Texas Insurance Law Newsbrief - September 7, 2023

Texas Insurance Law Newsbrief

The United States District Court for the Southern District recently concluded that the plaintiff’s settlement demands were valid Stowers demands and rejected the insurer’s argument that there was no legally sufficient evidentiary basis for the jury to have found that the insurer violated its Stowers duty.

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In Westport Ins. Corp. v. Pennsylvania National Mutual Casualty Ins. Co., No. 4:16-CV-01947, 2023 WL 5352619 (S.D. Texas [Houston Division], Aug. 21, 2023, mem. op.), after a jury trial, judgment was entered against Westport Insurance Corporation (“Westport”) for violating its Stowers duty by not accepting the plaintiff’s three settlement demands.  Subsequently, Westport moved for judgment as a matter of law arguing that there was not a legally sufficient evidentiary basis for a reasonable jury to find that Westport violated its Stowers duty because the first demand did not provide for settlement and release of the third-party defendant’s potential indemnity claim against the insured, and the two subsequent demands lacked clear and definite terms.  The court disagreed and denied Westport’s motion. 

As to the first settlement demand, Westport contended that the demand did not address the “risk of future liability” the insured faced from an indemnity claim by CRC Insurance Services, Inc. (“CRC”). The court rejected this argument.  The court reasoned that at the time of the demand, CRC had not asserted a claim against the insured/defendant; rather, the insured/defendant brought a third-party claim against CRC, and CRC filed an answer in which CRC referenced an indemnity provision in the contract between CRC and the insured/defendant as a defense to the insured/defendant’s claims against CRC. Therefore, at the time of the demand, the only live claim with CRC was one instigated against it by the insured/defendant.

As to the other two settlement demands, Westport contended that the oral $3.6 million settlement demands lacked clear and undisputed terms.  The court rejected this argument too.  The court reasoned that the course of communications and continuing settlement efforts could allow a reasonable jury to find that the terms and conditions were clear.  Specifically, there was legally sufficient evidence to support the conclusion that the demands were extensions of the Mediator's Proposal and carried with them the same terms and conditions as the Mediator's Proposal.

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Recently, the United States District Court for the Southern District of Texas concluded that the insured did not state sufficient facts to constitute a violation by the adjuster of Section 541.060(a)(1) of the Texas Insurance Code and, consequently, the court denied the plaintiff’s motion to remand and dismissed the claim against the adjuster.

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In Kidd v. Federated Mutual Ins. Co., No. 4:22-CV-04477, 2023 WL 5352622 (S.D. Texas [Houston Division], Aug. 21, 2023, mem. op.), Elaine Kidd sought underinsured motorist benefits under her automobile policy with Federated Mutual Insurance Company (“Federal Mutual”).  Upon denial of her claim, Kidd filed suit in state court against Federal Mutual and its adjuster asserting contractual and extra-contractual claims arising from the denial and nonpayment of insurance benefits. Among Kidd’s claims, she asserted that the adjuster violated Section 541.060(a)(1) of the Texas Insurance Code, which prohibits “misrepresenting to a claimant a material fact or policy provision relating to coverage at issue.”

Federal Mutual removed the case to federal court on the basis of diversity of citizenship, contending that the adjuster was improperly joined. Plaintiff subsequently sought remand to state court. 

In deciding whether joinder of the adjuster was improper, the U.S. District Court began by noting that ‘it is well settled that insurance adjusters can be held personally liable for violations of the Texas Insurance Code.” However, the court concluded that Kidd’s only statement regarding a misrepresentation in support of her claim pursuant to Section 541.060(a)(1) –i.e., that Kidd “misrepresented to Plaintiff that the damage she sustained was not covered under the Policy, even though the damage was caused by a covered occurrence” –did not state sufficient facts to constitute a violation under § 541.060(a)(1). “Misrepresentations under this provision must relate to the details of the Policy, not the facts giving rise to a claim for coverage.” Thus, the court concluded that the adjuster was improperly joined, denied remand, and dismissed the claim against the adjuster.

