Law and Insurance

Connecticut AG Announces $1.3 MM Hartford Settlement of Price-Fixing Conspiracy

Two novel developments this week.  First, the House Judiciary Committee approved H.R. 3596, a bill that would remove the antitrust exemption in the McCarran-Ferguson Act of 1945 for health and medical malpractice insurers.  See Health Insurance Industry Antitrust Enforcement Act of 2009.  The Senate Judiciary Committee is considering the same legislation in S. 1691.  Although the politics and emotions roused in the the debate over this legislation is seen as just another wrinkle in the health care reform debate, repeal of McCarran-Feguson has been kicked around for years.  Proponents of the bill argue that the insurance industry, particularly health insurance, is not competitive, in part because insurers have managed under lax state controls to conspire, fix prices, and carve up markets.

Not so, says the Attorney General of Connecticut, Richard Blumenthal, who yesterday announced a $1.3 MM settlement with Hartford Financial Services Group, the first antitrust settlement of its kind in the reinsurance industry.  See Press Release.  The settlement is part of ongoing litigation by Blumenthal against Guy Carpenter & Company LLC, one of the world's largest reinsurance brokers.  The Connecticut AG began the action in 2007 against Guy Carpenter and reinsurers, like Hartford, allegedly part of a market allocation and price-fixing conspiracy.  This action is similar to the other enforcement suits that spun out of Eliot Spitzer's 2006 New York investigation of Marsh McClennan and other brokers.

"The Hartford is making history by this first-in-the-nation settlement --- and drawing back the cloak of secrecy on a series of illegal price-fixing conspiracies that inflated insurance costs by hundreds of millions of dollars nationwide at the expense of 170 insurance companies and their customers," said Blumenthal.

Hartford, one of 20 alleged co-conspirators, cooperated in the investigation, said Blumenthal, hence the light penalty.  Blumenthal also commented:

"Bolstered by backroom deals, insurance industry inertia and an unregulated market, Guy Carpenter's conspiracies continued undetected for almost 50 years.  The Hartford helped Guy Carpenter create an illusion of competition, but now has helped my investigation to break apart business practices that have inflated costs for consumers by as much as 40%."

So which is more compelling, head-cracking, fire-breathing state regulators fully capable and financed to police the insurance industry state-by-state, or the fact that this type of arrangement went on for 50 years before anyone blew the whistle?  A spokesperson for the health insurance industry, Karen Ignagni, said in a letter to the chairman of the House committee that the bills are unnecessary because McCarran-Ferguson doesn't shield insurers from antitrust regulation.  See Repeal of Antitrust Exemption.  "The bills attempt to remedy a problem that does not exist," said Ignagni. 

I'd call that an overstatement.  The problem exists.  Which is the better remedy is the question.  If I had to bet, with or without health care reform, state regulation of insurance is probabaly on its way out.

Court Finds Texas Insurance Code Delay Penalties Accrue Invoice By Invoice

Basic Energy Services, Inc. v. Liberty Mutual Ins. Co., #08-CV-78 (W.D. Tex. September 18, 2009)

In my last post, I called this case a potential harbinger of how Texas courts might interpret CGL policies that revoke the duty to defend (see Court Applies 8 Corner Rule to Loss-Indemnity Policy).  The case also addresses another open issue under Texas law by prescribing a methodology for calculating penalties an insurer must pay under Texas' delay statute for denial of the duty to defend (or refusal to advance defense costs under a loss-indemnity policy).

Section 542.051 of the Texas Insurance Code (formerly Art. 21.55) imposes a penalty of 18% per annum on the amount of a 1st-party claim that an insurer delays or refuses to pay.  The Lamar Homes decision in 2007 resolved in favor of policyholders a long-standing controversy over whether the statute applies to the defense-payment compoment of a 3rd-party liability policy (see my post Delay Penalty Held Applicable to Defense Costs).  However, Lamar Homes did not spell out the way the penalty should be calculated.  The statute keys payment of the penalty on the insurer's delay or failure to pay a "first-party claim."  Lamar Homes held that the policyholder's claim for defense is a first-party claim but did not define when and how that claim is made for purposes of calculating the 18% penalty.

