By: Gordon Wright
Near the end of 2015, the United States Court of Appeals for the Fifth Circuit certified a question to the Texas Supreme Court. The question had to do with whether a claim under Texas Insurance Code, Chapter 541, can be made for trebling of damages if the only actual damage suffered is the loss of policy benefits. The Texas Supreme Court appeared to settle that question in the case of Vail v. Texas Farm Bureau Mutual Insurance Company, 754 S.W.2d 129 (Tex. 1988). There the court held that an insured who is wrongfully denied policy benefits may recover under the Insurance Code and need not show injury independent of policy benefits. That would seem to have resolved the issue. However, numerous cases in the Texas Supreme Court since the Vail case was decided, apparently created some ambiguity which the Fifth Circuit feels needs to clarified.
In Southwestern Bell Telephone Co. v. DeLanney, 809 S.W.2d 493 (Tex. 1991) the court seemed to pull back a little bit from the Vail case. In Vail, and its predecessor, Chitsey v. National Lloyds Insurance Company, 738 S.W.2d 641 (Tex. 1987), the court indicated that where there is a breach in an insurance contract, damages due under the contract could be recovered under a tort theory or a contract theory. In DeLanney¸ the court retreated a bit from that doctrine and urged that the damages for breach of a contract were contractual in nature. The court recognized that the contract gave rise to the duty that was being sued upon, that the breach was not of a common-law duty, and therefore the damages should be contractual in nature. Four years later, in Twin City Fire Ins. Co. v. Davis, 904 S.W.2d 663 (Tex. 1995), the court supported the doctrine from Southwestern Bell. The dissent in the Davis case urged that the court’s holding in Davis was that a bad faith refusal to pay does not cause damages supporting a punitive award. Also, in 1995, the court held in Republic Insurance Co. v. Stoker, 903 S.W.2d 348 (Tex. 1995), that there is generally no claim for bad faith when an insurer promptly denies a claim that is not covered. The court also said, in Stoker, that there is a possibility a tort claim could be made if when denying the claim, the insurer does something so extreme that it would cause injury independent of the claim.
Plaintiffs were thinking not just about the statutory trebling of damages, but of punitive damages. In Universal Life Ins. Co. v. Giles, 950 S.W.2d 48 (Tex. 1997), the court said that punitive damages were available if an insurer was actually aware that it would cause extraordinary harm, such as death, grievous physical injury, or financial ruin, by denying a claim. It is apparent that the court’s thinking had moved well beyond the simple notion in Vail that if the only damage suffered was contract damage, then statutory damages could be obtained. In Provident American Ins. Co. v. Castenada, 988 S.W.2d 189 (Tex. 1998), the court imposed the requirement of injuries independent of those resulting from the denial of the claim. In fact, the court said that there would not be a bad faith denial if the medical evidence was conflicting. In such a case, there would not be reasonably clear liability, and no liability would exist for punitive damages.
In re: Deepwater Horizon, Cameron International Corp. v. Liberty Ins. Underwriting, Inc., 807 F.3rd 689 (U.S. App. – Fifth Cir. 2015), the Fifth Circuit considered a situation where the only damage was the denial of coverage on a $50,000,000 claim. There was no damage claimed other than the loss of benefits and attorney’s fees. The court faced the question that if the only damage suffered is loss of policy benefits, can an insured maintain a claim for additional damages. The Fifth Circuit considered that the previous rulings by the Fifth Circuit added additional confusion to the issue, and it sought guidance from the Texas Supreme Court as to whether Vail was still good law.
The case has been briefed although the Texas Supreme Court has not set Vail argument yet on the issue. While we cannot at this time predict what the Texas Supreme Court will do, a couple observations seem pertinent. First, given the current state of Texas Supreme Court law, it is far easier for an individual to show physical harm or potential financial ruin supportive of punitive damages than for a corporate insured to make the same showing. If the Supreme Court upholds Vail, then the corporate insureds will have an easier time seeking punitive or statutory damages than they now do. Second, the court may give some direction as to any distinction perceived between punitive damages and statutory trebling of damages. It is entirely possible that the Vail case could still be good law with the court reasoning that the legislature wanted the statutory trebling of the damages to discourage insurers from wrongfully not paying a claim. Finally, it will be interesting to see if the court addresses the tort versus contract theories of liability again. If it concludes that the contract theory of liability governs, then it is more likely to overrule Vail and exclude statutory punitive damages for the situation where the only damage is the failure to pay the claim.