In Trejo, Allstate denied the Plaintiff’s underinsured motorist (“UM”) claim. The Plaintiff then filed suit in state court naming both Allstate, and its adjuster Tonja Hess, a Texas resident, as defendants. Allstate removed the case to federal court claiming the Hess had been improperly joined to defeat diversity jurisdiction. To determine whether Hess was improperly joined, the Court analyzed whether the Plaintiff had established a cause of action against Hess.
Trejo alleged that Hess failed to attempt in good faith to effectuate a prompt, fair, and equitable settlement of his claim for UIM benefits, even though liability was reasonably clear, in violation of Tex Ins. Code. §541.060(a)(2)(A). The Court acknowledged that there have been contradicting opinions regarding whether an adjuster can be held liable under this section, and did not opine either way, except to note that any doubt as to the propriety of removal are resolved in favor of remand.
The court next considered Allstate’s assertion that the claim against Hess was not viable because the Plaintiff had not yet obtained a judgment against the at-fault driver. The court’s analysis of this issue began with Hamburger v. State Farm Mutual Automobile Insurance Company, 361 F3d 875 (5th Cir. 2004). In Hamburger, the Fifth Circuit held that it is possible that liability under a UM/UIM policy can be reasonably clear, before legal entitlement to those benefits is established. The Trejo court then reconciled that opinion with Brainard v. Trinity Universal Ins. Co., 216 S.W. 3d 809, 818 (Tex. 2006), and determined that the Texas Supreme Court did not overrule Hamburger in the Brainard decision. The Trejo court opined that while a legal judgment against the tortfeasor is required to give rise to the contractual obligation to pay UM/UIM benefits, liability under the insurance code is a different standard, which requires the Plaintiff to show that the payment of UM/UIM benefits was wrongfully withheld when the obligation to pay became reasonably clear.
Substantially similar to Trejo, the second case worth noting is State Farm Mut. Auto. Ass’n v. Cook, No. 04-18-00729-CV, 2019 WL 4453763 (Tex. App. [4th Dist.] Sept. 18, 2019). In Cook, the Plaintiff obtained a judgment against State Farm showing entitlement to the UM policy limits. State Farm paid the judgment nine days later and then moved to dismiss the extracontractual claims which had been severed and abated from the breach of contract action. State Farm’s Motion for Summary Judgment was denied and a permissive appeal was allowed regarding: (1) whether a common law or statutory bad faith claim can be sustained if payment of UM benefits is withheld until a judgment establishing entitlement to those benefits is obtained; and (2) whether an insured can sustain a claim under the Prompt Payment of Claims Act if a judgment is timely paid.
With respect to the bad faith issue, State Farm argued that an insurer’s liability cannot be reasonably clear until a judgment against the tortfeasor is entered. Relying on Hamburger, the Cook court held that a UM/UIM carrier can act in bad faith by “failing to reasonably investigate or delaying payment” until a legal determination is made that benefits are owed.
The Cook court recognized that the contractual liability to pay UM/UIM benefits does not arise until a judgment is entered establishing the liability and uninsured status of the other motorist. The court held that where an insurer timely pays the claim following the judgment, there is no liability under the Prompt Payment of Claims Act.
The third recent UM/UIM case deserving of attention is Allstate Ins. Co. v. Irwin, No. 04-18-00293-CV, 2019 WL 3937281 (Tex. App. [4th Dist.] Aug. 21, 2019). In Irwin, the Plaintiff settled with the tortfeasor and then sought a declaratory judgment against his UIM carrier that he was entitled to benefits. The claim was brought under the Uniform Declaratory Judgment Act (UDJA). The jury returned a verdict in favor of the Plaintiff which awarded policy limits, costs and attorneys’ fees. Allstate appealed asserting that the UDJA was not the proper procedural mechanism through which to obtain a verdict of entitlement to UIM benefits and as such, the plaintiff cannot recover attorneys’ fees under the UDJA.
The Irwin court held that the UDJA is a proper mechanism to determine whether the Plaintiff’s damages exceeded the tortfeasor’s limit. This is the second appellate court in Texas to do so. See Allstate Ins. Co. v. Jordan, 503 S.W. 3d 450 (Tex. App. [6th Dist.] Texarkana 2016, no. pet.).
The Jordan court opined that recovery of attorneys’ fees was governed by Tex. Civ. Prac. & Rem. Code Chapter 38, and Brainard, and as long as the UM/UIM benefits were paid within thirty days of plaintiff establishing an entitlement to benefits, attorneys’ fees were not recoverable.
The Irwin court disagreed with the Jordan holding, finding instead that under the UDJA, attorneys fees are governed by Tex. Civ. Prac. & Rem. Code Chapter 37.009. The court distinguished Irwin from Jordan and Brainard on the basis that the Irwin did not allege breach of contract. The Irwin court held that attorneys’ fees are recoverable since they are expressly authorized by the UDJA.
Although binding on cases pending in the U.S.D.C. Western District, the precedential value of the Trejo decision is somewhat limited to the removal context. The court did not determine that the alleged Texas Insurance Code violation is actually viable against the adjuster before there is a judgment against the at-fault driver, the court determined only that such a claim could be viable and construed Texas law in favor of remand.
Similarly Cook did not involve an analysis of whether the carrier had unreasonably delayed payment, but only opined that a bad faith claim for failure to pay benefits when liability is reasonably clear, is an allegation that could potentially warrant recovery.
Where there is a bona fide dispute regarding liability and/or damages, and that dispute is timely communicated in writing to the insured, it will be difficult for the insured to argue that the obligation to pay was reasonably clear. Consistent, thorough, and well-reasoned communications with the insured are important components in defending extra-contractual claims. It is still the law in Texas that UM/UIM policy benefits do not have to be paid until thirty (30) days after judgment against the uninsured/underinsured driver. However, insurers will need to monitor such cases, and if liability is “reasonably clear” under any objective analysis, it may be wise to consider paying such benefits under limited circumstances as noted.
As Irwin is the first Texas court to allow attorneys fees as damages in a UM/UIM context, there is likely to be much more litigation on this issue.
At the time of publication, appeals of decisions in these cases have not been taken. We will continue to monitor these issues and seek out appellate opportunities to create favorable law. The more discrepancies that arise between appellate districts, the more likely it is that the Texas Supreme Court will opine on these important issues.
Lugenbuhl Senior Counsel Michael McCoy and Counsel Christine Edwards are members of the firm’s Litigation and Insurance practices. Learn more about our Litigation practice here and our Insurance practice here.
The content of this article is not intended to serve as an exhaustive review of the laws and statutes, and it is not intended to provide legal advice. The opinions expressed through this article may not reflect the opinions of the firm, individual attorneys or clients.