Does the penalty begin to accrue from the time the insured demands a defense?  From the time defense fees are first incurred?  From the time defense-cost invoices are submitted to the insurer?  Not until the insurer is adjudged liable?  If the insured submits defense bills monthly, is each bill a new "claim" starting its own 18% calculation (implied in Primrose Operation Co. v. National Am. Ins. Co., 382 F.3d 546, 555 (5th Cir. 2004))?

The Basic Energy case elects the latter option and holds that the "penalties apply at the time an insurer improperly denies a first-party claim and, thus, fails to meet its obligation within the ... statutory deadline."  The court noted that Basic Energy tendered notice of the underlying lawsuit and claims for insurance on November 12, 2007.  The insurer denied the claim on February 13, 2008.  "Thus, the Court finds that the date that Defendant improperly denied Plaintiff's first claim was February 13, 2008."  In a footnote, the Court stated that Basic Energy would have to provide further evidence of its defense invoices for the court to determine "the precise damages and from what date interest may apply."  

Although the Court could have elaborated the method in greater detail, I see no other way to read the footnote than to follow the method suggested in Primrose Operations:  a new interest calculation begins on each separate invoice from the time it is submitted through final judgment against the insurer.  The denial date, February 13, 2008, may or may not be the date to begin accrual of the penalties.  If the insured submitted invoices before the denial date, the penalty should being to accrue as early as the 15th business day after the insurer received the invoice or any "items, statements, or forms required by the insurer to secure final proof of loss."  (See Tex. Ins. Code Sec. 542.056 stating that the insurer must accept or reject a claim within 15 business days after receiving required items).  Once the insurer denies the claim, then presumably the insurer has waived any right to delay accrual by requesting "items statements or forms."

The key point for policyholders: for greatest recovery, submit each separate defense invoice to the insurer for payment as soon as possible.

A number of open issues regarding Sec. 542.051 remain that future courts will need to resolve.  (For example, other than the invoice itself, what "items, statements, or forms" could an insurer require before accepting or rejecting a claim?)  However, by following the suggestion of the Primrose Operation case, this court has put the invoice-accrual method for calculating delay damages on a more solid footing.

South Carolina Supreme Court Affirms Bad Faith Punitive Damage Award

Correction: Court calculated actual damages at $1,081,189.40.

Mitchell V. Fortis Insurance Company, # 26718 (S.C. September 14, 2009), see Mitchell Decision

This decision out of the South Carolina Supreme Court is remarkable first as a model for intelligent, careful consideration of a difficult legal and factual issue, and second, I have not seen such outrageous conduct by an insurance company since the wild and wooly days before bad faith liability entered American jurisprudence (yes, I am that old). 

Briefly the facts:  Mitchell, 17, applied for health insurance when he left home and went away to school.  The insurance application asked if he had even been diagnosed or treated for any immune deficiency disorder.  He answered no and submitted the application to Fortis on May 15, 2001.  In April 2002, Mitchell's blood was screened by Red Cross and tested positive for HIV.  On May 14, 2002, Mitchell contacted a doctor who confirmed the result and noted in a medical chart that Mitchell tested positive for HIV, was 18 years old, and the date of the confirming test was May 14, 2001 (not 2002). 

Mitchell submitted insurance claims for the tests and subsequent treatment.  Fortis investigated, found the referral note with the erroneous date, and concluded that Mitchell had lied on his May 15, 2001application.  Fortis rescinded the policy and refused payment.  There followed a series of communications to Fortis from Mitchell, his doctor, his lawyer, and his mother's insurance agent, all providing ample proof that Mitchell's first inkling that he was HIV-positive was in 2002 and urging, even begging, that Fortis reconsider its decision. 

