Recent Cases Involving First-Party Claims

Underinsured/Uninsured Motorists

A common first-party claim situation involves underinsured/uninsured motorist claims. A recent Dallas federal court applying Texas law illustrates this type of claim in Stoyer v. State Farm Mut. Auto. Ins. Co., 2009 U.S. Dist. LEXIS 15571, at *4 (N.D. Tex. Feb. 24, 2009) (mem. op.). There, the plaintiff claimed State Farm breached the contract by failing to pay her underinsured motorist claim under the policy's provisions. The plaintiff's "policy contained a provision for uninsured/underinsured motorists (UIM), providing coverage for 'damages which a covered person is legally entitled to recover from the owner or operator of an uninsured motor vehicle because of bodily injury sustained by a covered person, or property damage caused by an accident.'" In a motion to dismiss, State Farm contended that the plaintiff had failed to establish her legal right to recover by failing to prove a condition precedent to establishing a legal right to pursue her UIM claim—the third party's liability through a judgment (citing Brainard v. Trinity Universal Ins. Co., 216 S.W.3d 809, 818 (Tex. 2006)). Black's Law Dictionary (7th ed. 1999) defines a condition precedent is an act or event that must exist or occur before a duty to perform something promised arises. If the condition does not occur and is not excused, the promised performance need not be rendered.

The court observed that in the Brainard case, the Texas Supreme Court stated that neither filing suit against the UIM insurer nor demanding UIM benefits will trigger a contractual duty of the insurer to pay. The Texas Supreme court held in Brainard, that "an insurer in Texas has no contractual duty to pay benefits [on a UIM claim] until the insured obtains a judgment establishing the liability and underinsured status of the other motorist."

The court stated that it could find no previous determination of the driver's liability, and the plaintiff did not direct the court to any such evidence. The court, relying on the Brainard opinion, noted that no contractual duty can arise for the insurer until an insured obtains a judgment proving the other motorist's liability and underinsured status. Because there is no such judgment here, the court could not conclude that State Farm breached a contractual duty that never was triggered.

The plaintiff also alleged that State Farm knowingly failed to act in good faith to effectuate a prompt, fair, and equitable settlement of her claim once liability became reasonably clear. State Farm moved the court to dismiss these claims on the basis that the plaintiff failed to prove the condition precedent to establish her legal right to pursue a UIM claim.

Texas law provides that an insurer is liable for bad faith in denying or postponing a claim the insurer was reasonably clear was covered under the policy.

Source: Stoyer, 2009 U.S. Dist. LEXIS 15571, at *5 (citing Giles, 950 S.W.2d at 56)

The court held that a bad faith claim cannot survive absent the insurer's liability under the policy; however, if the insurer's conduct is extreme and causes injury in tort independent of the claim against the policy, the insurer's conduct may be deemed to be in bad faith.

The court found that the plaintiff might still be entitled to and recover UIM damages under the policy. As such, the court concluded State Farm's liability under the policy for UIM damages should be determined first, then the bad faith claims should be addressed. The court noted that with its granting of the motion to abate, (see Hurricane Ike and First-Party Litigation). State Farm represented that it waived its right to a judicial determination of the motorist's negligence for causing the collision and that the parties agreed to a trial on the issue of damages, if any, to determine the third party's status as an underinsured motorist.

Workers Compensation

Another first-party situation deals with workers compensation claims. In Texas Mut. Ins. Co. v. Ruttiger, 265 S.W.3d 651, 655 (Tex. App.—Houston [1st Dist.] 2008, pet. filed), the First District Court of Appeals in Houston analyzed a situation involving first-party claims related to workers compensation coverage. Texas Mutual challenged the trial court's judgment, entered after a jury trial, in favor of plaintiff, in plaintiff's suit for violations of the Texas Insurance Code, breach of the duty of good faith and fair dealing, and violations of the Texas Deceptive Trade Practices Act (DTPA). Texas Mutual raised several issues on appeal, including its contention that the evidence was legally insufficient to support the jury's findings that Texas Mutual:

• violated the Insurance Code by engaging in unfair and deceptive acts or practices;
• breached the common law duty of good faith and fair dealing;
• violated the DTPA; and
• "knowingly" engaged in unfair and deceptive acts or practices.

