Evanston Insurance Company v. Atofina Petrochemicals, Inc.

IN THE SUPREME COURT OF TEXAS

IN THE SUPREME COURT OF TEXAS

════════════

No. 03-0647

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Evanston Insurance Company,

Petitioner,

v.

ATOFINA Petrochemicals,

Inc.

Respondent

════════════════════════════════════════════════════

On Petition for Review from the

Court of Appeals for the Ninth District of

Texas

════════════════════════════════════════════════════

Argued April 13,

2005

Justice Green delivered the opinion of the Court, in

which Chief Justice Jefferson, Justice

O’Neill, Justice Wainwright, Justice Brister, Justice Medina , and Justice Willett joined, and in which Justice Hecht and Justice Johnson joined as to Parts I,

II.A–II.D, and II.F.

Justice Hecht filed an

opinion concurring in part and dissenting in part, in which Justice Johnson joined.

Rehearing is granted. We withdraw the opinion and judgment previously issued in this case and substitute the

following opinion.

In this case, we examine the interplay between a contractual indemnity

provision and a service contract’s requirement to name an additional insured.

More particularly, we must decide whether a commercial umbrella insurance policy

that was purchased to secure the insured’s indemnity obligation in a service

contract with a third party also provides direct liability coverage for the

third party. In addition, we must decide whether the insurer is bound to pay the

amount of an underlying settlement between the additional insured and a

plaintiff. Finally, we must determine whether article 21.55 of the Texas

Insurance Code, the “Prompt Payment of Claims” statute, authorized the

imposition of penalties and attorney’s fees for the insurer’s failure to pay the

claim timely. We conclude that the umbrella policy provides coverage for

liabilities arising from the additional insured’s sole negligence, that the

settlement agreement binds the insurer to the amount recited therein, and that

the additional insured is not entitled to penalties for untimely payment of

claims. We affirm the judgment of the court of appeals to the extent that it

resolves the coverage dispute in favor of the additional insured, and to the

extent that it binds the insurer to the amount recited in the settlement

agreement, but we reverse the court of appeals’ judgment regarding damages and

attorney’s fees under article 21.55 and render judgment that the additional

insured is not entitled to recovery of such damages and fees.

I

ATOFINA Petrochemicals, Inc. [1] contracted with

Triple S Industrial Corporation to perform maintenance and construction work at

ATOFINA’s Port Arthur refinery. The service contract

contained an indemnity provision and a requirement that Triple S carry certain

minimum levels of liability insurance coverage. Triple S agreed to indemnify

ATOFINA from all personal injuries and property losses sustained during the

performance of the contract, “except to the extent that any such loss is

attributable to the concurrent or sole negligence, misconduct, or strict

liability of [ATOFINA].” Triple S also agreed to carry at least $500,000 of

primary comprehensive general liability (CGL) insurance, “[ i ] ncluding coverage for

contractual liability insuring the indemnity agreement,” and an excess (or

“umbrella”) liability policy “following form for [the CGL policy]” of at least

$500,000. Finally, the contract required Triple S to furnish certificates of

insurance to ATOFINA evidencing the required insurance coverages and showing ATOFINA as an additional insured on

the policies. Triple S complied with its contract obligations by purchasing a $1

million CGL policy from Admiral Insurance Company and a $9 million commercial

umbrella policy from Evanston Insurance Company, and by furnishing the required

certificates of insurance.

Matthew Todd Jones, a Triple S employee working at the ATOFINA facility

pursuant to his employer’s contract with ATOFINA, drowned after he fell through

the corroded roof of a storage tank filled with fuel oil. Jones’s survivors sued

Triple S and ATOFINA for wrongful death. Admiral tendered its $1 million policy

limits. ATOFINA then demanded coverage from Evanston as an additional insured under the

umbrella policy. Evanston denied the claim, and

ATOFINA brought Evanston into the case as a third-party

defendant for a declaration of coverage. ATOFINA then severed its suit against

Evanston from

the remainder of the Jones litigation. Both ATOFINA and Evanston moved for partial

summary judgment in the severed action. While the motions were pending, the

Jones case was settled for $6.75 million. ATOFINA seeks to recover from

Evanston the

$5.75 million not covered by Admiral.

The trial court granted summary judgment in favor of Evanston. The court of

appeals reversed the judgment, holding that the Evanston policy covered ATOFINA, and remanded

the case to the trial court for determination of statutory penalties and

attorney’s fees. [2]

II

Evanston

argues it should not have to indemnify ATOFINA for its contribution to the Jones

settlement for several reasons. First, it says ATOFINA agreed in its service

contract with Triple S that it would not seek indemnification for losses

resulting from its own negligence. Evanston says the language of its policy

similarly excludes coverage for such losses caused by ATOFINA’s negligence. The umbrella policy was a “following

form” policy as required by the service contract, meaning that its coverage was

no broader than the underlying policy, which identified ATOFINA as an additional

insured “only with respect to liability arising out of [Triple S’s] ongoing

operations performed for [ATOFINA], but in no event for [ ATOFINA’s ] sole negligence.” Second, Evanston says this court’s

decision in Fireman’s Fund Insurance Co. v. Commercial Standard Insurance

Co. [3] precludes

ATOFINA from obtaining a judgment for insurance proceeds based on losses arising

from its own negligence. [4] Finally, Evanston says the Jones settlement amount was

unreasonable and is thus unenforceable. We address these arguments in turn.

A

In its service contract with Triple S, ATOFINA disclaimed any right of

indemnity for losses “attributable to [its] concurrent or sole negligence.”

Under the terms of the service contract, ATOFINA is not entitled to be

indemnified by Triple S if the Jones loss was occasioned in any way by ATOFINA’s negligence. But ATOFINA does not seek indemnity

from Triple S; it claims instead that it is entitled to indemnification from

Evanston by virtue of its status as an additional

insured on the umbrella policy Evanston issued to Triple S. [5] Instead of looking, as the court of

appeals did, to the indemnity agreement in the service contract to determine the

scope of any coverage, we base our decision on the terms of the umbrella

insurance policy itself.

