Texas Insurance Law Newsbrief - September 24, 2024
FIFTH CIRCUIT FURTHER CLARIFIES STOWERS DOCTRINE, FINDING IN FAVOR OF EXCESS INSURER IN DISPUTE AGAINST PRIMARY INSURER
The Fifth Circuit Court of Appeals decided Westport Ins. Corp. v. Pa. Nat'l Mut. Cas. Ins. Co., No. 23-20282, 2024 U.S. App. LEXIS 23723 (5th Cir. 2024) which involved a dispute between a primary and an excess insurer, Westport, the primary, and the excess insurer, Pennsylvania National, regarding liability for a judgment against their mutual insured, Insurance Alliance (“IA”).
IA is an insurance agency which was sued by Lake Texoma Highport for failing to procure the requested insurance coverage. Westport controlled the defense and engaged in settlement discussions with Highport throughout the underlying case. Westport rejected five settlement demands, and eventually IA was found liable by a jury for failing to procure the requested coverage and awarded Highport $13.7 million. Westport appealed, and to prevent seizure of IA’s assets, a supersedeas bond was obtained. Eventually, the trial court’s judgment was affirmed and Highport was paid the full amount of the judgment and Penn National paid a part of the judgment due.
In the following insurance action, Westport brought suit in IA’s name, as subrogee, to recover for Penn National’s alleged breach of the excess policy and to recover the amounts paid over policy limits after Penn National allegedly deflected its obligations to pay under the excess policy. Penn National counterclaimed in IA’s name, as its subrogee, under the Stowers doctrine for Westport’s alleged failure to accept the five demands received from Highport before and during the underlying trial. At subsequent insurance trial on the Stowers issues, the jury returned a verdict in favor of Penn National, finding that Westport had breached its Stowers duty for four out of the five demands made. Westport then filed a motion for judgment as a matter of law and a motion for new trial, both of which the federal district court denied, giving way to an appeal to the Fifth Circuit.
First, the Fifth Circuit found that Penn National could not rely on the Stowers doctrine to relieve itself of its contractual duties as a defense to Westport’s breach of contract case. The Fifth Circuit found that the district court had erred in making Westport’s ability to recover from Penn National conditional on Penn National’s Stowers claim failing. On appeal, however, this error was found to be harmless.
Next, the Fifth Circuit addressed Westport’s argument that Penn National lacked standing to assert a Stowers claim and found that Penn National did, in fact, have standing because it had paid a portion of the final judgement owed to Highport. In Texas, an excess insurer may bring an equitable subrogation action against the primary insurer to enforce the primary insurer’s Stowers duty, and when an insurer pays out on its insured’s loss, it becomes a “pro tanto owner of the cause of action.” Westport argued that an excess insurer obtains standing only after paying the entire amount of the judgment. However, the Fifth Circuit, concluded that there was no legal authority to support this argument and that such holding would “undermine the protections that the Stowers doctrine affords insureds.”
The Fifth Circuit also discussed the settlement demands made and found that Westport did breach its duty under the Stowers doctrine in rejecting some of the demands. Of significance, the Fifth Circuit found that, as with punitive damages, an insurer has no duty to take into consideration its insured’s potential exposure due to claims that may arise out of separate and distinct contract disputes. Westport argued that its rejection of one of the demands was reasonable because the demand was not unconditional because it did not release IA from the claims of a certain third party. However, at the time of that demand, the third-party had not yet asserted a claim against IA. The Fifth Circuit refused to “immunize primary insurers from exposure to liability under Stowers for simply invoking claims that would have arisen out of separate and distinct contract claims.”
Additionally, Westport argued that two of the other demands did not provide specific terms or a release, however, the Fifth Circuit’s review of the facts found that the demands were the extension of a mediator’s proposed settlement agreement and carried the same terms and conditions of such. Lastly, the Fifth Circuit agreed that the evidence did not support the jury’s conclusion that Westport acted unreasonably in not accepting a demand that was made in the early stages of litigation, when there was little discovery, and when IA only had 45 minutes to make the decision.
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NORTHERN DISTRICT CASE HANDLED BY MDJW HIGHLIGHTS THE IMPORTANCE OF TIMING IN INSURANCE CASES
The MDJW Insurance Team enjoyed a win last week in Shalport, Inc. v. Amguard Ins. Co., Civil Action No. 4:24-cv-00354-O, 2024 U.S. Dist. LEXIS 168096 (N.D. Tex. 2024), having three out of four counts dismissed against insurer Amguard Insurance Company for being time-barred.
In this bad faith case where the insured allegied bad faith, claims under the Deceptive Trade Practices Act, and for late payment of claims. Such claims have a two-year statute of limitations. However, the insured filed suit one day after the statute of limitations ran, and the court rejected the insured’s argument that the four-year contractual limitations period applied.
The court allowed the insured’s breach of contract claim to proceed. Although the insured did file suit within the four-year contractual limitations period, it did not effectuate service within the contractual limitations period, and we argued service was untimely. As such, the insured had the burden to present evidence of due diligence in serving Amguard. Although the insured was ultimately successful in meeting its burden here, this case serves as a reminder that timing can make or break a case.
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FIFTH CIRCUIT FURTHER CLARIFIES MEANING OF “PROPERTY DAMAGE” IN COVERAGE CASE ARISING OUT OF UNDERLYING TORT LIABILITY CASE
In TIG Ins. Co. v. Woodsboro Farmers Coop., No. 23-40435, 2024 U.S. App. LEXIS 24003 (5th Cir. 2024), the Fifth Circuit decided what “property damage” would invoke an insurer’s obligation to indemnify.
