THERE IS A CONTRACT OF INSURANCE (“CI”), AND ANOTHER, SEPARATE CONTRACT (“SC”) ARGUABLY MADE-PART OF (OR INCORPORATED INTO) CI IN WHOLE OR IN PART.

HOW DOES ONE DETERMINE (KNOW) WHETHER SC HAS BEEN MADE PART OF CI, AND IF IT HAS, HOW IS SC TO BE INTERPRETED AND THEREFORE HOW ARE CI AND SC TO BE INTERPRETED TOGETHER?

ExxonMobil Corp. v. National Union Insurance Company and Starr Indemnity and Liability Insurance Company, 21-0936[672 S.W.3d 415] (Tex. April 14, 2023).

Executive Summary

This executive summary addresses the legal intricacies involved when external contracts are integrated into insurance policies, particularly highlighted by a case involving ExxonMobil. ExxonMobil was designated as an “additional insured” in several liability insurance policies due to a service agreement with Savage Refinery Services, which required Savage to secure liability insurance covering its employees and specifically named ExxonMobil as an additional insured. The dispute centered on whether the details of their service agreement were effectively incorporated into the insurance policies, a matter complicated by the policies not explicitly reflecting the terms of the agreement. The Texas Supreme Court’s decision in this case underscored the foundational principles of contract interpretation within the insurance sector: the policy’s text must be the starting point for interpretation, and external documents should only influence this interpretation when the policy explicitly permits this integration. This ruling is pivotal, affirming adherence to traditional contract interpretation methods while addressing complexities introduced by external agreements in modern insurance practices. The court emphasized that contract terms should be interpreted based on the “original” document into which there has been an insertion when there is a clear and intended incorporation of the external documents, a contra or something else. This case not only resolved the dispute regarding the scope of coverage under ExxonMobil’s policies but also – at least impliedly set a significant legal precedent on the integration of external contracts – or other documents into insurance policies, reinforcing the need for clear and explicit terms to guide both policyholders and insurers in understanding their rights and obligations under the law.

Preface

When can a contract, not part of a contract of insurance, or insurance policy, be correctly understood as part of – or inherent in – that policy and be correctly interpreted accordingly, though restrictively?  (This sort of incorporation can be accomplished in whole or in part. I am assuming (1) that the “incorporation,” under discussion was accomplished intentionally by the parties to the CI, (2) that there was no objection made by anyone with an interest in the matter at the time of the incorporation,

This problem is most likely to arise in situations involving policies which huge policy limits and concern individual, specialized commercial insurance policies.

The insurance contracts in this case were liability policies – Comprehensive General Liability Insurance, and similar contracts or policies, to be more exact. (Keep in mind that the words “insurance policy” in this – and similar insurance contexts – mean, at least roughly speaking, one of two things:  (1) It is virtually (almost) a synonym for the phrase “insurance contract,” or, that the phrases “contract of insurance” and “insurance policy” (IP) mean the same thing; or (2) the phrase insurance policy names a document which is used in the commercial context of selling and buying insurance.  This second meaning might name a document which summarizes parts of the contract of insurance which are not provided the policyholder at least at first. Thus, an insurance policy might set forth the substance of the contract in simple, “non-legalese” terms, found in various ways in ordinary English discourse, whereas the contract itself is longer – sometimes – more difficult for non-lawyers or non-insurance professionals, e.g., underwriters, to understand. One can see how this kind of arrangement might work during the process of the policy holder’s purchasing the contract. Thus, a document titled or named “[Something]Policy” might provide the policyholder to-be with information which might help induce sale and purchase. Naturally, if the “policy”-version of the deal is false as a summary of the contract, there may well be breach of contract, fraud, violations of the Texas Deceptive Trade Practices Act, or similar other-state violations, and so forth, especially if the “lack of fit” between the “policy” and the “contract” cause injury to the policyholder. (Notice that the term “policyholder” is an often-used phrase in ordinary discourse which identifies the “holder” as a party to a contract of insurance). (Thus, probably, an additional insured (“AI”) designated by the partiers to the contract is usually not called a policyholder, even if that AI is a third-party beneficiary of the contract and have rights flowing from the existence of the contract and “its” status either “under” it or simply as a result its existence).

 (Of course, the vocabulary could work just the reverse, so the insurance contract summarizes the policy (or parts of it). I do not think I have ever actually observed or even read about such an arrangement.)

