FIFTH CIRCUIT FINDS THAT INSURER CANNOT AVOID PROMPT PAY PENALTIES BY POINTING TO INFORMATION THAT WAS NOT PROVIDED BY INSURED BUT DID NOT AFFECT CLAIM DECISIONS

In Weiser-Brown Operating Co. v. St. Paul Surplus Lines Ins. Co., No. 13–20442, 2015 WL 5449134 (5th Cir., Sept. 16, 2015) the Fifth Circuit weighed in on Prompt-Payment liability under Chapter 542 of the Texas Insurance Code and on trial court ruling related to “bad faith” experts. This case involved an insurance dispute between Weiser–Brown Operating Company (“Weiser–Brown”) and St. Paul Surplus Lines Insurance Company (“St.Paul”). On September 7, 2012 a jury found that St. Paul breached its insurance contract with Weiser–Brown by failing to pay Weiser–Brown’s insurance claim for costs associated with the “loss of control” of an oil well. St. Paul was ordered to pay Weiser–Brown $2,290,457.03 in damages for its breach of contract. After trial, the district court awarded $1,232,328.14 in penalty interest to Weiser–Brown under the Texas Prompt Payment of Claims Statute, The court concluded that St. Paul violated the statute on November 21, 2009, when it failed to accept or reject Weiser–Brown’s claim fifteen days after receiving certain requested information, and the court calculated interest accruing from the date of that violation. St. Paul appealed and argued that the district court erred in concluding that St. Paul violated the Prompt–Payment Statute and, alternatively, that the district court used the wrong accrual date in calculating interest under the statute. Weiser–Brown cross-appealed, claiming that the district court erred by granting judgment as a matter of law in favor of St. Paul on Weiser–Brown’s bad-faith claim.

Weiser–Brown operates wells that explore for oil and had a control-of-well insurance policy with St. Paul. In August 2008 Weiser–Brown experienced a loss of control of a well in Lavaca County, Texas. In March 2009, Weiser–Brown notified St. Paul that it was interested in making a claim under the insurance policy for the event. St. Paul acknowledged the claim and appointed a loss adjuster to investigate. In a letter dated March 9, 2009, the adjuster requested seventeen categories of information from Weiser–Brown. Within one month, Weiser–Brown sent some, but not all, of the requested documentation. On June 9, 2009, the adjuster sent a letter to Weiser–Brown indicating that it had received some of the requested documents, but still needed several others. On September 29, 2009, the adjuster informed Weiser–Brown via e-mail that an independent expert had reached a preliminary conclusion that “there was not a subsurface loss of control” of the well. The email noted that additional information had been requested. The adjuster asked Weiser–Brown to provide the additional information and to “advise” if it believed the expert’s conclusion was incorrect. Weiser–Brown continued to send documents to the adjuster in October and November 2009.

On February 8, 2010, the adjuster informed Weiser–Brown that, after reviewing the additional information, the expert had not changed his conclusion that the well was never out of control. The e-mail concluded: “Again, please review this report and if you believe that the conclusions reached in the report are incorrect, please advise accordingly and provide any information or documentation in support.” In March and April 2010, St. Paul sent two letters to Weiser–Brown explaining that it had not received a response and that it would close the claim in thirty days if no response was received. On April 26, 2010, Weiser–Brown responded that it was “studying the matter” and would “respond to that report shortly.” On June 7, 2010, Weiser–Brown sent a one-page response to the expert’s report, challenging his neutrality and conclusion. On June 23, 2010, St. Paul acknowledged receipt of Weiser–Brown’s response and indicated that it would forward the response to the expert “for further review and comment.” On July 16, 2010, Weiser–Brown filed the present lawsuit.

Weiser–Brown alleged that St. Paul breached the insurance agreement and brought claims for breach of contract and for bad faith, in violation of Texas Insurance Code § 541.2 As part of its breach-of-contract claim, Weiser–Brown asserted that St. Paul was liable under the Prompt–Payment Statute for 18% interest on any damages awarded. During trial, the parties agreed to submit the Prompt–Payment Statute issue to the court if the jury returned a verdict in favor of Weiser–Brown. At the close of Weiser–Brown’s case, St. Paul moved for judgment as a matter of law on Weiser–Brown’s § 541 bad-faith claim. The district court granted St. Paul’s motion. The jury found that Weiser–Brown had not complied with the contract’s conditions, however, the jury also found that St. Paul had waived compliance with those conditions. It further found that St. Paul breached the insurance agreement and awarded Weiser–Brown $2,290,457.03 in damages.

