After Giles, the biggest distinction between common law and statutory bad faith claims is in the damages available. Actual and punitive damages are available for a proven breach of duty of good faith and fair dealing. The types of actual damages available include both economic (e.g. proceeds of the policy) and non-economic (e.g., damages for mental anguish). Under current law, recoveries of punitive or exemplary damages are governed by the requirements of Chapter 41 of the Texas Civil Practice and Remedies Code. Pursuant to that statute, an insured may not recover exemplary damages without demonstrating something more than the evidence necessary to show a breach of duty of good faith and fair dealing.
Specifically, the insured must show by “clear and convincing evidence” that the harm suffered resulted from “fraud” or “malice.” Under the statute, “malice” is defined as: “a specific intent by the defendant to cause substantial injury or harm to the claimant.” Moreover, “fraud” does not include “constructive fraud.” Except in the case of certain felonious conduct, the statute also limits the amount of exemplary damages that may be recovered to the greater of: (1) double the insured’s economic damages, plus any non-economic damages, not to exceed $750,000 in total; or (2) $200,000. The carrier is entitled to, and in almost all instances should, request a bifurcated trial on punitive damages.
3. Defenses:
Various defenses have also been developed through bad faith case law. Although the insured nominally bears the burden of demonstrating several of the following “defenses” as part of its bad faith case, as a practical matter, the insurance carrier should develop and introduce evidence supporting the insurer’s counter arguments on these issues.
a. No Coverage:
As a general rule, denial of a claim that is not covered does not give rise to a cause of action for bad faith.
Although the claimant nominally has the burden of demonstrating coverage, in many cases the practical burden of demonstrating an absence of coverage for the loss will fall to the insurance carrier. Moreover, some cases have held open the possibility that an insurer may still be held liable for a failure to investigate a claim, even if it the court ultimately determines that the claim was not covered.
Thus, it is advisable to reasonably investigate all but the most clearly uncovered claims.
b. Bona Fide Coverage Dispute:
Although a lack of coverage will typically defeat a bad faith claim, the duty of good faith and fair dealing is not breached simply because the court determines coverage exists. “An insurer is not liable merely for being wrong on a coverage issue, only for being unreasonable.”
If a good faith, “bona fide dispute” over coverage is found to exist, there should be no finding of bad faith on the part of the carrier.
However, the insurer will be hard-pressed to demonstrate a coverage dispute is “bona fide” without contemporaneous documentation justifying its coverage position. Thus, if the coverage denial rests on a factual determination, it is important for the adjuster to document the file with information supporting his or her factual conclusions. If the denial of coverage is based on the legal interpretation of policy language, or the application of fact to law, it may be advisable to seek a formal coverage opinion before making a final determination on the claim.
Both types of determinations should be made by analyzing both factors that favor coverage, and factors that militate against it.
c. Standing (Who can sue? Who can be sued?):
Because the duty of good faith and fair dealing is an implied duty arising from the insurance contract, Texas courts have held that those who are not parties to the policy, or
intended third-party beneficiaries thereof, cannot sue for bad faith. For example, in
Allstate Insurance Co. v. Watson, the Texas Supreme Court held that an injured third party had no standing to sue the negligent driver’s insurance carrier for bad faith.
Other Texas courts have entered similar rulings with respect to treating physicians and even spouses of insureds.
Based on this same principle—the lack of a “special relationship”—the Texas Supreme Court has also held that independent, third party claims adjusters do not owe a duty of good faith and fair dealing to insureds, i.e., the duty belongs solely to the insurance carrier and is nondelegable.
d. Limitations:
The statute of limitations on common law bad faith claims is two years from the date on which the insurer denies the claim.
If a definitive date on which the claim was denied cannot be established, courts will generally use the date on which the insured knew, or should have known, that the insurance carrier was not going to pay the claim.
This date will typically be a question of fact, which, in cases where the insured’s claim is not denied on a date certain, will preclude summary judgment on limitations grounds. The requirement for relatively prompt acceptance or rejection of claims under Article 21.55 has generally prevented such proof problems in recent years.
e. ERISA Preemption:
The Employees’ Retirement Income Security Act of 1974 (“ERISA”) preempts all common law bad faith claims arising from the delay or denial of benefits under employee benefit plans.
ERISA’s reach is broad. ERISA preempts all causes of action that relate to benefits payable under an employer-sponsored employee welfare benefit plan. ERISA’s preemption of bad faith causes of action limits the insured’s potential remedies to those available under ERISA: (1) recovery of benefits; (2) declaratory relief regarding rights to future benefits; (3) reasonable and necessary attorney’s fees and costs; and in some circumstances (4) injunctive relief.
Unlike a bad faith cause of action, ERISA does not allow recovery of punitive or non-economic damages.
f. Misrepresentations by the Insured:
Another common defense to first party claims—particularly life and health insurance claims—is based on material misrepresentations in the insured’s application for the policy. This defense is codified in Texas Insurance Code Article 21.16. In order to prevail on an Article 21.16 defense, the insurer must show: (1) that the insurance policy provides that false statements in the application make the policy void or voidable;
and (2) that the misrepresentation made by the insured was material to the risk assumed by the insurer;
or (3) the misrepresentation caused or contributed to the loss.
However, whether a misrepresentation is material to the risk, or contributed to the loss is expressly a question of fact to be decided by the jury (or the court in the case of a bench trial). Thus, insurers infrequently obtain summary judgment under Article 21.16.
B. Texas Insurance Code Article 21.21:
Section 16 of Article 21.21 creates a private right of action that may be brought by “any person who has sustained actual damages caused by another’s” violation of: (1) a provision of Article 21.21, § 4; or (2) any of the specific provisions of Section 17.46(b) of the Texas Deceptive Trade Practices and Consumer Protection Act (the “DTPA”).
The primary Section of Article 21.21 that concerns claims handling is Section 4(10)—“Unfair Settlement Practices”.
However, circumstances arise where the claims professional may also have to deal with those provisions of Section 4 and the DTPA that prohibit misrepresentations. Although actionable misrepresentations are most frequently made in connection with the sale of the policy, such misrepresentations rarely surface until a claim is denied. Thus, the claims professional is well served to have a familiarity with the misrepresentation provisions of Article 21.21 and the DTPA.
