Texas Court Ruling on Insurance Dispute: The Complexities of Additional Insured Coverage

In a pivotal decision for insurers and corporate policyholders, a Texas appellate court has reversed a $25 million summary judgment previously awarded to Exxon Mobil Corporation and ExxonMobil Oil Corporation in their protracted legal dispute with Lexington Insurance Company. This case highlights the intricate nuances of insurance coverage, particularly concerning additional insureds and policy exclusions. The ruling addressed the complexities surrounding coverage rights under an umbrella liability policy and the implications of statutory employee status under Texas law. The dispute originated from an explosion at Exxon’s Beaumont, Texas refinery in April 2013 during a maintenance project, for which Exxon had engaged Brock Services, Ltd. to provide scaffolding services. Under their service agreement, Brock was acknowledged as an independent contractor and tasked with obtaining various insurance coverages, including workers’ compensation, employer’s liability, and commercial general liability (CGL) policies, naming Exxon as an additional insured. Notably, Exxon retained the option to secure these insurances on Brock’s behalf, opting to do so through an Owner Controlled Insurance Program (OCIP).

Exxon procured the appropriate workers’ compensation and employer’s liability policies that covered Brock and its employees under the OCIP. When three Brock employees suffered injuries in the explosion, they received workers’ compensation through the OCIP but subsequently sued Exxon for their personal injuries. Exxon settled these claims for approximately $35 million and sought to recoup $25 million from Lexington via the umbrella policy issued to Brock. Claiming its additional insured status, Exxon emphasized Lexington's obligation to provide coverage. However, the Lexington policy featured a binding arbitration clause for resolving interpretative disputes, which compelled Exxon to submit to arbitration following a prior appellate court's directive. The three-member arbitration panel, comprised of two party-appointed arbitrators and a neutral umpire, recognized Exxon as an additional insured but deferred the decision on policy exclusions to the courts.

The trial court initially affirmed the arbitration award and granted Exxon a summary judgment, entitling it to the full $25 million of the Lexington umbrella policy, alongside prejudgment and post-judgment interest and attorney fees. On appeal, Lexington challenged this ruling, contending that even if Exxon was an additional insured, the policy's 'Employer’s Liability' exclusion negated coverage. Furthermore, Lexington disputed the trial court's decision to award interest and fees. The appellate court in Beaumont sided with Lexington, asserting that Exxon was considered a statutory employer of Brock's injured workers under Texas Labor Code § 406.123, as it had provided workers' compensation coverage through the OCIP. This statutory employer status activated the policy’s Employer’s Liability Exclusion, barring coverage for bodily injuries to an 'employee' of the insured that arose out of employment activities. The court reasoned that the exclusion applied irrespective of whether Exxon faced a lawsuit as an employer or in another capacity. Since Exxon was identified as a statutory employer, and the injured employees performed their duties at Exxon’s worksite under the OCIP, the exclusion decidedly applied.

Lexington further argued that the policy’s Workers’ Compensation and Similar Laws Exclusion precluded coverage for obligations under workers’ compensation statutes. The appellate court dismissed this argument, clarifying that Exxon was not seeking coverage for obligations under workers’ compensation law but for indemnity related to third-party injury claims, thus not triggering this particular exclusion. Nonetheless, due to the activation of the Employer’s Liability Exclusion, the court concluded Lexington was under no duty to defend or indemnify Exxon. Hence, Exxon was not entitled to any portion of the policy limits, interest, or attorney's fees, leading to the reversal of the judgment and a directive that Exxon receive nothing. This decision underscores the critical importance for insurers and corporate risk managers to thoroughly evaluate OCIP arrangements and comprehend the interaction between statutory employer designations and policy exclusions. It also serves as a crucial reminder that while umbrella policies offer broad coverage, they are not impervious to specific exclusions embedded within statutory frameworks. The appellate court's reversal clarifies that umbrella coverage cannot be leveraged to bypass the liability restrictions within Texas’s workers’ compensation system when employer coverage is procured through an OCIP. This case, Lexington Insurance Company v. Exxon Mobil Corporation and ExxonMobil Oil Corporation, underlines profound implications for the application of exclusion clauses within insurance policies, particularly in states with stringent workers’ compensation laws.