Steven Plitt, Expert Witness Steven Plitt, Expert Witness
Insurance Bad Faith Claim Handling Expert Serving Clients Nationwide

Severance Of Bad-Faith Claims Under Texas Law When Coverage Issues Are Unresolved

REPRINTED WITH PERMISSION FROM WESTLAW JOURNAL

11 No. 2 Westlaw Journal Insurance Bad Faith 1

Westlaw Journal Insurance Bad Faith
*1
May 27, 2015

Commentary

Severance Of Bad-Faith Claims Under Texas Law When Coverage Issues Are Unresolved

Steven Plitt, Esq., Kunz Plitt Hyland & Demlongaa1

Copyright © 2015 Thomson Reuters .

Steven Plitt of Kunz Plitt Hyland & Demlong discusses the effect of Texas law on the severance of bad-faith claims in cases where insurance coverage issues are unresolved.

Texas Rule of Civil Procedure 41 governs severance of claims in the trial court.1 Rule 41 provides in relevant part that "any claim against a party may be severed and proceeded with separately." Under Texas law, claims are properly severable where three conditions are met: • The controversy involves more than one cause of action.

  • The severed claim is one that would be the proper subject of a lawsuit if independently asserted.
  • The severed claim is not so interwoven with the remaining action that it involves the same facts and issues2

Severance is permitted under Texas law to avoid prejudice, do justice, and promote judicial and party convenience.3 The Texas trial courts have broad discretion in severing causes of action.4 The trial court is obligated under Texas law to order severance when "all of the facts and circumstances of the case unquestionably require a separate trial to prevent manifest injustice, and there is no fact or circumstance supporting or tending to support a contrary conclusion, and the legal rights of the parties will not be prejudiced thereby."5

Frequently, insureds bring both breach-of-contract and bad-faith allegations against the insurance company in a single lawsuit. In most circumstances, the insured cannot prevail on the bad-faith claim without first showing that the insurer breached the contract.6 Under Texas law a breach-of-contract claim is separate and distinct from a bad-faith claim.7 Thus, insureds must generally establish that the insurance company was liable on the contract before the insured can recover for bad faith against the insurer for failing to promptly pay, settle or investigate a claim.8

The recent decision of the Texas Court of Appeals in In re Allstate County Mutual Insurance Co. demonstrates the operation of Texas law regarding severance in the context of an underinsured-motorist claim9

In Allstate, the insured’s minor son Grant Briers was a passenger in a vehicle owned and driven by DaYonajja Williams. A single-vehicle accident occurred, resulting in Briers’ death.10 His parents filed a UIM claim with Allstate under a business auto policy issued by Allstate to the father’s employer, T&R Pipeline Services.11 Allstate denied the UIM claim on the ground that neither the father nor Briers was an insured under the policy; therefore, there was no UIM coverage available.12

*2The Briers sued Allstate, seeking declaratory judgment relief to establish UIM coverage under the policy and alleging that Allstate acted in bad faith by failing to settle or make a good-faith attempt to settle the claim.13 Allstate moved to sever the extra-contractual claims from the breach-of-contract claim and to abate the extra-contractual claim until the preliminary issue of coverage had been decided. The trial court denied Allstate’s motion.14 Allstate filed a petition for writ of mandamus, seeking to compel severance and abatement. The Court of Appeals agreed with Allstate, ordering severance and abatement.

The court in Allstate began its analysis by recognizing that insurance companies could not be liable for failing to settle or investigate claims when there was no contractual duty to pay.15 In the context of UIM coverage, insurance companies do not have a contractual duty to pay UIM benefits until the insured proves:

  • The insured had UIM coverage.
  • The underinsured motorist negligently caused the accident.
  • The injury was negligently caused by the accident that resulted in covered damages.
  • The amount of the insured’s damages.
  • The tortfeasor’s UIM coverage was deficient.16

Because of this, an insured is required to first establish that the insurance company is liable under the UIM contract before the insured can recover any extra-contractual damages against the insurance company for failing to promptly pay, settle or investigate a UIM claim.17 Thus, in many instances, an insured asserting a claim for UIM benefits requires severance and abatement of the bad-faith claims.18

The court in Allstate noted there was no evidence in the record showing that the insureds had established that Allstate was liable under the insurance contract. Therefore, the insured’s bad-faith claim based on the failure to settle could be negated by a determination in the breach-of-contract claim that Allstate was not liable.19 The court thus found that it would not do justice, avoid prejudice or further convenience to require Allstate to prepare for and litigate the bad-faith settlement claims, which had not yet accrued and could be rendered moot by a determination on the breach-of-contract claim.20

Moreover, allowing the insureds to conduct discovery into Allstate’s claims-handling history involving unrelated accidents and then allowing the introduction of that information at trial on the breach-of-contract claim would be manifestly unjust.21

