While Rule 94 of the Texas Rules of Civil Procedure and Section 554.002 of
the Texas Insurance Code made it clear that the insurer had the burden of
pleading and proving policy exclusions, the provisions did not address which
party had the burden to prove the applicability of an exception to a policy
exclusion. As noted by the citation above, the court in Telepak v. United Servs. Auto. Ass'n, 887 S.W.2d 506
(Tex. App.—San Antonio 1994), recognized the new rule that the insurer bears
the burden of pleading and proof as to policy exclusions. But the case also
laid down a new rule with respect to exceptions to those policy exclusions.
In Telepak, the insurer provided an "all
risks" homeowners insurance policy to the Telepaks. The policy contained
exclusions from coverage for damage resulting from settling or cracking of the
foundation. However, an exception to the policy provided that the exclusion
would not apply to settling caused by accidental leakage from an
air-conditioning system. There was no dispute that the damage occurred as a
result of the settling of the foundation, but the Telepaks argued that the
settling itself was caused by water that leaked from an air conditioner, thus
falling under an exception to the policy exclusion.
The jury answered "No" to the following charge: Do you find that
the damage to the Telepaks' residence was caused by an accidental
discharge, leakage, or overflow of water from within an air-conditioning
system?
On appeal, the Telepaks argued that the jury charge improperly placed the
burden of proof on the insureds to negate the application of the policy
exclusion. The court first looked to the language of the policy exclusion and
then-current Article 21.58(b) of the Insurance Code and found that neither was
ambiguous. Thus, the court applied the statute based on its express language
and determined that an exception to an exclusion is not "language of
exclusion" or an "exception to coverage" as those terms are used
in the statute.
According to the court, an exception to an exclusion "creates coverage
rather than excluding or limiting it." Thus, as a coverage issue, "it
was incumbent upon the insured to demonstrate the existence of facts supporting
the air conditioner exception to the exclusion. In other words, it was
incumbent upon the insured to prove that his loss was in fact covered by the
policy." In addition to recognizing that the insured had the burden of
proving policy exceptions, the court mentioned in passing that the insured
needed to prove this by a "preponderance of the evidence." It also
stands to reason that if the Telepak court
concluded that an exception to an exclusion creates coverage, the insured would
also bear the burden of pleading the exception. This is consistent with the
rationale of the insured bearing the burden of showing the claim initially
falls within the coverage of the policy.
Since Telepak, other Texas courts have
recognized and applied the rule that the insured must prove exceptions to
exclusions—for example, Gilbert Tex. Constr., L.P. v.
Underwriters at Lloyd's London, 327 S.W.3d 118 (Tex. 2010);
Kelly v. Travelers Lloyds of Tex. Ins. Co., 2007
Tex. App. LEXIS 1320 (Tex. App.—Hous. 14th Dist. Feb. 22, 2007, no
pet.) (mem. op.); Venture Encoding Serv., Inc. v.
Atlantic Mut. Ins. Co., 107 S.W.3d 729 (Tex. App.—Fort Worth 2003,
no pet.); Wallis v. United Servs. Auto.
Ass'n, 2 S.W.3d 300 (Tex. App.—San Antonio 1999, pet.
denied).
While the legislature has not addressed this issue, the Texas Supreme Court
and numerous courts of appeals have. They have been consistent in their holding
that the insured has the burden of proving an exception to an exclusion. This
would mean that the insured would have the burden of obtaining a jury finding
or fact finding that the exception to the exclusion applied. Failure to do so
would mean that the insured had not carried its burden of proof.
Who Is Insured
One issue that frequently occurs in coverage litigation is the question of
who is an insured. Most policies contain specific provisions or definitions
stating who will qualify as an insured under the policy. In order to be
entitled to recover under a policy, the plaintiff must show that it qualifies
as an insured. As a result, the insured bears the initial burden of proving
coverage under the policy. As part of that burden, the party seeking to recover
must prove exactly who is an insured under the terms of the policy.
See Houston Gen. Ins. Co. v. Owens, 653 S.W.2d
93 (Tex. App.—Amarillo 1983, writ ref'd n.r.e.). Owens ran a
trucking company, originally in his own name but later incorporated as Ralph
Owens Trucking Company. Houston General provided an excess policy to Owens, and
the named insured was Ralph Owens, not the corporation. However, Owens'
agent discussed with Houston that Owens was incorporating, and Houston later
delivered the excess policy. Owens later bought a truck in the
corporation's name, and this truck was involved in an accident with Dean,
who sued the company and driver for $1.5 million. Houston denied liability,
contending that Owens had coverage but the corporation did not. The lawsuit
settled for $269,000 and Owens sought to recover $19,800, the settlement amount
that exceeded the underlying limits. The jury found for Owens, and the trial
court rendered judgment.
On appeal, Houston argued that the trial court had erroneously reformed a
contract to provide coverage for an unnamed entity, the corporation.
Id. at 97. The court of appeals began by noting that Owens, as the
insured, had the burden to prove that the corporation was covered by the
policy: "To recover on the policy in the face of the general denial
interposed by Houston General, Owens and the corporation had to establish,
under their pleadings, that (1) the corporation was an insured under the
policy...."
The excess policy defined "insured" to include any organization
named in the underlying insurance, and the corporation was indeed named in the
underlying policy. Thus, by definition, the corporation was an insured under
the excess policy, and by producing the underlying and excess policies, Owens
carried his burden of proof.
Later, in Grain Dealers Mut. Ins. Co. v.
McKee, 943 S.W.2d 455 (Tex. 1997), the sole shareholder of a corporation
sought coverage for his daughter for injuries she sustained in an automobile
accident. McKee's corporation was the named insured under the policy
declarations, but two separate endorsements provided additional categories of
insureds, including "You and any designated person and any family member
of either" and "You or any family member while occupying or when
struck by any auto." Id. at 457. McKee attempted to argue that
his daughter was an insured under these endorsements because she was a family
member of an insured. While the trial and appellate courts agreed with McKee,
the supreme court reversed, stating that by the clear terms of the policy, the
named insured was the corporation, not McKee. McKee attempted to argue that as
the sole shareholder of the corporation, he was really the "you" for
purposes of the policy. But the court disagreed, stating that his status as the
sole shareholder did not equate him with the insured company. As a distinct
legal entity, the corporation could not have a "family member"; thus,
McKee could not meet his burden to show that his daughter was an insured.
Conclusion
What does this mean? If there is a dispute about whether the plaintiff is an
insured under the terms of the policy, the plaintiff has the burden of pleading
that it is an insured. The plaintiff has the burden of bringing forward
evidence that it is an insured. And finally, the plaintiff has the burden of
securing a finding from the trier of fact that would establish that the
plaintiff qualifies as an insured under the terms of the policy.
Note: See Part
5 of this article.