Law and Insurance

Texas Appellate Court Strives to Get It Right in Insurance Dispute Over $12,000 Towing Charge.

Canal Ins. Co. v. Hopkins Towing and Recovery, # 12-06-00411CV (Tex. App. Tyler Oct. 24, 2007)

We don't always give enough credit to our courts for the hard work it takes to resolve disputes, even the little one.  The dollar value of a dispute is not always (or even often) the measure of how complicated it can be to resolve, as this case demonstrates.  As the poet observed, "The mountains labored and a mouse was born."  It is a tribute to our judiciary when the mice are treated as worthy of careful scrutiny as the larger species.

On motion for rehearing (i.e., the court already ruled on this case in June but agreed to reconsider arguments) the Tyler Court of Appeals untangled a Gordian knot to resolve an insurance coverage dispute over a $12,690 towing and storage fee for a tractor trailer destroyed in a one vehicle accident on a rural road. (The rig had rolled over requiring the use of special air bags to return tractor and trailer to an upright position.) The driver may or may not have mumbled consent to allow the rig to be towed before being led away on a stretcher (a disputed issue at trial).  The insurer paid for the property damage to the rig but challenged the towing company's right to recover its fees directly from the insurer. 

The statute under which Hopkins sought payment from Canal is section 2303.156 of the Texas Occupations Code, which requires "An insurance company that pays a claim of total loss on a vehicle in a vehicle storage facility [to pay] the operator of the facility any money owed to the operator in relation to delivery of the vehicle to or storage of the vehicle in the facility regardless of whether an amount accrued before the insurance company paid the claim." 

The trial court ruled in favor of the towing company, and the insurer appealed, asserting numerous complicated issues:

1. The owner consented to the tow and storage (which would somehow get Canal off the hook);
2. The vehicle was not a "total loss" (even though evidence at trial proved the repair cost exceeded the fair market value of both tractor ant trailer);
3. The statute only applied if Canal took title to the vehicle;
4. The statute is unconstitutionally vague over what is meant by "total loss" and other terms;
5. The legislative history of the statute shows the law was intended to apply only to a post-tow transfer of title to the insurer;
6. Title didn't transfer to the insurer;
7. The legislative history shows that "total loss" means the wreck has no market value;
8. The statute only applies if the vehicle has been abandoned.

To its credit, the appellate court meticulously examined each issue in detail.  With each new issue, the court patiently defined the standard of review to be applied before discussing the issue.  Where sufficiency of evidence had to be examined, the court quoted trial testimony at length.  The court cited rules governing statutory interpretation and constitutionality.  Only after exhaustive analysis of each challenge did the court come back to its original decision and reassert that Canal had to reimburse the towing and storage charges.

The court earned its pay with this decision.

Will Carbon Emissions Litigation Become the Next Asbestos Deluge for the Construction Industry?

In an article published this week in Business Insurance magazine (republished in IndustryBrief at Buildings' Carbon Emissions), author Stacy Shapiro poses the question whether in a few decades building owners, contractors and architects might face huge liability claims for failing to build green buildings, creating a wave of litigation that could dwarf the tobacco and asbestos litigation of prior years.  If carbon emissions are the largest man-made contribution to climate change, buildings, residential and commercial, account for approximately 38% of such emissions in the United States, more than either the transportation or industrial sectors.

At present, attention largely rests on such entities as power companies and automobile manufacturers and there is no know litigation targeting carbon emissions from buildings.  However, Ms Shapiro observes that legal experts see a real potential for litigation in the commercial construction sector either from the buildings' inhabitants who complain of losses from violations of health and safety laws, or from other potential plaintiffs seeking accountability for failing to keep pace with climate change regulations.

Although it may several decades before this type of litigation emerges, it is not too soon to be watching what one commentator calls the New Carbon Cycle.

Insurers Lose First Challenge to "Known Loss" Exclusion in CGL Policies

Transportation Ins. Co. v. The Regency Roofing Cos., Inc., 2007 U.S. Dist. LEXIS 74364 (S.D. Fla. Oct. 2, 2007)

This is the first test case of the so-called "known loss" exclusion that has been written into most standard commercial general liability  (CGL) policies for about five years.  This exclusion bars coverage for any "bodily injury" or "property damage" that any insured knew had occurred or begun to occur before the inception of the insurance policy.  As the court put it, "In other words, to be covered, the Insured must have been unaware of any property damage prior to the Policy period, and must have first learned of such damage during the term of the Policy."

The rationale behind this exclusion is simple and reasonable: you can't wait until your house burns down to go out and buy fire insurance.  Courts have always refused as a matter of public policy to allow insurance coverage for a "known loss."  However, over the last decade or so, the insurance industry has pressed this doctrine aggressively, as the facts of this case illustrate. 