All calls to Fortis were routed to one or another customer service representative who invariably said that there "was nothing [the representative] could do."  The Fortis rescission committee that initially made the decision met to consider the appeal and noted only that Mitchell's lawyer had written that Mitchell had not lied because the diagnosis was first made a year after the inception of the policy.  Apparently finding lawyers inherently untrustworthy, the committee refused to budge.  Evidence developed later in the lawsuit showed that Fortis, contrary to its usual practice, either had failed to log telephone calls to its claims manager, or those logs were deleted.  Fortis also twice sent Mitchell altered or illegibile copies of the referral form that contained the wrong date. 

Folks, it gets worse.  At trial, Mitchell produced evidence that it was Fortis' practice to shut down an investigation once a single piece of evidence was discovered that would support rescission.  (Even in Texas, where bad faith is rarely sustained on appeal, this evidence would doom an insurer).  Then, a Fortis manager testified that she was not "able to answer" whether she or any of her employees "had a responsibility to find out the truth" about a policyholder's medical conditions.  Oy vey!

The jury awarded Mitchell $186,000 in compensatory damages, $36,000 on the breach of contract claim, and $15,000,000 in punitive damages.  Fortis appealed the punitive damages award as violative constitutional due process.  The South Carolina High Court got down to business.

Ever since the U.S. Supreme Court recognized due process restrictions on state-imposed punitive damages in BMW of North America v. Gore, 517, U.S. 599 (1996), the courts of the land have struggled to find reasonable criteria for evaluating the amount of punitive damages an incensed jury might award.  The Mitchell Court applied the three basic criteria stated in Gore: (1) the degree of reprehensibility of defendant’s conduct, (2) the disparity between the actual or potential harm and the amount of the punitive damages (ratio), and (3) comparative penalty awards from other cases.

The South Carolina High Court first found that actual damages should have been calculated at $1,081,189.40, but found that the award, almost 14 times actual damages, was excessive under the Gore criteria. Accordingly, the Court determined that an award of approximately 9 times actuals would not offend due process and would comport with South Carolina's "substantial history of upholding punitive damages wards against insurance companies that fraudulently rescind their customer’s heath insurance policies.”   Noting that without the coverage, Mitchell could not afford treatment and would lilkely die of AIDS within a few years, a fact of which Fortis was aware (in fact, Fortis reinstated the policy but only after getting kicked in the slats in court), the Court remitted the award to $10,000,000.

Because the pre-existing exclusion appears to be on everybody's health-care reform list, this case may be among the last of these enormities we will see.  Let's hope so.

Insurance Reserves Are Discoverable in Bad Faith Litigiation

Brothers Petroleum, LLC v. Underwriters at Lloyd's London, CA No. 06-2836, 2008 U.S. Dist LEXIS 51389 (E. D. La. July 2, 2008).

Whenever a claim is submitted to an insurance company for loss or liability, the insurer typically sets a reserve, an estimate of what the claim will cost the insurer.  Many states require insurers to set a reserve.  Of course, claimants would love to be able to discover the amount of reserve set, which,in a claim negotiation with the insurer, is the equivalent of looking at the other guy's poker hand.  Courts ordinarily do not allow discovery of reserve information, primarily because the reserve is simply the insurer's preliminary approximation of the amount of loss, not direct evidence of the damages.  Claimants do not ordinarily need to discover the insurer's reserve to prove up the loss.

This case illustrates a common exception allowed by courts.  When the insured, or another insurer standing in the insured's shoes, sues the insurer for denying or underpaying a claim in bad faith, the reserve may be considered relevant.  In the Brothers case, the policyholder submitted a claim for Katrina-related loss.  Lloyd's appears to have paid part of the claim, and after attempts to resolve the dispute, Brothers sued for additional damages and for bad faith delay under Louisiana law.  In the discovery process, Bothers asked for the insurer's files, including reserve information.

