The opinion
Supreme Court of Texas
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No. 23-0006
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The Ohio Casualty Insurance Company,
Petitioner,
v.
Patterson-UTI Energy, Inc.; Patterson-UTI
Management Services, LLC; Patterson-UTI Drilling
Company LLC; and Marsh USA, Inc.,
Respondents
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On Petition for Review from the
Court of Appeals for the Fourteenth District of Texas
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Argued October 30, 2024
JUSTICE YOUNG delivered the opinion of the Court.
We must decide whether the excess-insurance policy in this case
covers the insured’s legal-defense expenses. Excess policies provide
coverage that becomes available when an underlying insurance policy’s
limits have been exhausted. Logically enough, therefore, the underlying
policy often features prominently in excess-coverage disputes, especially
when the excess policy is a “follow-form” contract—one that can be shorter
and simpler than the underlying policy because it embraces many of the
underlying policy’s terms. But even for follow-form excess policies, the
contract that governs a dispute about excess coverage is the excess policy,
not the underlying policy. As in any contractual case, therefore, we begin
with the excess policy’s text and look to the underlying policy only to the
extent that the parties consented to incorporate its terms. The court of
appeals inverted this process: “We start from the ground up, first
examining the terms of the [underlying] policy and then looking to the
excess policy to determine coverage.” 656 S.W.3d 729, 734 (Tex. App.—
Houston [14th Dist.] 2022). This mistaken approach led to an erroneous
result: while the underlying policy covered the insured’s defense
expenses, the excess policy does not. We therefore reverse the court of
appeals’ judgment, render judgment in part, and remand to the trial court
for further proceedings.
I
The dispute is between Patterson (the collective name for
respondents Patterson-UTI Energy, Inc.; Patterson-UTI Management
Services, LLC; and Patterson-UTI Drilling Company LLC) and Ohio
Casualty Insurance Company. Patterson provides oil-and-gas equipment
and services. Each year, Patterson buys insurance to protect itself from
costs arising from any incident that might occur during drilling
operations involving its rigs. Patterson covers its risk by building an
“insurance tower,” which consists of a primary policy that underlies
multiple layers of excess coverage. For the 2017–2018 policy year,
Patterson bought several lines of insurance through its broker,
respondent Marsh USA, Inc. One of those lines—the “underlying policy”
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in this case—was an umbrella policy from Liberty Mutual Insurance
Europe, Ltd. Patterson also obtained various additional excess policies
through Marsh, including the one from Ohio Casualty at issue here.
A drilling-rig incident during the policy year led to multiple
lawsuits, which Patterson settled after extensive litigation. The
settlements and the litigation’s defense expenses triggered the Ohio
Casualty excess policy after exhausting the coverage limits of all lower-
level policies. Ohio Casualty funded portions of the settlements but
refused to indemnify Patterson for any defense expenses.
Patterson then sued Ohio Casualty and Marsh. In its live petition,
Patterson alleged that Ohio Casualty’s refusal breached the contract and
violated the Insurance Code. In the alternative (and assuming that the
excess policy did not cover defense expenses), Patterson alleged that
Marsh violated the Insurance Code and committed negligence, negligent
misrepresentation, fraud, and breach of contract by failing to procure an
insurance policy that did cover defense expenses.
The parties filed competing motions for summary judgment
regarding whether the Ohio Casualty policy covers defense expenses. The
trial court granted Patterson’s motion and denied Ohio Casualty’s. The
court determined that “the defense costs sought by [Patterson] are
covered under the Ohio Casualty policy at issue in this case because the
Ohio Casualty policy did not clearly and unambiguously exclude the
coverage for defense costs provided by the underlying primary policy.” To
expedite resolution of the case, the parties jointly moved for entry of an
agreed final judgment, which the trial court signed. Ohio Casualty
appealed.
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The court of appeals affirmed. It noted the parties’ agreement that
the underlying policy covers defense expenses. Id. at 734–35. The
excess policy, the court then noted, is a “follow form” policy that does not
unambiguously exclude defense expenses. Id. at 735–37. Therefore, the
court reasoned, the excess policy necessarily also covers those expenses.
Id. at 738.
We granted Ohio Casualty’s petition for review and now reverse.
II
The case turns on the construction of the excess policy—the
contractual undertaking between the parties that determines what Ohio
Casualty promised Patterson that it would cover.