1. Liability Issues:
Liability under Article 21.21 turns on violation of a specific provision of Section 4 of that statue, or on a violation of Section 17.46(b) of the DTPA. The following sections of this article focus first on unfair settlement practices prohibited by Section 4(10) of Article 21.21, then address potential liability for misrepresentations under both Section 4 of Article 21.21 and Section 17.46(b) of the DTPA.
a. Section 4(10)(a)—Unfair Settlement Practices:
Section 4(10)(a) prohibits the following unfair settlement practices:
(i) misrepresenting to a claimant a material fact or policy provision relating to coverage at issue;
(ii) failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim with respect to which the insurer's liability has become reasonably clear;
(iii) failing to attempt, in good faith, to effectuate a prompt, fair, and equitable settlement under one portion of a policy of a claim with respect to which the insurer's liability has become reasonably clear in order to influence the claimant to settle an additional claim under another portion of the coverage, provided that this prohibition does not apply if payment under one portion of the coverage constitutes evidence of liability under another portion of the policy;
(iv) failing to provide promptly to a policyholder a reasonable explanation of the basis in the policy, in relation to the facts or applicable law, for the insurer's denial of a claim or for the offer of a compromise settlement of a claim;
(v) failing within a reasonable time to: (A) affirm or deny coverage of a claim to a policyholder; or (B) submit a reservation of rights to a policyholder;
(vi) refusing, failing, or unreasonably delaying an offer of settlement under applicable first-party coverage on the basis that other coverage may be available or that third parties are responsible for the damages suffered, except as may be specifically provided in the policy;
(vii) undertaking to enforce a full and final release of a claim from a policyholder when only a partial payment has been made, provided that this prohibition does not apply to a compromise settlement of a doubtful or disputed claim;
(viii) refusing to pay a claim without conducting a reasonable investigation with respect to the claim;
(ix) with respect to a Texas personal auto policy, delaying or refusing settlement of a claim solely because there is other insurance of a different type available to satisfy all or any part of the loss forming the basis of that claim; or
(x) requiring a claimant, as a condition of settling a claim, to produce the claimant's federal income tax returns for examination or investigation by the person unless: (A) the claimant is ordered to produce those tax returns by a court; (B) the claim involves a fire loss; or (C) the claim involves lost profits or income.
The unfair settlement practices prohibited by this provision are best illustrated through a review of the cases applying them.
As with the common law duty of good faith and fair dealing, most litigation under Section 4(10) arises under the provisions that prohibit: (A) the insurer’s failure to attempt in good faith to effectuate settlement of a claim for which the insurer's liability has become reasonably clear (§ 4(10)(a)(ii)); and (B) refusal to pay a claim without conducting a reasonable investigation with respect to the claim (§ 4(10)(a)(viii)). As previously discussed, in
Giles, the Texas Supreme Court harmonized the standard for common law bad faith with that of a statutory cause of action for bad faith under Article 21.21, § 4(10)(a)(ii).
Since that time, Courts in Texas have routinely dismissed Article 21.21 bad faith claims where there was no evidence to support a common law bad faith claim. For example, in
Carter v. State Farm Mut. Auto. Ins. Co.,
the court concluded that State Farm’s summary judgment evidence that it did not breach the common law duty of good faith and fair dealing by exhausting most of the policy limits on those insureds who were willing to settle their uninsured motorist claims was also sufficient to defeat the non-settling insured’s Section 4(10)(a)(ii) claim.
Giles illustrates the circumstances under which an insurer's denial or delay in paying an insured’s claim was no longer merely erroneous but in bad faith. In
Giles,
the plaintiff's medical records showed the need for surgery, and the plaintiff's physicians wrote to insurer and clarified the basis for the claim. The Court concluded coverage of the claim was reasonably clear, and the jury's finding that insurer was liable for bad faith was supported by the evidence.
Conversely, the insurer was not liable under § 4(10)(a)(ii) in a case where the appellate court determined the insurer's denial of coverage for employee dishonesty losses was not only reasonable, but was ultimately correct, and the insured did not set forth any evidence suggesting bad faith or unreasonable delay.
Similarly, the mere passage of time without acceptance or denial of a claim is not alone enough to give rise to a cause of action for unfair settlement practices under Article 21.21. For example, in
General Star Indemnity Co. v. Brooke Trust,
the insurer was entitled to summary judgment on the insureds' Article 21.21 claim for bad faith delay in determining that a water damage claim was not covered under the insureds' commercial property insurance policy, even though it took the insurer a year and nine months to deny the claim.
It is unusual for an insurer to fail to conduct any investigation of a claim. Thus, most litigation under Section 4(10)(a)(viii) focuses on whether the insurance carrier’s investigation of the claim was “pretextual”. An insurer has a duty to investigate claims, and “cannot insulate itself from bad faith liability by investigating a claim in a manner calculated to construct a pretextual basis for denial.”
When an insurer’s investigation of the claim focuses only on those factors supporting a denial of coverage, while ignoring those facts supporting acceptance of the claim, a case for a pretextual investigation can be brought. For example, in
State Farm Lloyds v. Nicolau,
a jury verdict of breach of duty of good faith and fair dealing was affirmed where the evidence supported finding that expert report on which claim denial was based was not objectively prepared. Since
Giles’ unification of liability standards in common law and Article 21.21 bad faith cases, the pretextual denial of claims should form a basis of liability under Article 21.21 as well.
b. Misrepresentations:
Generally, misrepresentation claims under Article 21.21 are based on Section 4(1) for making misrepresentations regarding the terms, nature or benefits of policies of insurance, Section 4(2) for distribution of false information, or Section 4(11), which prohibits more generic forms of misrepresentations.
Plaintiffs also frequently assert misrepresentation claims under the incorporated provisions of the DTPA, and Section 4(10)(a)(i) (claims for “misrepresenting to a claimant a material fact or policy provision relating to coverage at issue”). The relevant provisions of Article 21.21 most frequently asserted in misrepresentation cases are set forth below.
