EL PASO COURT OF APPEALS HOLDS TRIAL COURT ERRED IN DENYING MOTION TO SEVER EXTRA- CONTRACTUAL UNDERINSURED MOTORIST CLAIMS FROM CONTRACT CLAIMS BUT PROPERLY DENIED ABATEMENT

August 20, 2012

In an underinsured motorist lawsuit, State Farm sought mandamus relief from the trial court’s order denying its motion to sever the plaintiffs’ breach of contract claim from their extra-contractual claims and its motion to abate the extra-contractual claims pending resolution of the breach of contract claim. In In re State Farm Mut. Auto. Ins. Co., --- S.W.3d --- 2012, WL 3195099, No. 08–12–00176–CV. (Tex. App.—El Paso, August 8, 2012),  the El Paso Court of Appeals denied mandamus relief with respect to the portion of the trial court’s order denying abatement, but conditionally granted mandamus relief with respect to the portion of the trial court’s order denying severance.

In the underlying action, Rosa Duran was injured when struck by an underinsured motorist while walking through the parking lot of a shopping center.  Rosa settled her claim with the underinsured motorist, accepting the full amount of liability insurance the motorist had in force at the time of the accident.  Rosa then made a claim on two separate State Farm policies, one issued to her husband Alfonso Duran and the other to her daughter Cecilia Duran. State Farm offered Rosa $7,500 to settle both claims.  The Durans did not accept the settlement offer and sued State Farm for breach of the insurance policies, violations of the Deceptive Trade Practices Act and Chapter 542 of the Insurance Code, and violations of the common-law duty of good faith and fair dealing. The Durans sought $50,000 in damages—$25,000 from each policy— for Rosa’s injuries and for Alfonso’s claims of loss of consortium and of household services.

State Farm moved to sever and abate arguing that severance and abatement of the Durans’ extra-contractual claims from their contract claim pending resolution of the contract claim was necessary to avoid the prejudice it would suffer in defending both claims in a single trial. The trial court denied State Farm’s motion.

On appeal, State Farm argued that because it offered to settle the Durans’ entire contract claim, the trial court should have severed and abated the Durans’ extra-contractual claims from their contract claim. And by failing to do so, the trial court abused its discretion.  The Court of Appeals agreed that the trial court should have severed Durans’ extra-contractual claims, stating that severance is required when an insurer offers to settle the entire contract claim so as to avoid the unfair and prejudicial dilemma an insurer faces in simultaneously defending against a contract claim and extra-contractual claims.

As to abatement of the extra-contractual claims, however, the El Paso Court of Appeals stated that no rule of law mandates that a trial court abate extra-contractual claims when it orders severance of such claims from a contract claim.  Rather, in determining whether extra-contractual claims should be abated until a contract claim becomes final, the trial court should abate if the movant can show that abatement will: (1) promote justice; (2) avoid prejudice; and (3) promote judicial economy. Tex. Farmers Ins. Co. v. Cooper, 916 S.W.2d 698, 701 (Tex.App.-El Paso 1996, orig. proceeding).

The Court disagreed with State Farm’s reliance on Brainard v. Trinity Universal Ins. Co., 216 S.W.3d 809 (Tex. 2006), stating that Brainard does not address when abatement of extra-contractual claims in an uninsured/underinsured case is required. Rather, Brainard addressed whether an insured can recover attorney’s fees from his or her uninsured/underinsured insurer if the insured fails to establish the underinsured motorist’s fault and the amount of damages. Brainard, 216 S.W.3d at 818.   In this case, however, the Court found that there was no dispute that the Durans reached a policy limits settlement with the underinsured motorist, thereby proving the negligence and underinsured status of the motorist.   The Court noted that the case of Liberty Nat’l Fire Ins. Co. v. Akin, 927 S.W.2d 627, 631 (Tex.1996), squarely addressed the issue of abatement in the context of an uninsured/underinsured case and held that abatement of a bad faith claim until all appeals of a contract claim are exhausted was not required as a matter of law.

The Court ultimately determined that State Farm failed to carry its burden of showing that it would be prejudiced in defending against the Durans’ contract claim while defending against their extra-contractual claims and that abatement would promote justice, avoid prejudice, and promote judicial economy. Accordingly, the Appellate Court held that abatement of the Durans’ bad faith claims was not required and the trial court did not abuse its discretion in refusing to abate the Durans’ extra-contractual claims.