Tuesday, January 26, 2016 On September 3, 2015, the Texas Supreme Court heard oral arguments in what might be one of the most important Stowers-related decisions of the decade.

In Yorkshire Insurance Co., Ltd. v. Seger, the court is faced with determining whether a post-answer default can be used to establish damages for an assigned Stowers claim, where the insurer has breached the duty to defend and settle within policy limits. Falling somewhere between the Court’s 1995 decision in State Farm Fire & Casualty Co. v. Gandy, and its later opinion in Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., the Yorkshire decision could answer questions left open by both.

The underlying claims in Yorkshire involve the 1992 death of Randall Seger, who was killed when an oil rig owned by Diatom collapsed. At the time, Seger was employed by ECS, a corporation established by Diatom’s general partner, Cynthia Gillman, to provide oilfield services to Diatom.

Seger’s parents filed suit against Diatom.

Diatom and ECS were insured under a “Lloyds-type” CGL policy issued by several different underwriters, including Yorkshire and Ocean Marine. Diatom tendered the suit to the insurers, who refused to defend on the basis the policy contained a “Leased-In Workers” exclusion, which the insurers argued barred coverage for injuries to Seger.

The Segers demanded $500,000—the full policy limit—to settle their claims. They later reduced their demand to $250,000, after being informed that two of the underwriting insurers had become insolvent. Yorkshire and Ocean Marine, however, refused to settle. Prior to trial, the Segers non-suited all defendants except Diatom.

At trial, Cynthia Gillman appeared pro se on Diatom’s behalf, but did not identify herself in her representative capacity at trial, did not announce ready when called to trial, and failed to cross-examine any witnesses. The trial court entered judgment in favor of the Segers, awarding them each $7.5M, plus post-judgment interest.

At the conclusion of the trial, Gillman assigned her claims against Yorkshire to the Segers, who subsequently filed suit against Yorkshire and Ocean Marine. Following an extensive procedural history involving numerous appeals, the jury determined the Segers’ claims were covered, the judgment was the product of a fully adversarial trial, and the judgment conclusively determined the Segers’ damages.

Yorkshire appealed, arguing that the evidence was factually and legally insufficient to establish Diatom was damaged by the insurers’ conduct, and that the Segers’ claims were excluded from coverage as a matter of law. According to Yorkshire, because Gilliam did not adequately represent Diatom’s interests at trial, the judgment could not be used as evidence of Diatom’s damages in the Stowers suit because the judgment was not the product of a “fully adversarial trial” as required by Gandy. The Segers countered that the Texas Supreme Court’s later decision in ATOFINA eliminated the “fully adversarial trial” requirement set forth in Gandy, because the insurers had wrongfully failed to defend the underlying claims.

The court of appeals agreed with Yorkshire, holding that the ATOFINA exception did not apply because “before the underlying judgment was obtained, Diatom was judgment-proof and each of the individual principals of Diatom had been nonsuited.” The “assignment distorted the litigation” because neither Diatom nor the principals had any financial exposure or incentive to contest liability. Diatom’s “participation was so minimal” the court could not “conclude that the underlying judgment was the result of a fully adversarial trial.” “When the entire underlying proceeding is considered,” reasoned the court, “the underlying judgment was the result of a proceeding more akin to a post-answer default than a fully adversarial trial.”

These issues are now pending before the Texas Supreme Court. The case presents the dichotomous question of whether a carrier is always bound by an underlying judgment in a subsequent (assigned) Stowers action, even where the insurer has breached the duty to defend; or, whether a judgment entered in an underlying lawsuit is ever admissible to show damages in a subsequent Stowers lawsuit, when the judgment is not the product of a fully adversarial trial.

After listening to the recorded proceedings, it is evident the Court clearly understands the significance of the issues, as the entire panel made a commendable effort to quell its disdain over the unpalatable facts evenly distributed among the parties. During proceedings, the Court posed three pivotal, thought-provoking questions, giving insight into where the panel might land:

  • What should the legal standard be for determining whether a judgment is the product of a fully adversarial proceeding?
  • What safeguards are in place to be certain the judgment is not the type of arrangement prohibited by Gandy?
  • Should ATOFINA apply where the judgment is not tied to specific evidence of the amount of compensatory damages?
However the Court rules, the Yorkshire decision is certain to be an entertaining read. We do not envy the Court in its endeavor to sort out these sticky issues.