Recently, the Houston Fourteenth Court of Appeals issued a memorandum opinion affirming a trial court’s judgment that 1) disregarded a jury’s finding that a policyholder had breached the policy first and 2) excluded trial evidence of the policyholder’s excessive demand.  In State Farm Lloyds v. Fuentes, No. 14-14-00824-CV, 2016 WL 1389831 (Tex. App. Apr. 7, 2016)(mem. op.) the dispute arose out of a claim for storm damage to the insured’s home during Hurricane Ike. The home sustained exterior damage and the insureds claimed their home also sustained interior damage from water leaks. After the claim was reported, State Farm inspected the home and allowed for total replacement of the roof and covered damage to a backyard shed, fence, a window, and a screen. The adjuster also inspected the interior of the home and determined that the interior damage was not caused by Hurricane Ike. The adjuster provided the insureds with a check for $4,988.63 for the exterior damage, as well as a check for $350 in “food loss.” State Farm closed its file on the same day. The insureds filed suit alleging breach of contract, Insurance Code violations, breach of the duty of good faith and fair dealing, and fraud. The case was assigned to the MDL court, which presided over pretrial matters, and was then transferred to the trial court.

A jury found State Farm liable and awarded damages as to each of the theories of liability asserted including breach of contract, violations of the Texas Insurance Code, breach of the duty of good faith and fair dealing, and fraud. The jury also found that the insured failed to comply with the policy and did so first. The trial court disregarded these two particular findings and rendered judgment in the insured’s favor on the remaining findings. The jury awarded damages for the underpayment of the claim as well as additional damages for knowing conduct and for attorney’s fees.

On appeal, State Farm argued that the trial court erred by disregarding the jury findings regarding the insured’s prior material breach of the policy because: (a) the trial court did not have the authority to reject the jury findings on its own initiative; (b) evidence supports the insureds committed a material breach; (c) evidence supports the insureds breached first; and (d) the findings were material to the verdict. State Farm also argued that the trial court committed reversible error in excluding evidence of the excessive demand and that the trial court erred in denying State Farm's motion for remittitur or new trial.

In their first issue, State Farm argued that the Court should not have disregarded the jury finding that the policyholder breached first. State Farm also argued that the evidence showed that the policyholder’s prior breach was material. In rejecting this argument, the court relied on a comment in Vail v. Tex. Farm Bureau Mut. Ins. Co., 754 S.W.2d 129 (Tex.1988), for the proposition that even without a breach of contract an “insured is not precluded from bringing a cause of action for violations of the DTPA or the Insurance Code in addition to any breach-of-contract claim against an insurer.”  The court then relied on their own previous decision in United Ant'l Ins. Co. v. AMJ Invs., LLC, 447 S.W.3d 1 (Tex. App.—Houston [14th Dist.] 2014, pet. dism'd), for the proposition that when an insurer fails to pay the full amount of a claim as a result of an unfair-settlement practice the insured may elect to recover its damages under either a breach-of-contract or a statutory-violation theory even though the Supreme Court had previously granted a writ to review that decision. 

Further, the court did not analyze or distinguish that the jury in AMJ Invs. also found that the insurer had breached the contract or  address whether or not an independent injury was specifically required to recover under the extra-contractual claims as required by the Texas Supreme Court in Provident Am. Ins. Co. v. Castaneda, 988 S.W.2d 189 (Tex. 1998). The court unfortunately sidestepped the independent injury issue and found that State Farm had failed to address the independent theories of recovery that could independently support a judgment. The court further found that, because State Farm had not specifically argued that breach of contract is a prerequisite to extra-contractual damages until their reply brief, they had waived the argument. State Farm argued that the insureds joined the issue when they brought it up in their response brief and they should not have to anticipate an argument contrary to Texas law, but the court did not agree. Based on this conclusion, without specifically addressing the trial court’s disregard of the jury findings on breach, the appellate court concluded that because all independent grounds supporting the judgment had not been attacked on appeal, the first issue was overruled without further analysis.

In their second issue, State Farm argued that the trial court committed reversible error by completely excluding evidence of excessive demand. In November 2010, counsel for Plaintiffs sent a demand letter seeking $230,000.00 in economic damages (noting these could increase), $50,000.00 in mental anguish damages; and$112,000.00 for expenses, including attorney's fees (noted these fees will increase they prepare for trial). The demand letter further explained that it was a “conservative effort” to resolve the litigation and that if not paid within 60 days, Plaintiffs would seek actual damages, mental anguish damages, prejudgment interests, attorney's fees, and treble damages and additional penalties. State Farm argued that the demand for $230,000 in economic damages when their policy limit was approximately $133,000 and when they only requested approximately $62,000 at trial was unreasonable on its face. State Farm also argued that the demand for $112,000 for attorney's fees and expenses was unreasonable and made in bad faith when the evidence at trial was only $240 in attorney's fees through the date of the demand letter. The trial court excluded this evidence at trial and refused to submit a jury question for excessive demand. The appellate court found that State Farm had failed to meet the “futility-of-tender” element of the excessive demand defense. Essentially, the court found that because the letter did not specifically say they would only take the full amount demanded, State Farm could not meet the futility element of the excessive demand defense and therefore any error in excluding the evidence was harmless. Consequently, the Court affirmed the trial court’s judgment in full.

Editor’s Note: It remains to be seen how this opinion might impact the excessive demand defense in first-party insurance cases where, as in this case, the demand from plaintiff’s counsel was clearly excessive and intended to escalate fees in litigation rather than to promote settlement.

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