In support of its insured status, ATOFINA points to part III of the

Evanston policy,

which defines who is an insured. Section III.B.6 states that an insured

includes:

A person

or organization for whom you have agreed to provide

insurance as is afforded by this policy; but that person or organization is an

insured only with respect to operations performed by you or on your behalf, or

facilities owned or used by you.

ATOFINA claims

it is fully covered as an insured by virtue of this paragraph because it is a

“person or organization for whom [Triple S has] agreed to provide insurance,”

because the Evanston policy is the kind of insurance that

was intended to secure that obligation, and because the loss “respect[ ed ] . . . operations performed by [Triple S].”

But Evanston counters that ATOFINA fails to qualify

as an additional insured under section III.B.6 because the language does not

cover an additional insured for its own negligence. Although no fact finding has

been made regarding who was responsible for Jones’s death, Evanston contends that

because Jones’s death was caused solely by ATOFINA’s

negligence, the death did not “respect . . . operations performed by [Triple

S].”

The courts of appeals have confronted these additional insured provisions

on several occasions, producing divergent results. Like Triple S’s policy, the

insured contractor’s policy in Granite Construction Co. v. Bituminous

Insurance Cos. [6] provided for

additional insurance “only with respect to liability arising out of operations

performed for such insured.” [7] Granite adopted a fault-based

interpretation of “arising out of operations,” recognizing coverage only if an

insured’s wrongful act during the operation caused the injury. [8] The Granite court held that the

claim did not “ aris [e] out of operations performed by”

the insured because only the additional insured company was responsible for the

injury. [9]

The First and Third Courts of Appeals reached different results under a

more liberal causation theory of additional insured provisions. In those cases,

the additional insured provisions created coverage only “with respect to

liability arising out of” the named insured’s operations, and in both cases the

claimants alleged that the additional insured companies acted negligently. [10] In Admiral Insurance Co. v. Trident

NGL, Inc. , the court concluded:

[B] ecause the accident in this case occurred to a[n]

[insured’s] employee while the employee was on the premises for the purpose of

performing preventive maintenance on the compressor that exploded, the alleged

liability for the employee’s injuries “arose out of [the insured’s] operations,”

and, therefore, was covered by the “additional insured” provision. [11]

The court in

McCarthy Brothers Co. v. Continental Lloyds Insurance Co. applied a

similar theory to find that a worker’s slip-and-fall injury while retrieving

tools at the job site “arose out of” the insured subcontractor’s operation, even

for purposes of a negligence claim against the additional insured premises

owner. [12]

We prefer the reasoning of Admiral and McCarthy to

Granite for two reasons. First, Granite relied on an underlying

service contract that made the additional insured company responsible for the

specific injury-causing act. [13] However, our decisions since

Granite make clear that “the liability insurer is to determine its duty

to defend solely from terms of the policy and the pleadings of the third-party

claimant,” and, accordingly, that “evidence outside the four corners of these

two documents is generally prohibited.” [14] Even if we examine the service contract

here, we can easily distinguish this case from Granite . The service

contract between Triple S and ATOFINA does not assign responsibility for

maintaining the storage tank that caused Jones’s injury. Rather, the contract

gives Triple S the exclusive “power and authority to select the means, method

and manner of performing” the operation, and provides that Triple S “shall have

control of and be responsible for the WORK SITE.” Far from shifting any

responsibility to ATOFINA, the specific terms of the service contract make

Triple S responsible for all operations.

Second, regardless of the underlying service agreement’s terms, we do not

follow Granite because the fault-based interpretation of this kind of

additional insured endorsement no longer prevails. [15] Instead, we interpret “with respect to

operations” under a broader theory of causation. Generally, an event “respects”

operations if there exists “a causal connection or relation” between the event

and the operations; we do not require proximate cause or legal causation. [16] In cases in which the premises condition

caused a personal injury, the injury respects an operation if the operation

brings the person to the premises for purposes of that operation. [17] The particular attribution of fault

between insured and additional insured does not change the outcome. [18]

Our interpretation results, in part, from the ordinary and natural

meaning of the phrase “with respect to.” [19] It also results from our recognition

that, had the parties intended to insure ATOFINA for

vicarious liability only, “language clearly embodying that intention was

available.” [20] The majority of other courts facing the

issue have reached a similar result. [21]

Under section III.B.6 of the Evanston policy, the Jones injury

“respect[ ed ] [] operations

performed by [Triple S]” because Triple S employed Jones, who was performing the

operation at the time and place of the injury. Although the pleadings in the

underlying suit do not indicate whether or not Jones was performing a Triple S

operation at the precise time of the accident, Jones was present at ATOFINA’s facility for purposes of Triple S’s operations

when the accident occurred. As a result, even if ATOFINA’s negligence alone caused Jones’s injury, section

III.B.6 of the Evanston policy provides direct insurance

coverage to ATOFINA. [22]

B

Evanston and ATOFINA both look to section

III.B.5 of the policy to support their respective positions regarding the scope

of coverage under the Evanston policy. ATOFINA claims that section

III.B.5 provides an independent basis for coverage, while Evanston argues that

section III.B.5 does not apply. Section III.B.5 says an insured can be:

Any other person or organization who is insured under a policy of

“underlying insurance.” The coverage afforded such insureds under this policy will be no broader than the

“underlying insurance” except for this policy’s Limit of Insurance.

This is a

catch-all section that appears intended to bring within the policy coverage any

“other” entities that are insured by the underlying policy but are not included

within the preceding who-is-an-insured sections of paragraph III.B of the

policy. Because ATOFINA cannot be an insured under sections III.B.1 through

III.B.4, section III.B.5 applies in this case as long as ATOFINA was insured

under the Admiral policy.

