INSURANCE LAW
Fall 2017 Outline
P a r t I: In t r o d u c t i o n / B a s i c s
Major Players (see Vol. I page before I.B. tab)
1. Defense Counsel: carrier hires the lawyer and pays them to defend the insured against a claim
brought by a third party. Defense counsel is typically selected by the insurance carrier, pursuant to
the insurer’s contractual right to control the defense under the insurance policy.
2. Coverage Counsel: the attorney retained by the insured to give advice regarding insurance coverage
issues and to represent the insured during coverage litigation with its insurer.
3. Insured: The person(s) protected under an insurance contract.
4. Insurance Carrier
Claims Adjuster: person who is working on behalf of insurance company who is
investigating the claim and determining the facts of the case and handling the overall
supervision of the claim. Can be employed by the carrier or a third party (third party
administrator TPA).
Underwriter: responsible for underwriting risk and putting together policies. These bring in
the money
5. Broker: an insurance intermediary who represents the insured rather than the insurer. Since they are
not the legal representatives of insurers, brokers, unlike independent agents, often do not have the
right to act on behalf of insurers, such as to bind coverage. While some brokers do have agency
contracts with some insurers, they usually remain obligated to represent the interests of insureds
rather than insurers.
6. Agent: Typically, the rep of the carrier; a person or organization who/that solicits, negotiates, or
instigates insurance contracts on behalf of an insurer and can be independent or an employee of the
insurer.
7. Reinsurer: entity that insures the insurance company
Basic Types of Insurance Policies
1. First Party vs Third Party
a. First party coverage benefits insured directly and is paid to insured
b. Third party coverage applies when third party makes claim against insured, and the third
party gets paid
i. Common Types of Third Party Policies:
1. General Liability: coverage for losses or damage related to specified business
actives such as manufacturing, landlord tenant issues, product defects, or other
harms caused in the operation of a commercial enterprise.
2. Workers Compensations: insures for injury to employees of a business that
occur in the “course and scope” of their employment.
3. Professional Liability: oftentimes called “malpractice insurance” or “errors
and omissions” coverage, this covers losses related to the rendering of
professional services.
4. Directors and Officers Liability: this covers for losses stemming from alleged
acts or failure to act on the part of a corporate officer or director.
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5. Employment Practices Liability- this covers specified employment claims
such as wrongful termination.
c. Some policies of insurance contain both “first party” protections and “third party” coverages.
Most commonly, these include the following:
i. Homeowner Insurance: the typical homeowner’s policy has aspects of first party
coverage for payment to the property owner or purchaser of the policy for perils that
can be either governed by statutory provisions, specified or included. In addition,
homeowners are covered for liability of other people for bodily injury, wrongful
death or property damage or loss.
ii. Automobile Insurance
iii. General liability coverage is an example, with the first major benefit being defense
(first party coverage), and second major benefit being indemnity (third party
coverage)
2. Claims Made vs Occurrence (THIS SHOULD BE THE FIRST QUESTION ASKED)
a. Occurrence
i. Look at policy that existed at time of injury (even if it has expired between
occurrence of injury and filing of lawsuit)
b. Claims Made
i. Look at policy that existed when the claim was made
ii. Definition of “claim” really matters here
a. Policy may define claim as something less than a lawsuit, i.e. a written
demand for money or services or non-monetary relief, or it may be a
lawsuit, or something else entirely
iii. 2 types of claims-made policies
a. Generic claims-made policy requires (1) the claim be made within
policy period, and (2) notice as soon as practicable
b. Claims-made-and-reported policy requires (1) the claim be made
within the policy period, and (2) notice to carrier must also be given
within the policy period
iv. Difference between claims made policy and occurrence policy is that a claims-made
policy provides unlimited retroactive coverage and no prospective coverage, while an
occurrence policy provides unlimited prospective coverage and no retroactive
coverage.
v. Claims-made policies mean that you look to the insurance in place on the date the
claim is made. Under these policies, you pay close attention to any “retroactive date,”
which limits how far back the policy will cover.
1. Example: A claims-made D&Q policy in effect for 2015 with a retroactive
date of 200 will cover the company for lawsuits filed in 2015 even if the
actions at issue took place in 2011 or late. If the actions took place in 2010 or
earlier, the policy does not apply.
3. Primary, Umbrella, and Excess Policies
a. Not uncommon for a company to have multiple layers of coverage
b. Primary
i. “on the front lines”; respond first
ii. Usually pay for defense of case
1. Defense usually costs the insurer more than indemnity, because of our
litigious society
2. Provides the company with the resources to fend off the lawsuit
a. Thus, the premium on primary policies is higher than premium on
excess policies
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3. If policy requires carrier to defend you in a case, more than likely it is a
primary policy
4. Note that in CGLs, defense costs are usually outside the policy limits
c. Excess
i. Policy that is in excess to the primary policy; sits on top of the indemnity obligation;
does not kick in until the primary policy is exhausted
ii. Usually does not carry with it a defense obligation
d. Umbrella
i. A policy that sits broadly on another type of policy beneath it
ii. Can act as either primary or excess policy
1. First, go to the primary policy (or whatever it sits on), and if primary says it
covers it, then the umbrella policy becomes an excess policy. If primary does
not cover, then umbrella will be the primary
4. Reinsurance
a. Insurers buying insurance for their risks (transfer some risk to the reinsurer)
Anatomy of a Policy
1. Declarations Page
a. The first section of the policy is the declarations page
i. First place you look when you get a policy (gives basic info)
b. What law applies?
i. This is important because most policies do not have a choice of law provision in them
1. When no choice of law provision, the address of the named insured tells us
where the policy was issued, and therefore what the premium is
ii. The “most significant relationship test” is important in determining choice of law
c. Limits of the policy are found on declarations page
i. Occurrence limit will be whatever the accident is (the most that can be paid on that
occurrence)
ii. General aggregate means that the policy will only pay, in total when everything is
aggregated together, $2 mil on sample CGL
d. Broker identity
e. Listing of the Forms, Endorsements, and Schedule Numbers
i. Good way to determine if you have a complete copy of the policy
ii. Good way to CYA
2. Insuring Agreement
a. Heart and soul of the policy (tells what insurer is going to cover)
i. “those sums that the insured becomes legally obligated to pay as damages because of
‘bodily injury’ or ‘property damage’ to which this insurance applies”
1. The quotations lead to the next place you look: the definitions
3. Definitions Section
a. Important to understand what major terms mean
4. Exclusions
a. Narrows the broad promise in the insuring agreement
5. Conditions
a. These are the duties and obligations of the insured
6. Endorsements
a. These may change everything else
Burden of Proof
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1. Initially it is insured's burden to show that it comes within the ambit of the insuring agreement
(that there is the potential of coverage)
a. Burden then shifts to the carrier to establish that an exclusion applies to defeat coverage
i. Burden then shifts back to the insured if there is an exception to the exclusion on
which the insurer relies
P a r t I I : In t e r p r e t a t i o n o f In s u r a n c e C o n t r a c t s – K e y P r i n c i p l e s
A. General Rules of Interpretation
1. Contra preferentem: the insurer wrote the policy, so it will be construed against them if need be
a. also known as "interpretation against the draftsman", is a doctrine of contractual
interpretation providing that, where a promise, agreement or term is ambiguous, the preferred
meaning should be the one that works against the interests of the party who provided it
2. Main objective in interpreting the policy is to understand the parties' written manifestation of their
intent
3. Same rules applicable to contracts apply to insurance policies
4. Policy must be read as a whole, not in parts
a. You cannot take out one clause and look at it separately from the other clauses
b. You do not want to interpret it in a way where one provision is isolated from the others
5. Never interpret a policy in a way that renders one of its terms meaningless (every word/term means
something)
6. Noscitur a sociis: a word is known by the company it keeps (Fiess)
a. You look at words in the context in which they are used
7. You should not add words to a policy (Gilbert v Underwriters)
8. Remember that one of the first places you look is the definitions in the policy
a. But what if a term is not defined?