The parties then submitted the prompt-payment issue to the court. The district court concluded that St. Paul violated the Prompt–Payment Statute. The court found that “[b]y November 6, 2009, Weiser–Brown had complied with ‘most,’ but not all, of the requests for information in Watson’s report.” The court also held that, despite any omission, “St. Paul and its adjusters did not indicate in the February 8, 2010; March 30, 2010; or April 21, 2010 correspondence that any request for information remained unfulfilled or that determination of coverage was contingent upon receiving such information.” Because St. Paul did not accept or reject Weiser–Brown’s claim fifteen days later, on November 21, 2009, the district court held that St. Paul was liable to Weiser–Brown for “interest on the amount of the claim at a rate of 18 percent a year” from that date. The court subsequently entered a final judgment ordering St. Paul to pay $1,232,328.14 in interest under the Prompt–Payment Statute.

The court first analyzed the trial court’s finding of liability under the Prompt-Payment Statue. The parties did not dispute that St. Paul did not accept or reject Weiser–Brown’s claim until after the present lawsuit was filed. The question presented was whether St. Paul received “all items, statements, and forms required by the insurer to secure final proof of loss” such that § 542.056’s fifteen-day deadline was triggered, and subsequently violated. See Tex. Ins.Code § 542.056(a). St. Paul argues that the district court “improperly changed the wording in 542.056” and urges the court to look at “the plain meaning of the statute’s language.” After discussing the lack of guidance and the different methods used by Texas court’s on the issue, the court found:  “common to all of these decisions is the understanding that the information and documentation “required by the insurer to secure final proof of loss” under § 542.056 will depend on the facts and circumstances involved in a given case.” The documents required to prove a loss with respect to a defense claim might differ from the documents required to prove a loss with respect to a roof-damage claim that the insurer has already determined is only partially covered. Turning then to the facts of the present case the court found that as of November 6, 2009 Weiser-Brown had complied with most of the requests for information. The court further found that there had been no “back and forth between the adjuster and the oil company” to sort out a final loss amount because St. Paul concluded, and maintained, based on items of information requested and received, that the event was not covered. The court concluded with the statement that: “the insurer cannot avoid liability under § 542.056 by pointing after-the-fact to missing information, the absence of which did not affect the insurer’s decision.”

Weiser–Brown cross-appealed claiming that the district court erred in granting St. Paul’s motion for judgment as a matter of law on the bad-faith claim under Texas Insurance Code § 541. The court found that, even though the jury ultimately disagreed with St. Paul and found that the well did experience a loss of control, the evidence at trial was insufficient to support a conclusion that coverage was obvious or that St. Paul had no reasonable basis to deny the claim. The court also found that there was no evidence of an “outcome-oriented investigation” because there was no evidence that St. Paul or its adjuster attempted to influence the independent expert’s opinion.

Weiser–Brown also appealed the district court’s exclusion of evidence of St. Paul’s post-litigation conduct and the exclusion of testimony from expert Bill Arnold (“Arnold”). At trial, Weiser–Brown attempted to introduce numerous post-litigation filings to support its bad-faith claim. On appeal, Weiser–Brown limited its focus to St. Paul’s unsuccessful summary judgment motion which Weiser–Brown claimed was based on grounds they knew were meritless. The court found that the evidence of post-litigation filings was proper under Fed.R.Evid 403 because it would likely confuse the jury, even if relevant. As to the exclusion of the expert testimony from Arnold, the curt noted that it shared the trial court’s concerns regarding the relevance and reliability of Arnold’s testimony. Arnold intended to testify that St. Paul’s failure to send a reservation of rights letter violated industry practice and should have informed the insured of a potential coverage issue before retaining an expert. The court found that such an “untestable, conclusory statement” would not assist the jury.  The court also noted that Arnold had not worked for an insurer since 1978 and exhibited a lack of knowledge of the Texas Insurance Code during his deposition. Citing the “conclusory nature of his proposed testimony, coupled with his lack of knowledge regarding the Texas Insurance Code and lack of recent experience adjusting insurance claims” the court found no abuse of discretion in the district court’s decision to exclude Arnold’s testimony.

Concluding the trial court properly determined liability under the Prompt-Payment Statute and did not err in excluding evidence of post-litigation and unreliable expert testimony, the district court was affirmed in all respects.