Evanston

argues section III.B.5 establishes the policy’s identity as a “following form”

policy of the kind that was specified by the service contract, and that the

nature of the policy precludes coverage. [23] Under section III.B.5, coverage cannot

extend beyond what the underlying Admiral policy provides. Looking to the

underlying policy, which specifically excludes coverage for ATOFINA’s sole negligence, we conclude coverage under

section III.B.5 is limited and excludes losses caused by ATOFINA’s sole negligence. [24] On the record before us, we are unable

to determine as a matter of law whether the Jones accident was the product of

ATOFINA’s sole negligence. The Jones family originally

sued both ATOFINA and Triple S, alleging both parties were negligent. There were

allegations in ATOFINA’s pleadings that Jones himself

was contributorily negligent. Triple S was eventually

nonsuited , and the Jones’s claim against ATOFINA was

settled with no admission of liability by either party. Thus, without a

determination of liability, it is impossible to say whether ATOFINA’s responsibility for the accident, if any, excluded

it from coverage under section III.B.5 of the Evanston policy.

C

Evanston and ATOFINA disagree about the

scope of coverage available in the event that ATOFINA qualifies as an insured

under both sections III.B.5 and III.B.6 of the Evanston policy. ATOFINA favors a broader scope

of coverage under section III.B.6, relying on the fact that it, unlike section

III.B.5, does not expressly limit the coverage afforded to an insured to that

provided by an underlying policy.

When interpreting an insurance contract, we “must adopt the construction

of an exclusionary clause urged by the insured as long as that construction is

not unreasonable, even if the construction urged by the insurer appears to be

more reasonable or a more accurate reflection of the parties’ intent.” [25] “Exceptions or limitations on liability

are strictly construed against the insurer and in favor of the insured,” and

“[a]n intent to exclude coverage must be expressed in clear and unambiguous

language.” [26] Therefore, we must adopt ATOFINA’s broad interpretation of coverage unless there is

“clear and unambiguous” policy language requiring the limitations on coverage in

section III.B.5 to also restrict the coverage available when section III.B.6 or

any other who-is-an-insured clause independently provides coverage.

Reading paragraph III.B as a whole, we conclude that each

who-is-an-insured clause operates to grant coverage independently. Nothing in

paragraph III.B suggests that the limitations of one section granting coverage

should be read into another separate section granting coverage. [27] In fact, apart from section III.B.5,

other paragraph III.B sections contain disparate limiting language in their

definitions of “insured,” suggesting that each grant of coverage in paragraph

III.B can be read independently as a self-contained grant of coverage. For

example, section III.B.1 covers employees as “an insured” but excludes coverage

for certain bodily injury. For the same reason that we would not read the

section III.B.1 bodily injury limitation into the broad coverage of section

III.B.6, we refuse to read section III.B.5’s exclusion of coverage beyond the

scope of the Admiral policy into section III.B.6. Because ATOFINA is entitled to

coverage under more than one who-is-an-insured clause in paragraph III.B, it is

not unreasonable to conclude that the policy should be read to provide the

broader measure of coverage available under the applicable clauses. We therefore

hold that the Evanston policy provides the broader scope of

coverage that does not exclude liabilities arising out of ATOFINA’s sole negligence.

D

Evanston

next contends that this Court’s 1972 decision in Fireman’s Fund v. Commercial

Standard Ins. Co. [28] is dispositive

because, applying that holding, ATOFINA cannot recover insurance proceeds based

on losses arising from its own negligence. In Fireman’s Fund , we

addressed the relationship between indemnity agreements and the requirement of

liability insurance in service contracts. [29] In that case, General Motors Corporation

contracted with Sam P. Wallace Co., Inc. to perform work on its Arlington assembly

plant. [30] In the contract, Wallace agreed to

indemnify GM for any losses arising out of its work and to obtain liability

insurance to satisfy that obligation. [31] While performing under the contract, two

of Wallace’s employees were injured, and they sued GM for negligence. [32] After the case settled, a declaratory

judgment action was filed by the involved insurance carriers to resolve a

dispute over whether Wallace was required by its contract to indemnify GM for

GM’s negligence. [33] We followed the general rule in holding

that “a contract of indemnity will not afford protection to the indemnitee against the consequences of his

own negligence unless the contract clearly expresses such an obligation

in unequivocal terms.” [34] Wallace’s indemnity agreement with GM

failed to do that and thus we concluded that Wallace’s insurance carrier was not

required to indemnify GM. [35] In doing so, we noted that “all of the

relevant provisions of the contract should be considered when arriving at its

intent and meaning.” [36] In its contract with GM, several

provisions evinced Wallace’s intent to indemnify GM only with respect to losses

occasioned by its own negligence, not GM’s negligence. [37] For example, in one provision, Wallace

assumed liability “for any injuries or damages occasioned by his agents or

employees on the premises of the Owner.” [38] In another, under a section entitled

“Contractor’s Responsibility,” Wallace specifically excluded from its

responsibility the “negligence of [the] Owner [GM].” [39]

In Fireman’s Fund , Wallace’s obligation to purchase insurance was

to secure only its agreement to indemnify GM for Wallace’s own negligence. [40] We held that GM was not entitled to

indemnification because the contract did not specify that the indemnity

agreement extended to GM’s negligence. [41] However, it was never contended in

Fireman’s Fund that GM was an additional insured under Wallace’s

liability policy and was therefore entitled to coverage on that basis, a fact

that distinguishes Fireman’s Fund from this case. This case is similar

to Fireman’s Fund only in that Triple S was required to purchase

liability insurance to secure its indemnity agreement. But Triple S was also

required to add ATOFINA as an insured on its policies, which was not a

requirement of the contract in Fireman’s Fund .

This case is more analogous to our 1992 decision in Getty Oil Co. v.

