyl to its patients for surgical purposes.

The plaintiffs filed suit during the period that ICA's claims-made policy was in effect. ICA provided a defense for the Anesthesiology Group and was able to secure settlements with a number of the plaintiffs prior to ICA's insolvency. After the insolvency, the Association assumed ICA's defense obligations. Subsequently, after only four plaintiffs remained in the case and an amended petition was filed alleging additional claims implicating the general liability coverage, the Association tendered the defense of the lawsuit to American Indemnity in the Spring of 1998 and to Utica on September 8, 1998. All four of the remaining plaintiffs received the contaminated anesthesia during the time in which Utica's policy was in effect. Utica denied that it had a duty to defend or indemnify.

B. Procedural History

Although American Indemnity originally denied it had a duty to defend, it eventually agreed to assist the Association in settling the remaining claims. The settlement costs were split evenly between the Association and American Indemnity at $525,000 each. After disposition of the underlying lawsuit, American Indemnity filed suit seeking a declaratory judgment to determine the rights and obligations of each insurance carrier and sought subrogation damages from Utica for the settlement costs paid by American Indemnity. The Association and Utica answered and filed counter and cross claims.

Each party then filed motions for summary judgment on the duty to defend issue. While still pending, American Indemnity and the Association mediated their duty-to-defend dispute and arrived at a settlement. Utica's summary judgment motion on that issue was subsequently denied. Following that ruling, American Indemnity and the Association shifted their attention to whether Utica had a duty to indemnify. After considering all motions, the district court declared that Utica had both a duty to defend and a duty to indemnify. The court further found Utica to have breached both duties. Utica was ordered to pay $45,983.38 in defense costs to the Association along with pre judgment interest in the amount of $9,234.47. Due to its failure to pay damages on behalf of its insured, Utica was ordered to pay $525,000, plus $105,431.49 in pre-judgment interest, to each the Association and American Indemnity. Finally, Utica was ordered to pay all attorney's fees. Postjudgment interest was also awarded.

DISCUSSION

Both Utica and the Association appeal to this Court. Utica claims that it did not owe a duty to defend nor a duty to indemnify. The Association counters that, not only did Utica have a duty to defend, it is not entitled to a pro rata reduction of its defense costs. The Association also claims that Utica owes additional damages based on article 21.55 of the Texas Insurance Code. We will first address the issues raised by Utica and then those put forth by the Association.

A. Utica's Appeal

The duty to defend and the duty to indemnify by an insurer are distinct and separate duties. Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 821-22 (Tex. 1997). The construction of an insurance policy is a question of law for the court to determine. Coker v. Coker, 650 S.W.2d 391, 393-94 (Tex.1983); R & P Enters. v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d 517, 518 (Tex.1980). Insurance policies are to be strictly construed in favor of the insured in order to avoid exclusion of coverage. Puckett v. U.S. Fire Ins. Co., 678 S.W.2d 936, 938 (Tex.1984).

An insurer's duty to defend is determined by the allegations in the pleadings and the language of the insurance policy. See National Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.1997); Cowan, 945 S.W.2d at 821; American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 847-48 (Tex.1994). This is known as the "eight corners" rule.¹ See Merchants Fast Motor Lines, 939 S.W.2d at 141. In applying the eight corners rule, we give the allegations in the petition a liberal interpretation. As the supreme court has explained:

Where the complaint does not state facts sufficient to clearly bring the case within or without the coverage, the general rule is that the insurer is obligated to defend if there is, potentially, a case under the complaint within the coverage of the policy. Stated differently, in case of doubt as to whether or not the allegations of a complaint against the insured state a cause of action within the coverage of a liability policy sufficient to compel the insurer to defend the action, such doubt will be resolved in the insured's favor.

Id. (quoting Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex.1965)). In reviewing the underlying pleadings, this Court must focus on the factual allegations that show the origin of the damages rather than on the legal theories alleged. See id.; Adamo v. State Farm Lloyds Co., 853 S.W.2d 673, 676 (Tex. App.-Houston [14th Dist.] 1993, writ denied) ("It is not the cause of action alleged that determines coverage but the facts giving rise to the alleged actionable conduct."). The factual allegations against the insured should be considered in light of the policy provisions without reference to their truth or falsity and without reference to what the parties know or believe to be the true facts. See Argonaut Southwest Ins. Co. v. Maupin, 500 S.W.2d 633, 635 (Tex. 1973). The court may not read facts into the pleadings, may not look outside the pleadings, and may not "imagine factual scenarios which might trigger coverage." Merchants Fast Motor Lines, 939 S.W.2d at 142.

An examination of the pleadings in this case shows numerous acts and omissions by the Anesthesiology Group that allegedly caused the plaintiffs' injuries. For organizational purposes, we will follow Utica's summary of the allegations into three subgroups containing (a) twenty-one antecedent acts, (b) a single injury-causing act (the administering of the contaminated fentanyl), and (c) five subsequent acts. The eight corners rule requires us to examine every factual allegation in the pleadings to determine whether Utica had a duty to defend. Although Utica chooses to focus on the administering of the fentanyl, the eight-corners rule requires us to examine all twenty-seven acts. The rule calls for a liberal, rather than constrictive, interpretation of the pleadings. See St. Paul Ins. Co. v. Texas Dep't of Transp., 999 S.W.2d 881, 884 (T...