Sec. 4. The following are hereby defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance:
(1) Misrepresentations and False Advertising of Policy Contracts. Making, issuing, circulating, or causing to be made, issued or circulated, any estimate, illustration, circular or statement misrepresenting the terms of any policy issued or to be issued or the benefits or advantages promised thereby or the dividends or share of the surplus to be received thereon, or making any false or misleading statements as to the dividends or share of surplus previously paid on similar policies, or making any misleading representation or any misrepresentation as to the financial condition of any insurer, or as to the legal reserve system upon which any life insurer operates, or using any name or title of any policy or class of policies misrepresenting the true nature thereof, or making any misrepresentation to any policyholder insured in any company for the purpose of inducing or tending to induce such policyholder to lapse, forfeit, or surrender his insurance;
(2) False Information and Advertising Generally. Making, publishing, disseminating, circulating or placing before the public, or causing, directly or indirectly, to be made, published, disseminated, circulated, or placed before the public, in a newspaper, magazine or other publication, or in the form of a notice, circular, pamphlet, letter or poster, or over any radio or television station, or in any other way, an advertisement, announcement or statement containing any assertion, representation or statement with respect to the business of insurance or with respect to any person in the conduct of his insurance business, which is untrue, deceptive or misleading;
(11) Misrepresentation of Insurance Policy. Misrepresenting an insurance policy by:
(a) making an untrue statement of material fact;
(b) failing to state a material fact that is necessary to make other statements made not misleading, considering the circumstances under which the statements were made;
(c) making a statement in such manner as to mislead a reasonably prudent person to a false conclusion of a material fact;
(d) making a material misstatement of law; or
(e) failing to disclose any matter required by law to be disclosed, including a failure to make disclosure in accordance with another provision of this code.
(2) causing confusion or misunderstanding as to the source, sponsorship, approval, or certification of goods or services;
(5) representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities which they do not have or that a person has a sponsorship, approval, status, affiliation, or connection which he does not;
(12) representing that an agreement confers or involves rights, remedies, or obligations which it does not have or involve, or which are prohibited by law;
(23) failing to disclose information concerning goods or services which was known at the time of the transaction if such failure to disclose such information was intended to induce the consumer into a transaction into which the consumer would not have entered had the information been disclosed. . . .
Both Sections 4(10)(a)(i) and 4(1) relate to misrepresentations regarding insurance policies. The primary distinction between the two sections is that Section 4(10)(a)(i) generally applies to post-loss representations of coverage, whereas Section 4(1) principally applies to representations made in connection with the sale of policies. For example, in
Royal Globe Ins. Co. v. Bar Consultants, Inc., the representation of an insurance company's secretary and agent that the insured's damage was covered, when in fact it was not, entitled the insured to relief under Section 4(10)(a)(i). Whereas in
Performance Autoplex,
the insured asserted a viable claim under Article 21.21, § 4(1) because the insured’s representative testified that the insurance agent from which it purchased the policy asserted that inventory shortages due to an employee's criminal activity would be covered in their entirety under the policy.
After a claim arises, the claims professional may often encounter misrepresentation allegations arising out of disputes over whether a policy was properly cancelled or nonrenewed. For example, in
West v. Mendota Insurance Co.,
the insured avoided summary judgment on her Article 21.21 and DTPA claims by presenting evidence an employee of the insurer represented that if a payment were made late, there would be no disruption of coverage. However, other courts have held that such representations that are contrary to the express language of the policy, are not actionable.
Nevertheless, most courts have held that an affirmative misrepresentation contrary to the terms of the policy is necessary for liability under Article 21.21, § 4(1). For example, in
Gulf States Underwriters, Inc. v. Wilson,
the Beaumont Court of Appeals held that a cause of action under Article 21.21, § 4(1) requires: (1) a misrepresentation of the policy, (2) which either purposely induced to tended to induce the insured to let the policy lapse.
Thus, there was no misrepresentation of the insurance policy where insurer sent insured a notice of intent not to renew and thereby cancel the policy, which included the phrase "in accordance with all policy provisions." The Court determined that, contrary to the insured’s assertions, the failure to give notice of a right under the policy cannot be equated with a misrepresentation of the policy. Courts in Texas have treated claims under Article 21.21, §§ 4(2) and 4(11) in a similar manner.
Because allegations of misrepresentations often affect how a claim is adjusted, part of the claims professional’s adjustment of a claim may be to interview other company personnel who allegedly made the representations. In such situations, the claims professional should consult the policies of his or her company on how to handle the internal investigation. If there is no company policy on the matter, it may be advisable to consult with management, and if available, counsel, prior to proceeding.
c. DTPA Incorporation:
Another source of acts and omissions that may give rise to liability under Article 21.21 is the DTPA “laundry list,” found in Section 17.46(b) of the Texas Business and Commerce Code.
Violations of the provisions of Section 17.46(b) are expressly made actionable by Section 16(a) of Article 21.21. However, there are certain additional hoops an insured must jump through to prevail on a DTPA claim under Article 21.21. First, to prevail on an incorporated DTPA claim, the plaintiff must show detrimental reliance.
Reliance is not an element of an Article 21.21 claim. Second, the plaintiff must establish “consumer standing” under the DTPA, if the provision of the DTPA asserted requires consumer standing.
Although demonstrating consumer standing should be easy for insurance purchasers, other claimants may have substantially more difficulty.
2. Damage Issues:
Successful plaintiffs under Article 21.21 may recover their actual damages, court costs, and their reasonable and necessary attorney’s fees.
Injunctive relief is also available.
Treble damages (three times actuals) are available if the jury concludes that the violation of Article 21.21 is “knowingly” committed.
“Knowingly” is defined in Article 21.21 as having an “actual awareness of the falsity, unfairness, or deception of the act or practice made the basis for a claim for damages under Section 16 of this Article.”
Moreover, the statute provides that “‘actual awareness’ may be inferred where objective manifestations indicate that a person acted with actual awareness.”
Like the showing necessary to obtain punitive damages on a common law bad faith claim, demonstrating a “knowing” violation of Article 21.21 requires more than a simple refusal to pay a claim.
A “knowing” violation was found in
Southern Life & Health Ins. Co. v. Alfaro.
In that case, a life insurance beneficiary brought an Article 21.21 bad faith claim based on the insurer’s refusal to pay double indemnity based on the allegation that the insured was killed while committing a felony. The jury rejected the carrier’s basis for denying the claim, and found a knowing violation of Article 21.21. Factors relevant to the jury’s finding of a knowing violation included that the insurance carrier: (1) denied the claim without interviewing any of the witnesses to the killing; and (2) presented no evidence supporting the contention that the insured was committing a felony when he was killed.
A knowing violation of the statute was also found in
Bellefonte Underwriters Ins. Co. v. Brown.