The court noted:

A bad faith claim requires an analysis of whether the failure to pay the amount of a claim within 60 days after receipt of a satisfactory proof of loss was arbitrary, capricious or without probable cause, as determined by the facts and circumstances held by the insurer at the time of refusal. (La. Rev. Stat. 22:1220).  The setting of reserves bears some relationship to the insurer's calculation of potential liability, and have [sic] been found to be discoverable when bad faith is asserted.

In other words, an insurer who refuses or delays in paying a $3 million claim and asserts that the damages are only $2 million, may be acting in bad faith if its own reserve is set at $4 million.  (I say "may be" because the insurer may have a good explanation for its early overestimation of loss.  For example, significant new evidence emerging after setting the reserves may justify a lower valuation come settlement time -- but no insurer wants to have to fight this fight).

Several other courts have taken the same approach and allowed discovery of the reserve when bad faith is alleged.  (See e.g., North River Ins. Co. v Greater New York Mut. Ins. Co., 872 F. Supp. 1411 (E.D. Pa. 1995)).  Courts will likely continue this trend.

Texas Court Upholds Bad Faith Judgment For Denial of Coverage for Dead Race Horse

Insurance Corporation of Hannover v. Polk, #11-06-00336-CV (Tex. App. Eastland July 17, 2008) (see Polk Decision)

We don't often see a bad faith judgment upheld on appeal, particularly under an equine mortality policy, so this decision from the wilds of West Texas is worth a look.  Smart Score, a thoroughbred race horse, was insured for $40,000.  The policy had an extension covering the animal's death within 30-days after the expiration of the policy on June 28, 2002, if the accident causing death occurred within the policy period.  Smart Score fractured his right knee on May 31, 2002.  X-rays taken on June 30 showed both knees were fractured.  An operation to repair the fractures was performed on July 2. The patient was released on July 5 with good prognosis and transported to a stall in the next state.  On July 14, Smart Score developed colitis and had to be euthanized.

The owners submitted an insurance claim asserting that the colitis resulted from the fractures within the policy period and subsequent treatment.  Hannover denied the claim saying that the colitis was caused by factors occurring after June 28.  Several large animal veterinarians who treated Smart Score testified at the non-jury trial.  Some opined that colitis is stress-related and the fractures and subsequent operation were the cause.  By contrast, the doctor that operated testified that the colitis developed too long after the operation for that to be the cause, and unrelated bacterial infection or unknown caused were to blame.

The court ruled that the death was covered for the full $40,000 and that the policyholder was entitled to extracontractual damages under the Texas Insurance Code because Hannover failed "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."  (Tex. Ins. Code Sec. 541.060(a)(2)(A)).  Moreover, the court held that Hannover "knowingly" failed to do so allowing the court to also award up to three times the amount of actual damages.  Accordingly, the court awarded $40,000 in actual damages plus $120,000 for a total of $160,000.

On appeal, Hannover was particularly exercised over the bad faith finding and damages.  The owners presented their experts; Hannover presented its experts.  The owners won the race, so to speak.  That doesn't justify a judgment that coverage was reasonably clear, said Hannover, and it certainly couldn't support the court's finding that Hannover's violation was committed knowingly, defined in the Code as "actual awareness of the falsity, unfairness, or deceptiveness of the act" at issue. 

Indeed, more often than not, even when Texas appellate courts affirm the lower court judgment that the insurer should have paid the claim, they reverse the bad faith judgment and find that the insurer had some reasonable basis for thinking the claim was deniable.  Unless the insurer fails to conduct any reasonable investigation or patently ignores evidence that supports coverage and bases the denial only on contrary evidence, appellate courts usually reverse.