i. You consider the plain and ordinary meaning of the word/term
1. How to determine the plain and ordinary meaning?
a. Look at definitions in dictionaries
9. Ambiguity
a. Determining if policy is ambiguous or not is solely the province of the court, not the jury
(matter of law)
b. A policy is ambiguous if its meaning is susceptible to more than one reasonable
interpretation
c. If it can be given a definite or certain legal meaning, it is not ambiguous
d. Court cannot consider any extrinsic evidence when determining whether something is
ambiguous. Courts do not look to extrinsic evidence unless the language is unclear
e. Two kinds of ambiguity
i. Patent: evident on face of contract
ii. L atent: when a contr a ct which is unambiguous on its f ace is applie d to the
s ubject matter w ith w hich it dea ls and an ambiguity appears by reas on of
s ome collat er al mat te r ( The ambiguity mus t become ev ident whe n the
contr act is r ead in co ntex t of the s urrounding circums tances , no t af ter
par ol ev idence of inte nt is admitted cre atin g an ambiguity : ( Natio nal Union
v CBI)
1. In this instance, allowed to consider circumstances surrounding the entering
into the contract in determining whether or not it is latently ambiguous (shade
of gray because sounds like extrinsic evidence) (Balandran)
a. Expressions of the parties, simultaneous with the making of the
contract, are never treated as surround circumstances
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2. Latent ambiguity rule: if the meaning of the language used in a written
contract becomes uncertain when an attempt is made to apply it to the subject
matter of the contract, though not otherwise uncertain, parol evidence is
permissible to aid in making the application (Birmingham Fire)
f. What happens if the judge finds a term is ambiguous?
i. One body of law says the court must construe it in favor of coverage (RSUI v Lind,
latest SCOTX decision)
1. Court in RSUI v Lind said that to bring in extrinsic evidence would be to
contradict or vary the meaning of the language of the agreement, which it
could not do.
ii. Another body of law says that you can now consider extrinsic evidence (Baladran)
g. When construing exclusions or limitations of coverage, if you determine that there are two
reasonable interpretations, even if the carrier's interpretation is the more reasonable, the
policyholder still wins, as must construe in favor of coverage (RSUI v Lynd)
10. Contractual Liability Exclusion (as discussed in Gilbert v Underwriters)
a. This exclusion says that to the extent you are assuming liability in a contract, there is no
coverage
i. But there are two exceptions:
1. (1) If it is an insured contract as defined in the policy (this includes a contract
in indemnity)
2. (2) The exclusion does not apply to liability for damages that the insured
would have in the absence of the contract or agreement
P a r t I I I : Li a b i l i t y I n s u r a n c e
A. Intro to CGL
1. The Insurance Services Organization (ISO) are the ones who try to put together standard forms
for policies, not just for CGLs, but for commercial property policies and other standard form
policies
2. CGL is most litigated contract
3. Covers breach of contract claims, contrary to popular belief
i. Coverage A has a contract liability exclusion, but has an exception for insured contracts,
which include contracts for indemnification
4. 2 major sections (Coverage A, Coverage B) and a minor section (Coverage C)
i. Coverage A
1. Limited to bodily injury and property damage
2. On definitions page of sample CGL, bodily injury means bodily injury, sickness
or disease sustained by a person, including death resulting from any of these at
any time
a. Because “bodily” modifies injury, sickness, and disease, a physical
manifestation is required for sickness or disease to be covered (Evanston)
ii. On definitions page, property damage means (in short terms)
1. Damage to tangible property; or
2. loss of use of tangible property
3. Note that property damage is not limited to what we may think of when we first
hear "property damage": use the words of the policy to find a way to create
coverage
5. Must be the insured, which can be found in section titled “Who is the insured?”, which defines
who the insured is, which is important because will say who is legally obligated to pay
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i. No requirement that the "legally obligated to pay" be in the context of a lawsuit in order
to invoke the duty to indemnify
1. "legally obligated" can be from a contract or something else (any contract the
insured enters into can trigger this)
2. A settlement agreement can provide legal obligation
6. Trigger for coverage under Coverage A
i. The bodily injury or property damage must be caused by an "occurrence" within the
policy period
1. Occurrence means an accident, including continuous or repeated exposure to
substantially the same general harmful conditions
7. Exclusions (see Vol. 2, page 36 for exclusions)
i. Reasons for exclusions
1. Certain kinds of risks are covered by other types of policies, and/or may be
considered uninsurable under the policy
a. Ris k s r epres ent an increas ed ex pos ure f or which the ins ur ed can
buy additional cov era ge
ii. Expected or intended injury exclusion
a. Bodily injury or property damage from expected or intended action by the
insured
b. There is a big difference between intending the act, and intending the law
i. So, carrier must show that the exclusion applies
ii. Most states require subjective test as to whether insured suffered
an intended injury
iii. Contractual liability exclusion
1. This insurance does not apply to bodily injury or property damage for which the
insured is obligated to pay damages by reason of this assumption of liability in a
contract or agreement. This exclusion does not apply to liability for damages:
a. Assumed in a contract or agreement that is an "insured contract", provided
the bodily injury or property damage occurs subsequent to the execution
of the contract or agreement; or
b. That the insured would have in the absence of the contract or agreement.
iv.
v.
vi.
vii.
2. This is a way to cover breach of contract (via an exception to this exclusion)
3. Express negligence rule: we will allow the situations that, if indemnifying
someone for their screw-ups, it must be bold and all caps and conspicuous
4. While most policies do not cover breach of contract, a CGL does cover it, as long
as there is the necessary exception for insured contracts
Liquor liability exclusion (post-liquor liability coverage)
1. This precludes coverage for bodily injury or property damage arising from the
furnishing of alcoholic beverages
2. Applies only if in business of manufacturing, distributing, selling, serving, or
furnishing alcoholic beverages
Workers Comp
1. Covered by a specific policy or not covered under CGL
Employers Liability
1. Covered by a specific policy or not covered under CGL
Pollution exclusion
1. Absolute pollution exclusion
2. Qualified pollution exclusion
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viii. Aircraft, auto, watercraft
1. These should be covered separately
ix. Damage to Property
1. Eliminates coverage for property damage that you own, rent, or occupy because
the insured cannot be legally liable to itself.
x. Damage to your work
1. Precludes coverage to the insured’s work after it has been completed
2. Does not apply if the work is being done by a subcontractor (Pine Oak case on
10/3-10/10 says this is exception to the “damage to your work” exclusion)
8. Coverage B
i. Covers personal injury (which is defined in the policy and means specific things (not
what we think of when we hear “personal injury”)) and advertising liability
ii. Trigger for coverage under Coverage B is an offense, which is not defined (although
there are certain risks that are intentional in nature but are covered)
iii. Major difference between Coverage A and Coverage B, other than the bodily
injury/property damage and "personal injury/advertising injury" dichotomy?