(The reader should be aware that the ordinary language used in the business of insurance is not, for the most part, filled with rigorously defined and fixed terminology. It is often “language as used” in “everyday discourse” in the insurance industry. To repeat, that language is not a rigorous semantical system like that characteristic of mathematics, physics, some types of engineering, and some parts of even philosophy.)  Then again, often contracts of insurance and/or insurance policies contain explicit definitions – sometimes long lists of them – and they are sometimes applied and enforced in legal proceedings. Those explicit definitions are often more applicable to policyholders (insureds). On many occasions, I have witnessed insurers try to and/or successfully seek to have courts declare that parties to contract, such as contracts of insurance, are expected to know and understand the contents of the contract.

The oddity of contract formation based upon a policy with the actual contract being supplied later is not under discussion in the case under review. I am not discussing incorporating the “policy” into the “contract.” In theory, that could be a problem in contract law or a problem as to good versus bad faith in contract formation, but that is an essay for a different context. What is true in this case is that ExxonMobil was an “additional insured” in the contracts in controversy.

The case under discussion in this essay, ExxonMobil, concerns the incorporation of a “Service Agreement” between two businesses into several insurance policies, but for the sake of simplicity the incorporations can be regarded as the same thing. This is a very rare situation, conceptually speaking and from an empirical point of view. (The personal injury damages were an unusually large recovery for an accidental injury case, though not unheard of recently.)

A Quinn Comment: This is as good a place as any herein to observe that the idea of incorporating one contract into another is not like placing a package of paper in a box – it’s not like stuffing a turkey in preparation for Thanksgiving dinner. It need not even be regarded as making the document with external origin part of the contract of insurance. It is more like giving that document a special legal status, namely its usability in interpreting the contract of insurance, not only in routine matters but in quite radical ones. Endowing an external document with that sort of status creates an important exception the usual and accepted rules of contract interpretation, in accordance with which the meanings of contracts “stand on their own two feet,” as it were, along with the rest of the contract terms and are thus interpreted by what is contained within the contract itself and nothing else. This is certainly the accepted rule for interpreting contracts of insurance, as the court in this case points out.

As rarified as the insurance-related facts in this case were, the reasoning of the unanimous Texas Supreme Court is orthodox, broad, and provides accepted legal observations and arguments as to the sound interpretation of insurance contracts, as well as – impliedly – others.  Its discussion of contract interpretation will be used and cited for many years. Thus, this case is a valuable source for precedential (or precedent locating/identifying) purposes in connection with insurance contract interpretation. The court sees its conclusion, ruling, and opinion, in part, based upon a “string” of cases and decisions where each of them depends on the one (or ones) before it, thereby providing an attractive line of reasoning where law of the relatively “distant” past matters for sound and convincing legal reasoning in the present.

(It is worth noting for academic purposes, that the “Incorporation Into Contract Rule” applies to many sorts of contracts and not just contracts of insurance.)

The opinion discussed here is probably the last in a series of Texas appellate court cases arising out of two severe – ghastly – personal burn injuries inflicted on two different workers. The injuries resulted from a single occurrence – a refinery fire – that happen, in 2013, and the personal cases that arose out of it were resolved several    years before the insurance cases were decided. (As is sometimes said, “The wheels of justice rotate most slowly when insurance litigation is involved.”)

ExxonMobil paid a huge sum, $24M, which was part of the damages owed the two injured workers. The insurers had denied coverage, so ExxonMobil paid, and then sued some of its insurers, NU and Star, for wrongfully denying coverage. The insurance cases dragged on for a decade. 

The reader must keep in mind the fact that there are two separate insurance companies involved. First, National Union Fire Insurance Company of Pittsburgh Pennsylvania Company (‘NU’s), an AIG company was (1) the insurer providing a routine Comprehensive General Liability (CGL) primary policy, but it had also (2) issued an umbrella policy which was functioning as, at least, something like an excess policy. (NU is part of the AIG group.) Second, Starr Indemnity and Liability Insurance Company (“Starr”) had underwritten another umbrella policy. It had a rather odd title for a case of this kind and had some unusual usages in the commercial marketplace. The name and characteristics and different uses of the Starr policy made no difference in this case. Both liability policies under which coverage had been denied were functioning as umbrella policies, according to the court.