It further argued that no cause of action exists in Texas for breach of the duty of good faith and fair dealing in the context of a workers compensation claim.

As part of its common law duty, and as codified in the Insurance Code, an insurer has an obligation to conduct an adequate investigation before denying a claim. (See Hurricane Ike and First-Party Litigation.)

An insurer will not escape liability merely by failing to investigate a claim so that it can contend that liability was never reasonably clear.

Ruttiger (citing Giles, 950 S.W.2d at 56).

The court reasoned that an insurer does not act in bad faith when a reasonable investigation reveals the claim is questionable, and an insurer maintains the right to deny questionable claims without being subject to liability for the erroneous denial of the claim.

There can be no claim for bad faith when an insurer has denied a claim that is, in fact, not covered and the insurer has not otherwise breached the contract.

Ruttiger (citing Lundstrom v. United Servs. Auto. Ass'n, 192 S.W.3d 78, 96 (Tex. App.—Houston [14th Dist.] 2006, pet. denied).

The court observed that the Texas Supreme Court highlighted the appropriate legal sufficiency standard of review to be applied in insurance bad-faith cases in Minnesota Life Ins. Co. v. Vasquez, 192 S.W.3d 774, 777 (Tex. 2006). The court stated that, based on the Vasquez opinion, appellate courts should look at all the evidence, crediting favorable evidence if reasonable jurors could, and disregarding contrary evidence unless reasonable jurors could not. The court went on to espouse that:

[w]hether there is a reasonable basis for denial, … must be judged by the facts before the insurer at the time the claim was denied.

Ruttiger at 666 (citing Viles v. Security Nat. Ins. Co., 788 S.W.2d 566, 567 (Tex. 1990).

However, the court recognized that Texas Mutual's post-denial evidence may be relevant because there can be no claim for bad faith when an insurer has denied a claim that is, in fact, not covered and the insurer has not otherwise breached the contract.

Commercial Property

Yet another first-party scenario involves commercial property coverage. In In Re Acceptance Indem. Ins. Corp., 2008 Tex. App. LEXIS 1795, at *1 (Tex. App.—Corpus Christi, Mar. 13, 2008, petition denied), plaintiff sued Acceptance for breach of contract, breach of the duty of good faith and fair dealing, violations of the Texas Insurance Code, and DTPA. The plaintiff claimed commercial property damage for two properties under his commercial lines insurance policy with Acceptance. After an investigation, Acceptance issued two checks for the two properties.

On two separate occasions, plaintiff informed Acceptance that the estimates were too low, and each time, Acceptance obtained estimates and issued supplemental payments for each property. Plaintiff requested an additional amount of money, and Acceptance denied the claim.

The trial court ordered separate, or bifurcated, trials of the contractual claim and the extra-contractual matters. The court refused to abate discovery or sever the claims into separate lawsuits, and plaintiff filed for a writ of mandamus. (See Hurricane Ike and First-Party Litigation.)

The court found that the Texas Supreme Court held that, in certain circumstances, a severance may be required when a policyholder asserts a breach of contract claim and extra-contractual claims against an insurer who has made a settlement offer on the disputed contract claim, or when there are other compelling circumstances. The Supreme Court:

explained that an insurer may be unfairly prejudiced by having to defend the contract claim at the same time and before the same jury that would consider evidence that the insurer offered to settle the entire dispute.

In Re Acceptance (citing Liberty Nat'l Fire Ins. Co. v. Akin, 927 S.W.2d at 630 (Tex. 1996)).

When the insurer merely pays the portion of the claim it does not dispute, severance is not necessarily required.