1 . Co vera g e B c overs of fen s es , wh ile Co vera g e A c o vers oc c u rrenc es
a. Based on definition of personal knowledge from page 42 of volume 2:
i. Lots of things are covered that you may not think would be
covered
ii. Defamation is covered under this policy --> an oral or written
publication of material that slanders of libels someone
iii. False arrest is covered
iv. Malicious prosecution is covered
b. Advertising injury definition
i. Things like copyright infringement, slogan infringement, and so on
are covered
ii. Defamation is covered
iii. Violation of right to privacy is covered
9. Coverage C (see notes 9/26)
i. Conditions (see page 7 of sample CGL policy)
1. Conditions are raised by carriers
2. Most important: duties the insured has in event of occurrence, offense, claim, or
suit
a. Most polices will have notice provision in them that will require the
insured to notify the carrier in certain circumstances
i. This one says must notify as soon as is practicable of an
occurrence or offense which may result in a claim
ii. The law in Texas is that in order for a carrier to rely on a latenotice clause, it must demonstrate it has been materially prejudiced
by the lack of notice in order to rely on it
3. The “other insurance” clause
a. Also important
b. Carriers like to throw these in and say they won't pay until the other
insurance pays
c. Carrier has obligation to fully and completely take care of its insured
without regard to the other insurance clause
i. The other insurance clause is a mechanism for the carriers to duke
it out between themselves
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ii. Important point: carriers cannot use this clause as a means of not
protecting their insured
B. Intro to Insurer’s Duties
1. The two major benefits of CGL policy is the duty to defend and duty to indemnify
C. Duty to Defend
1. Texas applies a strict Eight Corners analysis (AKA, the complaint allegation rule)
a. In determining a carrier's duty to defend, you look at 2 documents:
i. The policy's four corners, and compare it with the four corners of the
complaint/petition
2. Determined by the allegations in the pleadings and the language of the policy
a. If a petition does not allege facts within the scope of coverage, an insurer is not legally
required to defend a suit against its insured
i. The duty to defend is limited to the claims actually asserted
3 . When apply ing the eig ht corners rule, we give the all ega tions in t he petit ion a
liber a l inter pr e tat ion ( in f avor of coverage) ( National Union v Mer chants )
a. When the complaint d oes not s tate f acts s uf f icient to brin g w ithin or
without cov er age, th e general rul e is that t he ins urer is obligate d to def end
if ther e is , potentia lly , a cas e under the complaint wi thin the co ver ag e of
the policy .
i. Said another way, in case of doubt as to whether or not the allegations of a
complaint against the insured state a cause of action within the coverage of a
liability policy sufficient to compel the insurer to defend the action, such doubt
will be resolved in insured’s favor.
4 . Cour t mus t f ocus on factual a ll ega tions that s how the or igin of the damages ,
rather than the l ega l t heories al leg ed
a. On exam, h e thr ow s i n a hy po peti ti on a nd tr i es to tr ic k y ou by label i ng
the c aus e of ac ti on di ffer entl y than t he al l eg ati ons, to make sur e y ou
know that th e the or i es ar e not i mpor ta nt, but the f ac tual al l eg ati ons
i . Do not g et si detr ac ke d by how the c auses of ac ti on ar e ti tl ed ; l ook
at the c ompl ai nt 's c har ac ter i z ati on of fac t s
5 . Cour t will not r e ad f acts into the ple adings
6 . Car r ier mus t of f er a complete def ens e
7 . It is a contr ac tual dut y that comes f rom the ins uring agreement
8 . M ajor dis tinction bet ween duty to def end and duty to indemnif y is that the duty
to indemnif y can be li mited but the duty to def end cannot be limi ted ( duty to
def end is br oader )
9 . B ei ng abl e to l ook ou ts i de the pl ea di ng s i n or der to de t er mi ne the duty to
defe nd ( s ee Int er nati onal Servic e v Bo l l)
a. S ome cour ts pus h agains t the eight corners rule
i. While S COT X has not y et recogni zed an ex ce ption to the s tr ict 8
cor ner s tes t, and has not recognized ex trins ic ev idenc e to al lowin g
duty to def end , f ederal courts and interme diate courts HAVE
r ecognized s uch an ex ception, in 2 ins tance s :
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1 . When it goes s imply to as certain who the ins ured is and
whether the party is a s tranger to the policy
2 . Where ex trins ic e vide nce only applied to co verag e is s ue with
no overlap on li abil ity is s ues on the underlying cla im ( AKA, a
pur e coverag e is s ue)
a. “ Tex as courts allow ex trins ic ev idence to be admitted
s howing a lack of a duty to def end. We conclude that
the underly ing peti tio n, read broadly , does not addr es s
the is s ue of how the boat was us ed, which is an
es s ential f ac t f or dete rmining coverag e under this
privat e boat owner’ s policy , and whether State F ar m
has a duty to def end the wrongf ul death s uit. I t makes
no sense to us, i n l i ght of these hol di ng s, to s ay that
extr i nsi c ev i denc e shoul d n ot be a dmi tted to s how
that an i nstr ume ntal i ty (boat) w as bei ng used for a
pur pose expl i c i tl y excl uded fr om c ov er ag e
par ti c ul ar l y , w hen do i ng so does not q uest i on the
tr uth or fal si ty of any fac ts al l eg ed i n the u nder l y i ng
peti ti on fi l ed ag ai nst the i nsur ed. ” ( State F ar m v
Wade)
i. The court is k ind of articula ting tha t the ex t r ins ic
evid ence has nothing to do with the under ly ing
merits of the cas e, it only has to do with the
is s ue of coverage, and theref ore, s hould allow
ex trins ic ev id ence
b. This benef its both carrier and ins ured depending on the
s ituation ( equitab le w ay to handle ex trins ic evid ence)
1 0 . When car r ier gets not ice of s uit/cl aim, it ha s 3 options once it compares the 4
cor ner s of policy with 4 corners of pleadings ( a f ourth opti on is to res er ve r ights
and f ile decl ar ator y judgment action to g et guidance f rom court as to whether it
s hould continue to pr ovide def ens e)
a. Deny cover age
b. Admit liabi lity cov era ge ( unqualif ied def ens e)
c. Res er ve r igh ts
i. M os t common
ii. S ay ing that they wil l d ef en d, but will do s o while res erving r ights to
deny /contes t the ins u red coverag e f or indemnity
1 . Determining duty to i ndemnif y means y ou als o cons ider the
actual f ac ts that es ta blis h liabi lity in addit i on to the pleadings
and policy
iii. Als o means there wil l us uall y be a f ight over who gets to pick the
lawy er
iv. S COTX has interpret e d the duty to def end in a CGL policy to mean
that when carri er has duty to def end, it has right to control the
def ens e, which includes the right to s el ect couns el ( and to mak e
decis ions abou t cas e as if it were c li ent)
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1 . Ther e are ex ceptions , however ( the righ t giv es way when
ther e is a dis qualif y in g conf lict)
a. The wat ers hed landmark cas e: Northern County M ut.