Finally, the court found that Allstate would have no adequate remedy on appeal if the insured’s bad-faith claims were tried with the breach-of-contract claim. Under that circumstance, the parties would be required to conduct discovery, prepare for trial, and conduct voir dire on claims that may have not yet accrued and that could be rendered moot by the portion of the trial relating to breach-of-contract for UIM benefits. 22

Footnotes

1

See Texas Rule of Civil Procedure 41

2

Guar. Fed. Sav. Bank v. Horseshoe Operating Co.,793 S.W.2d 652, 658 (Tex. 1990)

3

F.F.P. Operating Partners v. Duenez,237 S.W.3d 680, 693 (Tex. 2007)

4

Morgan v. Compugraphic Corp.,.,675 S.W.2d 729, 734 (Tex. 2004); Black v. Smith, 956 S.W.2d 72, 75 (Tex. App. 1997).

5

Womack v. Berry,291 S.W.2d 677, 683 (Tex. 1956).

6

See, e.g.,Liberty Nat’l Fire Ins. Co. v. Akin, 927 S.W.2d 627, 629 (Tex. 1996);see also In re Progressive Cnty. Mut. Ins. Co., 439 S.W.3d 422, 426-27 (Tex. App. 2014); In re Old Am. Cnty. Mut. Fire Ins. Co. No. 13-12-00700-CV, 2013 WL 398866 at *4 (Tex. App. Jan. 30, 2013); In re State Farm Mut. Auto. Ins. Co., 395 S.W.3d 229, 238 (Tex. App. 2012); Smith v. Allstate Ins. Co., No. H-03-0651, 2007 WL 677992 at *5 (S.D. Tex., Feb. 27, 2007)..

7

See, e.g.,U.S. Fire Ins. Co. v. Millard, 847 S.W.2d 668, 672 (Tex. App. 1993); Akin, 927 S.W.2d at 629; In re Am. Nat’l Cnty. Mut. Ins. Co., 384 S.W.3d 429, 433 (Tex. App. 2012); In re United Fire Lloyds, 327 S.W.3d 250, 254 (Tex. App. 2010)..

8

Akin, 927 S.W.2d at 629; In re Progressive Cnty. Mut. Ins. Co., 439 S.W.3d at 426-27; In re Old Am. Cnty. Mut. Fire Ins. Co., 2013 WL 398866 at *4; In re State Farm Mut. Auto. Ins. Co., 395 S.W.3d at 238.

9

447 S.W.3d 497 (Tex. App. 2014).

10

Id. at 498

11

Id.

12

Id.

13

Id.

14

Id., at 499.

15

Id.at 501 citing Progressive Cnty. Mut. Ins. Co. v. Boyd, 177 S.W.3d 919, 922 (Tex. 2005); Akin, 927 S.W.2d at 629; In re Old Am. Cnty. Mut. Fire Ins. Co., 2013 WL 398866 at *4; In re State Farm Mut. Auto. Ins. Co., 395 S.W.3d at 237-38; In re Am. Nat’l Mut. Ins. Co., 384 S.W.3d at 437, 38; Millard, 847 S.W.2d at 673..

16

Id.at 501 citing Brainard v. Trinity Universal Ins. Co., 216 S.W.3d 809, 818 (Tex. 2006); In re Old Am. Cnty. Mut. Fire Ins. Co., 2013 WL 398866 at *4; In re United Fire Lloyds, 327 S.W.3d at 255.

17

Id citing Akin, 927 S.W.2d at 629; In re Progressive Cnty. Mut. Ins. Co., 439 S.W.3d at 426-27; In re Old Am. Cnty. Mut. Fire Ins. Co., 2013 WL 398866 at *4..

18

Id citing In re Old Am. Cnty. Mut. Fire Ins. Co., 2013 WL 398866 at *4; In re Progressive Cnty. Mut. Ins. Co., 439 S.W.3d at 426-28; In re Am. Nat’l Cnty. Mut. Ins. Co., 384 S.W.3d at 438-39; In re United Fire Lloyds, 327 S.W.3d at 255-56.

19

Id.at 501 citing Boyd, 177 S.W.3d at 922.

20

Id.

21

Id.

22

Id.at 504.

aa1

Steven Plitt is the current successor author of "Couch on Insurance 3d." A practicing attorney, Plitt is a founding partner of the coverage boutique law firm Kunz Plitt Hyland & Demlong in Phoenix, where he serves as chairman of the insurance practice group and maintains a national practice. He is frequently called on as an expert witness in insurance-related cases on subjects including bad faith, coverage issues, insurance agent errors and omissions, and legal malpractice. He can be reached at sp@kunzlegal.com.

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