Texas Insurance Law Newsbrief - September 26, 2023
“OFFERING” FULFILLS “INCLUDING,” HOLDS TEXAS COURT OF APPEALS IN BEAUMONT
The Texas Court of Appeals for Beaumont held that making wind-driven rain coverage available to clients satisfied Texas’ Insurance Code’s mandate to “include” coverage for wind-driven hail.
In Texas Windstorm Insurance Association v. Kelly and Kelly, 2023 WL 6150277 (Tex. App.—Beaumont Sept. 21, 2023), Tiffany and Kevin Kelly obtained a windstorm and hail insurance policy from Texas Windstorm Insurance Association (TWIA) for their residential property. Their home was damaged by Hurricane Harvey in 2017, and they filed a claim with TWIA, which accepted coverage for damages to the Kelly’s garage track but denied coverage from rainwater intrusion, The Kellys sued TWIA for breach of contract, Deceptive Trade Practices, and bad faith.
The Kelly’s lawsuit relied on Texas Insurance Code Section 2210.208 that states that “. . . a windstorm and hail insurance policy issued by the associate for a dwelling. . . must include coverage for: (1) wind-driven rain damage, regardless of whether an opening is made by the wind.” TWIA moved for summary judgment, arguing that it had fulfilled this statutory obligation by offering the Kellys a wind-driven rain endorsement, which they declined. The Kellys counter-argued that TWIA was statutorily prohibited from omitting such coverage in the policy, regardless of their elections. The trial court sided with the Kellys, TWIA appealed to the Beaumont appellate court, and the appellate court agreed with TWIA.
The Beaumont appellate court held that TWIA fulfilled the statute’s “must include” obligations by making the endorsement available. The Court reasoned that to follow the Kelly’s interpretation would render other provisions of the statute meaningless, such as Tex. Ins. Code § 2210.208(e), which says that an association is not required to offer coverage for indirect losses as provided by wind-driven hail, unless that coverage was excluded from a companion policy in the voluntary market. Thus, the Court reasoned, the legislature contemplated situations in which policies would not have wind-driven hail coverage, contrary to the Kellies’ reading of the statute. Thus, the Court ruled for TWIA.
REMINDER: “NOTICE” ISN’T GOOD ENOUGH IN FEDERAL COURT
The United States District Court for the Southern District of Texas reinforced the United States Court of Appeals for the Fifth Circuit’s holding that for removal considerations of properly-joined defendants, courts are to use federal, not state, pleading standards.
In Maverick Field Services, LLC v. Emaxx Insurance Services, LLC, 2023 WL 6162757 (S.D. Tex. Sept. 21, 2023), Maverick sued Emaxx and a Texas-based defendant in state court in the Southern District of Texas’s region. Emaxx removed the case to the federal Southern District and argued that the Texas-based defendant was improperly joined, thus establishing diversity between the parties and allowing federal court jurisdiction. Maverick moved to remand the case back to state court, arguing that it had sufficiently met Texas’ state “notice pleading” standard in alleging facts against the Texas-based Defendant. In making this argument, Maverick cited two 2013 Fifth Circuit opinions stating that Texas’ notice pleading standard should be the one utilized to assess whether a plaintiff has alleged potentially viable claims against a defendant. However, the Southern District observed that the Fifth Circuit overruled those earlier cases’ holdings in Int’l Energy Ventures Mgmt., L.L.C. v. United Energy Grp., Ltd., 818 F.3d 193 (5th Cir. 2016), where the Fifth Circuit held that a federal court should assess a plaintiff’s claims under the federal, more rigorous “plausible claim” standard for purposes of alleged improperly-joined defendants.
THEFT OCCURS IMMEDIATELY AT THE FRAUDULENT EXCHANGE, EVEN IF REALIZED LATER—BUT WATCH THE EXCLUSIONS!
In Kent Distributors, Inc. v. Travelers Casualty and Surety Company of America, 2023 WL 6159820 (W.D. Tx. Sept. 21, 2023), during the early months of the COVID-19 pandemic, fraudsters stole U.S. Treasury checks from apartment complex mailboxes in Houston, Texas.
They signed the checks and cashed them at Kent, which had no knowledge of the fraudulent histories of the checks. Initially, the Treasury honored the checks, then in May 2020, the Treasury department discovered the fraud and sent reclamation notices to Kent totaling $74,091.75 and withdrew that from Kent’s bank account. Kent then filed a claim with Travelers for the loss under its social engineering fraud, on-premises theft, and forgery policy provisions, and Travelers denied them all. Kent then sued Travelers for breach of contract, breach of duty of good faith and fair dealing, and Insurance Code violations.
Travelers filed a motion to dismiss, arguing that the claim was not covered (1) as forgery because the checks were not “made by, drawn, by, or drawn upon” Kent, (2) as on-premises theft because it was not “theft,” and (3) as social engineering fraud because there was no communication involved.
The Court held that the forgery and social engineering provisions were properly denied, but the “on-premises theft” applied (and was subsequently excluded). Under this provision, Travelers was required to cover “[t]he Insured’s direct loss of Money or Securities located inside the Premises or Financial Institution Premises directly caused by Theft committed by a person present inside such Premises or Financial Institution.” The Court held that this provision applied, and the theft factually occurred the moment Kent exchanged cash for the fraudulent, worthless checks, even though the Treasury subsequently paid and reclaimed the funds. That the loss was realized much later did not change the fact that the theft occurred immediately at that exchange.
Nevertheless, the Policy excluded “the giving or surrendering of Money, Securities or Other Property in any exchange or purchase, whether genuine or fictitious, rendering the theft excluded in this case. Thus, the Court ultimately granted Travelers’ motion to dismiss.