Ins . Co. v Davalos
i. Tes t f or when the ins ured can s elect couns el:
wh en th e f ac ts to b e ad ju d ic a ted in th e lia b ility
la ws u it a re th e s a me fa c ts up on wh ic h c o vera g e
d ep en d s, th e co nf lic t o f in teres t will p reven t th e
in s u rer f ro m c o nd uc tin g th e d ef en s e
1 . “ adjudicate” means “ t o rule upon
judicia lly ”
f acts are going to be adjudicat ed and r uled
upon (I t i s not enoug h j ust to s ay that the
same fac ts, but the f oc us must be on
w hi c h fac ts w i l l be ad j udi c ated)
2 . This is chall enging to es tablis h ther e is a
dis qualif y ing conf lict i n res ervation of
rights , but is s till the governing t es t
ii. 4 s eparate circums tances in which the ins ur ed
may rightf ully ref us e the ins urer’ s def ens e:
( 1 ) when the def ens e ten dered is not a
complete def ens e und er
circums tances in whic h it s hould
have be en
( 2 ) When the attorney hir ed by the
carrier acts unethi cal l y and, at the
ins urer’ s direction, advances the
ins urer’ s interes ts at the ex pens e of
the ins ured’ s
( 3 ) when the def ens e wo uld not, under
the gov erning law, s at is f y the
ins urer’ s duty to def end
( 4 ) when, though the def ens e is
otherwis e proper, the ins ur er
attempts to obta in s ome ty pe of
conces s ion f rom the ins ur ed bef or e
it wi ll def end
b. Als o the DHA ( Dallas Hous ing Authority ) cas e
i. If the bas is f or the res ervat ion over laps with the
merits of the underly ing cas e, then ther e may be
a conf lict tha t al lows f or s election of counsel by
the ins ured
1 . Federa l courts have s t arted chipping aw ay
and as k ing if it is an is s ue that would be
decided by the jury : If it wi ll not be
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decided by jury , does not really ov er lap
the is s ue
2 . Gener al rule is that th e underly ing cas e is
not ripe when the underly ing cas e is s ti ll
pending
1 1 . Tr i-P ar ti te Re lat ions hip
a. Car r ier —Def ens e L aw y er —Ins ured
i. Def ens e lawy er is ge tt ing paid by carrier, but is s uppos ed to be
r epr es enting the ins ured
1 . Def ens e lawy er has one cli ent ( the ins ured, even if car r ier is
pay ing bills ) and owes unqualif ied duty to ins ured ( undivided
loy alty to the ins ured, according to Ti ll ey )
a. Ex ception f rom the unauthorized practi ce of law cas e :
when no res ervation o f rights , lawy er has two clie nts
becaus e carrier and in s ured’ s interes ts are aligned ( this
is ok ay if interes ts ali gn)
i. BUT if int eres ts are n ot align ed ( s uch as when
overlap w ith res erv ati on of rights ), then it is
inappropriate
ii. L ots of iss ues are rais ed by this relations hi p
iii. Cour t in Tr av er s aid le vel of control tha t ins urer has over attor ne y
who is an independent contractor is not s uff icient f or liabi li ty
1 . Car r ier is not vi cariou s ly liable f or the malf eas ance of the
lawy er it re ta ins
a. The court s aid this is becaus e lawy ers are i ndepende nt
contractors , and are bound by s et of ethical and
prof es s ional rules , and no one has right to dictat e how
the lawy er repres en ts the ins ured on a day to day bas is ,
s o we will not ho ld ca rrier res pons ible f or malpr actic e
by that k ind of independent contrac tor
2 . But, lef t door s lightly open f or ins ured to s ue carrier : If
car r ier hires lawy er w ho k nows nothing about the s ubject
matter ( i. e. , carrier hi res criminal la wy er f or an IP matter ) ,
then ins ured could s ue carrier. But otherw i s e, ins ur ed is S OL
f or s uing carrier
D. Duty to Indemnify
1 . Duty to indemnif y is bas ed on the actual f ac ts that es tabl is h liabi l ity ( as res ult of a
trial)
a. The ins ur er ’ s duty to indemnif y depends on the f acts proven and whether the
damages caus ed by the act ions or omis s ions proven are c ov ered by the ter ms
of the policy ( DR Hor ton )
2 . A car r ier can hav e a duty to indemnif y even if it has no duty to def end ( DR Hor ton )
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a. They ar e s epar at e and dis tinct duties tha t a re not dependent on e ach other
3 . What ( evidenc e) s hould y ou look at in determining i f there is a duty to indemnif y ?
a. S ettl ement
i. Can cons ider pleading s , s ettlement agre eme nt, f acts es tablis hed i n cas e
( Ens er ch )
b. Tr ial
i. Can cons ider pleading s , evidence in re cord at tria l ( s o the trial
tr ans cr ipt, s ubmitted evid ence, tes t imony , etc. ) ( Swicegood )
c. Ther e ar e s i tuations w here party can look outs ide thos e ins truments , and look
at ev idenc e not intr oduced in underly ing cas e, but deals with cov e rage only
is s ue
i. M ay have to r e -l it igat e underly ing cas e in s ome ins tances lik e th i s if
cover ag e only is s ue ( cannot redo the whole cas e, but may have to r edo
a por tion of it if cover age only )
4 . The car r i er can s ometimes chall enge whe ther a s ettl ement is rea s onable, but when
the car r ier wr ongf ully denies cover age, the y are no longer permitted to contes t th e
reas onablenes s of the s ettlem ent
5 . Deter mining wha t por tion of s ettlemen t al l ocation f rom trial is i ntended to cov er
claims f or policy at is s ue ( coverag e s uit)
a. In an alloc at ion tr ial t o apportion a s ettl ement betw een cov ered and non cover ed ins ur ance c lai ms under Tex as law, al l i nfor mati on i nfl uen c i ng the
s ettl ement dec i s i on, w hi c h mig ht i nc l ude inter nal memor a nda,
c or r es ponde nc e betw een th e i nsur er and i nsur ed, c ommuni c ati ons w i th the
i nj ur ed par ty , i nv es tig ati v e r epor ts and statements, an d ev en a sses s ments of
how s y mpatheti c the pl ai nti ffs w oul d be at tr i al , i s potenti al l y r el ev ant , and
the dis tr ict cour t has cons iderable l eew ay i n deciding the re le van ce is s ue.