A
“As early as 1886, this Court recognized as ‘a cardinal principle
of . . . insurance law’ that ‘[t]he policy is the contract; and if outside
papers are to be imported into it, this must be done in so clear a manner
as to leave no doubt of the intention of the parties.’ ” ExxonMobil Corp. v.
Nat’l Union Fire Ins. Co. of Pittsburgh, 672 S.W.3d 415, 418 (Tex. 2023)
(quoting Goddard v. E. Tex. Fire Ins. Co., 1 S.W. 906, 907 (Tex. 1886)).
In other words, “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 418–19. We have applied this principle in the
context of follow-form excess-insurance policies. See RSUI Indem. Co. v.
Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015).
True, as we observed in RSUI, it is expected that a contractual
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dispute about a follow-form excess policy will implicate the underlying
policy. See id. at 122. The extent of that implication, however, is not a
binary choice but one that presents an array of options. The excess policy
could adopt the underlying policy in its entirety; it could do so except for
various express exclusions; or it could substantially change the scope of
initial coverage by providing its own terms. Characterizing an excess
policy as a “follow-form” policy, in other words, confirms only that the
excess policy will to some degree incorporate the provisions of the
underlying policy—the degree of incorporation is determined by the
excess policy’s text. At all times, the excess policy itself remains the
contract that governs a dispute about its coverage. The court of appeals
should have first “look[ed] to the excess policy to determine coverage”
rather than “first examining the terms of the [underlying] policy.” 656
S.W.3d at 734.
We therefore begin with the Ohio Casualty excess policy, which
supplies the following statement of coverage:
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].
Patterson’s legal expenses related to the drilling-rig accident are covered
by this provision only if those expenses constitute “loss” because “loss” is
all the excess policy agrees to cover. The excess policy defines “loss” 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.
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No one disputes that Patterson’s legal expenses were “actually paid” or
that Patterson was “legally obligated to pay” them in at least one sense:
Patterson presumably had executed an engagement letter with its
attorneys (a contract), thus obligating it to pay their fees. But to
constitute “loss,” the excess policy requires a different kind of legal
obligation—specifically, that Patterson was legally bound to pay the
amount “in the settlement or satisfaction of a claim . . . as damages.”
Ohio Casualty agrees that the settlement amounts were “damages”
under this definition and were thus covered as “loss.” It indemnified
Patterson for amounts that Patterson owed the plaintiffs through the
settlements. But Ohio Casualty contends that Patterson’s own legal
expenses do not qualify as “loss” because they do not constitute “damages.”
We agree with Ohio Casualty that the excess policy does not cover
attorney’s fees as “loss.” Initially, as we have repeatedly held, a party’s
own attorney’s fees “are not, and have never been, damages.” In re
Corral-Lerma, 451 S.W.3d 385, 387 (Tex. 2014) (quoting In re Nalle
Plastics Fam. Ltd. P’ship, 406 S.W.3d 168, 173 (Tex. 2013)). But parties
may give bespoke definitions to ordinary terms; if they do, the courts will
enforce them. For Patterson’s legal expenses to qualify as “loss,”
therefore, the parties must have agreed by contract to give “damages” a
specialized meaning. The underlying policy, to which we will next turn,
did just that by expressly providing that defense expenses were covered.
The excess policy, however, does not provide any such special definition—
it does not even define “damages” at all. And the context surrounding the
excess policy’s use of “damages” suggests the usual definition—not an
expanded one that includes defense expenses—because a party paying its
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own defense expenses would not do so “in the settlement or satisfaction
of a claim.” Accordingly, Patterson cannot satisfy its burden to establish
coverage. See Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd’s
London, 327 S.W.3d 118, 124 (Tex. 2010).
B
Patterson says that it largely agrees with our framework. For
example, Patterson acknowledges that “Texas courts do not presume that
a follow-form policy necessarily follows the entirety of the underlying
policy’s coverage.” And it agrees that the “critical question” in this case
is “what is meant by the word ‘damages’ when the Excess Policy uses it
in its definition of ‘loss.’ ” To show that “damages” as used in the excess
policy includes legal expenses, Patterson turns to the underlying policy.
Patterson’s contention is that the underlying policy treats “damages” as
including defense costs and that the excess policy follows that approach.
The underlying policy does not separately define “damages,” but
it does define “ultimate net loss,” which in turn refers to damages.