What was different in this case?  The court of appeals noted that the standard of review required it to favor the lower court's finding if supported by sufficient evidence.  Also, the fact-finder can choose to believe one witness over another with conflicting testimony.  The insurance adjuster spoke to the treating doctors and testified that none of them said definitively that stress from the operation caused the colitis.  One of them, who testified for Hannover at trial, said the operation was not the cause.  However, the physician that testified for the policyholder disputed the adjuster's testimony and said that he always told the same account: that stress from the operation was probably the cause.  The appellate court also found that no evidence established when the adjuster spoke to the doctor that sided with the insurer.  Therefore, the fact-finder was justified, according to the appellate court, to decide that at the time the adjuster denied the claims, every physician he had spoken to told him operation stress caused the colitis. 

The appellate court did rule for Hannover in one respect.  The insured was entitled to no more than three times the actual damages, not actual damages plus treble damages.  Accordingly, the appellate court reduced the amount of the judgment from $160,000 to $120,000.

Trial Lawyers Pick 10 Worst Insurance Companies

The American Association for Justice (formerly the Association of American Trial Lawyers or ATLA) has published its list of the top 10 worst insurance companies with the byline: "How They Raise Premiums, Deny Claims, and Refuse Insurance to Those Who Need It Most."  See 10 Worst Insurers List

At the very top of the list is Allstate.  “While Allstate publicly touts its ‘good hands’ approach, it has instead privately instructed its agents to employ a ‘boxing gloves’ strategy against its policyholders,” said American Association for Justice CEO Jon Haber.  “Allstate ducks, bobs and weaves to avoid paying claims to increase its profits.”

The whole list includes:

1. Allstate;
2. Unum (for denying claims contrary to doctors’ evaluations);
3. AIG (for engaging in “massive corporate fraud and claims abuses");
4. State Farm (for denying and delaying Katrina claims);
5. Conseco (for hardball tactics with long term health care claims);
6. WellPoint (for routinely canceling policies of pregnant women and the chronically ill);
7. Farmers Insurance Group (for rewarding adjusters who meet low claims payment goals);
8. UnitedHealth (for compromising patient health by denying or delaying physician reimbursement);
9. Torchmark (for preying on low income Southern residents and discriminating against minorities on burial policies); and
10. Liberty Mutual (for hiring a consultant to train adjusters to adopt aggressive practices).

It should come as no surprise that ATLA is an association representing lawyers on the plaintiffs side of the legal profession.

AIG Executive and Attorney Jailed Over D&O Insurance Dispute In Mexico

Now we know why there are far fewer insurance coverage disputes in Mexico than in the U.S.  The policyholder gets to file a criminal complaint for fraud and have the insurer's management taken to jail. 

Apparently, TV Azteca S.A. de C.V. submitted a claim under its Directors and Officers Insurance Policy, which the insurer, AIG Mexico Seguros Interamericana, S.A. de C.V., denied.  "Fraud!" said Azteca.  So in late April, AIG's, general manager, Luis Ferrara Perini and AIG's outside attorney, Nestor Diaz Barriga, were jailed.  Just this week, AIG apparently paid the claim and the individuals were released.  See AIG Executives Released From Jail, reported in May 5, 2008 edition of Business Insurance.

I say "apparently" because much of the story is based on comments from brokers involved in the case who, for obvious reasons, wish to remain anonymous (and unincarcerated). 

Gives a whole new meaning to Alternative Dispute Resolution.

Houston Court of Appeals Exonerates Agent's Misstatement of Coverage

Brown & Brown of Texas, Inc. v. Omni Metals, Inc., 2008 Tex. App. LEXIS 2065 (March 20, 2008), See Omni Metals Decision.

If this decision stands, then let the word go forth: customers and additional insureds, never, never rely on a certificate of insurance, insist in all cases on getting a copy of the named insured's policy, and read it carefully. 

The named insured, Port Metal Processing, Inc., stores large coils of steel for processing.  Its customer, Omni Metals, used Port's services over the years and continually asked Port to verify insurance coverage for Omni's products while stored with Port.  Port maintained a bailee's liability policy covering property of others stored in Port's facility, but the policy excluded coverage if Port charged a fee for storage, which it did.  Port obtained the policy from Transcontinental through an agent, Brown & Brown (actually, a predecessor named Poe & Brown -- this case was first appealed in 2000).