In
Brown,
fire destroyed an insured's building and Underwriters subsequently revoked their acceptance of the insured's proof of loss. Underwriters also sent a telex to co-insurers urging them to do the same. The Court concluded that treble damages were proper because the insured proved that the Underwriters intentionally drafted and sent the telex that contained a false statement about the insured's conduct in placing insurance policies.
3. Defenses:
The only defense expressly set forth in Article 21.21 is the statute of limitations. However, Texas courts have over the years fashioned certain judicial defenses to liability, or otherwise interpreted the statute in ways that exclude certain parties from its reach.
a. Standing (Who can sue? Who can be sued?):
Although Section 16(a) indicates only that “persons who have sustained actual damages” may sue for violations of Article 21.21, and “persons” is defined in the statute as those “engaged in the business of insurance,” Texas courts have consistently held that insureds and named beneficiaries have standing to sue even though they are not “engaged in the business of insurance.”
Corporate insureds are also considered “persons,” and therefore may bring a cause of action under Article 21.21.
Insurance agents may also sue and be sued under Article 21.21.
Whether intended (but not specifically named) third party beneficiaries may sue under Article 21.21 is still the subject of some controversy.
Notwithstanding the controversy over the standing of intended third-party beneficiaries, plaintiffs who can prove reliance on the representations of an insurer have established standing under Article 21.21 in a string of cases. For example, in
Hermann Hosp. v. National Standard Insurance Co.,
a hospital that relied on insurance carrier’s subsequently revoked representation of coverage to treat the insured had standing to sue for misrepresentations under Article 21.21.
Similarly, in
Webb v. International Trucking Co.,
a third party claimant who relied on representation by other driver’s insurance carrier that payment for repairs would be made could maintain a cause of action against the insurer under Article 21.21.
Texas courts have also determined that certain entities are not subject to liability under Article 21.21. For example, in
Great Am. Ins. Co. v. North Austin Municipal Util. Dist. No. 1,
the Texas Supreme Court concluded that Article 21.21 does not apply to commercial sureties because suretyship did not constitute the "business of insurance" under Section 2(a) of Article 21.21.
Other cases have exempted structural engineers conducting investigations on behalf of insurance carriers from the statute’s reach.
However, Article 21.21 has been construed in a limited number of cases to apply to reinsurers, self-insured city governments, and even employers.
The case law in this area continues to evolve. If your claim involves a plaintiff other than an insured or named beneficiary, or an insurer other than a “traditional” primary carrier, you may want to consult the most recent precedents on the issue of standing.
Thus far, those involved in the adjustment of insurance claims have been able to avoid personal liability under Article 21.21. For example, in
Ardila v. State Farm Lloyds,
summary judgment was granted to a claims adjuster who handled the insureds' claim. Assuming, without deciding, that the adjuster was the insurance carrier’s agent, the court determined the claim still failed because the insureds failed to allege any actionable conduct to the employee, such as particular misrepresentations to the insureds.
Similarly, in
Dagley v. Haag Engineering Co.,
structural engineers who investigated hail damage to the insureds’ home, were not engaged in the “business of insurance,” and therefore were not subject to claims under Article 21.21. However, neither of these cases erects a bar to Article 21.21 liability for either in-house or third party claims adjusters. Moreover, given the Texas Supreme Court’s conclusion that insurance carrier employees who are “engaged in the business of insurance” may be held personally liable under Article 21.21,
the better course is to act as though your actions expose not only your company to liability, but also you personally.
b. Suits Brought in Bad Faith:
Although not technically a defense, Article 21.21 does provide a mechanism to penalize those who assert frivolous claims. Under Section 16(c), if the court determines that a lawsuit under Article 21.21 “was groundless and brought in bad faith or brought for the purpose of harassment, the court shall award to the defendant reasonable and necessary attorneys' fees and court costs.”
However, prevailing under this provision is difficult. In fact, there are no reported cases in which a Section 16(c) recovery has been allowed. Nevertheless, if the plaintiff’s case appears to be groundless, assertion of a Section 16(c) counterclaim may provide the insurer with litigation and negotiating leverage.
c. Limitations:
All cases under Article 21.21 must be brought within two years after the date on which the violation of Article 21.21 occurred, or “within two years after the person bringing the action discovered or, in the exercise of reasonable diligence, should have discovered” the violation of the statute.
The limitations period may be extended by 180 days if the defendant strings the plaintiff along, or in the words of the statute, “engage[es] in conduct solely calculated to induce the plaintiff to refrain from or postpone the commencement of the action.”
As a general rule, an Article 21.21 bad faith claim arises on the date the insurer denies coverage.
However, as indicated in Section 16(c), the discovery rule applies. Thus, in a case where a mortgage company unilaterally cancelled the homeowners’ mortgage protection policy and, without notice, substituted a policy with significantly less benefits, the two-year statute of limitations did not bar the insureds' suit because the cause of action did not accrue until the insureds received notification that their twelfth mortgage payment would be the last one covered by the original policy.
d. Good Faith / “Bona Fide” Dispute:
As with common law bad faith claims, Texas courts have found that where there is a bona fide dispute as to coverage of the claim, that the insurance carrier is not guilty of bad faith under Article 21.21. Some courts have phrased this concept in terms of the “mere breach of contract” doctrine developed in cases under the DTPA. It is also not bad faith for an insurance carrier to wait until there is a judicial resolution of the disputed coverage issue to make payment. Similarly, an insurer generally cannot be held liable under Article 21.21 for denying a claim that is in fact, not covered by the policy.
e. ERISA Preemption:
Whether a claim under Article 21.21 is preempted by ERISA generally turns on the facts of the specific case. For example, in
Hermann Hosp. v. Aetna Life Ins. Co.,
the hospital’s claim was not preempted because it did not seek benefits under the insurer's plan as the patient's assignee; instead, the hospital sought damages based on its independent status as a hospital and for the insurer's misrepresentations as to coverage on which the hospital relied in rendering services to the patient. According to the appellate court, such claims were independent of any obligations under an ERISA plan, and therefore the hospital’s Article 21.21 claim did not relate to an employee-benefit plan. Similarly, in
Gulf Coast Alloy Welding, Inc. v. Legal Security Life Ins. Co.,
the court held that claims for violations of the DTPA and Article 21.21 which arose out of the alleged false promise to reinstate a lapsed nonsubsriber workplace injury policy upon receipt of the premium were not preempted by ERISA. The court concluded those claims dealt specifically with an area subject to traditional state regulation, i.e., the commercial dealings between the parties, and would have existed if the underlying insurance policy were for property and casualty, life, or any other type of insurance, rather than an ERISA plan. Conversely, in
Silva v. Aetna Life Ins. Co.,
the court held that an employee's Article 21.21 claim for his employer's wrongful failure to pay medical bills was preempted under ERISA.