In this coverage action, the Fifth Circuit found that the district court erred when it granted summary judgment and in finding that that there was no property damage that invoked the insurer’s duty to indemnify for an adverse arbitration award. In this matter, Woodsboro Farmers’ Cooperative contracted E.F. Erwin, Inc., the insured, to build two grain silos, which Erwin subcontracted to AJ Constructors, After completion, Woodsboro discovered leaks and defects. Erwin attempted repairs but was ultimately unsuccessful and an inspection revealed serious construction flaws attributed to AJ Constructors’ poor workmanship, necessitating complete deconstruction and reconstruction of the silos at a cost of over $800,000. Woodsboro sued Erwin for breach of contract, leading to arbitration, where it was found that the silos were defective. Woodsboro was awarded nearly $1 million in damages. TIG Insurance Company, Erwin's insurer, filed a declaratory judgment action on its duty to defend and indemnify Erwin. Erwin. Eventually, the district court granted TIG’s motion for summary judgment, finding that although TIG had a duty to defend, it did not have a duty to indemnify due to lack of coverage for the alleged property damage. Woodsboro then appealed.
First, Woodsboro argued that TIG lacked standing to pursue a declaratory action and the issue of indemnity was not ripe because the duty to indemnify does not accrue until there is a final judgment. The Fifth Circuit found the district court had jurisdiction as the duty to defend is decided separately from the duty to indemnify, and the district court did not err in deferring resolution of indemnity issues until the underlying tort liability case was resolved and a final judgment was entered.
As to the property damage issue, the policy covered “property damage,” which was defined as “physical injury to tangible property…”. Under Texas law, "physical injury" to tangible property "requires tangible, manifest harm and does not result merely upon the installation of a defective component in a product or system." As such, the issue was whether the problems were defective assembly or whether the insured caused tangible manifest harm to the silos. In reviewing the facts, the Fifth Circuit found there were defects in the silo’s roof construction which left them unsecure, leading roofs to experience structural fatigue and bend thereby damaging the roof to such an extent that a new roof had to be purchased.
The Fifth Circuit also discussed two common property damage exclusions. First, the Fifth Circuit found that an exclusion which excluded property damage for “[t]hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations” did not apply because the property damage in this matter did not occur until after operations were complete. The court found that this exclusion only applied to property damage caused during the active performance of work. The Fifth Circuit also found that it did not apply, as this was not “a case where faulty construction of one "distinct component part[]" of a project led to damage to other distinct parts” but rather the subcontractor assembled the silos completely. The Fifth Circuit further found that even if the exclusion applied, an exception to the exclusion negated it, as the district court correctly concluded. The court also found that genuine disputes of material fact existed, making the district court’s granting of summary judgment improper.
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ABATEMENT AND NEW TRIAL APPROPRIATE, AND POSSIBLY REQUIRED, IN UI/UIM CASES
Elham v. State Farm Mut. Auto. Ins. Co., Civil Action No. 4:24-cv-02235, 2024 U.S. Dist. LEXIS 167049 (S.D. Tex. 2024) involved a UIM/UM coverage dispute between State Farm and its insured.
In this case, the insured sued State Farm asserting claims for breach of contract and also asserted several extracontractual claims. State Farm removed the case to federal court and filed a motion requesting abatement and separate trial for the extracontractual claims. The United States Court for the Southern District of Texas (Houston Division) concluded that State Farm’s motions should be granted.
The insured attempted to argue that federal courts are not required to follow the state court approach to UM/UIM cases, which consistently grant abatements and separate trials in UM/UIM EC cases such as this. The federal district court here agreed with the case law supporting State Farm’s request and concluded that Plaintiff’s extracontractual claims in this UM/UIM case should be tried separately and abated until The allegedly under-insured’s liability and the insured’s damages were both determined. Specifically, the court reasoned that UM/UIM disputes warrant separate trials because the benefits are conditioned upon the insured’s legal entitlement to receive damages from a third party, and as such, an insurer’s obligation to pay benefits does not arise until liability and damages are determined. Additionally, in the UIM context, extra contractual claims have the additional hurdle in that the insured must first establish that the policy requires payment on they claim. As such, Texas courts have found that separate trials and abatement are not only proper, but required. The court also concluded that abatement would help to avoid wasting resources.
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FEDERAL COURT FINDS THAT EXTRACONTRACTUAL CLAIMS FAIL IF BREACH OF CONTACT CLAIM FAILS
In Espinoza v. State Farm Lloyds, No. 1:23-CV-751-DII, 2024 U.S. Dist. LEXIS 166363 (W.D. Tex. 2024), the U.S. District Court for the Western District of Texas (Austin Division) ruled in favor of State Farm’s motion for summary judgment in this homeowners’ coverage case.
This case involved a dispute between the insured and State Farm from under a homeowner’s policy. The insured filed a claim for alleged damage from a severe hail and windstorm. However, the insured made the claim a year after the alleged date of loss. After inspecting the property, State Farm found the replacement cost value to be an amount below the deductible and did not issue payment. State Farm also found the damage was not due to the alleged storm occurring at the insured’s house on the reported date of loss. The insured disagreed and eventually filed suit against State Farm, asserting claims for breach of contract, noncompliance with certain provisions of the Texas Insurance Code, breach of the duty of good faith and fair dealing, and violations of the Texas Deceptive Trade Practices Act. State Farm filed a motion for summary judgment arguing that the insured failed to raise a genuine issue of material fact as to whether the alleged damage occurred on the reported date of loss, or even the coverage period. Because the insured failed to prove that his claim fell within the insuring agreement of the policy, the insured’s breach of contact failed, and State Farm was entitled to summary judgment.
The court also found that State Farm was entitled to summary judgment as to the insured’s extra contractual claims because the insured’s breach of contract claim failed. Under the same logic, the insured’s claim for violations of the Prompt Payment of Claims Act failed because no payment was never made, and therefore no payment was delayed in violation of the Act.
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