Now, here for me is the kicker.  Port's president actually read the policy, noticed the exclusion and asked the agent if the exclusion applied to Omni's product.  The agent said the exclusion only excluded property unrelated to Port's core business, and the steel coils were covered.  The agent issued a number of certificates of insurance over the years for Omni's benefit stating that Port purchased the bailee's liability policy covering "all risks" of direct physical loss to property.  The certificates also had the usual disclaimers the the certificate was informational and did not change the actual terms of the policy.

A fire destroyed Port's warehouse including Omni's product.  Transcontinental denied the claim, and all kinds of litigation followed.  This lawsuit was brought by Omni against both the insurer and agent (earlier litigation with Port had settled).  The trial court dismissed the case based on the exclusion.

One of the oddities of this case is that Houston state courts are subject to the co-extensive jurisdiction of two courts of appeal, in the the 1st and the 14th Districts (the 1st District used to be Galveston, but after the 1900 hurricane practically destroyed the city and other historical developments, the District was moved to Houston).  In 2000, Omni appealed the case, which the clerk randomly assigned to the 14th District.  The appellate court found that both the actual statements and the certificate were actionable misrepresentations and reversed and remanded back to the trial court for fact findings by a jury to determine if Omni relied on the alleged misrepresentations.

The jury brought a verdict favorable to Omni, and the insurer and agent appealed, this time drawing the 1st Court of Appeals.  Ignoring the legal findings of the 14th Court, the 1st Court held that Omni, as a stranger to the policy, could not, as a matter of law, have relied on any statements made to Port, and could not have relied on the certificate of insurance because of the Texas Supreme Court's statement in Via Net v. TIG Ins. Co., 211 S.W.3d 310 (Tex. 2006) that "those who take [certificates of insurance] at face value do so at their own risk."  Reversed and rendered that Omni take nothing.

This decision drew a vigorous dissent (see Dissent) regarding both the majority's disregard of the 14th District's "law of the case" (meaning that a legal decision made on appeal should not be reconsidered on a subsequent appeal of the same case), and its distortion of the Via Net decision, which addressed the applicable statute of limitations in a failure-to-procure insurance case.  Via Net had nothing to do with an agent's liability for misrepresentations in a certificate.

But neither the majority nor the dissent (nor the 14th Court for that matter) drew any distinction between the agent and the insurer, even though Transcontinental asserted that Poe & Brown was not its actual or apparent agent.  Based on the facts related, coverage under the policy is not the issue.   It is the law in Texas that an insurer will not be bound by misrepresentations in a certificate of insurance (barring liability for the agent's misrepresentations).  So I don't see how Transcontinental is on the hook here, unless Poe & Brown was the agent of the insurer (not Port's agent).  The key is the agent's liability for misrepresentation.

Poe & Brown knew that Port charged Omni for storage.  The agent also knew that Omni was asking Port about coverage.  And, asked point blank if the exclusion applied to Omni's product, the agent gave Port a false yet plausible explanation of the exclusion.  Both Port and Omni were justified in accepting the agent's explanation despite what they may have thought the policy said.  This is the dictionary definition of the tort of negligent misrepresentation.

I hope this panel of the 1st District Court of Appeals will reconsider the dissent's arguments.  If not, I hope the 1st District Court of Appeals will reconsider the decision en banc.  If not, I hope the Supreme Court considers the decision.  If not, never, never rely on a certificate of insurance or, for that matter, an agent's explanation of policy language.

New York High Court Allows Consequential Damages For Breach of Contract

Bi-Economy, Inc. v. Harleysville Ins. Co. (N.Y. Feb. 19, 2008) (see Bi-Economy Decision)

The highest court of New York has joined a number of other states that have allowed policyholders to recover consequential damages in excess of the policy limits for a first-party insurer's breach of contract.  "Consequential damages" are those that flow naturally and foreseeably from a breach but are beyond the direct damages that the parties actually contemplated, or probably contemplated, when the the contract was made. 