( Amer ican Inter nat ional Specia lty L ines Ins . Co. v. Res -Care Inc. )
i. In other wor ds , potential ly all inf ormation i s relevan t, s o not limited to
jus t the ev idence f ro m the underly ing s uit
Duty to Settle
1. Comes from the common law (Stowers), not the policy (there is a right to control settlement in the
policy, nothing REQUIRNG the carrier to settle; the contract itself does not impose a duty to settle)
2. Reasonableness standard: degree of care and diligence that ordinarily prudent persons would
exercise in the management of their own business
3. Stowers established a cause of action against an insurance company, when the insurance company is
controlling the defense and/or settlement of the case, and there is an opportunity to settle the case
a. Insurer is held to that degree of care and diligence which a man of ordinary care and prudence
[an insurer] would exercise in the management of his own business pertaining to settlements
(Stowers)
i. If carrier completely controls the case (defense/settlement), it has become the agent of
the insurer, including the rights and responsibilities that come with that (to act
reasonably in context of settlement and to do so in good care)
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4.
5.
6.
7.
ii. When the insurer by the terms of the contract, assumes responsibility to act as the
exclusive and absolute agent of the insured, as an agent it should be held to a degree of
care—diligence which an ordinary prudent person would exercise in the management of
his own business.
1. Thus, if a prudent person in the exercise of ordinary care would have settled, then
the agent which fails to do so should be responsible for damages
A Stowers cause of action is a negligence claim that arises when a third-party claimant offers to
settle a disputed claim within the policy limits and the insurer refuses to settle. If a jury finds that a
person of ordinary care and prudence in the insurance company’s position would have accepted the
settlement offer, the insurance company’s refusal of such an offer is negligent and the insurance
company is liable for the judgment that exceeds the policy limits.
a. This Stowers duty arises when a settlement demand on the insured satisfies 3 prerequisites: 1)
the claim against the insured is within the scope of coverage; 2) the demand is within policy
limits and proposes to release the insured fully; and 3) the terms of the demand are such that an
ordinarily prudent insurer would accept it
The duty to settle is activated when the third party seeking to impose liability on an insured makes a
demand to settle the claim and the following circumstances exist (first three are Stowers doctrine,
later ones are ancillary rules):
a. The claim against the insured is within the scope of policy coverage
b. The settlement demand is for the policy’s limits or a stated sum of money that is within the
policy limits
i. This puts the burden on the claimant (thought to incentivize P to make demands earlier,
which would encourage early settlements)
c. The third party’s proposal to settle must be on such terms that an ordinarily prudent insurer
would have accepted it, considering the likelihood and degree of the insured’s potential
exposure to an excess judgment (must be reasonable)
d. The proposed settlement must be one that will result in a full and unconditional release of the
insured (Trinity v Bleeker)
There is no obligation for carrier to affirmatively negotiate on behalf of the insured
Where have multiple claimants and demand is made, where there is only finite amount available,
carrier has right to accept demand that completely exhausts policy, as long as demand itself is
reasonable, in scope of coverage, and within policy limit, even to detriment of other claimants
(Soriano)
a. When have multiple claims, the carrier must evaluate each claim on its own, with ultimate goal
being to minimize the exposure of the insured as best as possible (Soriano)
b. When faced with a settlement demand arising out of multiple claims and inadequate proceeds,
an insurer may enter into a reasonable settlement with one of the several claimants even though
such settlement exhausts or diminishes the proceeds available to satisfy other claims. This
promotes settlement of lawsuits and encourages claimants to make claims promptly. (Soriano)
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c. The Patterson case completely contradicted and flipped Soriano on its head, and said that it was
not a proper Stowers demand because did not purport to release all the claims, all the claimants,
and all the insureds
i. This is very strange, and so is SCOTX not accepting writ on it
1. Possible justification: Wrongful death statute in Texas mandates only a single
claim can be brought against tort-feasor for benefit of the surviving injured
parties (think surviving wife and kids)
2. HOWEVER, Soriano is SCOTX, so that is still the governing rule
8. Does a settlement offer trigger an insurer’s duty to settle when the plaintiff’s settlement terms
require funding from multiple insurers, and no single insurer can fund the settlement within the
limits that apply under its particular policy? (AFTCO)
a. SCOTX has left this issue unanswered
b. In a claim involving multiple policies, a settlement demand does not activate one primary
insurer’s Stowers duty unless the demand falls within the applicable limits available under that
single policy
c. The Stowers duty does not arise for an excess insurer until the primary carrier has tendered its
limits
9. If carrier only has right to control settlement (and does not exclusively control the defense), the
carrier can still be responsible and held liable under Stowers theory (Rocor)
a. This is first time court said carrier does not have to exclusively control the defense in order to
trigger Stowers
10. Settlement demand must be clear (Rocor)
11. You can have a demand that is in excess of limits, but if the insured unequivocally (clearly) informs
carrier that he is willing to pay that difference, then the carrier can have Stowers exposure
(Maldonado)
a. If client gets a demand from underlying P to settle case and the amount of demand is in excess
of policy limits such that you do not think you can Stowers-ize the carrier, the truth is you CAN
Stowers-ize carrier if client is willing to pay that and tells the carrier
12. If the primary policy tenders policy limits, Garcia suggests that there is a Stowers cause of action for
the excess policy
13. American Centennial v Canal: Can excess carrier pursue a Stowers claim against a primary carrier?
a. Some states say primary carrier has a duty to excess carrier (direct duty approach, where excess
is operating on its own and has rights against primary carrier, so primary carrier owes direct duty
to excess carrier), but Texas adopted equitable subrogation approach instead (American
Centennial v Canal)
i. Equitable subrogation means you are standing in the shoes of someone else, so you have
no greater rights or duties than the person whose shoes you are in
1. Means that insured has Stowers right against primary carrier because there were
opportunities to settle and they did not settle; so, excess carrier steps into shoes
of insured, and thus has action against primary carrier
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2. Both insured and excess want primary to settle, because it is in everyone's best
interest
14. Can carrier who settles case on behalf of insured come back later and seek reimbursement if it is
later determined there is no coverage? (Frank’s Casing)
a. Carrier that settles a claim when coverage is questionable cannot seek reimbursement of what it
paid from insured unless 1 of 2 things exists, even though it does so with a cloud hanging over its
head as to the coverage question:
i. Policy specifically gives carrier the right to seek reimbursement (never seen this in a
policy before)
ii. There is a side agreement made between carrier and insured that allows carrier to seek
reimbursement
b. Fundamental principle of insurance law: insurance company cannot subrogate on behalf of its
own insured
15. Although the triggering of multiple policies would provide multiple funding sources, it cannot lead to
the conclusion that insured’s total coverage for a continuing claim occurrence somehow exceeds the
per claim occurrence limit stated in all the policies he purchased
a. if a single occurrence triggers more than 1 policy covering different policy periods, then different
limits may have applied at different times. The limit should be whatever limit applied at the
single point in time during the coverage period of the triggered policies when the insured’s limit
was highest.
