Texas Insurance Law Newsbrief - February 5, 2025
COVID-19 ATTACHED TO SURFACES IS NOT “DIRECT PHYSICAL LOSS OF OR DAMAGE TO PROPERTY” $12 MILLION DAMAGE AWARD REVERSED
The 14th Court of Appeals in Houston, Texas reversed a $12 million judgment in favor of the insured finding that the COVID-19 related losses claimed did not result from “direct physical loss of or damage to” property as required for coverage under the policy.
In Lloyd's Syndicate 1967 Subscribing to Pol'y B0180PG1922227 v. Baylor College of Med., 2025 Tex. App. LEXIS 378 (Tex. App. – Hou. [14th Dist.] January 28, 2025), Baylor College of Medicine sought coverage under its policy providing coverage for “all risks of direct physical loss of or damage to property” for a term ending in October 2020. When Baylor’s claim for business interruption and other losses associated with the COVID-19 pandemic was denied, Baylor sued for breach of contract and other claims. The case was tried to a jury which answered “Yes” to Jury Question No.1: “Did COVID-19 cause direct physical loss of or damage to Baylor’s property?” And the trial court signed a final judgment awarding Baylor over $12 million in damages and attorney fees. This appeal followed.
Addressing the issue as a matter of first impression, the court examined the various means by which COVID-19 is transmitted, in particular - droplets landing on a surface - to determine whether the surface was damaged as a result of that contact. Experts for both the insured and insurer provided testimony arguing the effect of microdroplets on surfaces, the methods by which it is removed or resolves overtime. The court then closely examined the policy terms and specifically, because they were not defined in the policy, the plain meaning of “loss”, “damage” and “physical.” The court also considered The Supreme Court of Texas analysis of “physical injury” in a commercial general liability policy noting “that a ‘physical injury’ had to be ‘one that is tangible.’”
With the above framework, the court then reviewed the evidence presented and other courts’ rulings from around the country examining similar COVID-19 issues. The court observed that the insurer presented “dozens of cases holding that the presence of COVID-19 did not cause a physical loss, injury of damage to property as a matter of law.” And noted that “Baylor does not cite to a case holding otherwise.” After reviewing the evidence in this case, the court held that “there is legally insufficient evidence to support the jury’s answer to Jury Question No. 1 because there is no more than a scintilla of evidence that COVID-19 caused direct physical loss of or damage to Baylor’s property.” Accordingly, the trial court’s judgment was reversed, and a judgment rendered that Baylor take nothing.
Read Less
NO BREACH OF CONTRACT + NO INDEPENDENT INJURY = NO STATUTORY VIOLATION
The Corpus Christi Court of Appeals upheld summary judgment granted in favor of an insurer, agreeing with the trial court that the insured could not recover under an independent-injury theory without first establishing a right to recover policy benefits.
In Salinas v. Farmers Texas County Mut. Ins. Co., 2025 Tex. App. Lexis 443 (Tex. App. – Corpus Christi January 30, 2025), Salinas was involved in a car accident and settled her claims with the responsible third-party. Without asserting a claim for breach of contract, Salinas sued Farmers for alleged violations of the Texas Insurance Code for failing to promptly investigate and settle her underinsured motorist claim and alleged that she suffered mental anguish damages independent of her right to underinsured motorist benefits. The trial court granted summary judgment in favor of Farmers and this appeal followed.
The court observed that The Supreme Court of Texas has recognized two paths for insureds to recover damages for alleged insurance code violations. First - establish a right to recover benefits under the policy, or second – by establishing an act so extreme, that it caused an injury independent of the policy claim. Salinas stated in her petition that she was “unequivocally not seeking” policy benefits and that her claims relied solely on the independent-injury theory. In its motion for summary judgment, Farmers argued that because Salinas failed to establish the right to recover benefits under policy there was no breach of contract. And the independent-injury exception did not apply because “Salinas’s claim ‘flows from the denial of her claim for policy benefits.”
Applying the framework provided by The Texas Supreme Court in USAA Tex. Lloyds Co. V. Menchaca, 542 S.W.3d 479 (Tex. 2018), the court noted that Salinas’s insurance code claims “are not premised on the denial of benefits and instead are premised on Farmer’s act of mishandling its investigation and its failure to explain its decision. ‘But as explained in Menchaca …when it comes to damages, the question is not whether [Salinas’s] claims are independent of the right to receive policy benefits. The question is whether the alleged damages are truly independent of Salinas’s right to receive policy benefits.’” Here, the court found that “Salinas’s entitlement to damages is ‘entirely predicated on [her] entitlement to policy benefits,’ and she asserts no injury ‘independent of the denial or underpayment of benefits.’” Noting that “no Texas court has yet held that recovery is available for an insurer’s extreme act, causing injury independent of the policy claim” the court refused to do so here and upheld summary judgment in favor of Farmers.