The seminal case illustrating the distinction between ordinary damages and consequential damages is Hadley v. Baxendale (England 1854) in which H., a mill owner, contracted with B., a carrier (we would say trucker today) to transport a broken mill wheel to engineers for repair by a specified date.  B. failed to deliver the wheel on time, and H sued for damages, including the lost profits for the extra time he lost while the mill was shut down.  B. protested that he was never told that H needed the wheel to keep his mill running, and the damages should be limited to those that were generally foreseeable by the parties at the time of contract.  The court agreed with B that a common carrier was not in a position to appreciate the likely effect of a shipping delay of cargo.  Nevertheless, the principle stuck that the party breaching its contract may be liable for indirect or consequential damages, such as lost profits caused by the breach, if the parties could have reasonably foreseen the consequences had they thought about it.

In this case, a meat market sustained inventory and structural damage from a fire.  The company was insured by a policy that covered loss form fire, including "business interruption," a common type of coverage for lost profits over defined period of interruption caused by the insured peril.  The period of interruption in this policy ended with the repair or replacement of the property, but no more than 12 months.  As often happens, the insurer and policyholder disagreed over valuation issues.  The insurer offered much less for the loss than the insured claimed and agreed to pay no more than 7 months of interruption, even though the company never returned to operation.

The dispute was submitted to alternate dispute resolution.  After more than a year, the insured was awarded more than twice what was offered.  The policyholder then sued for breach of contract and bad faith, alleging that the insurer improperly delayed payment for the direct loss and the full amount of its lost profits, and seeking consequential damages for the complete demise of the business, an amount in excess of the policy limits.  The insurer argued that, in addition to other defenses, the policy itself contained several exclusions of "consequential damages."  The lower courts granted the insurer's motion for summary judgment.

The New York Court of Appeals reversed and held that the insured's loss of its business was a foreseeable and probable result of the insurer's refusal to timely pay to restore the property and the lost income.  The dissent argued that the majority was confusing consequential damages with punitive damages.  The majority responded that consequential damages are designed to compensate a party for reasonably foreseeable damages, and so must be measured by actual loss.  Punitive damages, by contrast, are designed to punish or serve as an example and need not bear a close relation to the plaintiff's actual loss.  At any rate, the Court held that limiting an insured to the amount of the policy, "money which should have been paid by the insurer in the first place, plus interest, does not place the insured in the position it would have been had the contract been performed."

A few other states have awarded consequential damages as a bad-faith remedy.  See Lawton v. Great Southwest Fire Ins. Co., 392 A.2d 576 (N.H. 1978) (Allowing only policy limits plus interest would not make policyholders whole or discourage insurers from delaying a reasonable settlement); Beck v. Farmers Ins. Exch., 701 P.2d 795 (Utah 1985)(compensatory damages under policy may exceed policy limits and include damages for economic loss and mental anguish when those damages are reasonably foreseeable).

I am unaware of any Texas case that has awarded consequential damages in excess of the policy limits.  Texas does provide an 18% per annum statutory penalty for delay of payment of a first-party claim (Tex. Ins. Code Sec. 542.051).

Texas Supreme Court Does About Face on Frank's Casing Decision: Insurers May Not Reserve a Right of Reimbursement For Uncovered Claims

Excess Underwriters at Lloyd's, London v. Frank's Casing Crew & Rental Tools, Inc., #02-0730 (Tex. Feb. 1, 2008) See Majority Opinion

The Texas High Court first decided this case in May 2005 causing a near fire-storm among policyholder and defense-bar interest groups.  I commented on this reaction and the reasons for it last April (Why Has the Frank's Casing Decision Got Everybody So Upset?).  In a nutshell, the Court originally held that a liability insurer, defending under a reservation of rights, may accept a reasonable settlement offer within policy limits while continuing to reserve its rights to contest coverage and seek reimbursement for amounts allocable to uncovered claims.  The policyholder must repay the insurer even if it does not consent to the insurer's right to reimbursement, as long as the policyholder agrees that the settlement amount is reasonable.

