Expert Commentary

Burden of Proof in Coverage Litigation (Part 3)

Part 1 of this series dealt with the burden of proof of showing that a claim initially was covered by the policy. Part 2 dealt with the placement of the burden of proof for an exclusion. Part 3 deals with two separate issues. The first is who has the burden of proof to prove an exception to an exclusion. The second is who has the burden of proof to show that the person claiming coverage under the policy is indeed an insured. This article will deal primarily with Texas law. However, it should be noted that the placement of the burden of proof on these two issues is the same in most other jurisdictions. Part 4 addresses who has the burden of proof to show that a claim falls within the policy period and the burden of proof on causation and allocation of damages.


Courts and Coverage
April 2014

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.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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