Insurance Co. of North America . [42] In that case, Getty entered into a

contract to purchase chemicals from NL Industries. [43] The contract included an indemnity

provision and a broad insurance requirement which provided that “[a] ll insurance coverage carried by [NL] . . . shall extend to

and protect” Getty “whether or not required [by other provisions of the

contract].” [44] After an accident involving NL’s product

killed one of Getty’s contractors, and a jury found that Getty was 100 percent

responsible, NL’s insurer refused coverage for Getty

because the Texas Oilfield Anti-Indemnity Statute [45] prohibited indemnification for one’s own

negligence. [46] But we held that the insurance

requirement of the contract was separate and independent from the indemnity

provision and, consequently, the prohibition of the Anti-Indemnity Statute did

not apply. [47]

Although the service contract in this case does not include an insurance

requirement quite as clear as the one in Getty , it is clear enough—it

requires that ATOFINA “shall be named as additional insured in each of [Triple

S’s] policies.” Evanston argues that this “brief statement” in

the contract is insufficient to extend insured status to ATOFINA for its own

negligence because the insurance requirement and certificates of insurance

cannot expand coverage beyond the language of the policy. [48] While we agree that an insurance

certificate merely evinces the holder’s status as an insured and does not create

coverage, [49] it is unmistakable that the agreement in

this case to extend direct insured status to ATOFINA as an additional

insured is separate and independent from ATOFINA’s

agreement to forego contractual indemnity for its own negligence. We

disapprove the view that this kind of additional insured requirement fails to

establish a separate and independent obligation for insuring liability. [50] We conclude that our Fireman’s

Fund decision does not bar ATOFINA from obtaining insurance proceeds for

losses resulting from its own negligence.

E

Next we examine Evanston’s obligation to pay $5.75 million of

the $6.75 million settlement. Evanston argues

that ATOFINA failed to meet its burden of showing that the amount was

reasonable, and argues instead that its evidence proves the amount was

unreasonable as a matter of law, entitling Evanston to summary judgment. ATOFINA asserts

the opposite, contending that its summary judgment evidence proves the

settlement amount was reasonable as a matter of law. Before reaching that

question, we must address ATOFINA’s additional

contention that Evanston’s denial of coverage bars it from

challenging the reasonableness of the settlement.

Our last occasion to address this issue was Employers Casualty Co. v.

Block , [51] in which we held that if an insurer

wrongfully denies coverage and its insured then enters into an agreed judgment,

the insurer is barred from challenging the reasonableness of the settlement

amount. [52] Although this case presents some

different facts, Block ’s rule should apply nonetheless.

In Block , “[t]he basic issue before the trial court was the

reasonableness of the damages recited in the agreed judgment” between the

defendant roofing company and the plaintiff homeowners. [53] The Block court of appeals

“concluded that once it was determined that [the insurer] wrongfully failed to

defend its insured, [the insurer] was barred from collaterally attacking the

final agreed judgment.” [54] Block addressed two questions

concerning the effect of the agreed judgment between the plaintiffs and the

defendant roofing company. [55] First, did the agreed judgment bar the

insurer from contesting the reasonabless of damages? [56] Second, did the agreed judgment bar the

insurer from contesting the agreed judgment’s factual recitations relating to

coverage? [57] Block ’s answer was clear:

While

we agree with the court of appeals’ conclusion that [the insurer] was barred

from collaterally attacking the agreed judgment by litigating the reasonableness

of the damages recited therein , we do not agree with its conclusion that the

recitation in the agreed judgment that the damage resulted from an occurrence on

August 6, 1980 is binding and conclusive against [the insurer] in the present

suit. [58]

In this case, the plaintiffs sued ATOFINA, ATOFINA requested coverage

from Evanston, and Evanston wrongfully denied coverage, citing the

policy terms. ATOFINA brought Evanston into the

case as a third-party defendant for a declaration of coverage, and Evanston continued to deny

coverage in its pleadings. ATOFINA then settled with the underlying plaintiffs

and litigated the remaining coverage issues against Evanston. Though this case

differs from Block in several respects, none of the differences justify

departing from Block .

First, the forms of settlement and policy claims differ. Block ’s

insurer violated the policy’s duty to defend, [59] and while no duty to defend is

implicated in this case, Evanston wrongfully denied all coverage under

the policy. [60] In addition, Block ’s plaintiff

and defendant entered into an agreed judgment, [61] while ATOFINA and the wrongful death

plaintiffs used a contractual settlement agreement and nonsuit . But neither the difference in policy claims nor the

absence of a judgment memorializing the parties’ settlement disrupts the

Block principles here because Block ’s rule is not derived from the

nature of the violated policy term or the formality of agreed judgments. The

cases barring insurers’ challenges rest on principles of estoppel and waiver; what is most important in this context

is notice to the insurer and an opportunity to participate in the settlement

discussions. [62]

Some cases in this area bar an insurer’s invocation of policy provisions

as a defense, not what we have here—an insurer’s invocation of the common law

reasonableness requirement. However, the principles of notice to the insurer and

an intentional choice to forego participation in settlement discussions operate

the same no matter how the insurer chooses to attack the settlement. That is,

the particular source of the insurer’s later-raised attack on the settlement

amount—be it a policy provision or a common law rule—does not control our

inquiry. One case cited by Block noted that, “[h]ad [the insurer]

accepted the defense, it would have had, of course, the

opportunity to conduct the defense in the manner most likely to have defeated

the plaintiffs’ claim or at least to have reduced the amount of the damages.” [63] Had Evanston not unconditionally denied coverage,

it too would have been able to influence the amount of the settlement. [64] For these reasons, the difference in

policy claims and the absence of a formal judgment do not persuade us to abandon

Block here. [65]

In addition, this case’s posture is different than Block ’s. In

Block , the underlying plaintiff sued the insurer as a judgment creditor,

leading to some disapproval from this Court in State Farm Fire & Casualty

Co. v. Gandy . [66] In Gandy , the Court said:

In no

event, however, is a judgment for plaintiff against defendant, rendered without

a fully adversarial trial, binding on defendant's insurer or admissible as

evidence of damages in an action against defendant’s insurer by plaintiff as

defendant’s assignee. We disapprove the contrary suggestion in dicta in

Employers Casualty Company v. Block , 744 S.W.2d 940, 943 (Tex. 1988), and

United States Aviation Underwriters, Inc. v. Olympia Wings, Inc. , 896

F.2d 949, 954 (5th Cir. 1990). [67]

Gandy does not disrupt the

application of Block to this case for two reasons. First, this

case does not fall within Gandy ’s holding. Gandy ’s holding

was explicit and narrow, applying only to a specific set of assignments with

special attributes. [68] By its own terms, Gandy ’s

invalidation applies only to cases that present its five unique elements. [69] Here, Gandy ’s key factual

predicate is missing: ATOFINA made no assignment of its claim against Evanston; ATOFINA sued Evanston directly. [70] That removes this case from the formal

bounds of Gandy . Second, Gandy ’s rationale does not require

disapproving Block in this setting. Gandy ’s reason for

invalidating assignments was simple: Those assignments made evaluating the

merits of a plaintiff’s claim difficult by prolonging disputes and distorting

trial litigation motives. [71] But not all cases implicate

Gandy ’s concerns. “We should not invalidate a settlement that is free

from this difficulty [of fairly evaluating a plaintiff’s claims] simply because

it is structured like one that is not.” [72]

Barring Evanston’s challenge here does not implicate

Gandy ’s concerns. Preventing insurers from litigating the reasonableness

of a settlement does not extend disputes; by definition, it shortens them. Nor

is there a risk of distorting litigation or settlement motives here. ATOFINA

settled without knowing whether or not it would be covered by the policy,

leaving in place its motive to minimize the settlement amount in case it became

solely responsible for payment. [73] To accomplish Gandy ’s goal of

“fairly determin [ ing ]” the

value of plaintiffs’ claims, we apply the Block rule to this

circumstance, which will encourage early intervention by the insurers who are

best positioned to evaluate the worth of claims during settlement discussions.

Thus, without relevant factual differences or Gandy concerns to dissuade

us from following Block , we hold that Evanston’s denial of coverage barred it from

challenging the reasonableness of ATOFINA’s

settlement. [74] Evanston is, therefore, bound to pay the $5.75

million that remains of the settlement.

F

Finally, Evanston argues that the court of

appeals erroneously awarded ATOFINA 18% per annum of the claim amount and

attorney’s fees for Evanston’s failure to promptly pay claims under

article 21.55 of the Texas Insurance Code. [75] Under article 21.55, a court may impose

damages “[ i ]n all cases where a claim is made pursuant

to a policy of insurance and the insurer liable therefore is not in compliance

with this article.” [76] “Claim” is defined as “a first party

claim . . . that must be paid by the insurer directly to the insured or

beneficiary.” [77] Evanston relies on the definition of “claim” in

arguing that the statute does not apply to claims for reimbursement of

settlement costs in the context of a liability insurer’s denial of indemnity for

a third-party claim against its insured.

Though the statute does not define first-party claims, we distinguish

first-party and third-party claims based on the claimant’s relationship to the

loss. [78] “[A] first-party claim is stated when

‘an insured seeks recovery for the insured’s own loss,’ whereas a third-party

claim is stated when ‘an insured seeks coverage for injuries to a third

party.’” [79] A loss incurred in satisfaction of a

settlement belongs to the third party and is not suffered directly by the

insured. [80] This case in which ATOFINA seeks

coverage for injuries sustained by a third party presents a classic third-party

claim. Because the Legislature intended that article 21.55 apply to claims

personal to the insured, [81] ATOFINA is not entitled to the article

21.55 damages or attorney’s fees. We therefore reverse the portion of the court

of appeals’ judgment pertaining to article 21.55 damages and attorney’s fees and

render judgment that ATOFINA recovers no attorney’s fees or damages under

article 21.55.

III

We affirm the court of appeals’ holding that ATOFINA is an insured under

the Evanston insurance policy and is thus

entitled to coverage for the Jones litigation settlement, and we affirm the

court of appeals’ holding that Evanston is bound to pay the $5.75 million

settlement amount. We reverse the court of appeals’ judgment permitting ATOFINA

to recover attorney’s fees and damages under article 21.55 of the Texas

Insurance Code and render judgment that ATOFINA is entitled to no such damages

or fees.

_____________________________

PAUL W. GREEN

JUSTICE

OPINION DELIVERED: February 15,

2008

[1]

ATOFINA is the successor company to FINA Oil and Chemical Company, which

originally executed the independent contractor agreement with Triple S. For

purposes of this opinion, we shall refer to FINA and ATOFINA, without

distinction, as ATOFINA.

[2]

104 S.W.3d 247 , 251–52 (Tex. App.—Beaumont 2003) (per curiam ).

[3]

490 S.W.2d 818 (Tex. 1972).

[4]

See id.

[5]

We have held that an indemnity agreement will not be construed to cover an indemnitee’s sole negligence absent express language to that

effect. Id.

at 822. Evanston urges us to take this rule and apply

it to additional insured provisions as well. However, we have also noted that

where an additional insured provision is separate from and additional to an

indemnity provision, the scope of the insurance requirement is not limited by

the indemnity clause. See Getty Oil Co. v. Ins. Co. of N.

Am. , 845 S.W.2d 794, 804 (Tex. 1992). In fact, we specifically

declined to extend the rule in Fireman’s Fund to contractual provisions

other than indemnity agreements. Id. at

806.

[6]

832 S.W.2d 427, 428 (Tex. App.—Amarillo 1992, no writ).

[7]

Id.