f. Pre-Suit Notice Requirements:
Although not a defense to liability under either statute, both the DTPA and Article 21.21 require claimants to send specific, written pre-suit demands for payment to insurance carriers. Unless the statute of limitations is about to expire, these notices must be provided sixty (60) days prior to filing suit. If the claimant fails to send the proper notice, the insurer may make a motion to abate the case for sixty days after a proper notice is sent. There are also provisions in both statutes for compelling court-ordered mediation. Although these provisions do not preclude liability, they may offer the insurer an opportunity to promptly settle meritorious claims before significant attorney’s fees are incurred by either side.
C. Prompt Payment of Claims Under Texas Insurance Code Article 21.55
Article 21.55 of the Texas Insurance Code generally requires carriers to reject, accept, and if accepted, pay “first party” claims in a prompt manner. As explained in this Section, the statute sets forth specific triggers and timelines for the adjustment of claims.
If these timelines are not met, the “claimant” may bring suit and recover the statutory penalties set forth in the statute, as well as his or her costs of court and reasonable and necessary attorney’s fees.
Article 21.55 applies to almost all insurance carriers operating in Texas,
and virtually all lines of insurance except:
(1) workers' compensation insurance; (2) mortgage guaranty insurance; (3) title insurance; (4) fidelity, surety, or guaranty bonds; (5) marine insurance as defined by Article 5.53 of [the Insurance Code]; [and] (6) a guaranty association created and operating under Article 9.48 of [the Insurance Code].
Unless you are adjusting a claim for one of these types of coverages, Article 21.55 probably applies.
1. Liability Issues:
The first triggering event under Article 21.55 is the “notice of claim.” According to the statute, a notice of claim must be: (1) in writing; (2) sent to an insurer; (3) by a claimant; and (4) must reasonably apprise the insurer of the facts relating to the claim.
However, at least one court has held that an oral notice of claim was sufficient.
Moreover, courts have construed a notice from the claimant’s attorney to be a notice “by the claimant.”
Thus, the safest course is to treat any indication that the insured desires to make a claim as a “notice of claim” for Article 21.55 purposes, and begin the process of opening a file on the claim.
Once a notice of claim is received, the insurer
must, within 15 days:
(1) acknowledge the claim; (2) begin any investigation of the claim; and (3) request any additional information needed from the claimant.
The acknowledgement of the claim and any request for additional information should be made in writing, but the statute allows for oral acknowledgement of claims, provided the “date, means, and content of the acknowledgement” are recorded.
An insurer is not required under Article 21.55 to accept to reject a claim until it has received “all items, statements, and forms required by the insurer, in order to secure final proof of loss.”
However, once all such information is obtained, the insurer must accept or reject the claim, in writing, within 15
business days,
unless the insurer provides written notice to the claimant, within the 15 business days (or 30
calendar days, in the case of suspected arson), of the reasons the insurer needs additional time to accept or reject the claim.
If such a notice is sent, the carrier will have no more than 45 additional,
calendar days to accept or reject the claim.
If at any point in this process the insurer decides to reject the claim, it must send the claimant a written statement of the reasons the claim was rejected.
Section 4 of the statute governs the timeline for payment of accepted claims. Under that Section, an insurer must pay the claim within the later of: (1) 5
business days after the date of notice to the claimant that the claim would be paid; or (2) 5
business days after the claimant performs any condition precedent to payment.
If the carrier has accepted a claim only in part, the insurer need only pay the part of the claim that has been accepted.
However, acceptance and payment of part of a claim will not absolve the carrier from liability for failing to comply with the requirements of Article 21.55 with respect to other portions of the claim.
An insurer is subject to liability under Article 21.55 if the “insurer delays payment of a claim . . . for more than 60 [
calendar] days,”
after it receives all information requested an necessary to decide whether to accept or reject the claim.
Although Section 3(f) on its face requires the insurer to make “payment” of a claim to avoid liability under the statute, Section 3(g) makes clear that if the claim is not covered by the policy, there can be no liability under Article 21.55.
Texas case law is consistent with the statute. For example, in
Performance Autoplex II Ltd. v. Mid-Continent Cas. Co., summary judgment on the claimant’s Article 21.55 claims was proper where the court determined the claim for employee dishonesty losses was not covered. Nor is Section 3(f) of Article 21.55 violated when the insurer reasonably revokes a prior notification of payment due to new information or an intervening change in the circumstances of the claim.
In
Daugherty, the insurance carrier accepted the insureds’ claim for their stolen vehicle and sent an offer of payment to the insureds. However, before the offer was accepted or payment was made, the car was recovered, and the insurer withdrew the offer. In the insured’s suit under Article 21.55, the court held that there was nothing in the Insurance Code or in the policy at issue that prevented the insurer from withdrawing its offer of payment once the facts and circumstances known to the insurer significantly changed, and in the absence of evidence that the insurer unreasonably sought to delay its payment obligation to the insured, there could be no liability under Article 21.55.
2. Damage Issues:
Article 21.55 provides that if the statute is violated, a claimant may, in addition to recovering the amount of the claim, recover an 18 percent annual penalty and reasonable and necessary attorney’s fees in any suit filed under the statute.
The 18 percent penalty under Section 6 is considered an award of exemplary damages, rather than actual damages, because the award is made without reference to any harm actually suffered by the insured.
Moreover, the penalty is calculated on the entire amount of the claim, regardless of whether partial payment has been tendered by the insurer.
Attorney’s fees are awarded to prevailing claimants under the typical “reasonable and necessary” standard.
3. Defenses:
There are no express affirmative defenses stated in Article 21.55—not even a limitations defense (the limitations rules from Article 21.21 apply). However, as with Article 21.21, courts have crafted arguments that can be raised in defense to an Article 21.55 claim.
a. Standing (Who can sue? Who can be sued?):
Article 21.55 creates a cause of action for “claimants”—insureds, policyholders, or named beneficiaries
--who make “a first party claim . . . that must be paid by the insurer directly to the insured or beneficiary.”
