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Ace in the Hole: Insurer Escapes $105.7M Judgment

Last year, in Great Am. Ins. Co. v. Hamel, 525 S.W.3d 655 (Tex. 2017), the Texas Supreme Court decided that a judgment rendered against an insurance company’s policyholder in an underlying action was unenforceable against the insurance company because the judgment was not the product of a fully adversarial proceeding. In what may be the first federal use of the Hamel decision, a Texas federal judge recently ruled in CBX Res., LLC v. Ace Am. Ins. Co., No. 5:17-cv-00017 (June 28, 2018 W.D. Tex.) that an insurer is not bound by an underlying $105.7 million judgment because the proceeding that resulted in the judgment was not “fully adversarial.”

Background

CBX Resources LLC was the lessee of a tract of oil production land called the Hibdon Lease. Lessee, CBX hired Espada Operating LLC to perform the drilling and operation of a well called Picosa Creek 1V. During its work on the well, Espada was a named insured on a Commercial General Liability (CGL) policy issued by Ace American Insurance Company. Espada was also a named insured on an umbrella policy issued by Ace Property & Casualty Insurance Company.

In 2011, Espada drilled the well and then installed and attempted to pressurize a fracking system. In January 2012, Espada tried to pull out the well’s production casing. In doing so, Espada discovered a 3,400-foot fracture. Espada determined that any production casing below the fracture was unrecoverable and irremovable. Since it could not be restored, the well was plugged and abandoned. In 2013, CBX sued in Zavala County over the loss of use of the well, and eventually Espada was brought in as a defendant.

Two months before a scheduled trial, Espada’s insurer, Ace, withdrew its defense of Espada. After hearings took place in February 2016, a $105.7 million judgment was entered against Espada in state court. Espada’s claims against Ace were then assigned to CBX. In January 2017, CBX sued Ace American and Ace Property in federal court.

In October 2017, U.S. District Judge David Ezra granted partial summary judgment to Ace on the issue of the duty to defend Espada. The judge found that a “damage to property” exclusion in the CGL policy applied to the entire well, and the driller’s work could not be separated out from the rest.

Hamel Decision

In June 2017, the Texas Supreme Court decided Great Am. Ins. Co. v. Hamel, seeking to clarify the scope of a 1996 case, State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996), which established a requirement that an insured’s damages must result from a fully adversarial trial. In Hamel, the Texas Supreme Court unanimously granted Great American Insurance Company’s request for a new trial over whether it was required to cover construction defect claims against a builder it insured, after finding that the judgment in the underlying lawsuit was not binding on Great American because the builder did not have a sufficient stake in the outcome. The Court found that a pretrial agreement between the builder and the suing homeowners eliminated any real incentive for the builder to mount a meaningful defense of the homeowners’ claims. Hence, the judgment was not the product of a fully adversarial proceeding, and as a result, the judgment could not be enforced against Great American.

CBX v. Ace Judgment Decision

In an order released on June 28, 2018, U.S. District Judge David Ezra relied on Hamel in deciding that the $105.7 million state court judgment was not valid for the purposes of the federal suit unless Espada “bore any actual risk of liability for the damages at the time of the underlying judgment.” However, Ace presented sufficient evidence that Espada had no meaningful stake in the underlying judgment. It was particularly dispositive that once Ace withdrew its defense of Espada, there was no real dispute that Espada lacked the financial resources to retain an attorney to maintain its defense.

The judge also found that the only evidence produced during a February 2016 damages proceeding was from CBX, who produced six witnesses and 47 exhibits, without any witnesses or testimony from any other party. Such a proceeding could not be said to be an “adversarial proceeding” since there was clearly no opposition as to the amount of damages being claimed by CBX.

As for the next step in this case, the parties are to submit status updates and instruct the Court which claims should be dismissed based on this most recent ruling.

Takeaway

Texas courts adopt a relatively straightforward method for determining whether an underlying proceeding is fully adversarial. Rather than a fact-sensitive inquiry, the controlling factors are whether, at the time of the underlying proceeding, the insured had stake in the outcome or meaningful incentive to defend itself. While this test is not a categorical rule, absence of such factors creates a strong presumption that judgment did not result from an adversarial proceeding. In such cases, judgment against an insured will not be enforced against an insurer.

If you have any questions pertaining to the rules surrounding Texas proceedings, contact the experienced attorneys of Parker, LLP Attorneys at Law.

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