Acceptance argued that each time payments were issued to the plaintiff, the payments were offers of settlement on the entire disputed contract claim, and plaintiff accepted the settlements by signing sworn proofs of loss. The plaintiff argued that the payments were on claims the insurer did not dispute, were not settlement offers, and only a portion of the contract claim remained in dispute. Acceptance alleged that while bifurcation would ensure that settlement offers Acceptance made to plaintiff would not be introduced to the jury on the contractual claims, but that bifurcation and refusal to abate discovery does not remedy the prejudice, expense, and effort on the extra-contractual claims.

Abatement of the discovery on a bad faith claim necessarily accompanies severance because the scope of permissible discovery differs in the two types of claims. This is true when the extra-contractual claim is based solely on an alleged bad faith denial. The record in this original proceeding is unclear, however, as to whether plaintiff's extra-contractual claims are based solely on an alleged bad faith denial of his claim, on some other conduct, or both. The court held that, based on this record before it, it did not appear that a judgment for Acceptance on the breach of contract claim would necessarily render the extra-contractual claims moot.

Homeowners

The final common scenario for first-party claims in Texas involves homeowners insurance. In State Farm Lloyd's v. Hamilton, 265 S.W.3d 725, 727 (Tex. App.—Dallas 2008, petition filed), Lloyd's appealed the trial court's judgment in favor of its insureds. State Farm challenged the sufficiency of the evidence to support the jury's findings of breach of contract, cost of repair damages, extra-contractual violations, and mental anguish damages. The key dispute in the case involved dueling expert opinions over whether foundation damage was caused by a plumbing leak. The homeowners policy provided coverage to the plaintiffs for foundation damage if and only if the damage was caused by a plumbing leak.

The court agreed that State Farm breached its contract with the plaintiffs. The court then turned to the extra-contractual claims, noting that an insurer does not breach its duty of good faith merely by erroneously denying a claim.

[A]n insurer's reliance on an expert report, standing alone, will not necessarily shield the carrier if there is evidence that the report was not objectively prepared or the insurer's reliance on the report was unreasonable.

Hamilton, citing State Farm Lloyd's v. Nicolau, 951 S.W.2d 444, 448 (Tex. 1997).

The court further found that:

[i]n this case, the fact-finder concluded that State Farm acted in bad faith by failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim when its liability had become reasonably clear. State Farm argues the evidence is both legally and factually insufficient to support the jury's findings of extra-contractual liability. According to State Farm, the [plaintiffs'] extra-contractual claims are based on a single allegation: that State Farm hired a biased and non-independent engineer … to investigate the claim. State Farm, of course, disputes that [the expert] was biased in favor of State Farm when he performed his investigation. It points to the testimony of [the claims representative], [the expert], [the expert's employee], and [State Farm's claims team manager], all of whom testified to [the expert's] independence and to the fact that they did not keep track of "outcomes" or "percentages" when it came to [the expert's] opinions. The jury could have believed or disbelieved any part of that testimony. There was also evidence that: [the expert] was on the list of State Farm's approved engineers; more than 50 percent of [the expert's] business came from State Farm; [the expert] investigated 1440 claims for State Farm; State Farm had paid [expert's] company more than $3 million between January 1999 and December 2003; [the claim representative] had been using [the expert] for 10 years; and [the expert] had never testified against State Farm's interests. All of the witnesses who were asked testified that independence was important in this kind of investigation. Thus, if jurors believed [the expert] was not independent, they could have reasonably concluded his report was not objectively prepared and that it was not reasonable for State Farm to rely on it.

Id.

The court further found that the jury could have perceived conflict within the expert's report and perceived an incomplete basis for some of the report's conclusions.

Conclusion

The insurance industry will be closely scrutinized as a result of various coverage disputes that have arisen in the aftermath of Hurricane Ike. Though it is unlikely that courts will rewrite the policies and construe them in favor of coverage, the courts may be more inclined to address the uninsured losses by other remedies, such as extra-contractual liability for alleged unfair underwriting and claims handling efforts on the part of the insurance industry. Undoubtedly, the effect of Hurricane Ike could be not only catastrophic in loss of lives and property, but also a driving force in changing the insurance industry.