Regency Roofing was hired in 1999 to re-roof a large residence that included 11 flat roofs.  Over the course of the the following two years or so, Regency was called back several times to fix leaks around skylights and flashing.  On at least one occasion, the contractor reported rust in an air conditioning duct.  In January 2002, the homeowners sued Regency for alleged property damage, including mold damage, arising from faulty repairs.  Regency submitted the claim to its CGL insurer, who challenged coverage under the "known loss" exclusion.  The insurer argued that Regency had sufficient awareness of the roof leaks prior to the inception date of the CGL policies (Transportation issued several consecutive policies) to trigger the exclusion.  The court disagreed.

The court held that even if some of the damage is excluded, either because Regency knew about it before the policy period or because of other exclusions, the homeowners did not complain of mold damage until after the first CGL policy began.  Accordingly, the court denied the insurer's motion for summary judgment. 

The "known loss" exclusion is a potential trap particularly for building contractors who make several attempts to cure a problem hoping to satisfy the customer and so do not report the complaint to their insurer until the customer's patience wears thin and a lawsuit is filed.  By then, the "known loss" exclusion may bar coverage.  An illustration of this dilemma is Blanton v. Vesta Lloyds Ins. Co., 2006 Tex. App. LEXIS 1823 (Tex. App.---Dallas, March 9, 2006), in which a commercial landlord, insured under a standard CGL, leased an older structure to a retail tenant, who experienced problems with the roof.  The Tenant said the roof leaked whenever it rained and complained more than 80 times over a 2 and half year period before filing lawsuit.  Landlord attempted to fix the roof after each complaint.  Suit was filed October 24, 2000, and Landlord submitted the petition on December 6, 2000. 

The insurer in the Blanton case sought to avoid coverage under a late-notice theory rather than known loss, but the problem is similar.  Policyholders usually do not submit claims until there is a lawsuit against them.  In fact, the CGL insurer arguably has no legal duty to take any action until suit has been filed (policies vary on this).  But waiting until the lawsuit is filed may put coverage at risk because of late-notice or known-loss defenses. 

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Arbitration Agreements Are Next To Impossible To Break.

In Re U.S. Home Corporation, et al., #03-1080 (Tex. October 12, 2007)

This decision from the Texas Supreme Court illustrates how difficult it is to get out from under an arbitration clause in a contract.   Because many insurance policies contain clauses requiring any coverage disputes to be decided by arbitration rather than litigation in the courts, this case is worth a comment.  This is actually a ruling on a writ of mandamus rather than the typical appeal of a lower court's disposition of a case on it merits.  Mandamus is a procedure for challenging a lower court's  ruling on a pre-trial matter like a motion to compel discovery, or, as in this case, a motion to compel arbitration in lieu of litigation.

The plaintiffs sued their homebuilders alleging that their houses were built without shower pans.  The contracts signed by the plaintiffs contained clauses requiring that any disputes arising under the contracts will be determined first by mediation and, failing mediation, second by arbitration.  In general, consumers usually believe that they have a better chance of obtaining a favorable outcome before a jury in litigation rather than a panel of industry experts (or dispute resolution experts) on an arbitration panel.  At any rate, the plaintiffs in this case felt that way and sought (and obtained) a court decision that they were not compelled to submit to arbitration.  The builders filed for a writ of mandamus ("mandamus" is a Latin word meaning "we command," and is the name of the procedure in common law whereby a superior court compels a lower court to perform correctly mandatory yet purely ministerial duties).

The Supreme Court granted the writ conditionally (meaning that the Court declared what the lower court should do if the writ were actually drawn up, signed, and wrapped in red tape -- the conditional grant seems less officious).  The following are five arguments frequently raised to avoid arbitration agreements and the Court's reasons for pouring them out:

 

1. The trial court found the arbitration clauses were contracts of adhesion and thus procedurally unconscionable. But the High Court held: “Adhesion contracts are not automatically unconscionable, and there is nothing per se unconscionable about arbitration agreements.”

    

2. The trial court found the arbitration agreements were procured by fraud. But the Court countered:  “The plaintiffs pointed to no evidence of misrepresentations, scienter, or reliance, instead arguing only that the arbitration clause was on the back of their single-sheet contract. As they concede no one prevented them from reading both sides, this is not fraud.. Like any other contract clause, a party cannot avoid an arbitration clause by simply failing to read it.”

    

3. The trial court found the arbitration clauses were not supported by mutual consideration. But, the Court observed, “As both parties agreed to arbitration, this is again simply wrong.”

    

4. The trial court found arbitration would be unduly burdensome and costly. “To sustain such a defense, both the United States Supreme Court and this Court require specific evidence that a party will actually be charged excessive arbitration fees.”

    

5. The trial court found that mediation was a condition precedent to arbitration, and the former having yet to occur the latter could not be compelled. “But while the parties’ agreements clearly contemplated mediation before arbitration, there is no indication they intended to dispense with arbitration if mediation did not occur first.” 