Several courts recognize no material difference between the common term

“arising out of operations” and the Evanston policy term “with respect to

operations.” See McCarthy Bros. Co. v. Cont'l Lloyds Ins. Co. , 7 S.W.3d 725 , 730 n.8 (Tex.

App.—Austin 1999, no pet.); Miller v. Superior Shipyard & Fabrication,

Inc. , 2001-2907, p. 5–6 (La. App. 1 Cir. 8/20/03); 859 So. 2d 159 , 162–64;

Acceptance Ins. Co. v. Syufy Enters. , 81 Cal.

Rptr . 2d 557, 561–62 (Cal. Ct. App. 1999); Lim v.

Atlas-Gem Erectors Co. , 638 N.Y.S.2d 946 , 946–48 (N.Y. App. Div. 1996);

Fla. Power & Light Co. v. Penn Am. Ins. Co. , 654 So. 2d 276, 279 (Fla. Dist. Ct. App. 1995). We cite cases

addressing both terms because, even if there is a difference, whatever qualifies

as “arising out of operations” also qualifies under “with respect to

operations,” the broader term.

[8]

Granite , 832 S.W.2d at 430 .

[9]

Id.

According to the court:

Under the Granite-Brown contract, the loading operation

was the sole obligation of Granite, and Brown was not responsible for that

operation. Measuring the policy coverage provided Granite by the allegations in

Valchar’s petition, it is at once obvious that Valchar’s claim of Granite’s liability arose out of the

loading operations performed by Granite; it was not a claim “arising out of

operations performed for [Granite] by or on behalf of [Brown],” the only

operations for which Granite was insured.

Id. ; see also N. Ins. Co. of N.Y. v. Austin Commercial,

Inc. , 908 F. Supp. 436, 437 (N.D. Tex. 1994) (applying Granite to

slip-and-fall cases).

[10] Admiral Ins. Co. v. Trident NGL,

Inc. , 988 S.W.2d 451 , 453–54 (Tex. App.—Houston [1st Dist.] 1999, pet.

denied) (emphasis omitted); McCarthy , 7 S.W.3d at 727 & n.4 (emphasis

omitted).

[11] 988 S.W.2d at

455 .

[12] 7 S.W.3d at

730–31.

[13] 832 S.W.2d at

430 .

[14] GuideOne Elite Ins. Co. v. Fielder Rd. Baptist

Church , 197 S.W.3d 305 , 307–08 (Tex. 2006) (citing King v. Dallas Fire

Ins. Co. , 85 S.W.3d 185, 187 (Tex. 2002), and Nat’l Union Fire Ins. Co.

of Pittsburgh, Pa. v. Merchants Fast Motor Lines, Inc. , 939 S.W.2d 139, 141

(Tex. 1997)). In this case, the principles triggering the insurer’s duty to

defend apply equally to the insurer’s duty to indemnify.

[15] See Admiral , 988 S.W.2d at

454–56; McCarthy , 7 S.W.3d at 729–31 & n.9; Mid-Continent Cas . Co. v. Swift Energy Co. , 206 F.3d

487 , 496–500 (5th Cir. 2000) .

[16] Mid-Century Ins. Co. of Tex. v.

Lindsey , 997 S.W.2d 153 , 155–56 (Tex. 1999) (determining whether “injuries

were caused by an accident arising out of the use of [a] truck”); accord

Admiral , 988 S.W.2d at 454–56; McCarthy , 7 S.W.3d at 729–31;

see also Utica Nat. Ins. Co. of Tex. v. Am. Indem . Co. , 141 S.W.3d 198 , 201–03 (Tex. 2004)

(contrasting “arising out of” with “‘due to,’ [which] requires a more direct

type of causation that could tie the insured's liability to the manner in which

the services were performed.”).

[17] Admiral , 988 S.W.2d at 454–56 (“[I]t

is sufficient that the named insured’s employee was injured while present at the

scene in connection with performing the named insured's business, even if the

cause of the injury was the negligence of the additional insured.”);

McCarthy , 7 S.W.3d at 729–31; Highland Park Shopping Vill . v. Trinity Universal Ins.

Co. , 36 S.W.3d 916, 918 (Tex. App.—Dallas 2001, no pet.). Our causation

analysis is limited to these facts. Because the premises itself caused

the injury in this case, we do not decide what level of causation, but-for or

otherwise, would be required in a case where the additional insured’s premises

is merely the situs of the injury.

[18] Admiral , 988

S.W.2d at 454–56 ; McCarthy , 7 S.W.3d at 729–31; Highland Park , 36

S.W.3d at 917–18.

[19] See The Random House Dictionary of the English

Language 1640 (Stuart Berg Flexner ed., 2d ed. unabr . 1987) (With respect to: “with respect to: referring

to: concerning”); 2 The Compact Edition

of the Oxford English Dictionary 2512 (1971) (With respect: “with

reference or regard to something.”).

[20] McIntosh v. Scottsdale Ins. Co. ,

992 F.2d 251, 255 (10th Cir. 1993) (quoting Philadelphia Elec. Co. v.

Nationwide Mut . Ins. Co. , 721 F. Supp. 740, 742

(E.D. Pa. 1989)); accord Mid-Continent Cas . Co. v. Chevron Pipe Line Co. , 205 F.3d 222 ,

228–29 (5th Cir. 2000) (“[The insurer] easily could have limited coverage by

including in the endorsement terms such as ‘vicarious liability’ or ‘negligence

of the named insured.’”).

[21] See Mid-Continent , 206 F.3d

at 497–99 (observing that “ Admiral and McCarthy . . . are

consistent with the majority view in other jurisdictions”); Steven D. Caley , et al., The Scope of Additional Insured Coverage –

A State Survey , in Insurance

Law 2006: Understanding the ABC’s , at 149 (PLI Litig . & Admin. Practice, Course Handbook Series No.

