TX Supreme Court Evaluates Terms of “Follow Form” Excess Policy Independently From Underlying Policy

In December 2024, the Texas Supreme Court held in Ohio Casualty Insurance Co. v. Patterson-UTI Energy Inc. et al. that an excess insurer had no obligation to reimburse an insured’s defense costs under the terms of a “follow form” excess policy, even though the underlying insurer agreed to pay defense costs under the terms of the underlying policy.

The ruling puts Texas insureds and insurers on notice to carefully review the terms of each individual policy, even if an excess policy follows form of the policies beneath it.

In Patterson, the insured was served with several lawsuits and sought defense and indemnity coverage from various insurers. The insurers included:

• An underlying insurer who issued underlying insurance
• Ohio Casualty Insurance Company, which issued the subject “excess policy” written on a follow-form basis

Defense costs and settlements exhausted all underlying insurance. Ohio Casualty funded portions of the settlements under the excess policy but refused to indemnify the insured for any defense costs or expenses. 

The insured filed suit against Ohio Casualty for breach of contract and bad faith violations of Texas’ Insurance Code. The insured prevailed at both the trial court and intermediate appellate levels. The courts found that the excess policy:

• Followed the form of the underlying insurance and therefore covered defense expenses
• Did not clearly and unambiguously exclude coverage for defense expenses

Ohio Casualty petitioned the Texas Supreme Court, which agreed to hear the case. It reversed the underlying rulings and rendered judgment in favor of Ohio Casualty.

In an effort to control the priority in which the court should interpret the contracts, the insured argued that excess insurers and therefore the court are bound by the terms of underlying insurance, which must be considered first. The insured then argued that Ohio Casualty was obligated to cover defense costs because the underlying insurers were so required.

The Patterson court “emphatically reject[ed]” that argument. It started its analysis with the text of the excess policy and looked at the underlying insurance only to the extent that the parties agreed to incorporate such terms into the excess policy. 

The Patterson court noted that “follow form” excess policies can be written to adopt underlying policy terms in toto or differently with unique terms and conditions. Critically, the underlying insurance in Patterson covered “ultimate net loss,” which expressly included defense costs. But the excess policy only covered “loss,” which it defined as “sums actually paid in the settlement or satisfaction of a claim which [the insured was] legally obligated to pay as damages after making proper deductions for all recoveries and salvage.” The term “loss” did not expressly include defense costs.

The Patterson court explained that to constitute “loss,” the insured was legally bound to pay that amount “in the settlement or satisfaction of a claim ... as damages.” As a result, the court stated that, unlike the underlying policy, the “excess policy confine[d] its coverage to sums paid to an adverse party…[and]… d[id] not cover fees [the insured] paid its own attorneys.”

In arguing for coverage of defense costs, the insured noted that two exclusions contained in the excess policy (related to asbestos and pollutants) precluded coverage for attorney’s fees. The insured contended that these references to attorney’s fees supported the conclusion that defense costs must be included as covered “damages” if they have to be excluded. The Patterson court disagreed and stated that the references to attorney’s fees in those exclusions “were understandable redundancies designed to eliminate any conceivable doubt—not surplusage that would alter our interpretation of the rest of the policy.”

What does this mean for insurers and policyholders?

On one hand, the Patterson decision is uncontroversial to the extent it simply confirms a fundamental aspect of contractual interpretation, i.e., that every policy is unique and must be carefully considered based on its own unique terms. To that end, Patterson serves as a reminder to policyholders to review the terms of all their policies to ensure they are consistent with their intent. If identical coverage is desired, make sure all excess policies truly “follow the form” of underlying insurance on the exact same terms. For excess insurers, their position may be different than that of underlying insurers. In that case, policyholders must be aware that just because the primary insurer asserts a coverage position, this does not mean it will be held by the excess insurer as well.

On the other hand, Patterson could have significant implications on contractual relationships, including for additional insureds. For example, primary policies routinely include “primary and non-contributory” endorsements in favor of additional insureds. If, as the example goes, a “follow-form” excess policy has its own “other insurance” provision, an excess carrier could take the position that the additional insured does not enjoy the same primary and non-contributory benefits, despite following the form of the primary policy.    

Contact Jared Douthit, Sara Nau or any member of the Phelps insurance team with questions or for advice and guidance.