“Ultimate net loss” plays the same role in the underlying policy that
“loss” plays in the excess policy—it is what Liberty Mutual agreed to
cover. “Ultimate net loss” is defined as
the amount [Patterson] is obligated to pay, by judgement or
settlement, as damages resulting from an “Occurrence” to
which this Policy applies, including the service of suit,
institution of arbitration proceedings and all ‘Defence
Expenses’ in respect of such “Occurrence.”
(British English in original). The policy separately defines “defence
expenses” to mean
investigation, adjustment, appraisal, defence and appeal
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costs and expenses and pre and post judgement interest,
paid or incurred by or on behalf of [Patterson].
There is, therefore, no doubt that the underlying policy covers the
expenses of Patterson’s legal defense. Patterson contends that the excess
policy follows this coverage choice. We disagree.
Initially, Patterson attributes far too much to the excess policy’s
“follow-form” status. Patterson agrees that the excess policy’s text
governs the dispute, but it retracts most of the force of that principle by
treating “follow-form” policies differently from other contracts. According
to Patterson, the excess policy is bound by the underlying policy’s
coverage choice unless the excess policy repudiates that choice rather
than simply providing a different kind of coverage. This argument’s
essence amounts to the approach we emphatically reject: starting with
the underlying rather than the excess policy.
Like the court of appeals, see 656 S.W.3d at 735, Patterson relies
heavily but mistakenly on our decision in RSUI to justify its argument.
Central to our holding there, however, was our reiteration that “[a]n
insurance policy is a contract,” and so we focused on the text of the policy
sued on—that is to say, the excess policy. RSUI, 466 S.W.3d at 118. We
observed that, as here, the parties there agreed that the excess policy
was “a ‘follow form’ policy, meaning that it is generally subject to the
terms and conditions of [the] primary policy except where [the excess]
policy expressly modifies those terms.” Id. at 122. That observation was
entirely correct. It described follow-form policies in general but did not
purport to adopt a new rule of construction that would treat follow-form
contracts differently from all others. To the contrary, we emphasized our
duty to carefully parse the words of the excess policy to determine “how
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the . . . policies’ limits differ[ed].” Id.
The coverage issue in RSUI was sufficiently close that even “after
applying the rules of construction” to the text, we found it insolubly
ambiguous as to the coverage question presented, thus requiring us to
rule for the insured. Id. at 119, 140. But we came to that conclusion after
rigorously examining all the text—the excess policy and, to the
substantial extent that the excess policy adopted it, the underlying policy.
Id. at 119–39. The excess policy here does not present any such close call.
The text of the two policies illustrates why. Rather than covering
“ultimate net loss” as defined by the underlying policy (or even, as with
many follow-form policies, simply agreeing to the same coverage terms as
the underlying policy), the excess policy instead specifies that it covers
“loss,” a term for which it provides its own definition. That definition
refers to “damages”—a term that, without more, does not include defense
expenses. See Corral-Lerma, 451 S.W.3d at 387. And even if the excess
policy’s use of the term “damages” included defense expenses, Ohio
Casualty would still have no duty to indemnify Patterson for those
expenses here. That is because the excess policy covers only “those sums
actually paid in the settlement or satisfaction of a claim which [Patterson
is] legally obligated to pay as damages.”
In other words, the excess policy confines its coverage to sums
paid to an adverse party, like the personal-injury claimants who sued
Patterson after the drilling-rig incident. Cf. In re Farmers Tex. County
Mut. Ins. Co., 621 S.W.3d 261, 270–71 (Tex. 2021) (stating that either a
judgment or a settlement may trigger a duty to indemnify). Attorney’s
fees could fall within that scope. For example, if a fee-shifting statute
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led to a judgment requiring Patterson to pay the adverse party’s
attorney’s fees, Ohio Casualty would presumably be obligated to
indemnify Patterson for that amount because Patterson would be legally
obligated to pay it as part of the satisfaction of a claim. But the excess
policy does not cover fees that Patterson paid its own attorneys.
Patterson further argues that two exclusions in the excess policy
show that the policy must cover defense expenses. The policy explains
that it does not apply to “[a]ny liability, including, but not limited to
settlements, judgments, costs, charges, expenses, costs of investigations,
or the fees of attorneys, experts, or consultants arising out of or related in
any way, either directly or indirectly, to . . . asbestos” (emphasis added).
It contains a similar statement about liability related to “pollutants.”