Why the heated response?  The 2005 decision arguably puts the onus on the policyholder to accurately evaluate both the reasonableness of the settlement and the merits of the insurer's coverage defenses, something insureds are rarely experienced at but insurers do for a living.  Also, the defense bar screamed because the original decision appeared to offer the policyholder a way out if it did not agree that the settlement offer was reasonable.  But defense counsel is typically expected to evaluate settlement demands both for the insured and the defending insurer.  However, doing so after the 2005 decision might harm the interests of the insured (by pronouncing the demand as reasonable), but refusing to do so might violate duties owed to the insurer.

So the Supreme Court has now retreated from its original position and decided that the insurer may reserve rights to reimbursement only if that right is stated in the policy or the insured gives "clear and unequivocal consent to the settlement and the insurer's right to seek reimbursement."  In so holding, the Court expands the reasoning it adopted in Texas Ass'n of Counties County Gov't Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128 (Tex. 2000), in which the insurer attempted to reserve a right of reimbursement of a settlement that the insured neither consented to nor opposed (Frank's Casing not only agreed the settlement was reasonable but demanded that Lloyd's accept it). 

The Matagorda County Court recognized that either the insurer or the insured must be left to face a difficult choice.  If the insurer is barred from reserving a right to reimbursement, it must either refuse to accept a reasonable settlement within policy limits, relying on the strength of its coverage defenses, yet risk breaching its Stowers duty to accept a settlement demand within policy limits, or accept the settlement and avoid the risk of extracontractual damages, yet lose forever any right to show that the claim is not covered. 

If the insurer can reserve a right to reimbursement, the insured is put to the hard choice of rejecting the insurer's offer to pay and thereby risk both a much larger judgment plus losing the coverage fight, or accepting the settlement offer and face the risk of reimbursement.  The Court decided to shift the risks of decision to the insurer, holding that, even if the insured agrees that the settlement is reasonable and urges the insurer to accept it, the insurer may not reserve a right of reimbursement without the clear consent of the insured.

Three justices vigorously dissented.  Justice Hecht joined by Green (Dissent 1) argued that "a balanced, practical, and principled rule for resolving the issue presented by this case" is to allow a party disputing its obligation to perform to go ahead and perform the duty but reserve its right to restitution if the other party is benefited beyond what it bargained for in the contract.  (This principle is embodied in The Restatement (Third) of Restitution and Unjust Enrichment, Sec. 35).  Noting that the lower court found that the policy in fact did not cover the alleged claims, and also noting that Frank's Casing was "a substantial business," Justice Hecht argued that the balance of equities should be determined on a case-by-case basis, which the majority rejected.

Justice Wainwright dissented on other grounds (Dissent 2).  He stated, "I would conclude that there is no right to reimbursement.  Absent the parties' entering into a legally enforceable agreement, I do not believe the equities of the parties' respective circumstances alone support allowing a right to recoup the settlement payment."  Yet, in this case, Justice Wainwright would find that by acquiescing to Lloyd's payment, Frank's Casing in fact entered such an agreement.

Assuming no further alterations to this decision, insurers will, from now on, have to choose between continuing to contest coverage or accepting reasonable policy-limit settlement demands.  In Texas, insurers may pursue coverage actions while the underlying lawsuit is pending.  No doubt, we will see an increase in such actions.  Policyholders, who before now blanched at commenting on the reasonableness of demands, are now free to join with the underlying plaintiff in pressuring the insurer to avoid Stowers breaches and accept the demand.

Perhaps most important, we have now recently seen three major coverage decisions from this Court favoring the interests of the policyholder (the PAJ Decision and the Lamar Homes Decision).  Given the number of insurance cases still pending before the Supreme Court, the trend is likely to be significant.