There are no shortage of cases addressing the interpretation of an excess policy when it follows form to an underlying policy, such as a primary policy or lower-level excess policy.  You know the usual generally stated refrain – the excess policy follows form to (i.e., is subject to the same terms as) an identified underlying policy, except where the excess policy’s terms differ and then the excess policy provisions control.  And that’s what is at issue in the Texas Supreme Court’s opinion in Ohio Casualty Insurance Company v. Patterson-UTI Energy Company, No. 23-0006 (Tex. Dec. 20, 2024). 

But I chose the decision, as one of the year’s ten most significant, because it is about more than just the meaning of a specific policy provision in a follow form excess policy.  The court addressed the manner in which a follow form analysis should be undertaken.  In addition, as for the specific policy provision, the Texas justices held that the excess policy did not follow form – notably, in a situation where it would seemingly be expected to. 

Patterson provides oil and gas equipment services.  What the court called a “drilling-rig incident,” but with no further detail, led to multiple personal injury lawsuits.  Patterson had a tower of liability coverage.  The suits were settled and certain insurers in the tower paid the settlements and defense costs.  But when it reached the Ohio Casualty layer, the insurer funded portions of the settlements but refused to pay Patterson’s defense costs.

Patterson sued Ohio Casualty [and Marsh, for allegedly failing to procure a policy that covered defense costs].  The trial court and court of appeals found for Patterson.  The Texas Supreme Court reversed.

Key to the case was that the Ohio Casualty excess policy followed form to an underlying Liberty Mutual umbrella policy.  Nobody disputed that the Liberty Mutual policy provided coverage for Patterson’s defense costs.  The Liberty policy provided coverage for “ultimate net loss” and that term was defined to include defense costs.

But here’s the rub.  The Ohio Casualty policy’s coverage grant was for “loss,” which was 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.”  (emphasis added).

As Ohio Casualty saw it, the amounts that Patterson owed the plaintiffs for settlements were damages, and, thus, “loss.”  And Ohio Casualty paid those amounts.  But Ohio Casualty argued that Patterson’s own defense costs were not “loss” -- because they did not constitute “damages.” 

The Texas Supreme Court agreed: “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.’ (citations omitted) 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 own defense expenses would not do so ‘in the settlement or satisfaction of a claim.’”

That last line was central to the interpretative aspect of the court’s decision – a party’s own attorney’s fees are not paid in the settlement of a claim.  Thus, they are not damages, and, therefore, not “loss.”

But here’s the key take-away from the decision and why I chose it as one of the year’s ten most significant coverage cases: “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.”

To the Texas high court, that was also the flaw in the court of appeals decision.  It started from the ground up, by looking at the underlying policy, and then the excess policy.  It should have reversed that order.