i. For example, in Garcia, insured had policy limit of $500,000, and carrier never had the
opportunity to settle for $500,000, so therefore, the carrier cannot be held liable for not
settling
16. When have consecutive policies that trigger as result of one occurrence, the insured can pick the
policy in terms of which one maximizes coverage (Garcia)
a. When have multiple policies, once a policy is picked, that carrier can seek contribution from
other carriers
i. However, Texas has not discussed what happens if the other policies have a deductible or
SIR
17. SIR (self-insured retention)
a. This means that there is a sum of money that the insured must pay before the policy is triggered
b. Different than deductible. With a deductible, while the insured is responsible for that, the
insurer is responsible for duty to defend from day 1
i. During SIR, the insured can pick counsel, then when the SIR is exhausted the insurer will
keep their lawyer
The Insured’s Duties
1. Prompt Notice of Claims
a. Every policy will require insured give notice on a timely basis
i. N otice a llows carri er t o begin inv es tiga tion and work towards limiting
liabi lity and a s et tlem ent
b. 2 types of claims-made policies
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i. Generic claims-made policy requires (1) the claim be made within policy period,
and (2) notice as soon as practicable
ii. “as soon as practicable” will not defeat coverage if the carrier is not prejudiced
(Prodigy)
iii. Claims-made-and-reported policy requires (1) the claim be made within the policy
period, and (2) notice to carrier must also be given within the policy period
iv. Prodigy dealt with generic but had twist: provided as a condition precedent that
insured had to give notice as soon as practical, but in no event later than 90 days
after expiration of policy period
v. If it would have been a claims-made and reported policy, then would be dead in
the water and that would be it, since notice was after expiration
c. Why it is important for carrier to have timely notice (Prodigy):
i. Under claims made and reported policy, carrier will know and can close its books
on last day of policy (policy is over)
ii. This is why, if you are late, you have prejudiced the carrier
iii. But when the policy has the "as soon as practicable" language, the carrier cannot
close its books, so it cannot be prejudiced
d. If you give notice to the carrier AFTER settlement, chances are that the carrier has been
prejudiced (Maryland Casualty v American Home Assurance Co.)
i. Car r ier cann ot do any thing af ter this point ( cannot inves t igat e, ca nnot
tr y to mak e a better d eal f or the ins ured) , so court s ay s this was enough
to demons tr ate preju dice
e. L os s r un spr eads heets count as notice of cla im, as ambiguity mus t be r es olved
in f avor of ins ur ed , and carrier had previous ly accept ed los s runs as notice
( Eas t Tex as M edical C enter )
f . S epar ate noti ce is r eq uired f or claim and f or laws uit ( Eas t Tex as Medical
Center )
i. P r ejudice: Do y ou hav e to k eep notif y ing ea ch time?
ii. Cour t s aid in Eas t Tex as Medical C en ter tha t as long as notice of
under ly ing claim was t imely , then covera ge would ex is t under clai ms
made or claims made and reported policy
1 . Cour t s aid that there was no prejudice, s o long as under ly ing
claim was t imely
2. Consent
a. Policies will require insured to get consent of the carrier to hire or pay law firm for
defense costs, as well as to settle claims
b. FN 1 in Hernandez shows settlement-without-consent clause, which means that you
cannot settle something without getting the carrier’s consent/permission first
c. An insured can be proactive and try to mitigate its damages, and the carrier can still be
responsible for the claim, even though it flies directly in the face of the consent clause
(Lennar Homes)
i. Put another way, this means that even before a claim or suit is filed, an insured can
attempt to resolve the situation and still look to the carrier for recovery
ii. Carrier would have to demonstrate it was prejudiced by the attempted mitigation
3. Cooperate with Insurer
a. Work together to provide defense and information
b. Providing documentation for the underlying case that the insurer is defending
c. Intended to help carrier defend the insured
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i. Cooperation clause is not intended to give carrier the right to ask for anything or to
do anything
4. Failure by insured to meet these duties used to mean that the courts would support the carrier
denying coverage, but that has evolved to where now, the carrier must still demonstrate it was
prejudiced by that failure (Hernandez, PAJ, Lennar Homes)
a. P r ejudic e is a way of as k ing whether there has been a materi al b reach ( when
car r ier r el ies on one of the ins ured’ s duties , courts have analy z ed whether
car r ier can es cap e cov erage by as k ing wheth er it was mat erial bre ach of the
policy , thus tr eating it as a contra ct analy s is )
b. If the non-breacher is not harmed/prejudiced by the breach, it is not material
i. If immater ia l breach, the party may not be complete ly of f the hook
ii. M eas ur ing material ity : in determining th e materi ali ty of a breach,
cour ts will cons ider, a mong ot her things , the ex tent to wh ich the non br eaching par ty wil l be depriv ed of the benef it that it could hav e
r eas onably anticipa te d f rom f ull perf ormance. The l es s the non br eaching par ty is deprived of the ex pect ed benef it, the l es s mater ial
the br each.
c. If you give notice to the carrier AFTER settlement, chances are that the carrier has been
prejudiced (Maryland Casualty v American Home Assurance Co.)
i. Car r ier cannot do any thing af ter this point ( cannot inves t igat e, ca nnot
tr y to mak e a better d eal f or the i ns ured) , so court s ay s this was enough
to demons tr ate preju dice
d. Deter mining pr ejudic e can be a matter of la w or a matter of f act, accor ding to
cour t in P r ogr es s ive v Trev ino
i. When no dispute over facts, it is a matter of law because nothing for jury to decide
on as to whether or not it happened
e. Laundry list of things that demonstrate prejudice can be found in the Martinez v ACCC
Insurance case:
i. Carrier incurred additional expense in its attempts to solicit cooperation;
ii. Carrier unable to confirm material facts regarding the alleged collision;
iii. Carrier unable to determine the existence of potential claims or defenses that could
be asserted on insured’s behalf;
iv. Carrier prevented from developing a valid defense for insured because they had no
police report, no witnesses to the accident from which the facts could be
objectively confirmed, and no client to assist with discovery and testimony at trial;
v. Carrier was exposed to a judgment due to insured’s failure to cooperate in her
defense by notifying carrier that a default judgment had been taken against the
insured.
vi. Third party beneficiaries failed to satisfy their duty to cooperate by failing to
forward notice of their default judgment against insured until after it was final and
non-appealable.
5. If the duty is a condition precedent, then prejudice does not come into play whatsoever, but court
in PAJ said that conditions are not favored by law, and construed as covenant instead
P a r t IV : P r o p e r t y P o l i c y
A. Must Have Insurable Interest in Property in Order to Have Right to Recover Under the
Policy
1. Includes named insured, as well as other people
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a. For example: mortgagee, who has very important insurable interest since it loaned money
to insured to purchase property, and so has right to recover under commercial property
policy
i. Usually, the mortgagee will be identified specifically in the policy, or there will be
a blanket statement saying mortgagees have rights
B. Two Types of Commercial Property Policies
1. All Risk Policy
a. Covers all property you own that is insured for any risk unless it is specifically excluded
b. This is the better of the two, because of burden of proof
i. All the insured has to show is that the property is insured, and has been damaged.
