Lexington Ins. Co. v. North Am. Interpipe, Inc., #08-3589 (S.D. Tex. June 19, 2009)
The vast majority of insurance coverage disputes are decided either at trial (based on findings of fact --usually by a jury -- and conclusions of law) or by a motion for summary judgment (based on stipulations of fact and conclusions of law). The judge decides a summary-judgment motion based on paper submissions alone, without live witnesses. This case illustrates a third procedure by which the defendant seeks dismissal of the action simply because the plaintiff has failed to sufficiently allege a claim in the first place. In federal court, the procedure is called a 12(b)(6) motion for failure to state a claim. 12(b)(6) dismissals are rare in insurance cases because the policyholder can usually find the words to allege, "I bought a policy. I submitted a covered claim. My insurance company wrongly denied the claim."
In the Lexington case, the 12(b)(6) motion was actually brought by the insurance agent who procured the policy. The insured was sued for an allegedly defective pipe casing that leaked and damaged an underground oil formation. The insured must have realized that it would lose on coverage (most policies issued to oil patch suppliers exclude damage to underground resources) because it also sued its agent for negligent misrepresentation (i.e., "you told me you got an adequate policy")and breach of fiduciary duty ("you had a ironclad duty to get an adequate policy"). The agent moved for dismissal under 12(b)(6) on two grounds.
First, the agent argued that Texas is a strong duty-to-read jurisdiction. Even if the agent misrepresented the adequacy of the policy, the insured's failure to read the terms for itself trumps any misdeeds by the agent. The court refused to dismiss for this reason, noting that Texas courts have long recognized a cause of action for an insurance agent's negligent misrepresentation of coverage. Besides, the insured alleged that it never received the policy and therefore couldn't read it.
Second, the court did find that the allegations of breach of fiduciary duty were too thin. Insurance agents do not owe a blanket fiduciary duty to their customers. Only if a special relationship of trust and confidence has been established over time can an insured prevail on a fiduciary-duty claim. The court, accordingly, dismissed the fiduciary-duty claim, but allowed the insured 10 days to replead facts that, if proven, might show a special relationship.
Policyholders have a hard time winning this type of claim against their agents. Even if the duty to read doesn't end the claim, an insured has to prove that it asked the agent to get insurance for a specific risk, the agent mispresented that it got the coverage, and the insured could not discover the failure by reading the policy. (For a particularly egregious example of an insured getting the shaft, see Omni Metals Decision). The insured in this case has an uphill fight. But insureds can, at least, usually get past the pleading stage.
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