The Fifth Circuit has three burning questions for the Texas Supreme Court. Twice, last-minute settlements in insurance coverage disputes have blocked an answer from being announced.
Attorneys representing property owners are at a loss: How do you overcome a “chronological anomaly” to get courts to recognize that lawmakers already have clarified the issue in the face of muddled case law?
The questions ask who bears the burden of proof in certain insurance coverage disputes where damage is caused by a combination of covered and uncovered causes. It invokes the state’s “concurrent causation doctrine” and came to the Texas Supreme Court this time in a dispute between policyholder Harold Overstreet and Allstate.
And it seems insurance companies really don’t want the Texas Supreme Court to answer them.
“What’s a Texas business to do when a court refuses to follow the law and the insurance industry is in a position to prevent the Texas Supreme Court from ever hearing it?” Marc Gravely asked. “How surprising is that in a state like Texas that is so business friendly?”
The rules, Gravely argued in an amicus brief he filed on behalf of seven industry groups just days before a settlement was reached, have been mischaracterized, misapplied and misunderstood.
“That’s the problem,” Gravely said. “The law is already clarified, there are courts that choose simply not to follow it. I don’t know what the [Texas] Legislature can do. Pass a law that says ‘we really, really mean it’?”
But attorneys representing insurers, including Shannon O’Malley, a partner with Zelle, think the Fifth Circuit’s questions have been asked and answered.
“I don’t know what is driving the Fifth Circuit’s questions because the law has been so clear for so many years,” she said.
The Fifth Circuit, O’Malley said, “has what it needs from the Texas Supreme Court” to answer its questions about how the concurrent causation doctrine works, including the court’s rulings in State Farm Lloyds v. Johnson, JAW The Pointe v. Lexington Insurance Co. and last year’s ruling in Dillon Gage v. Certain Underwriters at Lloyds.
“If the Texas Supreme Court does eventually hear this, I do think they will look at Texas Supreme Court law … and their law answers these questions,” she said.
A teed-up chance for clarity — oral arguments before the Texas Supreme Court scheduled for Sept. 21 — fell through when a settlement was announced Sept. 16.
That settlement blocked the Texas Supreme Court from answering the certified questions for the second time in 10 months.
Ernest Martin Jr., the chair of Haynes and Boone’s insurance recovery group and founder of the insurance section of the State Bar of Texas, said he thinks it should be “very troubling” to everyone that what the Legislature has mandated is out of sync with the common law on the application of the concurrent causation doctrine.
“This is a monumental issue, it really is,” Martin said. “If you think about it, at its core, it is about making sure that we properly frame whose burden it is between carrier and insured to demonstrate that there is a lack of coverage.”
The first time the Fifth Circuit sent the trio of questions to the Texas Supreme Court, in Frymire Home Services v. Ohio Security Insurance Company, was Sept. 1, 2021. The state’s high court accepted the question nine days later and set oral arguments for Dec. 1, 2021.
A joint motion to dismiss was filed Nov. 23, 2021, according to court documents, a week and a day before arguments. Gravely said he was in the process of preparing the same amicus brief he ended up filing in Overstreet for the Frymire case when it settled.
O’Malley, who represented the insurer in Frymire, said she felt the amicus brief in Overstreet ignored the main issue, which she framed as: When did the damage occur and what is actually causing damage?
A 2015 ruling from the Texas Supreme Court, in JAW The Pointe v. Lexington Insurance Co., should clear up any confusion on the issue, O’Malley said. In briefing in Frymire, O’Malley said JAW stands for a simple proposition.
“There can be no debate: Under Texas law, the insured has the burden of establishing coverage under the terms of the policy,” the brief argued. “And when an insurer presents evidence that a noncovered peril, such as damage occurring outside the policy period, contributes to cause the loss, or pleads and proves that an exclusion applies, Texas law requires the insured to prove that the loss is covered under the policy.”
In her view, policyholders and the attorneys who represent them are “glossing over how JAW The Pointe applies.”
In May, the Fifth Circuit tried again, sending to the Texas Supreme Court the same verbatim questions it tried to get answered in Frymire.
Those questions are:
1. Whether the concurrent cause doctrine applies where there is any non-covered damage, including “wear and tear” to an insured property, but such damage does not directly cause the particular loss eventually experienced by plaintiffs.
2. If so, whether plaintiffs alleging that their loss was entirely caused by a single, covered peril bear the burden of attributing losses between that peril and other, non-covered or excluded perils that plaintiffs contend did not cause the particular loss.
3. If so, whether plaintiffs can meet that burden with evidence indicating that the covered peril caused the entirety of the loss (that is, by implicitly attributing one hundred percent of the loss to that peril).
Bruce Wilkin, a trial and appellate partner with Shackelford Bowen McKinley & Norton said in his view, the Fifth Circuit is trying, through its certified questions to the Texas Supreme Court in Overstreet and Frymire, to get at another question, which he framed as: Is every case an allocation case now?
“And the reason is, some insurers have been starting to take the position, and took this position in Overstreet and Frymire, that every building, the day after being constructed, started to have general wear and tear,” he said. “Because general wear and tear is excluded in the policy, some insurers started taking the position that you, the insured, have to allocate out wear and tear every single time.”
So, is every insurance coverage dispute an allocation case now?
