SUPREME COURT OF TEXAS FINDS ALLEGED INSURANCE CODE VIOLATIONS ARE NOT “TRULY INDEPENDENT” OF RIGHT TO RECEIVE UNDERINSURED MOTORIST BENEFITS – BIFURCATED TRIAL REQUIRED

The Supreme Court of Texas recently examined an insured’s ability to pursue recovery for alleged unfair claims handling under the Texas Insurance Code without first establishing a contractual right to receive underinsured motorist benefits and determined that the insured could not absent a “truly independent” injury. In In re State Farm Mutual Automobile Insurance Company, 2021 WL 1045651 (Tex. March 19, 2021), the insureds filed suit against State Farm in relation to claims presented for underinsured insured motorist (UIM) benefits. State Farm determined that benefits were not owed, and the insureds filed suit. But rather than alleging breach of contract and extracontractual claims under the Texas Insurance Code, the insureds did not allege breach of contract, and brought only the extracontractual claims under the Texas Insurance Code. State Farm relying on policy language requiring the insured to first establish both legal liability and damages in support of the UIM claim, sought to bifurcate the trial and first require the insureds to establish benefits were owed as a prerequisite to presenting claims for alleged insurance code violations. The trial court and appellate court denied the motion to bifurcate and this petition to the Supreme Court of Texas followed.

The Supreme Court considered the insureds’ argument that they should be allowed to “recover UIM benefits as extracontractual damages without first establishing that they are ‘legally entitled to recover’ from the underinsured motorist if they not allege a breach of contract claim.” And that the Brainard v. Trinity Universal Insurance Co. 216 S.W.3d 809 (Tex. 2006) decision establishing the “legally entitled to recover” pre-requisite had been overruled. The court clarified that there are two paths to recovery for recovery under the Insurance Code and that the insured must either: 1) establish “a right to receive benefits under the policy” or 2) “an injury independent of a right to receive benefits.” The court observed the unique nature of UIM benefits as contractually conditioned on the insured’s right to recover from a third party. And without first establishing legal liability and damages against the third party, that right could not be determined. Further, the court considered the alleged independent nature of the damages sought and concluded that they were not “truly independent.” “To the contrary, the insureds’ entitlement to these damages is entirely predicated on their entitlement to policy benefits.” Accordingly, and to avoid prejudice to State Farm arising from a failure to bifurcate the trials and conditionally granted the writ of mandamus.

Editor’s Note: This decision provides an excellent primer on UIM causes of action, the “independent injury” rule and summary of related case law. In particular, the footnotes provide an excellent analysis of the precedential value of the USAA v. Menchaca, 545 S.W.3d 479 (Tex. 2018), decision relied on by the insureds to mistakenly assert that Brainard had been overruled.