United States: Texas Supreme Court Reverses $71 Million Judgment And Upholds Policy Exclusion For Leased-In Workers

Case:    Seger v. Yorkshire Insurance Co., Ltd.
             Texas Supreme Court
             2016 Tex. LEXIS 503, 59 Tex. Sup. J. 1208

Randall Seger died in 1992 while working on a hydraulic-lift drilling rig, owned by Diatom Drilling Co., L.P., that suddenly collapsed. At the time of the accident, Seger was employed by Employer's Contractor Services, Inc. (ECS), an oilfield service company. ECS's president and founder, Cynthia Gillman, was also Diatom's general partner. Diatom could not afford workers' compensation insurance for all of its employees. So, Gillman established an arrangement under which ECS employed the drilling workers and, as Diatom's independent contractor, provided those workers to Diatom. Neither Diatom nor ECS furnished workers' compensation insurance for the drilling workers.

Diatom and ECS were insured only under a CGL policy issued by fifteen offshore insurers that provided a maximum of $500,000 of coverage for any one bodily injury accident or occurrence, and contained a condition "Excluding Leased-In Employees/Workers." The policy also excluded employees, but included independent contractors, and provided that the CGL Insurers "shall have the right and duty to defend any suit against the insured seeking damages."

Following his death, Seger's parents sued Diatom, which demanded that its CGL insurers defend the litigation. The insurers denied coverage, relying upon the exclusion for leased-in employees/workers. The Segers made several offers to settle the case within policy limits. The CGL Insurers continued to deny that Seger's death was a covered occurrence, notified Diatom that two of the CGL Insurers had become insolvent and therefore the demand exceeded policy limits, and refused to provide a defense or settle the case. Before trial, the last offer the Segers made was for $250,000. The CGL Insurers again declined to accept the settlement offer.

Before trial, Diatom's counsel withdrew from the case, claiming that Diatom was "unable to pay attorney fees." Thus, Diatom appeared at trial only through Gillman, its general partner, who is not a lawyer and had been subpoenaed to appear as a witness. Diatom did not announce ready when the proceeding was called, presented no opening or closing argument, offered no evidence, and did not cross-examine any witnesses. Gillman testified and was excused after her testimony. The CGL Insurers did not attend or participate. The Segers presented evidence to prove both Diatom's liability and damages. After a full day of hearing evidence, the trial court found Diatom liable for Seger's death and awarded $15 million, plus interest. Diatom then assigned to the Segers its rights against the CGL Insurers.

The Segers filed a Stowers action against the CGL insurers, seeking damages for wrongful refusal to defend the insured and negligent failure to settle the Segers' claim. Under Texas law established in G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544, 547–48 (Tex. Comm'n App. 1929, holding approved), an insurer can be liable for failing to accept a settlement demand that an ordinary prudent insurer would accept within its policy limits that would release the insured from an excess judgment. The insurers, in response, filed a third-party claim for declaratory relief arguing that the policy excluded coverage for the insured's leased-in workers and that they had no duty to defend.

The Stowers case was eventually tried, and the trial court entered a $37,213,592.01 final judgment in favor of the Segers. The insurers appealed, and the court of appeals found the CGL policy "excluded liability for injury or death to leased-in employees/workers." The appellate court remanded the case to the trial court for a determination of whether the exclusion applied. After trial on remand, the trial court entered a judgment that the Segers' claims were covered by Diatom's CGL policy. The trial court awarded damages to the Segers in the amount of $71,696,547. The Insurers appealed again.

The Texas Supreme Court then reviewed the case, and pointed out, although the parties' focus had been on damages, the Segers could not be entitled to any damages unless they establish all elements of a Stowers cause of action, the first of which was whether coverage was in place under the policy.

To prevail under the Stowers action here, the Segers had the burden to prove that Randy Seger was an independent contractor or other third party, since the Diatom CGL policy expressly excluded bodily injury to any employee of the insured arising out of and in the course of his employment by the insured. Diatom's CGL policy further excluded "Leased-in Employees/Workers." The Diatom CGL policy did not define leased-in employees or workers, and there was no generally accepted definition of leased-in worker or leased-in employee.

The Supreme Court concluded that the evidence conclusively proved that Seger was a leased-in worker as a matter of law, pointing out there is no doubt that Seger was a person who performed work as a derrick hand and that there was an agreement in place with another company, titled "Contract for Personnel Services," allowing the temporary use of the worker. The agreement stated that leasing company would "provide [the drilling company] with all necessary personnel for the operation of one or more drilling rigs in accordance with the needs of [the drilling company]." Under these terms, leasing company would provide the drilling company with workers only "as needed" depending on the drilling company's project. Not every worker was necessary for every stage of drilling company's drilling business, so the use of each worker was only temporary.

Consequently, the Court held that Seger was a leased-in worker as a matter of law, the Segers' claimed loss was therefore excluded from coverage under the CGL policy and their Stowers action failed as a result. 

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