Although the statute expressly applies only to “first party claims,” courts in Texas have split over whether a claim for a defense under a liability policy is a “first party claim” to which Article 21.55 applies. For example, in
Mt. Hawley Ins. Co. v. Steve Roberts Custom Bldrs., Inc.,
the court treated the insured’s rejected request for a defense from third party claim as a “first-party claim” under 21.55, and held insurer was subject to statutory penalties for noncompliance with statute. However, in
TIG Insurance Co. v. Dallas Basketball, Ltd.,
the Dallas Court of Appeals concluded that the insured’s demand for a defense under a liability policy was not a “first party claim” under Article 21.55, because it was not “paid by the insurer directly to the insured or beneficiary.” Although the opinion in
Dallas Basketball is the better reasoned approach, until this split of authority is resolved by the Texas Supreme Court, insurers may be well advised to treat demands for defense as “claims” under Article 21.55.
There are several prerequisites to
Stowers liability that arise from these elements. For example, liability under
Stowers is predicated on the insurer’s control of the litigation, and specifically, the power to settle the litigation. The Commissioner of Appeals in
Stowers stated:
Certainly, when an insurance company makes such a contract [giving it complete and exclusive control over the suit], it, by the very nature of the terms of the contract, assumed the responsibility to act as the exclusive and absolute agent of the insured in all maters pertaining to the questions in litigation, and, as such agent, it ought to be held to that degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business . . . .
Thus, if the carrier does not have the right to control the litigation, or specifically, settlement decisions, there should be no
Stowers duty.
Although this principle seems relatively straightforward, there are several unresolved issues regarding its application. Most cases where
Stowers demands are made involve claims where the potential exposure significantly exceeds the available insurance coverage. Given that many commercial insureds have multiple layers of coverage, and/or may have significant self insured retentions or deductibles, gauging who has control over litigation, and when, may become complicated.
For example, most excess policies provide that the excess carrier typically does not have any duty to defend an insured if the insured’s defense is being provided by the primary insurer. However, if the primary or underlying insurers tender their policy limits in response to a settlement demand, then the excess carrier’s obligation to evaluate the demand is likely triggered.
If the excess carrier fails to act as an ordinarily prudent insurer, it may be subject to exposure under
Stowers.
Due to the potential liability of excess carriers under
Stowers, the claims professional employed by an excess carrier should closely monitor—but abstain from attempting to control—litigation in which a judgment is likely to penetrate the excess carrier’s layer of coverage. Although one of the components of a valid
Stowers demand is a reasonable time to consider the offer, what may constitute a reasonable time will vary under the circumstances. You do not want to be caught in the position of having to evaluate a
Stowers demand without sufficient information about the case, if such information is available. Therefore, it is advisable in situations where the insured reports a claim on which excess policy proceeds may be at risk, to write the insured asking to be carbon copied on all significant pleadings and status reports from defense counsel. It is also not a bad idea to carbon copy this request to defense counsel and the adjuster for the primary and any underlying carriers. Often the underlying carrier’s handling of the claim is as important to the excess carrier as it is to the insured.
b. Demands in Excess of Policy Limits:
Another issue that arises in the context of multi-layered coverage is whether a demand made for the aggregate of all insurance coverage is a demand within policy limits as required by
Stowers. Generally, if a demand is in excess of the limits of the policy,
Stowers is not triggered.
The reason for this rule is that if the carrier does not have the ability to bring litigation against its insured to an end by paying its policy limits, it cannot be negligent for failing to do so. This is because under any circumstances, the insured would be subject to a judgment in excess of the primary policy. The application of this general rule becomes complicated in the presence of multiple layers of coverage. Does a primary carrier faced with multiple layers of coverage and a demand in excess of primary limits have any
Stowers exposure for failing to accept the demand? The Texas Supreme Court has expressly reserved ruling on this issue.
The answer to this important question has profound implications for the duties owed by primary carriers to both their insureds, and carriers with excess policies over the limits of the primary policy.
At least one Court of Appeals opinions has addressed the primary carrier’s duties when accepting a
Stowers demand would require funding from multiple layers of coverage. In
Westchester Fire Ins. Co. v. American Contractors Ins. Co. Risk Retention Group,
the Court of Appeals concluded that a demand of $1.8 million to a primary carrier with $250,000 policy limit did not trigger
Stowers, even though the insured had two additional layers of coverage up to $4 million. As a result, the court denied a recovery to Westchester (the excess carrier) whose policy would not have been tapped had the settlement demand been accepted, but was available to pay the post-trial settlement of $4.3 million (on a verdict of $7.5 million).
Despite the ruling in
Westchester, because the Texas Supreme Court has not spoken directly to this issue, primary carriers should still seriously evaluate
Stowers demands in excess of their policy limits, if there is excess coverage available to fund the settlement. Most excess policies are not triggered until the limits of the underlying policies are exhausted. If the primary carrier’s evaluation of the demand indicates that an adverse judgment is probable, and the damages awarded will likely exceed its policy limits, it should seriously consider tendering its limits to the excess carrier which maintains the next layer of coverage. If it fails to do so, and as a result, the excess carrier’s obligation to consider the demand is not triggered, the primary carrier could be subject to negligence claims by its insured, in the event of a judgment in excess of all available insurance coverage. Or, as in
Westchester, the primary carrier could face suits by an excess carrier that was not called upon to fund the demand, but as a result of the primary carrier’s rejection of the demand, has to fund part of the judgment.
Primary carriers have nothing to lose, and everything to gain by employing this strategy.
If a settlement demand in excess of the primary carrier’s policy limits is reasonable, then the primary carrier has determined that its policy limits will likely be exhausted whether or not the case is settled. Thus, the primary carrier takes little risk in tendering its policy limits to the excess carrier immediately above the primary layer. By putting the
Stowers ball in the excess carrier’s court, the primary carrier should be immunized against
Stowers liability to the insured, and claims of negligence by the excess carrier. Moreover, although the primary carrier may have to pay the limits of its policy, if the settlement is accepted, at least the primary carrier will have saved some money on defending the suit through trial.
Demands in excess of policy limits may trigger
Stowers duties in another situation—where the insured agrees to fund the amount of the demand in excess of policy limits, or for damages not covered under the policy.