Starr apparently had some doubts about the court’s opinion but its hesitancy about accepting the court’s opinion is not described or explored in this opinion. Thus, the opinion itself suggested that there might have to be at least one more decision and opinion. The matter got resolved, however, by settlement in early 2024, so that the odyssey of the insurance case of  ExxonMobil Corp. v. National Union Insurance Company and Starr Indemnity and Liability Insurance Company, 21-0936[672 SW3d 415]  (Tex. April 14, 2023). S.W.3d 415] (Tex. April 14, 2023) has come to an end, or so it appears. (The case in which the final matter was decided was in the very intermediate appellate court that the Supreme Court reversed. After the settlement agreement was recorded, the appeal in that was dropped.

PART TWO: A Short Discussion of Part of the Case.

ExxonMobil (Exxon), a large petroleum corporation, retained an independent contractor to render it services at Exxon’s Baytown, Texas refinery. The vendor’s name was Savage Refinery Services (“Savage”), an unfortunate name under the circumstances.

The service agreement contained roughly the following language, as set forth in the Court’s opinion:

“Savage promised to obtain at least a minimum stated amount of liability insurance for its employees and to name Exxon as an ‘additional insured.’” (Emphasis added.)

According to the opinion, Savage carried out its promises. NU underwrote two of them, and a third policy was underwritten by Starr.

As already noted, the key event was two horrible workplace burn injuries of Savage employees caused by the same occurrence. NU’s primary CGL policy paid policy limits, but coverage under the other policies was denied. It appears that there was a Workers Compensation policy issued by another carrier. Its existence and the carrier’s performance were not relevant to this case.

Since NU and Starr denied coverage under their umbrella carriers, Exxon paid the liability which the insurers denied, since – both carriers said – the injuries were not with Exxon’s coverage. This amount was approximately $24 million, Exxon paid the damages itself, and then sued the carriers to recover what it paid.

(There is a purely rhetorical point that might be mentioned here, and a business point that must be raised. First, the court states that ExxonMobil paid the $24M “out of its own pocket.” That strikes me as an unfortunate and ontological misleading use of language. Individuals, and some animals, have pockets, inanimate objects do not. Corporate, and similar entities do not. Second, a cynical minded anti-insurer (and/or anti-capitalist) ideologue might assert that the insurers were simply averse to paying such a large sum for injuries to only two injuries. I do not hold such views, since I believe that most insurers most of the time try to pay claims in conformity with their contractual obligations, subject to their legal rights as business entities. I say this sincerely and with resolve, though I recognize that insurance companies in some way associated with AIG have – or have had – a widespread reputation for being at best compulsively frugal about paying claims or paying them anywhere near accurately. (This reputation is not restricted to insureds and intermediaries but includes – or has included – at least some other insurers.) In any case, in this case I am skeptical that the insurers conducted their claim handling in good faith. This is true even though it was liability policies that were at issue, and Texas does not apply the law of the common law of insurer bad faith to the claims handling process for liability policies.

Further Discussion of the Case Itself

ExxonMobil is a major player in the oil and gas industry. One of its facilities is now, and has been for many years, a refinery in Baytown, Texas. Exxon had an independent contractor, by the name of Savage Refinery Services, to do work at this plant. As is customary, the two companies had a “Service Agreement.” Part of the agreement pertained to insurance matters. Much of what I say about the Exxon-Savage arrangement comes from the Supreme Court’s opinion.

Here is part of what it said, as set forth according to the Supreme Court opinion:

“Savage promised to obtain at least a minimum stated amount of liability insurance for its employees and to name Exxon as an additional insured.i”

Obviously, Savage was seeking a way to obtain tort protection for its employees in case of a workplace disaster where, if it supplied insurance for employee injuries, it would be restricted to workers compensation insurance, whereas if Exxon provided liability insurance covering the employees, it would not be restricted to workers comp. (That involved a different insured as is not relevant to this decision).