The lesson is that it is almost impossible to avoid arbitration once the parties have agreed to it.

Primary Co-insurer Owes No Duty to Other Co-insurer Who Pays More Than Its Share of Settlement

Mid-Continent Ins. Co. v. Liberty Mutual Ins. Co., #05-0261 (Tex. October 12, 2007)

The Texas Supreme Court decides in this case that a primary liability insurer may refuse to contribute its fair share to settle a lawsuit on behalf of its insured without breaching any duties to a co-insurer that pays more than its fair share.  The dispute arose out of an auto accident allegedly caused in part by hazardous road signs and barriers set up by a construction contractor.  As often happens, the contractor had liability coverage not only from its own policy, but also from subcontractors' policies covering the contractor as an additional insured.  In this case, Liberty Mutual provided both primary and excess coverage to the named-insured contractor.  Mid-Continent covered the subcontractor but also covered the contractor as an additional insured.  Each policy had $1 million limits.  Liberty's excess layer was $10 million.

In settlement negotiations, all the carriers agreed that the injured claimants would likely recover $2-$3 million at trial.  Liberty agreed at mediation to settle all claims for $1.5 million and demanded that Mid-Continent contribute half of that.  However, Mid-Continent insisted on paying no more than $150,000 based on an unreasonable assertion that the claims were worth no more than $300,000.  So Liberty paid all of the $1.5 million (less Mid-Continent's $150,000) but reserved rights to pursue Mid-Continent for its proportionate share.

The lower court held that Liberty could recover the overpayment of its fair share either because Mid-Continent owed a direct duty under the "other insurance" clause in its policy, or because Liberty had a right of subrogation to recover the over payment under its "other insurance" rights.  (The identical "other insurance" clauses in the two policies said that the insurance was primary and would share proportionately with other primary insurance available to pay the claim.)

The Texas Supreme Court reversed and held that Mid-Continent was within its rights to offer less than its share to the settlement.  First, the court re-stated an earlier holding (in American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (Tex. 1992)) that one insurer owes no direct duty to another even though it might owe an indirect duty.  In the Canal case, a primary insurer refused to accept a reasonable settlement within its policy limits, forcing an excess insurer to pay a judgment over the primary limits.  The primary insurer's act clearly would have breached a duty to the insured if the insured had not had excess coverage.  So the Canal court held that the paying excess insurer could step into the shoes of the insured and seek subrogation (the indirect claim) against the breaching primary insurer.

In this case, however, the Court refused to extend the Canal holding where two co-primary insurers were disputing their proportionate obligations to fund a settlement.  The Court provided several explanations for its holding, but probably the most compelling reason was stated in a concurring opinion.  Since Liberty had a $10 million excess policy, it had its its own selfish reasons for wanting Mid-Continent to split the $1.5 million settlement.  "Insurance companies are not eleemosynary institutions" wrote the concurring justice.  Where the interests of the insured are not at issue, the Court could find no basis for barring "hard line negotiations" among co-equal primary insurers, particularly where one of the insurers was protecting its own excess exposure.

The big question about this decision is the deterrent effect it may have on settlements.  The Court believes its decision will not prejudice insureds because it only limits duties owed to co-insurers.  However, policyholders may be adversely affected if fewer cases settle due to inter-insurer bickering.  We must wait and see what impact this case has on settlements in general.

5th Circuit Keeps the Door Shut against Extracontractual Remedies Under Federal Flood Insurance Program

Wright v. Allstate Ins. Co., # 06-20069 (5th Cir. September 11, 2007)

For most homeowners, the only way to get flood insurance is through the National Flood Insurance Program administered by FEMA and backed by the U.S. federal treasury using Standard Flood Insurance Policy forms issued by qualifying insurance companies like Allstate.  The standard form provides that all disputes arising from claims-handling are governed by federal regulations and the National Flood Insurance Act of 1968 as amended.  Courts have uniformly interpreted this restriction to bar any state statute or common law remedies, including consumer protection or "bad-faith" remedies.

In this case, Mr. Wright asserts that an Allstate agent told him that his proof of loss was sufficient when in fact it lacked certain information required on the proof-of-loss form, which Allstate urges invalidated a substantial part of the claim.  Barred from asserting state law claims for fraud and misrepresentation, Mr. Wright seeks to assert these actions under federal common law.

The 5th Circuit reviewed the federal statute and found no basis for inferring that Congress intended to create any extracontractual remedies for claims under the flood insurance program and held that Mr. Wright's remedies are limited to those provided under his policy, basically breach of contract.  Although the court doesn't explicitly say what will happen to the Wright's claim, since the policy requires the proof of loss to contain the missing information, presumably that part of the claim is lost even though the agent's misinformation prevented the policyholder from timely amending the proof of loss.