In
State Farm Lloyds v. Maldonado,
the San Antonio Court of Appeals concluded that the insured’s acceptance (through independent counsel) of such a bifurcated demand triggered the carrier’s
Stowers duty. However, on appeal, the Texas Supreme Court reversed, holding that because the carrier was never made aware that the insured had accepted the demand, the carrier’s obligations under
Stowers, if any, never came into play.
Although the Texas Supreme Court’s opinion in
Maldonado assumes that the carrier’s
Stowers duty was triggered when its insured accepted the demand for payment in excess of the policy limits, the Court expressly declined to determine whether such a duty existed.
Thus, in cases where bifurcated demands are made, if the carrier learns that the insured has agreed to pay the amount of the demand in excess of policy limits, the carrier should evaluate the settlement demand under
Stowers.
Other problems arise when multiple concurrent policies are available to fund the settlement demand. For example, if the demand exceeds the limits of any one primary policy, but not the aggregate limits of all concurrently available primary policies, is
Stowers triggered? Or, how should the carrier respond when faced with a
Stowers demand for its policy limits, but there are other, concurrent policies that are also sufficient to satisfy the settlement demand? Again, the Texas Supreme Court has expressly declined to answer these questions.
However, a prudent carrier will consider demands in both scenarios sufficient to trigger its duties under
Stowers, and evaluate the demand accordingly.
But, the question remains: If the carrier determines the demand should be accepted in one of the above situations, how much must the carrier pay to satisfy its obligations under
Stowers? In the first scenario (a demand in excess of the limits of any one policy, but within the aggregate limits of all concurrently available policies), the answer will be controlled by an interpretation of the “other insurance” clauses in the concurrently available policies.
In the second scenario (a demand to a carrier within its policy limits, in the presence of other concurrently available policies not subject to the demand), the carrier presented with the demand should demand that the other carriers contribute to the settlement. If they refuse, the carrier faced with the demand would be wise to settle the case, discharging its
Stowers obligation to the insured, and then pursue the other insurers for subrogation.
c. Written Demand:
Another unsettled area under
Stowers is the question of whether a
Stowers demand must be in writing. Although the better practice from the claimant’s perspective is plainly to put the offer in writing, the Corpus Christi Court of Appeals has held that oral offers were as valid as written offers in the
Stowers context, so long as they met the substantive requirements of a proper
Stowers demand.
Although the Court of Appeals’ decision was reversed by the Texas Supreme Court, that ruling was based on the finding that the demand did not provide for a full release, because it did not assure the carrier that all hospital liens would be paid from the proceeds of the settlement. The Court did not reach the issue of whether a
Stowers demand must be in writing.
In subsequent cases, the Texas Supreme Court has also stopped short of expressly requiring that
Stowers demands be in writing.
To date, no Texas court has expressly held that a
Stowers demand must be in writing to be valid. Ultimately, the failure to put a
Stowers demand in writing creates subsequent proof problems for the claimant. Although the claims professional is not in the business of ensuring that claimants make proper
Stowers demands, if an oral offer of settlement is made, that satisfies the substantive
Stowers requirements, the better course may be to ask that the offer be reduced to writing so that it may be properly evaluated by all those involved in the settlement decision-making process.
d. Existence of Coverage:
For
Stowers liability to exist, the demand must be made for damages covered under the policy. Although the carrier’s duty to defend is triggered by the allegations in the claimant’s lawsuit, the duty to indemnify is more narrowly based on the facts as they actually exist. Thus, when evaluating a
Stowers demand, the claims professional should be interested in determining whether the insured’s liability for claims and damages which are covered by the policy is reasonably clear.
For example, if the policy excludes coverage for punitive damages, but the
Stowers demand is based on the presumption by the claimant that punitive damages will be awarded, the
Stowers demand may not be proper.
e. Full Release:
A proper
Stowers demand must offer to fully release the insured in exchange for a sum certain within the policy limits, or simply in exchange for “policy limits”.
The Texas Supreme Court has held that a “full release” also includes the release of all third-party liens (e.g., hospital liens, Medicare / Medicaid liens, health insurer subrogation claims, etc.).
If the
Stowers demand is silent as to such liens, but the carrier is inclined to accept the demand, it should be made clear that the release offered by the claimant includes the release of all liens. If the carrier is not inclined to accept the
Stowers demand which is silent as to the release of liens, and the claims professional is aware that such liens exist, the silence of the
Stowers demand as to the liens may be sufficient to defeat any subsequent
Stowers claim.
The more problematic scenario is the one where the
Stowers demand is silent as to liens, the carrier is unaware of the existence of any such liens, but is inclined to reject the demand for other reasons. This situation is most likely to occur when a
Stowers demand is made early-on in a case. A valid argument can be made that the burden of disclosing and offering to release such liens should be on the claimant. However, the claims professional should consult with defense counsel who, even early on in a case, should have information about the extent of the claimant’s injuries, medical treatments and expenses, and may even have information on the existence of medical liens. In a case involving all but the most minor of injuries, it is likely that some liens or subrogation interests exist. Rejection of a policy limits
Stowers demand
solely because it does not include an offer to release all liens is not recommended. The better course is to respond to the
Stowers demand by demanding the disclosure and release of all liens as part of any settlement. The claimant is then faced with either acceding to this demand, or failing to properly trigger
Stowers.
f. Multiple Claimants:
How should the carrier respond if there are multiple claimants, all of whom make valid
Stowers demands that aggregate more than the limits of the policy? In
Texas Farmers Insurance Company v. Soriano,
the Texas Supreme Court held that when an insurer faces multiple settlement demands and the policy provides inadequate proceeds to pay them all, the insurer may enter into a reasonable settlement with less than all the claimants, even though the settlement(s) diminishes or exhausts the amount available to pay other claimants.
In
Soriano, the insured was involved in a head-on collision with Medina, one of the claimants. Medina, his children, and Soriano’s passenger, Lopez were severely injured. Medina’s wife was killed. Soriano’s policy with Farmers had limits of $10,000 per person, $20,000 per accident. Farmers offered to pay the limits of the policy to the Medinas, but the offer was refused. The Medinas and Lopez later sued Soriano. Prior to trial, Farmers settled with Lopez for $5,000, and offered the remaining $15,000 to the Medinas. The offer was met with a demand from the Medinas for $20,000. The case proceeded to trial, where the Medinas were awarded $172,187.00. Soriano then assigned his
Stowers claim against Farmers to the Medinas in exchange for a covenant not to execute on the judgment. In the subsequent
Stowers suit against Farmers, the jury awarded the Medinas $520,577.24 in actual damages, and $5 million in punitive damages.
