The Increasing Trend to "Set Up" Carriers (and the Inability (or Unwillingness) of Courts to Do Much About It)

Posted on November 20, 2008 by Chris Martin

Efforts by policyholder lawyers to "set up" a carrier to make a decision which will enable the lawyer to prosecute a bad faith claim are nothing new.   The trend, however, seems to be increasing across the country as some policyholder lawyers resort to such tactics with more frequency than in prior years.  Frustration among the insurance industry has also been growing as courts across the country fail to recognize a "set up" for what it is and, instead, find the facts giving rise to the set up simply create a "fact issue" that must be resolved by a jury at trial instead of by summary judgment.  A federal court judge in Texas recently decided a bad faith summary judgment issue against a carrier who was "set up" illustrating how easily the "set up" can occur and the limits on a trial court to do much about it once the bad faith suit is filed.

Several days ago, a federal judge in Dallas held an auto carrier was entitled to summary judgment on a spouse’s extra-contractual claims related to UIM benefits, but denied summary judgment as to the insured driver’s extra-contractual claims related to UIM benefits.  In Haralson v. State Farm Mutual Auto. Ins. Co., 2008 WL 4821326 (N.D. Tex. November 5, 2008), an insured driver sustained serious bodily injuries in an accident.  His spouse and daughter were following behind in another car and witnessed the accident.  After accepting the liable driver’s policy limits, the injured driver and his spouse (through counsel) filed separate claims for UIM benefits under their personal auto policy.

 

Subsequently, State Farm tendered its UIM policy limits (per person not per accident) payable to both the injured driver and his spouse.  The next day, the insureds, through their attorney, rejected the check because it purported to settle both claims.  Unable to resolve this dispute through negotiation, the insureds filed separate lawsuits which were later removed to federal court and consolidated.  Later, the carrier tendered another check for policy limits payable only to the injured driver.  This second check was also rejected.

 

The underlying UIM claim proceeded to trial on the issues of liability and damages.  At the conclusion of the trial, State Farm moved for summary judgment on the insureds’ claims for breach of contract and violations of the Texas Insurance Code.  The insureds argued State Farm breached the insurance contract and violated state law by failing to pay each of them $50,000 UIM policy limits in a timely manner.  In response, State Farm argued the injured driver’s spouse is not entitled to recover on her contract and extra-contractual claims because she was paid in full within 60 days after the court established the amount of her bodily injury damages.  Under Texas law, a “UIM insurer is under no contractual duty to pay benefits until the insured obtains a judgment establishing the liability of the underinsured status of the other motorist.”  The trial court agreed and held the carrier was entitled to summary judgment on the spouse’s claims as she had been compensated.  The court reached a different conclusion with respect to the claims for the injured driver.

 

Unlike the spouse’s claims for damages, the court noted the carrier never disputed the injured driver was legally entitled to recover his damages.  The court then noted the carrier waited 10 months after the accident to issue a settlement draft to the injured driver and his attorney.  Prior to that time, the spouse had been included on the settlement check.  Denying summary judgment against the injured driver, the court concluded if the injured driver could convince a jury the carrier improperly conditioned payment of his UIM claim on the release of the spouse’s claim for bodily injury damages, the carrier may be liable for breach of contract and delay damages under the Texas Insurance Code.

 

 

 

This case provides a good lesson and predictor on a growing trend of artificially created opportunities to “set up” a carrier for bad faith claims even though the carrier attempts to pay a claim in a fair and timely fashion.  In this case payment was issued within 30 days of the accident to both the injured driver and spouse.  According to the court, if the carrier had issued payment only to the driver, then it could have avoided a potential EC claim for its delay in payment and alleged breach of contract.  It appears the insured’s counsel manipulated the circumstances to set up the carrier in this instance.  Once the bad faith suit was filed, the carrier found itself in the unfortunate position of having to defend itself for trying to pay the claim quickly, but still not in manner that gave the trial court the ability to completely exonerate it from all extra-contractual claims.

 
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Texas Appellate Court Refuses to Recognize Claim for "Negligent Claims Handling"

Posted on February 4, 2008 by Chris Martin

Recently, the Houston Fourteenth Court of Appeals held State Farm did not breach a contract with its insured after it denied coverage for a mold claim. In Justice v. State Farm Lloyds Ins. Co., 2008 WL 123857 (Tex. App.—Houston [14th Dist.] January 15, 2008), the insureds made a claim under their State Farm homeowner’s insurance policy after a tree fell on their home. State Farm paid the claim. Later, the insureds discovered mold in the walls of their home and reported the claim to State Farm. After issuing a reservation of rights letter, State Farm contracted with a third-party vendor to remediate the home for $137,000. Thereafter, the insureds filed suit for additional mold damage. Both sides filed a motion for summary judgment. 

State Farm argued the breach of contract claim was barred by the mold exclusion in the policy. The insureds allege the mold exclusion is trumped by a provision of the State Farm Adjuster’s Guide, purportedly stating if the original claim is covered, such as the damage from the wind blown tree, then any loss that proximately results is therefore covered. The insureds, however, failed to provide any legal authority for their position and, as a result, waived any basis for relief on that contention.

The appellate court also summarily dealt with the insureds’ other issues such as extra-contractual claims and negligence on the basis the insureds provided no basis to contradict the trial court’s ruling. Importantly, the court reiterated the principle that Texas does not recognize a claim for negligent claims handling. Lastly, to the extent the third-party contractor was hired by State Farm to identify mold damage that could be covered under the policy, the court ruled the insureds response does not articulate a duty owed to them by the contractor or how its failure to identify the mold could have caused them damage if it was not covered under the policy.

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