Doctor Fails to Show "Mental Anguish" in Appeal of Bad Faith Lawsuit Against Medical Malpractice Insurer

The Medical Protective Company v. Herrin, M.D., 2007 Tex. App. LEXIS 7867 (Tex. App. Texarkana, October 3, 2007)

It's been a little over ten years since the Texas Supreme Court announced in Parkway Co. v. Woodruff, 901 S.W.2d 434 (Tex. 1995) that recovery in Texas for mental anguish required evidence of more than moans and groans and wounded pride.  Absent hard evidence of physical impact and outward manifestations of pain, mere emotional upset will probably not survive court review.  In Herrin, a doctor was told by his malpractice insurer that the doctor's consent to settle a pending lawsuit would not result in nonrenewal of his policy.  One year after the settlement, the insurer sent notice of nonrenewal because of the doctor's risk history.

In addition to other problems with the doctor's case (such as, he easily found replacement coverage and made more money in the years after non renewal than before), his evidence of mental anguish at being non-renewed was that he felt "terrible" when he received the nonrenewal notice, he was "tremendously" upset that the insurer wrote that claims against him were both frequent and severe, and work after that was not as pleasant as before.  The doctor also theorized that he became suicidal based on his once deciding to drive his new motorcycle at an extremely excessive rate of speed (although on cross-examination, he admitted that he was not truly suicidal; he just had never engaged in such risky behavior before).  The court found this insufficient evidence of compensable mental anguish.

The lesson for the plaintiff's bar: concentrate less on histrionic adjectives and more on concrete nouns to plead mental anguish (headaches, rashes, purple spots, sleepless nights, trips to the psychiatrist, things like that).

Insurer's Failure to Strictly Follow Policy's Appraisal Procedure Voids Award

Richardson v. Allstate Texas Lloyd's, 2007 Tex. App. LEXIS 7699 (Austin, Sept. 27, 2007)

Just about all property insurance policies, personal and commercial, contain mandatory appraisal clauses that specify a procedure for appointing one or more independent appraisers to quantify the damages the insurer owes (assuming the claim is covered -- appraisers are barred from deciding whether the policy covers the claim).  The common belief is that the appraisal process favors the insurer because juries would award higher damages than appraisers.  True or not, the Richardson case teaches the party seeking to enforce the appraisal award to adhere strictly to all the appraisal procedures.

The appraisal clause in the Richardson policy is typical.  When the insurer and policyholder do not agree on the the valuation of certain damage (whether "actual cash value," "cost of repair or replacement," or "amount of loss"), either can make written demand for appraisal, whereupon each selects a competent, independent appraiser, and the two appraisers choose an umpire.  The two appraisers then set the amount of the loss, "stating separately the the actual cash value and loss to each item."  If the appraisers fail to agree on the amount, they submit their differences to the umpire.  "An itemized decision agreed to by any two of these three and filed with [the insurer] will set the amount of such loss."

A catastrophic pressurized infusion of raw sewerage spewed through every plumbing opening in the Richardson house.  A claim was submitted, the insurer disputed the amount of the loss, and appraisal was duly invoked.  The two chosen appraisers met but could not agree on the amount of loss.  Each signed an appraisal form with three columns titled, "ITEM," "LOSS REPLACEMENT COST," and "LOSS ACTUAL CASH VALUE."  The "ITEM" column contained the handwritten phrase, "to be determined by hygienist."  The other two columns were left blank.  The policyholder's appraiser sent a written estimate to the umpire totaling approximately $141,000 (this estimate was not made a part of the court record).  Then the insurer's appraiser met at the umpire's office, and the two of them signed the form on which the sum of $39,650.75 was written under the LOSS REPLACEMENT COST column.  The insurer submitted this form for summary judgment in the ensuing coverage lawsuit.

The trial court granted summary judgment in favor of the insurer, but the appellate court reversed holding that, although Texas will enforce appraisal clauses, they are subject to reversal for three reasons:  the award was made (1) without authority, (2) as a result of fraud, or (3) not in substantial compliance with the terms of the insurance policy.  The appellate court found a failure of substantial compliance with the terms of the appraisal clause because the record failed to reflect which items were agreed and which were disagreed, the policyholder's appraiser apparently never saw the insurer's itemized list of damages, and the record fails to reflect an itemized list of damages.  Therefore, the award was set aside, and the case was remanded presumably for the jury will decide the amount of damages.

This case provides a road map for both preparing and attacking an appraisal award.  It is surprising how seldom competent engineers and appraisers do not read the policy or follow the procedures spelled out in the appraisal clause.  For the party seeking to enforce the award, usually the insurer, strict adherence to the terms of the policy is essential.  A court should enforce the award as long as the three conditions stated above are met. The party attacking the award should scrutinize the appraisal clause closely for material deviations from the specified procedures.