A Quinn Commentary: This is as good a place as any to discuss “umbrella policies.” Many terms in insurance markets are on the flexible and/or vague “side.” Many such elements of industry jargon have confusing categorizations. The word (or phrase) “umbrella policy” is like that. Usually, that term suggests that an umbrella policy sits on top of another policy (or policies), but the coverage(s) found in it are broader than those found in the lower-level policy. That’s why it’s called an “umbrella.”  It is this broader reach that distinguishes an umbrella policy from being an excess policy. To say that one policy is excess of another is to say that its coverages are the same – or pretty much the same – as the coverages found in the policy or policies underneath it, and/or the primary policies. (Sometimes there is a stack of excess policies and the underwriter of the policy which is the 5th (or the X layer up, for example), will tie that policy to the immediately layer beneath it – e.g., the 4th layer excess policy – and that policy’s coverages are not identical to the primary policy). Arguably, an excess policy that does not have all the coverages that the primary policy has (or that has added on a few “extras” is not really an “excess policy,” though it may come close). Obviously, it is not an umbrella policy since it does not have coverages not found in the primary policy. Given the somewhat rough definitions I have laid out, if, what is usually called an “excess policy” contains at least one coverage not found a policy below it that policy would technically be an “umbrella policy.”  I am inclined to think that what I have very briefly laid out is sufficiently rare, that this technologically correct name (and description) would simply be ignored in professional discourse. I do not think I have ever seen such a thing.

What I have seen, however, is an insurance policy referred to as an umbrella policy which is actually a primary policy. Why would anyone with knowledge and experience create this confusion? Underwriter ignorance is one explanation. A desire to create the impression that the policy called an umbrella policy should not be treated as an ordinary, routine primary policy. An underwriter might think that such a policy might be interpreted in favor of the issuing insure. Now let us return to the particulars of the ExxonMobil v. NU & Starr case.

In 2013, there was a terrible industrial accident. At least two Savage employees suffered terrible burn injuries, and their damages were approximately $24M. The NU primary policy paid its policy limits, but both the umbrella policies denied coverage entirely. Exxon paid the unpaid millions and sought recovery from NU and Starr.

It was proceeding in part on the basis of the Service Agreement it had with Savage pursuant to which Exxon was an additional injured on Savage policies. The reason they denied coverage was that the coverage was specified in and only for the Service Agreement and not in all (and therefore not for) the other relevant insurance policies in this case, i.e., the ones in dispute in this case. The position of the carriers was that if the alleged coverage was not set forth in in each policy, it did not exist. The rest of the carriers’ argument was simple. The alleged coverage and other insurance matters were to be found in the Service Agreement, but it was not in the policy. It is easy to see what will happen next. (There were four injuries, but only two of them were relevant in this case.)

The Court’s short, unanimous, 11-page opinion made abbreviated refutation of this sophistry. In essence, the Court pointed out that for more than a century, there has been a string of cases holding that if a contract other than the insurance policy clearly fits within the contract of insurance, the courts are obligated to recognize its presence and influence on the policy. The fit must be so manifest that its presence was intended by the parties. And then, how is the “inserted” contract to be interpreted? Its meaning must be clearly determined by the meaning of the terms of the contract insurance into which the insertion was made.

Justice Young, writing the court states this: The long line of cases cited herein, and others, “reflect three basic principles for interpreting the meaning of an insurance policy: (1) we begin with the text of the policy at issue; (2) we refer to extrinsic documents only if that policy clearly requires doing so; and (3) we refer to such extrinsic documents only to the extent of the incorporation and no further. Any venture beyond the four corners of an insurance policy must be carefully limited to the scope of that policy’s clearly authorized reference.” See pp. 5-6 of the Opinion.

Another Quinn Comment: Notice the presence and use of the word ‘incorporation’.

Justice Young also observes that the insurers and the court of appeals make a deadly error of their analysis of the concept, idea, word, and use of the word “coverage.” They seem to think that since the umbrella policy makes it clear that that it contained no coverage other than what was to be found in the primary policy, the insured could not have a right to payments under that policy above the policy limits of the primary policy. Their position is absurd, Justice Young implies, because there is a fundamental difference between “coverage,” a term that applies to risk of injury, and “policy limits,” a term that refers amounts for which the carrier may be libel, assuming that there is coverage. Obviously, Justice Young points out graciously, these are quite distinct concepts.

On this basis at least the Texas Supreme Court reversed the court beneath it.

Justice Young and the court are absolutely correct that the concept of “coverage” and the concept of “policy limits” are different concepts, and that the term “coverage” applies to what is at risk, e.g., what events, etc.  However, once can see why an insurer might make the mistake made here by the carriers.  In common industry parlance, players refer to risk exposures that are above policy limits as not being covered. Here is a locution that is used, “Jones policy has been used in full. Policy totals are gone. Therefore, there is no coverage.” Of course, given the correct, more rigorous use of the term “coverage” a player who says this is making a mistake. But as I have pointed out, the ordinary use of language in the marketplace is not rigorous. The use of language “sloshes” around a good deal. Still, the court’s observations are correct. What might be a better way to handle this situation? Maybe, even though the court’s mode of reasoning is sound. Why not assert that the term “coverage” when used in insurance commercial language is ambiguous. If it is – and it certainly is – then its meaning is to be interpreted in favor of the insured. (Technically the way the idea of ambiguity is concerned the reasoning is more complicated than I just laid out, but a simple version is all that is needed here.)