“I would say, candidly, even as a lawyer traditionally on the insurer side, I would say probably not,” he said. “We’re probably taking the allocation idea maybe a step too far.”
The ‘Chronological Anomaly’
The amicus brief in the Overstreet case — authored by Gravely, Brendan K. McBride and Jonathan C. Lisenby — begins by telling the Texas Supreme Court that the purpose of the filing is to explain the history of Texas lawmakers’ attempts to “appropriately place the burdens of proving covered and excluded losses on the insurer rather than policyholders, and the history of lower courts confusing the issue.”
The 52-page document takes a deep dive into the history of the statutes and the common law that govern the issue, and tells readers that both are “intertwined with the hurricane history of Texas.”
In the wake of 1961’s Hurricane Carla, two insurance coverage cases involving concurrent causation made their way to Texas appellate courts — Paulson v. Fire Insurance Exchange and Berglund v. Hardware Dealers Mutual Fire Insurance — and were decided one day apart, Paulson by the San Antonio Court of Appeals and Berglund by a Houston appellate court.
The rulings created a split among the state’s appellate courts.
The Berglund court held that the insurer had the burden of proof to allocate between the concurrent causes of damage, while the Paulson court determined that was the plaintiffs’ burden.
So, in 1965 the Texas Supreme Court weighed in.
Relying on an 1890 ruling in Pelican Insurance v. Troy Co-op., which stated “a party suing upon an insurance policy has the burden of proving that the insurance policy covered the loss,” the court ruled that the plaintiffs in Paulson and Berglund “had the burden to prove a negative — that the loss was not caused by an excluded peril,” the amicus brief states.
The pronouncement was repeated in the court’s 1971 ruling in Travelers Indemnity v. McKillip.
“This is where matters rested until the early 1990s,” according to the amicus brief.
In 1990 the Eastland Court of Appeals, in Millers Casualty Insurance v. Lyons, cited Berglund in holding the insured bears the burden of separating an excluded cause from a covered loss — a ruling that would eventually be appealed to the Texas Supreme Court and decided in 1993.
But before that happened, in 1991, lawmakers responded to the confusion in the courts and codified the burdens of proof applicable to insurance claims and exclusions in Article 21.58 of the Texas Insurance Code, now recodified as Section 554.002 of the code.
In a suit to recover under any insurance or health maintenance organization contract, the insurer or health maintenance organization has the burden of proof as to any avoidance or affirmative defense that the Texas Rules of Civil Procedure require to be affirmatively pleaded, and language of exclusion in the contract or an exception to coverage claimed by the insurer constitutes an avoidance or an affirmative defense.
The amicus brief argues that section was enacted “rather obviously in response to the court of appeals’ decision just six months earlier in Lyons I, bringing attention to the Berglund/Paulson/McKillip rule on burden of proof.”
But because Article 21.58 wasn’t yet law when Lyons was appealed, the Texas Supreme Court didn’t rely on it in its 1993 ruling in the case.
“Confusion resulted from the timing of the court’s 1993 opinion that postdates and seemingly ignores a contrary rule in Article 21.58 of the Insurance Code,” the amici argued. “Because of this chronological anomaly, many practitioners and courts are still today simply unaware that the legislature had already abolished the very rule on concurrent causation announced and repeated in Lyons II — a year before that opinion was even handed down.”
But it was a 1999 ruling from the San Antonio appellate court, in Wallis v. United Services Automobile Association, which cited Paulson and McKillip as if they had not been legislatively overruled, that has been “habitually cited by subsequent courts as the basis for continuing the same concurrent causation rule from Paulson, Berglund, McKillip and Lyons without any mention or analysis of the 1991 statute that voided and superseded this rule,” the amici argued.
The ruling “introduced a manifest and pervasive error into Texas jurisprudence,” knocked Texas law out of step with every other state in the nation, the amici said, and relegated Texas policyholders to a unique and often unwinnable position.
Another fix by lawmakers is unlikely Gravely said, but he does think there’s a path for what he called the improper interpretation of the law to “fall by the wayside.”
“The amicus brief, it completely untangles the thicket of decisions and gives the basis for why some courts didn’t address it and why some federal courts, unbelievably, keep quoting Wallis as good law,” he said.
Gravely said he hopes the amicus brief can be used as a roadmap for policyholder lawyers challenging insurance companies in coverage disputes.
“But the fact is, if you’re not a practitioner at the pinnacle in a matter like this,” he said, “you’re not going to understand the nuance.”
While courts may have been misinterpreting the law on the issue for decades, Martin said the confusion is “more of a failure of the bar, or the lawyers doing due diligence in learning about how did this particular doctrine came to be.”
Martin said that because the settlements were reached in the face of looming answers from the Texas Supreme Court about the application of the doctrine, it “suggests that the insurance industry realizes that the policyholders are correct here.”
“They probably realize that once the court really scrubs this down, they’re going to issue a declaration that clears this up, and I think they’re concerned it will be cleared up in favor of the policyholders,” he said.
The attorneys involved in the Overstreet case — Susan E. Egeland, Sara E. Inman, S. Vance Wittie and D. Alexander Harrell of Faegre Drinker Biddle & Reath for Allstate and Melissa Wray of Daly & Black for Overstreet — did not respond to messages requesting interviews.
The case is Overstreet v. Allstate, case number 22-0414.