FEDERAL COURT GRANTS MOTION TO DISMISS ON UNDERINSURED MOTORIST / EXTRA-CONTRACTUAL ONLY LAWSUIT

Last Wednesday, in a well written opinion providing an excellent summary of Texas law, the U.S. District Court for the Southern District of Texas, McAllen Division, granted an insurer’s motion to dismiss an underinsured motorist (UIM) lawsuit against the insurer in which the insured did not allege breach of contract, but only sought extra-contractual damages flowing from alleged insurance code violations in the denial of the claim. In Garza v. Allstate Fire and Casualty Insurance Company, 2020 WL 3077596 (S.D. Tex. June 6, 2020), the insured driver was involved in an accident with an at fault, third-party and incurred $26,180 in medical expenses. The insured requested permission from Allstate to settle with the third-party for a $30,000 policy limit and then presented a UIM claim to Allstate alleging the limits were insufficient. Allstate disagreed and sent a letter to the insured advising that his claim “did not pierce the threshold for an Underinsured Motorist claim.” The insured disagreed and this lawsuit followed.

But in the lawsuit, the insured specifically alleged that he “is not seeking any of the proceeds of the UIM policy” instead, suing only for alleged violations of the Texas Insurance Code, Chapter 541 for denying the claim without a reasonable investigation, failing to provide an adequate explanation, and failing to make a good faith attempt to settle the claim. The insured requested actual damages for past and future; medical expenses, pain, suffering and mental anguish. And, he also sought treble damages, attorneys’ fees and court costs under the Texas Insurance Code. After removing the lawsuit to federal court, Allstate filed a motion to dismiss under Rule 12(b)(6) for failure to state a claim.

The court engaged in a clear and concise summary of Texas law, analyzing the issues and in part, noted that UIM coverage is intended to protect “insureds who are legally entitled to recover” damages from underinsured motorist. And under Brainard v. Trinity Universal, 216 S.W.3d 809 (Tex. 2006), a settlement or admission by the third-party driver was insufficient to “pierce the threshold of the insured’s UIM policy” or prove legal entitlement to UIM coverage. A judgment was required. In this case, there was no judgment, but the court also noted that the insured was not seeking recovery of UIM benefits, instead seeking recovery only for alleged violations of the Texas Insurance Code and Unfair Claims Practices Act. Thus, identifying the issue of whether the insured can bring the Insurance Code claims absent a breach of contract claim.

The court then turned its attention to the “independent injury” rule first pronounced in Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995), observing that there may “some act, so extreme, that would cause injury independent of the policy claim.” And then, the court considered the clarification of the “independent injury” rule provided by USAA Texas Lloyds Company v. Menchaca, 545 S.W.3d 479, 489 (Tex. 2018). The court artfully took the five rules announced in the Menchaca decisions for determining for determining when an insured may assert extra-contractual claims, and boiled them down to their essence: “An insured cannot recover any damages under the Insurance Code based on an insurer’s statutory violation unless the insured establishes a right to receive benefits under the policy or an injury independent of a right to benefits.” And in the analysis that followed, the court found that the insured’s pleadings failed to state a claim for either breach of contract or independent injury and dismissed plaintiff’s claims with prejudice.