741, 2006) (collecting cases); Douglas R. Richmond, The Additional Problems

of Additional Insureds , 33 Tort & Ins. L.J. 945 , 956–65 (1998)

(collecting cases and finding that the “liberal interpretation of the additional

insured endorsement is fast becoming the majority rule”).

[22] See Nat. Union Fire Ins. Co. of

Pittsburgh, Pa. , 939 S.W.2d at 141 (“[T]he 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.”).

[23] ATOFINA contends Evanston waived any

argument regarding the impact of “following form” language in the insurance

purchasing agreement by failing to raise this point in its cross-motion for

summary judgment. While Evanston did not

articulate this argument in precisely the same form as it is enunciated here, we

note that Evanston did, in fact, argue before the trial

court that the scope of its policy was bounded by the sole-negligence exclusion

contained in the Admiral CGL policy. Furthermore, as the party that prevailed in

the trial court, Evanston was not required to raise this issue

before the court of appeals, as we do not normally require a party defending a

judgment to raise every alternative theory on which the trial court could base

its action. See Williams v. Khalaf , 802 S.W.2d 651, 658 (Tex. 1990).

[24] Endorsement 20 to the Admiral CGL policy,

which has the same effective date as the Admiral policy itself, supports this

interpretation. It states:

WHO IS AN INSURED (Section II) is amended to include as

an Insured [ATOFINA] but only with respect to liability arising out of [Triple

S’s] ongoing operations performed for [ATOFINA], but in no event for [ ATOFINA’s ] sole negligence.

[25] Nat’l Union Fire Ins. Co. of Pittsburgh,

Pa. v. Hudson Energy Co. , 811 S.W.2d 552, 555 (Tex. 1991).

[26] Id.

[27] Evanston argues that section III.B.5’s use of

“under this policy ” rather than “under this provision ” expressly

limits coverage regardless of the scope of coverage that may apply under another

provision within paragraph III.B. We disagree. Such a reading would render any

broader coverage provided by the Evanston policy illusory by always limiting

coverage to the scope of the Admiral policy. We cannot adopt a construction that

renders any portion of a policy meaningless, useless, or inexplicable.

ATOFINA Petrochemicals, Inc. v. Cont’l Cas . Co. , 185 S.W.3d 440, 444

(Tex. 2005) (per curiam ) (rejecting policy construction that would render

coverage illusory); Kelley- Coppedge , Inc. v.

Highlands Ins. Co. , 980 S.W.2d 462, 464 (Tex. 1998); Balandran

v. Safeco Ins. Co. of Am. , 972 S.W.2d 738, 741 (Tex. 1998).

[28] 490 S.W.2d 818 (Tex. 1972).

[29] Id. at 822–23.

[30] Id. at 820.

[31] Id.

[32] Id.

[33] Id.

[34] Id. at 822 .

[35] Id. at 823.

[36] Id. at 822–23.

[37] Id. at 821 .

[38] Id.

[39] Id.

[40] Id. at 823.

[41] Id.

[42] 845 S.W.2d 794 (Tex. 1992).

[43] Id. at 796.

[44] Id. at 804.

[45] Tex. Civ. Prac. & Rem.

Code §§

127.001–.007.

[46] Getty Oil , 845

S.W.2d at 804 .

[47] Id. (“[T]he additional insured

provision of the contract does not support the indemnity agreement, but rather

is a separate obligation.”).

[48] See Granite Const. Co. v. Bituminous

Ins. Cos. ,

832 S.W.2d 427, 429 (Tex. App.—Amarillo 1992, no writ).

[49] See id.

[50] See Emery Air Freight Corp. v. Gen.

Transp. Sys., Inc. , 933 S.W.2d 312, 315 (Tex. App.—Houston [14th Dist.]

1996, no writ).

[51] 744 S.W.2d 940 (Tex. 1988).

[52] Id. at 943 .

[53] Id. at 942 .

[54] Id.

[55] Id. at 943 .

[56] Id.

[57] Id. The dispute between ATOFINA and

Evanston

concerns only the reasonableness of the settlement amount, and not any factual

assertions within the settlement agreement text.

[58] Id. (emphasis added) (citations

omitted); see also W. Alliance Ins. Co. v. N. Ins. Co. of N.Y. , 176 F.3d

825, 830 (5th Cir. 1999) (citing Block , 744 S.W.2d at 943 ) (“If an

insurer breaches the duty to defend, it may not contest a determination that its

insured was liable in the underlying settlement or verdict (or the amount of

either).”); Enserch Corp. v. Shand Morahan & Co. , 952 F.2d 1485 , 1495–96 (5th Cir.

1992) (“Texas law denies insurers like these a collateral attack on the

settlement itself. . . . Recent opinions of both this Court and the Texas

Supreme Court have confirmed that, unlike a request for allocation, an attempt

to contest the reasonableness of a consent judgment entered into between the

insured and an injured third party is unavailable to an insurer who has

wrongfully breached its duty to defend.”).

[59] 744 S.W.2d at

942 .

[60] The dissent suggests that Evanston never breached

any duty owed to ATOFINA. ___ S.W.3d at ___. Yet on

multiple occasions before the settlement , Evanston explicitly rejected ATOFINA’s claim for coverage under the policy. Evanston first denied

ATOFINA’s request for coverage by letter, and then

consistently asserted the same in its pleadings throughout the coverage suit.

Even if this conduct does not amount to an anticipatory breach of the contract,

which it very well might, see Murray v. Crest Constr., Inc. , 900

S.W.2d 342, 344 (Tex. 1995); Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc. , 962 S.W.2d 507, 515 (Tex. 1998),

this kind of explicit, unqualified rejection of coverage surely operates to

trigger the equitable principles in Block .

[61] 744 S.W.2d at

942 .