The burden then shifts to the carrier to show an exclusion that trumps coverage
2. Named Peril Policy
a. Covers property for specifically named perils, and there may also be some exclusions that
apply
b. The burden is on the insured to demonstrate the damage was caused by a named peril,
then burden shifts to carrier to show an exclusion that bars coverage
3 . To decide if named per il or all -r is k policy , may need to go look at def inition of
cover ed c aus e of los s in ins uring agreement
C. Property Policy Claims are Extremely Fact-Driven, and Expert-Driven
1. Riddled with factual questions, and require experts on both sides
2. When talking about causation, you have a battle of experts
D. Builders Risk Policy Specifically Covers Damage to Property that Occurs During Construction
E. Boiler and Machinery Policies Cover Specific Types of Machinery
1. Boilers, turbines, combustion engines, steam engines, and related machinery
F. Inland Marine Policies Provide Coverage for Specialized, Movable Personal Property
1. Jewelry, bonds, stocks, pieces of paper, etc.
2. Insures this property during transit
G. Fortuity
1 . Stands f or pr opos ition that property policy will not co ver los s es t hat are ine vi tabl e
( ex . hous e is on f ir e, you r un to agent of f ice and try to buy covera ge f or y our
burning hous e)
a. The loss must be unknown or unexpected in order to be covered
H. Anti-Concurrent Causation
1. Often you will see exclusions in a property policy that say something like "if damage is caused
by water, there is no coverage, regardless of whether there is any other cause"
a. These are hard to overcome, because if carrier can show the loss is caused in any way by
the excluded peril, you are done
I. Preservation of Property Clause (AKA, Sue and Labor Clause)
1. Damage has not yet occurred, but is imminent, and you do something to prevent the damage, you
have coverage
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J. See pg. 8 of Vol. 3 for List of Typical Exclusions
1. Settling, cracking, and expansion exclusion
a. Physical damage is not covered if caused by settling, cracking, shrinkage, or expansion of
pavements, patios, foundations, walls, floors, roofs, or ceilings
2. Inherent defects, wear and tear
3. Faulty workmanship/design
a. If damage caused by faulty workmanship or design, carrier will say it is not covered
because insured can recover that from the contractor
K. Valuation of Damaged Property
1. Actual Cash Value
a. Pays you the cost of replacing the damaged or destroyed property, but deducts cost of
depreciation
2. Replacement Cost Coverage (Replacement Value)
a. Does not make deduction for depreciation (and is thus the better option)
b. You must make repairs in order to get the full money
i. If you decide to not make repairs and just pocket the money, then carrier only has
to pay you actual cash value
c. Need to specifically ask for replacement cost coverage, because ACV is default
L. Appraisal Clauses
1. Require arbitration for disputes over the value of the loss
2. Assumes there is coverage, so you cannot invoke it if there is a dispute about coverage
3. These are common in property policies now
M. Business Interruption Coverage (AKA, Time Element Coverage)
1. When you have property loss and business loss (profits gone during time needed to repair
damaged
2. Need to have link between lost earnings and the damage to property
N. Submitting a Claim
1. Under liability policy, all you have to do is give notice to carrier of occurrence/claim, and you
are good
2. Under property policy, you also have to give notice of damage or event, but the insured also has
obligation to put the claim together
a. Have to submit to carrier explaining the damage you suffered and the costs associated
i. This is done via proof of loss, usually a form created by carrier, providing lots of
different info they want
ii. Until you do that, the carrier has no obligation to respond, so you have to
affirmatively put together the claim (sometimes requires getting experts)
1. Some policies allow you to recoup the cost of getting experts
O. Property Policies Have Sub-limits for Specific Types of Losses (Unlike Liability Policies Which
Have One Limit)
1.
2.
3.
4.
Damage to real property
Damage to personal property
Cost of removing debris
Expediting expenses
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P. Contractual Suit Limitation Provision
1. Very dangerous
2. Will say things like "if you are going to file suit under this policy, must file two years from date
of loss", and this is often overlooked and is a "gotcha" moment
3. Usually is limited to two years (this is the minimum in Texas)
Q. Looking at Property Policy
1. First: Declarations page
2. Insuring agreement
a. Policy covers both damage or physical loss, which must mean that they are different
i. Physical loss might mean that it cannot be used for its intended use
ii. On the other hand, damage can occur without there being physical loss (ex. of
damaged gutters still works, but are replaceable)
iii. Most policies cover both damage and physical loss
b. To decide if named peril or all-risk policy, go look at definition of covered cause of loss
Part V: Remedies
A. Two Types of Remedies:
1. Breach of contract cause of action
a. Have this when carrier refuses to pay (this is first claim that should be asserted)
b. The policy is a contract, so insured can recover breach of contract damages
2. Extra-contractual claims/remedies (covered below)
B. Common Law Duty of Good Faith and Fair Dealing
1. First party only
2. Texas recognized common law duty of good faith and fair dealing in 1987 in the Arnold case
3. Requires insurers deal fairly with insureds because of the special relationship between carrier
and insured
a. Creation of the duty: In the insurance context, a special relationship arises out of the
parties' unequal bargaining power and the nature of insurance contracts which would
allow unscrupulous insurers to take advantage of their insureds' misfortunes in bargaining
for settlement or resolution of claims. In addition, without such a cause of action insurers
can arbitrarily deny coverage and delay payment of a claim with no more penalty than
interest on the amount owed. An insurance company has exclusive control over the
evaluation, processing and denial of claims. For these reasons, a duty is imposed that
“[An] indemnity company is held to that degree of care and diligence which a man of
ordinary care and prudence would exercise in the management of his own business.”
(Arnold)
b. Cr eation of the tor t : SCOTX s aid tha t ins urers had duty to deal f airly and in
good f aith with ins ure ds , and "caus e of acti on was s tated when it is alle ged
that that th er e is no reas onable bas is f or denial of cla im or delay i n pay ment
or a f ailur e on the part of ins urer to determine wheth er there is a ny
r eas onable bas is f or the denial or de lay " ( Arnold )
i. Thus, if carrier does not have reasonable basis for denying claim, it should not
deny claim
ii. If carrier denies claim but has no reasonable basis for doing so, can be held liable
under breach of duty of good faith and fair dealing
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4.
5.
6.
7.
iii. Giles recasts from negative to positive proposition: An insurer breaches its duty of
good faith and fair dealing when “the insurer had no reasonable basis for denying
or delaying payment of [a] claim, and [the insurer] knew or should have known
that fact.”
iv. “The problem is this: A plaintiff in a bad-faith case must prove the absence of a
reasonable basis to deny the claim, a negative proposition. Yet, under our noevidence standard of review, an appellate court must resolve all conflicts in the
evidence and draw all inferences in favor of a bad-faith finding”
v. Giles set out the reasonably clear standard, which is the standard for bad faith: the
reasonably clear standard recasts the liability standard in positive terms, rather
than the current negative formulation. Under this standard, an insurer will be
liable if the insurer knew or should have known that it was reasonably clear that
the claim was covered.