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A state appeals court in Houston recently affirmed the trial court’s decision to grant an insurer’s motion for summary judgment in a coverage dispute arising from Winter Storm Uri. Jean Kayihura v. Homeowners of America MGA, et al., No. 14-22-00680-CV, 2023 WL 5286911 (Tex. App.—Houston [14th Dist.] Aug. 17, 2023).

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The insured presented a property damage claim under a policy of homeowner’s insurance following Winter Storm Uri in 2021. The insurer’s adjuster inspected the house, determined the damage resulted from water leakage, and estimated the damage exceeded the $10,000 limit of coverage for water damage under the policy’s water damage endorsement, so the insurer paid the $10,000 limit for the damage to the home and his personal property. The claimant disagreed, arguing that the damage was covered under the freeze provision of the policy and sued for breach of contract and violations of the Texas Insurance Code, breach of the common law duty of good faith and fair dealing, and fraud.

The insurers then sought a declaration from the court that the claimant’s property suffered physical damage caused by sudden and accidental discharge of water from plumbing due to freezing pipes, that the claim was therefore subject to the water damage endorsement, and that the limit was properly applied under the “concurrent causation” doctrine because the bursting of pipes by freeze and the discharge of water from the burst pipes acted concurrently to cause all damage to the claimant’s home and private property. The trial court agreed, entered the declaratory judgment, and granted the insurers’ motion for summary judgment on the breach of contract claim.

The insurers then filed a no evidence motion for summary judgment, arguing that the previous finding that there was no breach of contract as a matter of law meant there was no evidence of actual damage to support the claimant’s extra-contractual claims. The trial court granted that motion as well and dismissed all the claimant’s claims. The appeal followed.

On appeal, the court emphasized it was indisputable that the frozen pipes caused the plumbing supply lines to burst in several areas of the house and there was resultant water damage to the house and some personal property. As such, the court held that whether the water damage was caused by the peril of freezing or sudden discharge was not relevant to the application of the endorsement because the endorsement limited direct physical damage caused by sudden and accidental discharge or overflow of water or steam from within a plumbing system, which is exactly what occurred here. Therefore, the water damage endorsement applied, the insurers properly paid the $10,000 limit under the endorsement, and there was no breach of contract.

The court also stressed the finding of no breach of contract precluded the extra-contractual claims unless there was evidence of extreme conduct in violation of a statute that resulted in injury independent of the loss of policy benefits, but the claimant in this case had not provided any such evidence, so the court upheld the trial court’s summary judgment as to the extra-contractual claims as well.

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An insurance agency, AAA Colorado recently obtained a dismissal on the basis that the Texas courts lacked personal jurisdiction over it.

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In August 2021, Jessica and Patrick Thornton planned to move from Centennial, Colorado to Irving, Texas.  Before the move, Mr. Thornton called AAA Colorado to obtain renter’s insurance.   The AAA Colorado agent that spoke with Mr. Thornton took the call from his home in Erie, Colorado.  AAA Colorado obtained a renter’s policy from Safeco on the Thorntons’ behalf, listing the Thorntons’ residence in Centennial, Colorado on the policy.

                 The Thorntons hired Moving Staffers to assist them with their move, and during the move, some of the Thorntons’ property was damaged—an estimated $27,000 worth of damage.  The Thorntons filed a renter’s insurance claim with Safeco, which denied the claim based on an exclusion for damage caused by a person or organization holding, storing, or transporting property for a fee.  The Thorntons sued AAA Colorado and Safeco in state court in their new home court, and Safeco removed the case to federal court to the Northern District of Texas, setting up Thorton and Thornton v. AAA Colorado, Inc., 2023 WL 5058839 (N.D. Tex. August 8, 2023).

