A KINGLY DECISION: Insurance Coverage Is in the Eye of the Insured Beholder

June 14, 2002


For the last several years, a dark cloud has hung over Texas policyholders seeking coverage for claims made against them for negligence but arising from the intentional conduct of others.  Perhaps no other group has endured this storm more than employers who by their “deep pocket” status have routinely been hailed into court for the intentional acts of those they employ. It is not unusual for employers to be sued for the intentional misconduct of their employees, who are sometimes the perpetrators of assaults, sexual molestation or harassment of others. Nor is it uncommon for employers to be held accountable for their own negligence in hiring, training or supervising their own employees. Recent news about wayward clergy molesting innocent children while church authorities turned a blind eye or carelessly handled the problem have highlighted the employer’s own liability, separate and apart from that of the employee.

While few expect the intentional wrongdoer to gain the benefit of  liability insurance, such as the payment of defense costs and settlements, many would suppose that coverage would be available for the negligent acts of the employer. After all, the prevalent view is that insurance is available for the careless acts and omissions that cause injury. Nonetheless, for the last several years, this latter view had  been largely rejected by Texas federal and intermediate state courts, leaving employers with no liability insurance protection even for the claims of negligence hurled against them.

The premise for this rejection was the argument that coverage is afforded to insureds for accidents or “occurrences,” and where the injury to the claimant directly caused the intentional non-covered conduct of an employee, there was no accident or “occurrence” that would afford coverage for the intentional wrongdoer or the negligent employer who indirectly contributed to the injury. As the courts would explain, “but for” the intentional misconduct of the employee, there would be no claim against the employer.

The problem with this analysis is that it ignored policy language and failed to acknowledge that whether there was a covered accident or “occurrence” should be determined from the viewpoint of each insured. Since under typical liability policies both the employer and employee are considered insureds, the determination of an “occurrence” should be made as to each.

Fortunately, Texas polichholders got a much needed reprieve.  On May 30, 2002 the Texas Supreme Court rendered an opinion in King v. Dallas Fire Ins. Co., 2002 WL 1118438 (Tex. 2002).  The court, in a unanimous opinion, held that coverage existed for derivative liability claims against an employer, where the employee’s conduct was intentional.  This case opens the door for coverage to policyholders who, through no intentional act of their own, are subject to liability for the intentional misconduct of other employees.

This article explores the reasoning and logic behind the Texas Supreme Court’s opinion, as well as the ramifications of that opinion.  The Texas Supreme Court’s opinion renders itself to a much broader application than simply in the context of an employer/employee derivative liability claim.  The opinion clarifies the correct approach to determining whether an “occurrence” exists under Texas law.  Because this opinion can reach beyond derivative liability claims—to vicarious liability cases and defective work claims in construction cases as well as other claims—this article addresses the impact in those areas as well.

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