Posted In: Insurance Recovery
Insurance Blog: Policyholders May Recover Extra-Contractual Damages in Texas Without an Independent Injury
on November 20, 2018
The Fifth Circuit U.S. Court of Appeals recently held that an insured may recover extra-contractual damages, including treble damages and pre-judgment interest, when its insurer knowingly breaches the duty to defend in violation of the Texas Insurance Code without establishing an injury independent of the denial of policy benefits. Lyda Swinerton Builders, Inc. v. Okla. Sur. Co., 903 F.3d 435, 453 (5th Cir. 2018). In this case, a declaratory judgment action was filed after several insurers refused to defend a general contractor against breach of contract claims brought by a property developer. Id. at 443. The district court entered judgment in favor of the general contractor on all issues except the insured’s extra-contractual damages claim against Oklahoma Surety Company for violation of the Texas Insurance Code. Id. at 444. The district court denied the insured’s request for treble damages because the general contractor did not establish the existence of any injury other than the denial of policy benefits. Id.
The district court’s ruling followed Fifth Circuit precedent that required the insured to prove an injury independent of the loss of policy benefits in order to recover extra-contractual damages. Parkans International LLC v. Zurich Ins. Co., 299 F.3d 514, 518 (5th Cir. 2002). In Parkans, the insured business claimed a loss caused by third-party fraud. After finding no coverage under the commercial crime policy, no bad faith, and no statutory violations, the Fifth Circuit reversed the district court’s judgment for the policyholder. Parkans, 299 F.3dat 519. In dicta, the court stated that under Texas law “[t]here can be no recovery for extra-contractual damages for mishandling claims unless the complained of actions or omissions caused injury independent of those that would have resulted from a wrongful denial of policy benefits.” Id.
Following the Fifth Circuit’s direction in Parkans and Great American Ins. Co., trial courts have denied insureds recovery of treble damages even when the insurer deliberately engaged in unfair and deceptive acts in violation of the Texas Insurance Code. See, e.g., State Farm Lloyds v. Webb, 2017 WL 1739763, at *9 (Tex. App.—Beaumont, May 4, 2017); Alvarado v. State Farm Lloyds, 2016 WL 6905865, at *4-5 (S.D. Tex. June 15, 2016). Few insureds have been able to establish an independent injury and, as a result, the statutory incentive in Texas for insurers to comply with their policy obligations lacked bite.
The Fifth Circuit reconsidered the independent injury requirement set forth in Parkans in light of the recent Texas Supreme Court opinion USAA Texas Lloyd’s Co. v. Menchaca, 545 S.W.3d 479 (Tex. 2018). In Menchaca, a first party property insurance dispute, the court clarified several earlier insurance coverage rulings and reconciled its holding in Castaneda, upon which Parkans relied,with an earlier opinion in which it had affirmed an award of treble damages for an insured’s wrongful denial of policy benefits. See Vail v. Texas Farm Bureau Mutual Ins. Co., 754 S.W.2d 129, 136-37 (Tex. 1988) (holding that the insurer knowingly violated the Texas Insurance Code and stating that “an insurer’s unfair refusal to pay the insured’s claim causes damages as a matter of law in at least the amount of the policy benefits wrongfully withheld.”(emphasis added)). After correcting the Fifth Circuit’s mistaken belief that Vail was overruled by Cataneda, the Supreme Court of Texas distinguished the two opinions on the basis that Vail was entitled to benefits under the insurance policy at issue but Castaneda was not. Menchaca, 545 S.W.3d at 496-97.
The clarification provided by the Supreme Court of Texas allowed the Fifth Circuit to reconsider and overrule the guidance provided in Parkans. Lyda Swinerton Builders, 903 F.3d at 451-53. After affirming the district court’s determination that the insurer had wrongfully denied the general contractor the defense to which it was entitled, the Fifth Circuit reversed precedent and held that if Oklahoma Surety misrepresented its coverage knowingly, the builder could recover extra-contractual damages under the Texas Insurance Code, even in the absence of an injury independent from the denial of policy benefits. Id. at 453. “Menchaca’s strong reaffirmation of Vail confirms that an award of trebled policy benefits pursuant to [the Texas Insurance Code] does not run afoul of the independent-injury rule’s limitation on the recovery of ‘damages beyond the policy benefits.’” Id. Now that Parkans has been overruled and the independent injury rule loosened, extra-contractual damage awards following an insurer’s breach of its coverage or defense obligations may be more common.
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