Making some classic law school exam arguments, AAA Colorado filed a motion to dismiss it for lack of personal jurisdiction, arguing that it never personally availed itself of the privilege of conducting activities in Texas, and that Mr. Thornton’s unilateral act of calling and filing a claim from his new Texas home was not sufficient contact with Texas to establish Texas courts’ power over AAA Colorado.  The Court agreed and dismissed AAA Colorado from the lawsuit.

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Recently, in Ramos v. Hernandez and Freight Pro Transport, LLC, 2023 WL 5115319 (Civ. App. – Fort Worth, August 10, 2023), Ramos sued Hernandez and his employer, Freight Pro, for a vehicle accident in which she and her minor son were injured.

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They entered into a settlement agreement wherein Ramos and her minor son released Hernandez and Freight Pro for their claims against them in exchange for $18,000.  However, the judgment approving that settlement only listed the minor child as the releasor. 

                After the court entered a judgment, Ramos initiated Ramos v. Hernandez and Freight Pro Transport, LLC, 2023 WL 5115319 for her own injuries.  Hernandez and Freight Pro successfully moved for summary judgment, presenting the settlement agreement wherein Ramos agreed to release them on her own and her son’s behalf.  Ramos appealed to the Fort Worth Court of Appeals, and the Court sided with her, noting (1) the caption of the earlier case listed Ramos only in her capacity as next friend of her son, (2) the earlier case did not include Ramos’s medical records in the filed medical affidavits, and (3) the settlement check was made out to Ramos’s son only, among other facts.  Citing these facts in the light most favorable to Ramos as required for summary judgment consideration, the Fort Worth Court held the settlement agreement was ambiguous as to whether it released Ramos’s son’s claims only, or her own as well.  The Court accordingly remanded the case for the trial court’s consideration of that issue.

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The U.S. District Court for the Northern District of Texas recently dismissed the insured’s extra-contractual claims as the insured did not plead a breach-of-contract claim.

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In Agee v Hartford Accident and Indemnity Co., No. 3:22-CV-1697-G, 2023 WL 4595195 (N.D. Texas, July 18, 2023, mem. op.), Joseph Barrera rear-ended Marty Agee’s vehicle. Agee settled his claims against Barrera, and subsequently sought underinsured motorist (“UIM”) insurance coverage through a policy with Hartford Accident and Indemnity Company (“Hartford”). Hartford denied Agee's UIM claim for damages that exceeded the settlement with Barrera.  Agee sued Hartford asserting extra-contractual claims of violations of the duty of good faith and the Texas Insurance Code; however, he did not seek declaratory relief that would establish his entitlement to UIM coverage and he did not assert breach-of-contract claim. 

Hartford filed a motion to dismiss for failure to state a claim, which the U.S. District Court granted.  The court dismissed the extra-contractual claims because Agee did not assert a breach- of-contract claim or plead an injury independent of the insurance contract. “The general rule in Texas is that ‘an insured cannot recover policy benefits for an insurer's statutory violation if the insured does not have a right to those benefits under the policy.’” “Twenty years of Texas state precedent indicate that extra-contractual claims cannot be asserted without the predicate breach of contract claim.” Further, “an insured who sues an insurer for statutory violations can only recover damages caused by those violations.”

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The Fifth Circuit Court of Appeals recently upheld a district court’s grant of summary judgment in favor of insurers involved in a coverage dispute with Texas-based ice cream maker, Blue Bell Creameries (“Blue Bell”). Discover Prop. & Caus. Ins. Co. et al. v. Blue Bell Creameries USA, Inc., et al., No. 22-50842, 2023 WL 4443246 (5th Cir. July 11, 2023).

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In 2015, a Listeria outbreak caused Blue Bell to shut down its factories and issue a nationwide recall of its products, leading to substantial financial losses. As a result, some of Blue Bell’s shareholders filed a lawsuit on behalf of the company against Blue Bell’s directors and officers, alleging that the directors and officers breached their fiduciary duties of care and loyalty by failing to comply with regulations and establish controls and because they knew Blue Bell’s manufacturing plants had repeatedly tested positive for Listeria contamination and disregarded the information. The shareholders sought hundreds of millions of dollars in damages in a Delaware court representing alleged economic losses to the company.