Quinn’s Final Comment

This is a splendid opinion – well reasoned and correct. There might be one criticism. When Justice Young is discussing the incorporation of the ExxonMobil-Savage Service Agreement into the umbrella policies what he says sounds ambiguous. On the one hand, he makes it sound like the whole of the Service Agreement becomes part of the policy, but that only part of it can be used in deciding the case, namely the substance of it which the contract of insurance permits. On the other hand, he makes it sound like only part of the Service Agreement became part of the insurance contract, namely that part which can be used in making the court’s decision. Justice Young makes it clear that thinking about how to use a document sucked into or incorporated into the insurance contract is a two-step process. (Notice that the idea of incorporation is being used in this discussion).

First, a determination must be made as to whether the contract of insurance clearly authorizes the incorporation of the candidate for insertion, in this case, the Service Agreement.

Second, there must be a determination as to (a) which parts of the incorporated contract are to be considered, (b) how this is to be done, and (c) to what end, i.e., to what result. All three of these inquiries are to be determined by the substance of the contract of insurance into which the outside, external document has been drawn or inserted.

A Last Quinn Comment: the idea of a three-dimensional inquiry is mine. Justice Young names only two. He makes no reference to (c). Nevertheless, they are probably equivalent.

In this opinion the court does not make it clear that documents other than contracts may be the type of document which can be incorporated. Of course, the answer is “Yes,” and this very topic is not needed for the logic of the opinion to succeed. Nevertheless, if this important opinion were to have the kind of precedential value it deserves and which the economy may need for a variety of different reasons, an explicit line or two in the opinion would have been helpful.

Also, the principles set forth in this opinion and the other recent precedential opinions regarding the incorporation of one contract into another apply only to insurance policies. However, might the same principles (or variations on them) apply to any two (or more) types of contracts? (Or if not “any,” then “most,” “many,” or “some.”)?

Although it is not a matter of any consequence for the decision in this case, but Justice Evan Young is a person of very conservative judicial or as-a-matter-of-law orientation. That political fact made no difference in this decision in this case. This this decision was substantially in favor of the insured, something which many liberal lawyers are inclined to think is the opposite of a conservative, judicial ideology. At the same time, this was an inter business type of case. At the same time conservative business organizations penned and published an opposite point of view. Liberal lawyer might point out that this opinion is not likely to have any (or much) impact on insurance case decisions where the insured is an individual person).

A Quinn Question, Though Not a Comment. To what extent does the logic of the decision in this make it true that its conclusion applied to contracts other than contract of insurance, i.e, insurance policies.

The Court’s Line of Authority    

I shall discuss this line in chronological order, the order in which the Court listed the. Justice Young made it clear that the most recent cases were the most important to the Court’s reasoning. This line of authority is among the court’s arguments for its ultimate decision, so I shall follow straight through. I shall “tack on” a couple of cases that are even earlier than where the Court begins sketching its line of authority and one from a court of appeals. 

The first case in the line of cases upon which the court relies is Stoddard v. East Texas Fire Insurance Co, 1 S.W. 906 (Tex. 30 November 1886), is a very interesting case from a historical standpoint, namely the nature of warranties “imposed” on policyholders by insurers, as early as the Eighteenth Century. Their use was still alive, if not well, in 1886. 

Goddard’s business sustained a fire loss. There was no suggestion the fire was by set by Goddard or that Goddard had done anything amiss in presenting the claim, since there were sufficient records in Goddard’s control that were handed over to the insurer to get an accurate value as to the property destroyed.  

The problem in the case was that there was an endorsement added on to th 

Perhaps something is significant about the opinion of the First Circuit Court of Appeals Opinion. The Supreme Court was contemptuous of the opinion it reversed. Perhaps it should be sketched, “just for the historical record.” This may be done in another later Blog article. For now, the only important fact about the underlying decision is that the case as to the Starr defendant was settled there, before the entire case was dismissed – it having been reversed.