HOUSTON COURT OF APPEALS AFFIRMS COMMERCIAL IKE DAMAGE AWARD & FINDING OF KNOWING CONDUCT
In the wake of a policyholder verdict which included findings of Insurance Code violations and knowing conduct by the insurer, Houston’s Fourteenth Court of Appeals affirmed the verdict in most respects last Thursday. This result will very likely be appealed to the Supreme Court of Texas and there is a good chance the Supreme Court will accept the petition, paving the way for potential reversal. In United Nat’l Ins. Co. v. AMJ Investments, LLC, ---S.W.3d ---, No. 14-12-00941-CV, 2014 WL 2895003 (Tex. App.—Houston [14th Dist.] June 26, 2014, no. pet. h.), AMJ alleged that United had knowingly underpaid its claim for hurricane Ike damage to a seven-story office building. At trial, AMJ presented evidence that United’s adjuster, Sheffield, retained an expert building consultant, UBS, who prepared a repair estimate, with which AMJ’s adjuster agreed. But instead of relying on that estimate, Sheffield prepared his own lower estimate based on an engineering report from Rimkus and used it as the basis of United’s payment.
The jury found both breach of contract and Insurance Code violations, but awarded identical damages of $300,000 for both causes of action, and AMJ elected to recover the Insurance Code damages. The jury also awarded treble damages of $600,000 based on a finding of knowing conduct, 18% interest under Insurance Code Chapter 542, and attorney fees totaling approximately $160,000. On a legal and factual sufficiency challenge, the Court of Appeals concluded that evidence in the record supported the jury’s finding because reasonable jurors could have concluded the parties agreed the claim would be paid based on the UBS estimate, but United then refused and paid based on Sheffield’s lower estimate.
Relying on the general rule that reliance on an expert is not evidence of bad faith, United argued it could not have committed bad faith because it relied on the causation findings of the Rimkus engineering report. The Court of Appeals disagreed and pointed out that in some circumstances use of an expert will not necessarily shield an insurer from a finding of bad faith. The court held the jury could have concluded that United agreed to pay based on the UBS repair estimate, and that choosing the contrary opinion of Rimkus over UBS was bad faith.
United also argued that AMJ had not sufficiently proven its damages because it relied solely on Xactimate estimates, and no witness testified that the figures in those estimates were reasonable and necessary repair costs. Although this argument has previously persuaded the Supreme Court of Texas, the Court of Appeals disagreed because both parties relied on Xactimate and there was some evidence the parties had agreed that Xactimate would be the method of determining the cost of repair. Additionally, the jury was not asked to find the “reasonable and necessary” cost of repair, and neither party requested the phrase “reasonable and necessary” be included in the jury charge.
United also argued there could be no extra-contractual liability without a showing of an independent injury apart from the plaintiff’s claim for policy proceeds. Thus, because the jury awarded identical amounts for the contract cause of action and the Insurance Code cause of action, United asserted AMJ could not recover on its statutory claim. However, the Court of Appeals disagreed, relying on one of Texas’s seminal bad faith opinions, Vail v. Texas Farm Bur. Mut. Ins. Co. for the proposition that a policyholder may elect to recover its damages under a breach of contract theory or a statutory violation theory. The court flatly rejected arguments that more recent opinions of the Supreme Court of Texas in fact require a showing of an independent injury.
On the other hand, the Court of Appeals reversed the verdict in two respects. The court held that the 18% “enhanced interest” under Insurance Code Chapter 542 had been improperly calculated based on a trigger date that was too early, and the interest began to accrue after United received all items needed to secure final proof of loss, not after the first date that AMJ asserted United should have paid the entire loss. This resulted in a reduction of the interest accrual period by about six months, eliminating approximately $45,000 in awarded interest.
Second, the Court of Appeals held that AMJ’s attorney fees were not supported by sufficient evidence. AMJ calculated its claimed attorney fees based on the “lodestar” method, which calls for the reasonable number of hours spent by the attorney to be multiplied by the attorney’s reasonable hourly rate. The court initially pointed out that the lodestar method is only required in cases decided under the Texas Commission on Human Rights Act, and AMJ’s counsel chose to use the lodestar method even though it was not required here. However, the lodestar method still requires the attorney to present specific evidence of the time expended on specific tasks. The court concluded that AMJ’s counsel did not present adequately detailed evidence of the time spent on specific phases of the litigation, and remanded the attorney fee award for further fact-finding by the trial court.
In a ten-page dissent, Justice Donovan argued that the verdict should have been reversed and AMJ should have taken nothing because McGinty v. Hennen, distinguished by the majority, in fact controlled the standards AMJ must meet to prove its damages. Because AMJ did not prove the figures in the Xactimate estimate were reasonable and necessary, Justice Donovan argued there was no evidence to support AMJ’s actual damages, and thus no basis for any other aspect of the award. Justice Donovan pointed out that the jury charge did in fact incorporate the “reasonable” standard in its statement, “What sum of money… would fairly and reasonably compensate AMJ for its damages…” Additionally, Justice Donovan opined that widespread use of Xactimate in the industry, and by both these parties, does not establish by itself that the figures in an Xactimate estimate are reasonable or necessary.
[Editor’s Note: AMJ was represented by Gravely & Pearson of San Antonio at trial. United National was represented by Tucker, Taunton, Snyder & Slade of Houston in the trial court, and by Strasburger & Price on appeal. The appellate court rulings on the “independent injury” issue and the “knowing” finding are both very significant. We presume the case will now proceed to the Texas Supreme Court. Given the lower court’s efforts to distinguish prior supreme court precedent on several key issues, we are hopeful the high court will take the case and use it to further clarify Texas law regarding the extra contractual claims. This case will certainly be watched carefully as the anticipated appeal to the Supreme Court of Texas proceeds and, as always, we will keep our readers updated on any further development.]
 The jury attempted to award $1 million in treble damages for knowing conduct, but this amount was reduced to the statutory cap of two times economic damages.
 See McGinty v. Hennen, 372 S.W.3d 625 (Tex. 2012).
 754 S.W.2d 129 (Tex. 1988).
 In fact, the Supreme Court of Texas has held in a more broadly applicable opinion that a contingent fee agreement, standing alone, cannot support an award of attorney fees, and the reasonable fee must be determined in light of a non-exclusive list of factors which were not considered here. See Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812 (Tex. 1997).