1. Advantages of this standard:
a. Requiring a bad faith claimant to prove that a carrier failed to
attempt to effectuate a settlement after its liability has become
reasonably clear eliminates the conflict with our no-evidence
standard of review.
b. Moreover, this solution unifies the common law and statutory
standards for bad faith.
c. Also allows for a factual inquiry that trial courts can easily and
intelligently craft into a jury charge
c. Bad faith claim is to be determined by a jury because it is a fact issue (Giles)
Cannot have a bad faith claim unless the insurance contract says that there is coverage (Stoker)
a. Even if carrier erroneously denies coverage (basing denial on wrong argument), if there is
no coverage  no bad faith
b. Stoker left door open slightly for argument that you do not have to have coverage under
the policy for a bad faith claim: “we do not exclude, however, the possibility that in
denying the claim, the insurer may commit some act, so extreme, that would cause injury
independent of the policy claim”
i. However, despite leaving door open for possible situation where carrier conduct is
so extreme as to cause damage, regardless of there being coverage, there has
never been an actual case that has held this
In bad faith claim, the carrier does not escape bad faith simply be relying on an expert (Nicolau,
with the Haag engineers)
a. There must be a reasonable basis for that reliance: have to objectively and in good faith
hire the expert (in other words, if carrier knew what expert would say before he was hired
and he was hired just because wanted someone to support their side, that is not allowed)
i. The mere fact that an insurer relies upon an expert's report to deny a claim DOES
NOT automatically foreclose bad faith recovery as a matter of law
ii. Instead, an insurer's reliance upon an expert's report, standing alone, will not
necessarily shield the carrier if there is evidence that the report was not
objectively prepared or the insurer's reliance on the report was unreasonable"
An insurance company cannot insulate itself from bad faith by investigating a claim in a manner
calculated to construct a pre=textual basis for denial (Simmons)
a. Carrier cannot conduct an outcome-oriented investigation
i. Carrier cannot decide to deny coverage up front and then try to find supportive
evidence later
As practical matter, common law duty of good faith and fair dealing has no teeth and has been
mostly abandoned
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a. Most lawyers don’t even bother with it, and look to 541 and 542 now (the hammers for
remedies, and more potent than common law tort)
i. 541 allows party to recover up to 3 times the actual damages, as well as attorney
fees (542 also permits attorney fees)
8. Recoverable damages (but really hard to get, almost impossible)
a. Mental anguish: must be debilitating
i. P may not recover mental anguish damages unless they introduce direct evidence
of the nature, duration, and severity of their mental anguish, thus establishing a
substantial disruption in the plaintiffs’ daily routine
b. Punitive damages: must show carrier knew it would do harm, and that harm would result
in severe bodily injury or severe property damage or harm
i. Punitive damage awards are usually thrown out in these cases because so difficult
to recover them
ii. Simmons: P cannot recover merely because the insurer breached duty of good
faith and fair dealing. Only when accompanied by malicious, intentional,
fraudulent, or grossly negligent conduct does bad faith justify punitive damages
1. P required to introduce evidence showing that carrier was actually aware
that its action would probably result in extraordinary harm not ordinarily
associated with breach of contract or bad faith denial of a claim—such as
death, grievous physical injury, or financial ruin
C. Statutory Bad Faith (Unfair Claims Settlement Practices Act, § 541 of Texas Insurance
Code)
1. Both first and third party
2. 541.060: Unfair Settlement Practices
a. Not limited to first party claims, or to third party claims; it applies to both, except where
it is obvious that it applies to one or the other (541.060(a)(5) is example of an instance
where the statute specifically applies to first party coverage only)
b. "thou shalt not dos" for insurance companies (things that are improper for carriers to
conduct)
c. See page 95 in Vol. 3
3. 541.061: Misrepresentation of the Insurance Policy
a. Broader statute that applies to misrepresentation than does the first part of 541.060
b. Discusses different types of misrepresentation
4. 541.151: Private Action for Damages Authorized
a. This gives you a private cause of action under 541
i. Based on anything in 541 or the Deceptive Trade Practices Act
b. "a person who sustains actual damages"
i. What are actual damages?
ii. Big debate over whether the policy benefits can equal the actual damages
1. Or, does it have to be something else other than policy damages?
a. Some courts say it must be independent injury (independent from
the benefit)
i. If independent injury is required, then statutory bad faith is
pretty much dead, according to professor Martin on
possible outcome of the USAA v Manchaca case
b. Some courts say that it need not be an independent injury
c. The Deepwater Horizon case dealt with whether it had to be
independent injury or not
5. 541.152: Damages, Attorney's Fees, and Other Relief
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a. A plaintiff who prevails in an action under this subchapter may obtain:
i. The amount of actual damages, plus court costs and reasonable and necessary
attorney's fees
6. 541.154: Notice Provision
a. Requires that before you sue carrier under the statute, you must give notice to carrier of
your specific complaint and notify carrier of expenses, attorney's fees, actual damages
you have incurred in asserting the claim
b. Have to give 60 days of notice to carrier unless doing so is impracticable due to filing to
keep statute of limitations from expiring or if the action is asserted as counterclaim
7. 541.155 (not provided)
a. If do not give noti ce, carrier can s eek abat e ment of the cas e until y ou give
pr oper notice
8. 541.162: Limitations Period (not provided)
a. The statute of limitations for a 541 claim is two years from date of offense
i. Remember, this is different from statute of limitations for breach of contract in
Texas, which is 4 years
D. Prompt Pay Statute (§ 542 of Texas Insurance Code)
1. First party only
2. Strict liability statute: Does not require you to demonstrate the carrier acted in bad faith (does not
matter)
a. Purpose is to incentivize carriers to promptly adjust and pay claims
3. Lays out a number of deadlines by which a carrier must do certain things
4. 542.060: Liability for Violation of Subchapter
a. If an insurer that is liable for a claim under insurance policy is not in compliance with
this subchapter [i.e., missed a deadline], the insurer is liable to pay to holder of the policy
or the beneficiary making the claim under the policy, in addition to the amount of the
claim, interest on the amount of the claim at the rate of 18 percent a year as damages,
together with reasonable attorney's fees
i. Note that "if an insurer is liable" means that there must be coverage
ii. Note that if carrier denied claim, it has missed deadlines, so this incentivizes
carrier to err on side of the insured, or else it may face the 18 percent damages
(not a penalty; just damages)
iii. The 18 percent goes to the bottom line, and the carrier cannot really shift that over
to its reinsurance, which shows how powerful and potent an incentive this is for
carriers
5. 542.051
a. Definition of claim:
i. "Claim" means a first-party claim that:
ii. Is made by an insured or policyholder under an insurance policy or contract or by
a beneficiary named in the policy or contract; and
iii. Must be paid by the insurer directly to the insured or beneficiary
b. Thus, this statute applies only to first party claims, not third-party claims
c. Are defense costs a first or third-party claim?
i. If they are first party, the prompt payment statute applies
ii. Court acknowledged that defense costs are first party in the Lamar Homes case
6. 542.002
a. List of the type of carriers that the statute applies to (effectively covers most any type of
policy you can think of)
7. Statute of Limitations under § 542
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a. Does the two-year statute of limitations in § 541 apply to § 542?
i. This is not in the statute; there is a split in authority as to whether 542 has a 2 or
4-year statute of limitations, so always assume it is 2 years to be safe
E. Attorney Fees
1. Both first and third party
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