TEXAS COURT OF APPEALS CONSIDERS WHETHER A COURT MAY BAR A CLAIMANT FROM RECOVERING ATTORNEYS FEES WHERE ITS LAWYER PREVIOUSLY DEMANDED MONIES TO WHICH THE CLAIMANT WAS NOT ENTITLED

The end may be near for one practice preferred by some plaintiffs’ lawyers seeking breach of contract damages: opening litigation with excessive settlement demands designed to either provide a windfall for those lawyers and their clients or needlessly increase the cost of litigation for the lawyer’s own benefit.  See, United Services Automobile Association v. Hayes, in the Court of Appeals for the First District of Texas, No. 01-14-00133-CV.  In Hayes, which is currently pending in Houston’s First Court of Appeals, the court will rule on whether an insured’s excessive pre-suit settlement demand bars the insured as a matter of law from recovering attorney’s fees it would be otherwise entitled under Chapter 38 of the Texas Civil Practice and Remedies Code.        

Hayes arises out of a first party coverage dispute stemming from Hurricane Ike.  Two insureds contended that the hurricane had “unsealed” roof shingles.  The insureds and its insurer, however, disagreed regarding the scope of damage caused by the hurricane and could not resolve the claim.  The insureds subsequently retained lawyers to represent them, and those lawyers issued a pre-suit demand letter.  Although the insureds had, according to the evidence disclosed at trial, incurred only about $53,000 in damages and $952.50 in attorney’s fees at the time of their demand, the insured’s lawyers demanded over $600,000 to settle the lawsuit.

At trial, the evidence showed that the roof had “unsealed” shingles after the hurricane, but no evidence was presented regarding the state of the roof prior to the hurricane.  The jury returned a verdict of $20,000 in favor of the insured and found that a reasonable and necessary fee for the insureds’ lawyers’ services was $312,500.  In a post-verdict hearing, however, the insurer argued that no attorney’s fees could be properly awarded under Texas law because the pre-suit demand sought monies to which the insured was not entitled, rendering the demand excessive as a matter of law.  The trial court agreed and struck the jury’s $312,500 attorney’s fees award from its judgment. 

The insured appealed contending that a jury, not the court, must decide whether a demand is excessive.  The insurer filed a cross-appeal on grounds that the evidence failed to establish a direct physical loss as required to trigger coverage because, even though the evidence established that the roof contained “unsealed” shingles after the hurricane, there was no evidence showing the state of the shingles at any other time.  The MDJW Newsbrief will continue to report on these important issues impacting insurers throughout the state as this matter progresses.

[Editor’s Note: Levon Hovnatanian, Kevin Cain, and Chris Martin of our firm have had the privilege of representing USAA in this matter at trial and on appeal.  We thank USAA for the opportunity to protect its interests in these important matters.]