Coverage for Vicarious and Derivative Liability Under Texas Law

October 06, 1999

Introduction
Suppose Employee works for Corporation and assaults Victim. Victim then hires a prominent personal injury lawyer and sues both Employee and Corporation. Victim's lawyer pleads assault against both Employee and Corporation, alleging that the assault was committed in the scope of employment and that Corporation is vicariously liable for the assault under respondeat superior. Victims's lawyer, who just attended a seminar on insurance coverage, also pleads various negligence claims against Corporation, such as negligent hiring, training, and supervision. Assume also that the injuries to Victim are substantial, the lawsuit is filed in a plaintiff-friendly county, and Corporation's defense lawyer is worried. Employee is either penniless, in jail, or nowhere to be found.
 
Suppose further that Corporation is an insured under a standard CGL policy, and that Employee is an additional insured. Corporation's lawyer decides he had better put Corporation's liability insurance carriers on notice, and he sends them a copy of the petition. The carriers respond with a letter denying coverage. They say that the injuries alleged by Victim cannot qualify as an "occurrence" under the policies, because "occurrence" means "accident" and the injuries resulted from intentional acts. Furthermore, they point out that the policy excludes coverage for injuries "expected or intended from the standpoint of the insured." Finally, they cite an exclusion for all injuries "arising out of" assault and battery, arguing that none of the claims asserted by Victim could arise but for Employee's intentional act.
 
Victim's lawsuit steadily moves towards trial, and Corporation finds it increasingly difficult to pay its defense lawyer's exorbitant fees. Corporation sues its insurance carriers, arguing that they have a duty to defend and to indemnify Corporation against Victim's lawsuit.
 
Meanwhile, Victim's case goes to trial. After hearing testimony from Victim that she will never walk again and will require constant medical attention for the rest of her life, the jury finds that Employee assaulted Victim, that Employee was acting in the scope of employment, and that Corporation was negligent in hiring and supervising Employee, who it turns out had a criminal record and assaulted dozens of victims while he was working for Corporation. The jury awards millions of dollars in compensatory and punitive damages.
 
The next day Corporation amends its pleadings in the coverage suit to seek indemnity from the carriers for the multi-million dollar verdict. Both sides in the coverage suit move for summary judgment.
 
The situation described here, and its myriad variations, is one that is becoming increasingly familiar to attorneys who practice in the areas of personal injury claims and insurance coverage. Despite the familiarity of this situation, Texas does not yet have a well-developed body of case law to deal with the insurance coverage issues that arise from these situations. It is fairly clear that in most cases there will be no coverage for the employee's individual liability for his own intentional torts. What is less clear is whether there will be coverage for the employer's "derivative liability," e.g. Victim's negligence claims against Corporation, and "vicarious liability," e.g. Victim's claims based on Corporation's vicarious liability for Employee's intentional torts. That is the subject of this paper.
 
The specific terms of the policy will determine whether the insured has coverage. In the hypothetical, the exclusion for injuries "arising out of" assault and battery will most likely bar coverage for the derivative claims, under a line of Fifth Circuit and Texas cases that construe similar exclusions very broadly against insureds. A line of Fifth Circuit cases has also held that such derivative claims are barred from coverage by the definition of "occurrence" and/or the exclusion of injury "expected or intended" by the insured. These cases are in conflict with recent Texas state court opinions finding that such claims are covered. Some Texas courts have suggested that even the insured's vicarious liability for intentional torts may be covered. The fact that the Texas Supreme Court has not yet addressed these issues, not to mention the conflict between state courts and the Fifth Circuit, ensures that policyholders and insurance carriers in Texas will continue to litigate coverage for derivative and vicarious liability.
 
This paper attempts to address coverage for derivative and vicarious liability with particular attention to cases from Texas state courts and the Fifth Circuit. A comprehensive review of the issues that arise in such situations could fill a small book, and that is not the goal of this paper. There are many important issues, such as how many "occurrences" there are if the individual assaults numerous victims over many years, or whether there is coverage if the individual intended the act but not the injury, that this paper does not even attempt to address. The focus of this paper is the recent history and current state of Texas law on coverage for what we are calling "vicarious" and "derivative" liability.

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