[62] See Gulf Ins. Co. v. Parker Prods.,

Inc. , 498 S.W.2d 676, 679 (Tex. 1973);

Womack v. Allstate Ins. Co. , 296 S.W.2d 233, 237 (Tex. 1956); see also St. Louis Dressed Beef &

Provision Co. v. Md. Cas . Co. , 201 U.S. 173, 181 (1906) (“Moreover, the

[insurer], by its refusal [to defend], cut at the very root of the mutual

obligation, and put an end to its right to demand further compliance with the

supposed term of the contract on the other side.”); Benjamin v. Amica Mut . Ins. Co. , 2006 UT

37, ¶ 29 , 140 P.3d 1210 , 1216 ; Liberty Mut . Ins. Co. v. Wheelwright Trucking

Co. , 851

So. 2d 466, 476–78 (Ala. 2002); D.E.M. v. Allickson , 555 N.W.2d 596 , 599–601 (N.D. 1996); Red

Giant Oil Co. v. Lawlor , 528 N.W.2d 524 , 531–32

(Iowa 1995); Fireman’s Fund Ins. Co. v. Sec. Ins. Co. of Hartford , 367

A.2d 864 , 867–73 (N.J. 1976); Theodore v. Zurich Gen. Accident & Liab . Ins. Co. , 364 P.2d 51, 55 (Alaska 1961); Albert v. Me. Bonding & Cas . Co. , 64 A.2d 27 , 29–30

(Me.

1949) . We cite these additional cases for their use of the equitable

waiver and estoppel decision frameworks generally, but

not for their opinions of how the equitable balance should be struck.

[63] Ranger Ins. Co. v. Rogers , 530 S.W.2d

162, 167 (Tex. Civ. App.—Austin 1975, writ ref’d n.r.e .).

[64] Admiral tendered its $1 million before the

settlement, invoking Evanston’s duties as an excess insurer. The

Evanston policy gave Evanston the right to

“associate with the insured in the defense and control of any ‘claim’ or ‘suit’

that we think may involve this policy.” Cf. Keck, Mahin & Cate v. Nat. Union

Fire Ins. Co. of Pittsburgh, Pa. , 20 S.W.3d 692, 701 (Tex. 2000) (supporting

an excess insurer’s right to “interject itself into settlement negotiations

before tender by the primary insurer”).

[65] The dissent cites United States Aviation

Underwriters, Inc. v. Olympia Wings, Inc. , 896 F.2d 949 (5th Cir. 1990), for

the proposition that “an insurer that does have a duty to defend is not

estopped to contest the reasonableness of a

settlement.” ___ S.W.3d at ___. Though the Fifth Circuit did so hold, the

dissent misapplies that case. Unlike Evanston, the insurer in that case offered

to supply the policy benefit (in that case, the duty to defend) under a

reservation of rights. U.S. Aviation

Underwriters , 896 F.2d at 952 . More importantly,

unlike ATOFINA, the insured in that case rejected the insurer’s offer .

Id. As

a result of those two facts, the Fifth Circuit explicitly distinguished its case

from Block and other cases where a defense is neither tendered nor

rejected. Id. at

954–55. For those latter situations, the Fifth Circuit concluded that

“under Texas

law an insurer which is obliged to defend its insured but flatly refuses to do

so . . . cannot contest the reasonableness of a consent judgment agreed to

between the insured and the injured party.” Id. at 955. Thus, United States Aviation Underwriters

supports our holding today, not the opposite.

[66] 925 S.W.2d 696 (Tex. 1996).

[67] Id. at 714 .

[68]

We hold that a defendant’s assignment of his claims against his insurer

to a plaintiff is invalid if (1) it is made prior to an adjudication of

plaintiff’s claim against defendant in a fully adversarial trial, (2)

defendant’s insurer has tendered a defense, and (3) either (a) defendant’s

insurer has accepted coverage, or (b) defendant’s insurer has made a good faith

effort to adjudicate coverage issues prior to the adjudication of plaintiff’s

claim.

Id. “We do not address whether an assignment is invalid

when any element of the rule is lacking, such as when an insurer has not

tendered a defense of its insured.” Id. at 719.

[69] Id. at 715 (“In the present case we

have focused on the validity of the assignment.”).

[70] In addition, Evanston never tendered a defense, a fact

Gandy purported to rely upon. See id. at 714 .

[71] Id. at 707–19.

[72] Id. at 714 . Even when it addressed

assignments, Gandy did not present an absolute rule: “Not every

settlement involving an assignment of rights in exchange for a covenant to limit

the assignor’s liability has the problems we have described.” Id.

[73] Cf. Guillen ex rel. Guillen v.

Potomac Ins. Co. of Ill. , 785 N.E.2d 1, 14 (Ill. 2003) (“[T]he risk of

collusion and fraud can be lessened . . . , if not avoided altogether, by

placing a requirement upon the plaintiff to prove that the settlement it reached

with the insured was reasonable before that settlement can have any binding

effect upon the insurer.”).

[74] The denial does not bar Evanston from challenging

coverage. See Utica Nat’l Ins.

Co. of Tex. v.

Am. Indem . Co. , 141 S.W.3d 198, 203 (Tex. 2004)

(“Even if a liability insurer breaches its duty to defend, the party seeking

indemnity still bears the burden to prove coverage if the insurer contests

it.”); Block , 744 S.W.2d at 943–44.

[75] The “Prompt Payment of Claims” statute has

been recodified without substantial change. See

Tex. Ins. Code §§ 542.051–.061;

Lamar Homes, Inc. v. Mid-Continent Cas . Co. , 242 S.W.3d 1 , ___

(Tex.

2007) . For purposes of this opinion, we refer to article 21.55.

[76] Tex. Ins. Code art. 21.55

§ 6.

[77] Id. § 1.

[78] Lamar Homes , 242 S.W.3d at

___ .

[79] Id.

(quoting Universe Life Ins. Co. v. Giles , 950 S.W.2d 48 , 54 n.2 (Tex. 1997) ).

[80] Id.

[81] Id. at

___.