Three years after the shareholder lawsuit was filed, Blue Bell’s directors and officers sought defense coverage under Blue Bell’s commercial general liability policies. The insurers responded by filing a lawsuit seeking a declaration that they had no duty to defend or indemnity the directors and officers in relation to the shareholder lawsuit.

The insurers contended that, although the policies at issue stated directors and officers were “additional insureds” with respect to their duties as directors and officers of the company, the policies’ duties to defend and indemnify were only triggered when Blue Bell or its directors or officers became legally obligated to pay damages due to “bodily injury” or “property damage” caused by an “occurrence,” which was defined in the policies as “an accident, including a continuous or repeated exposure to substantially the same general harmful conditions.”

The federal district court agreed and granted summary judgment in favor the insurers’ favor, holding (1) the directors and officers were not “insureds” under the policy because the shareholder’s complaint alleged the directors and officers “knowingly disregarded contamination risk and safety compliance” despite positive Listeria tests, which amounted to them being sued for actions “with respect to their duties” when it was alleged that they breached those very duties; and (2) the shareholder’s complaint did not allege any “occurrence” or seek “damages because of bodily injury.” Blue Bell appealed.

On appeal, the only issue before the Fifth Circuit was whether the insurers owed Blue Bell a duty to defend because, In the district court case, the parties stipulated that if the district court found there was no duty to defend, it may also find there was no duty to indemnify. As such, the Fifth Circuit panel focused on whether the insurers owed Blue Bell a duty to defend based on the pleading against the insured in the underlying litigation and the terms of the policies.

The Fifth Circuit disagreed with the district court’s finding regarding whether the directors and officers were “insureds” under the policy. The Fifth Circuit held that, because the shareholder’s complaint alleged the directors and officers violated their fiduciary duties because they “continued the Company’s production and distribution of ice cream” when they should not have, the directors’ and officers’ alleged decision to continue fell within the scope of their duties, which rendered them “insureds” under the policies.

However, the Fifth Circuit agreed with the district court’s finding that the alleged injuries were not caused by an “accident” because, under Texas law, a person’s act is not an “accident” when the person’s acts or omissions are intentional and result in injuries that ordinarily follow from or could be reasonably anticipated from the intentional act, and here, there were no allegations that the directors or officers were acting involuntary. Indeed, the shareholder’s complaint alleged the directors and officers committed their acts “knowingly” and “willfully,” and the Listeria outbreak and resulting financial harm were natural and probably consequences that could have been reasonably anticipated. Thus, the complaint in the Delaware lawsuit did not allege an “occurrence” covered by the policies.

Finally, the Fifth Circuit also agreed with the district court’s finding that the shareholder lawsuit did not seek damages because of “bodily injury” or “property damage,” the latter of which Blue Bell agreed was not at issue. Blue Bell argued that the damages sought in the shareholder’s lawsuit were attributable to bodily injuries suffered by Blue Bell’s customers. The Fifth Circuit, in line with the district court, agreed with the insurers that the shareholder’s lawsuit only sought to recover financial harm caused by an alleged breach of fiduciary duties and any reference to bodily injury was “merely informative” and “ancillary” because the shareholder complaint did not seek to recover damages on behalf of customers who may have suffered “bodily injury” from the Listeria outbreak and instead sought purely economic damages. The Fifth Circuit therefore held that the complaint in the Delaware lawsuit did not seek damages due to bodily injury.

Although the Fifth Circuit determined that the directors and officers were “additional insureds” under the policies, it also held the shareholder lawsuit did not allege any “occurrence” or seek damages due to “bodily injury” and therefore affirmed the district court’s grant of summary judgment in favor of the insurers.

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