Read Less
INSURED SUSTAINED NO DAMAGES FROM INSURER’S WITHHOLDING OF LABOR COSTS FROM INITIAL ACV PAYMENT AND INSURER’S SUBSEQUENT RCV PAYMENT CAPPED ITS POLICY OBLIGATIONS
The United States District Court for the Western District of Texas recently concluded that the insurer’s RCV payment to the insured capped its obligations under the policy, whether or not the insurer impermissibly withheld depreciation of future labor in its previous ACV payment.
In Cortinas v. Liberty Mut. Pers. Ins. Co., No. SA-22-CV-544-OLG (HJB), 2025 U.S. Dist. LEXIS 7074 (W.D. Texas [San Antonio Division], Jan. 13, 2025, mem. op.), Rawlins filed a claim with Liberty Mutual after her property was damaged by Winter Storm Uri. Liberty Mutual made an initial ACV payment, but the payment withheld future labor as depreciation. Rawlins subsequently made repairs to her property and requested an RCV payment in the amount of $44,935.60, which Liberty Mutual paid. Then, Rawlins sued Liberty Mutual for breach of contract, contending that Liberty Mutual impermissibly withheld future labor costs as depreciation when calculating the ACV. In response, Liberty Mutual filed a motion for summary judgment contending that because the most Liberty Mutual was required to pay Rawlins under the terms of the policy was the "necessary amount actually spent to repair or replace" the damage to her property, Liberty Mutual fully satisfied its contractual obligations by paying the RCV, regardless of whether the initial ACV payment was deficient. In other words, Liberty Mutual contended that Rawlins’ breach-of-contract claim must fail and, therefore, a finding as to whether the insurance policy permitted the depreciation of future labor in the calculation of ACV payments was not required.
The Magistrate Judge of the U.S. District Court recommended that Liberty Mutual’s motion for summary judgment be granted. The court did not reach the issue of whether the cost of future labor may be depreciated under the insurance policy. Instead, the court concluded that Rawlins' claim had been fully paid and “Liberty’s payment of RCV to Rawlins therefore moots any initial ACV underpayment, because ‘the actual costs of repair capped its obligations.’" In sum, Rawlins had no damages from Liberty Mutual’s withholding of labor costs from its initial ACV payment.
Read Less
U.S. DISTRICT COURT DISMISSES INSURER’S DECLARATORY JUDGMENT ACTION FOR LACK OF SUBJECT MATTER JURISDICTION
The United States District Court for the Western District of Texas recently dismissed the insurer’s suit seeking declaration that it had no duty to defend for lack of subject matter jurisdiction.
In Century Sur. Co. v. Rti Sedrvs., LLC., No. MO:24-CV-00074-DC-RCG, 2025 U.S. Dist. LEXIS 6262 (W.D. Texas [Midland/Odessa Division], Jan. 13, 2025, mem. op.), Century Surety Co. filed suit against its insured seeking a declaration that it was not obligated to indemnify the insured for damages the insured might incur in an underlying suit against the insured for alleged negligence in a motor vehicle accident. At the time of Century’s declaratory judgment action, the underlying suit was ongoing. The plaintiff in the underlying suit was seeking damages in excess of $2,000,000. The insured held a primary insurance policy with Redpoint County Mutual Insurance Company with a policy limit of $1,000,000, and an excess policy with a limit of $5,000,000 with Century. The excess policy with Century provided that "it is a precondition of coverage, under this policy that [the insured] notify [Century] in writing within 14 days of notifying the controlling underlying insurer. [The insured’s] failure to provide the written notice within 14 days will be deemed to have prejudiced [Century] and voids all coverage of an event, claim or suit." The insured did not notify Century of the accident until nearly a year after notifying Redpoint. Consequently, Century contended that the insured was precluded from recovering from Century for any damages the insured may incur in the underlying suit.
The Magistrate Judge of the U.S. District Court recommended that Century’s suit be dismissed for lack of subject matter jurisdiction. The court began its analysis by noting that “Texas law only considers the duty-to-indemnify question justiciable after the underlying suit is concluded,” except for the “very narrow” exception acknowledged in Farmers Tex. Cnty. Mut. Ins. v. Griffin, 955 S.W.2d 81 (Tex. 1997): "the duty to indemnify is justiciable before the insured's liability is determined in the underlying lawsuit when the insurer has no duty to defend and the same reasons that negate the duty to defend likewise negate any possibility the insurer will ever have a duty to indemnify." The court reasoned that because Century only sought a declaration that it had no duty to indemnify, not a declaration that it had no duty to defend, and because the underlying suit was still pending, the court lacked subject matter jurisdiction. “The Court cannot, and will not, rule on the issue of indemnification where [Century] has supplied nothing to absolve it of its duty to defend, because to do so would go beyond the Griffin exception.”
Read Less