According to Patterson, these references to attorney’s fees are surplusage
if the excess policy does not cover those fees to begin with. It urges us to
avoid surplusage by interpreting “damages” to include attorney’s fees.
It is not clear that these provisions are in fact surplusage. As we
have just noted, a judgment might obligate Patterson to pay an adverse
party’s attorney’s fees. The exclusions that Patterson has identified
arguably mean that, if attributable to a claim involving asbestos or
pollution, Ohio Casualty would not cover even shifted attorney’s fees. But
even assuming for argument’s sake that these provisions are surplusage,
the surplusage canon “has its exceptions.” Whole Woman’s Health v.
Jackson, 642 S.W.3d 569, 581 (Tex. 2022). “Like all canons of
construction, the surplusage canon ‘must be applied with judgment and
discretion, and with careful regard to context.’ ” Id. at 582 (quoting
Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of
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Legal Texts 176–77 (2012) (emphasis omitted)). And “[w]e have
repeatedly recognized, when faced with legal language that appears
repetitive or otherwise unnecessary, that drafters often include
redundant language to illustrate or emphasize their intent.” Id.
For example, in Philadelphia Indemnity Insurance Co. v. White,
the tenant pointed out “an apparent redundancy” in a lease. 490 S.W.3d
468, 477 (Tex. 2016). The lease included “catchall” language providing
that the tenant would be responsible for losses not caused by the
landlord’s negligence or fault but also specifically provided that the
tenant would be responsible for particular types of damage. Id. We noted
that “[t]hough we strive to construe contracts in a manner that avoids
rendering any language superfluous, redundancies may be used for
clarity, emphasis, or both.” Id.
We conclude that the excess policy’s specific references to
attorney’s fees in the asbestos and pollution exclusions were
understandable redundancies designed to eliminate any conceivable
doubt—not surplusage that would alter our interpretation of the rest of
the policy. The language of the two exclusions suggests a belt-and-
suspenders approach. After all, the policy could have just said that it did
not apply to “any liability” arising from asbestos. Instead, it mentions
“settlements, judgments, costs, charges, expenses, costs of investigations,
or the fees of attorneys, experts, or consultants,” and it clarifies that the
exclusion is “not limited” even to that list. In its apparent determination
to have nothing to do with asbestos and pollutants, the policy goes well
beyond the strictly necessary language. Perhaps Ohio Casualty took that
approach because it would bear the burden of proving the exclusion. See
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Tex. Ins. Code § 554.002 (providing that an insurer bears the burden to
show “[l]anguage of exclusion in the contract or an exception to coverage
claimed by the insurer”). In any event, the care with which the asbestos
and pollution exclusions were drafted should not have the perverse effect
of subjecting Ohio Casualty to liability for all other defense expenses,
even though the excess policy in no way undertakes to cover them.
Finally, Marsh, which is aligned with Patterson in this appeal,
argues that Patterson must prevail unless Ohio Casualty “could establish
an unambiguous exception to the coverage for defense costs found in the
Underlying Policy.” It cites Insurance Code § 554.002, which places the
burden of establishing an exclusion on the insurer, and our decision in
RSUI, where we explained that we construe an ambiguous contract in
favor of the insured. 466 S.W.3d at 140. That argument misses the mark
because, like the court of appeals’ analysis, it starts with the underlying
policy and then looks to the excess policy for exclusions. It does not credit
the excess policy for defining its own coverage even before it presents the
“follow-form” language on which Marsh relies. Because, as explained
above, that coverage of “loss” does not include defense costs, Ohio
Casualty need not point to an applicable exclusion from coverage.
III
The parties stipulated in the trial court that, if the judgment for
Patterson were reversed on appeal, then the judgment for Marsh must
likewise be reversed so that Patterson may continue its litigation
against Marsh. Parties and lower courts lack the authority to prescribe
judgments on appeal, whether contingently or otherwise. Nonetheless,
our rendition of judgment for Ohio Casualty does mean that the basis
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for the resolution of the dispute between Patterson and Marsh has been
eliminated. We therefore treat the parties’ stipulation as a concession
by Marsh that the judgment in its favor must also be reversed. On that
basis, we reverse the court of appeals’ judgment in favor of Marsh and
remand that part of the case to the trial court for further proceedings.
The judgment of the court of appeals is reversed. Judgment is
rendered for Ohio Casualty. We remand the dispute between Patterson
and Marsh to the trial court.
Evan A. Young
Justice
OPINION DELIVERED: December 20, 2024
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