Farmers appealed. The Court of Appeals held that when determining whether to accept a demand in a case involving multiple claimants and inadequate proceeds, the carrier must employ the “comparative seriousness” rule, and measure the proportional limits of each claim. The carrier should then attempt to settle the claims accordingly, but if the carrier is wrong in its assessment of the exposure of the insured on each claim, it becomes liable for damages in excess of its policy limits.
The Texas Supreme Court reversed.
The Supreme Court rejected the Court of Appeals’ “comparative seriousness” approach and concluded that Farmers could not be held liable for negligence under
Stowers unless it was shown that either: (1) Farmers negligently rejected a demand from the Medinas within the policy limits; or (2) the Lopez settlement was unreasonable.
The Court found that the Medinas did not meet either test. First, by the time the Medinas made a “policy limits” demand of $20,000, the limits of the policy had been reduced to $15,000 by the Lopez settlement.
Thus, the demand for $20,000 was not a proper
Stowers demand. Second, the Medinas had failed to show that the Lopez settlement was unreasonable—that a reasonably prudent insurer would not have settled with Lopez considering
solely the merits of Lopez’s claim and Soriano's potential exposure on that claim alone.
Under
Soriano, a claims professional faced with multiple claimants and inadequate proceeds should evaluate and address each settlement demand in isolation. If a reasonably prudent insurer would accept the demand considering
solely the merits of the demanding claimant’s case, then the carrier may be subject to
Stowers liability if the demand is not accepted. Unfortunately, the
Soriano case
does not address the situation where multiple demands are received, it would be reasonable for the insurer to pay any one of them in isolation, but the policy proceeds are insufficient to pay all the demands. Thus, it is not clear whether an insurer’s duty under
Stowers is triggered in such a situation.
One solution to this problem is as follows: If, as in
Soriano, the carrier has determined that policy limits will be paid, and the carrier cannot reach an agreement on allocation of the policy proceeds with the multiple claimants, the carrier may consider trying to reach an agreement with the insured and the claimants that in exchange for a stipulation to liability and a full release for the insured from any excess judgment, the claimants will accept a pro-rata share of the policy proceeds based on the damages awarded to each by the jury.
Such a proposal allows for a full release of the insured, a rational way for the carrier to allocate the policy proceeds among multiple claimants, reduces the cost of resolving the litigation, and has the effect of turning counsel for the differing claimants into competitors. Under this approach, the insurer should obtain the agreement from all claimants and the insured that the policy proceeds can be paid into the registry of the court, and the carrier’s defense obligation is terminated.
g. Multiple Insureds:
What if there are there are multiple insureds under a single policy, and a
Stowers demand for policy limits is extended to less than all of them? Although the insureds to whom the settlement offer was not addressed should get a credit for the settlement made on behalf of their co-insureds, such a credit may be of little comfort to the remaining insureds who will have to fund their own defense. This scenario has not been addressed by the Texas Supreme Court, but has been touched upon by the Fifth Circuit Court of Appeals.
In
Travelers Indemnity Company v. Citgo Petroleum Corp.,
Travelers paid its policy limits as part of a settlement on behalf of the primary insured who had been sued in a prior action. The claimants in that case then sued Citgo, an additional insured on the Travelers policy. Citgo demanded a defense and indemnity from Travelers. Travelers refused, for among other reasons, because it had already paid the limits of its policy to settle the claims against the primary insured. Travelers then filed a declaratory judgment action, and Citgo counterclaimed for breach of the policy, bad faith, and Insurance Code and DTPA violations. The trial court granted summary judgment to Travelers, and Citgo appealed. The Fifth Circuit, relying on
Soriano, concluded that Travelers was “not subject to liability for proceeding, on behalf of a sued insured, with a reasonable settlement, as defined in
Soriano at 316, once a settlement demand is made, even if the settlement eliminates ‘or reduces to a level insufficient for further settlement’ coverage for a co-insured as to whom no
Stowers demand has been made.”
The Fifth Circuit expressly declined to address a carrier’s obligations when “faced with multiple and concurrent
Stowers demands as to different insureds where the demands in total exceed the policy limits.”
Moreover,
Citgo may be factually distinguishable from a situation where multiple insureds are sued in the same case, and a
Stowers demand for policy limits is made to fewer than all insureds. Such a situation pits the carrier’s contractual duty to defend against its duty under
Stowers to evaluate the settlement demand as a reasonably prudent insurer, and protect its other insureds against an excess judgment. Although
Citgo and
Soriano suggest that a carrier would not face
Stowers liability for exhausting its policy limits by accepting reasonable settlements on behalf of less than all of its insureds, the precise issue does not appear to have been addressed by any Texas court.
2. Damage Issues:
Stowers creates a specialized form of negligence action. Thus, the damages available in a
Stowers case are those proximately caused by the carrier’s failure to act as a reasonably prudent insurer under the circumstances. The actual damages are typically the amount by which the judgment obtained by the claimant exceeds the limits of the policy, pre- and post judgment interest, and costs. Punitive damages may also be recovered in cases of gross negligence.
3. Defenses:
The most typical defense asserted against a
Stowers claim is that, because of a defect in the demand,
Stowers was never triggered. As demonstrated in Section IV (A)(1), above, there are still many open issues regarding what constitutes a proper
Stowers demand. However, because
Stowers is a negligence action, if defenses to a negligence claim apply under the facts of any given case, those defenses should be asserted. For example, if a carrier was precluded from accepting a settlement demand because its insured failed to reasonably cooperate in its defense, the carrier may be able to assert a contributory or comparative negligence defense to any subsequent
Stowers claim.
Stowers claims are also subject to a two (2) year statute of limitations that begins to run on the date the excess judgment becomes final.
B. Texas Insurance Code Article 21.21:
The actionable provisions of Article 21.21 do not necessarily differ in the first-party and third-party contexts, but as explained below, the facts that give rise to violations of those provisions do. Similarly, the Article 21.21 defenses and damages available in the first-party context as discussed in Section III (B), above, are equally applicable to Article 21.21 claims made in the third party context, with one notable exception set forth below.