What the Insurance Code Giveth, the Courts Cannot Taketh Away
by Robert M. Hoffman and Jaclyn M. O’Sullivan
Several appellate decisions indicate that policy proceeds alone cannot be trebled under the Texas Insurance Code (TIC). This article explains where these decisions went wrong.
The insurance code provides a private cause of action for unfair or deceptive insurance practices, whereby insureds can recover actual damages and attorney’s fees (as well as other relief the court deems proper). TIC § 541.060. Insureds can also recover an additional two times the amount of actual damages for knowing violations. TIC § 541.152(b).
In Great American v. AFS/IBEX Financial Services, 612 F.3d 800, 808 (5th Cir. 2010), the district court found coverage under the policy but dismissed the Section 541 claims because the insured “failed to plead and prove injuries separate from those that flowed from” the insurer’s breach of contract (i.e., no injury beyond policy proceeds).
On appeal, the insured argued that it did not need to prove a separate injury to maintain its extra-contractual claims and that the insurer’s denial of insurance proceeds, standing alone, entitled it to recover on its extra-contractual claims. The Fifth Circuit disagreed.
The only support cited was Parkans International LLC v. Zurich Insurance Co., 299 F.3d 514, 519 (5th Cir. 2002),a case where the Fifth Circuit found no policy coverage and, understandably, held that the insured must prove damages independent of policy proceeds to recover on its extra-contractual claims. Such is the law in Texas—if there is no policy coverage then TIC claims fail without an independent injury. But in Great American, coverage did in fact exist.
Other courts also confused this issue by extrapolating Provident American Insurance Co. v. Castañeda, 988 S.W.2d 189 (Tex. 1998) beyond its holding. There, the insured sued under the TIC, but the court found that the insurer had a reasonable basis to deny the claim. The court addressed whether the insured was entitled to recover damages equivalent to policy benefits if the insurer failed to acknowledge communications about the claim or to adopt reasonable standards for investigating claims (both prohibited under the TIC). The court observed that, where the insurer did not wrongfully deny coverage, such conduct must be a producing cause of damages separate from those otherwise resulting from a wrongful denial.
Thus, Castañeda stands for the unremarkable proposition that when a coverage denial is not actionable under the TIC, then an insured must prove damages independent of policy proceeds.
The leading Texas Supreme Court decision addressing multiplied damages based on a finding of a knowing violation isVail v. Texas Farm Bureau Mutual Insurance Co., 754 S.W.2d 129 (Tex. 1988). In Vail, the policyholders sued for breach of contract and violations of the TIC. The jury awarded unpaid policy benefits as actual damages; then, upon a knowing finding, trebled that amount.
The insurer argued that the policyholders could not recover under the TIC because “the amount due under the policy solely represents damages for breach of contract and does not constitute actual damages in relation to a claim of unfair claims settlement practice.” The court disagreed, holding that “an insurer’s unfair refusal to pay the insured’s claim causes damages as a matter of law in at least the amount of the policy benefits wrongfully withheld.” The court reasoned that “[i]t would be incongruous to bar an insured—who has paid premiums and is entitled to protection under the policy—from recovering damages when the insurer wrongfully refuses to pay a valid claim. Such a result would be in contravention of the remedial purposes of the DTPA and the Insurance Code.”
In Twin City Fire Insurance Co. v. Davis, 904 S.W.2d 663, 666 (Tex. 1995), the court held that the insured’s breach of contract damages would not support a claim for breach of the duty of good faith and fair dealing (and related punitive damages). The insured argued that this contradicted Vail, but the court disagreed. “Vail was only concerned with the insurer’s argument that policy benefits improperly withheld were not ‘actual damages in relation to a claim of unfair claims settlement practices.’ In rejecting the insurer’s argument, we held that policy benefits wrongfully withheld were indeed actual damages under the DTPA and Insurance Code.”
Vailremains good law today. When carriers wrongfully deny coverage, policy proceeds are “actual damages” and can be trebled in the advent of knowing violations.
Rob Hoffman is a partner at Gardere Wynne Sewell LLP and Jaclyn O’Sullivan is a third year student at SMU’s Dedman School of Law. They can be reached at email@example.com and firstname.lastname@example.org, respectively.