Chapter 541, Subchapter B, of the Texas Insurance Code (formerly codified as article 21.21 of that code) defines various actionable unfair methods of competition and unfair or deceptive acts or practices in the business of insurance.
There is an issue concerning whether the "actual damages" required to maintain an action under can simply be wrongfully withheld policy benefits, or whether some "independent damages" must be shown. In Parkans International LLL v. Zurich Insurance Co., 299 F.3d 514, 519 (5th Cir. 2002), the Fifth Circuit has 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." But that was a case where the court had found no coverage and was disposing of a statutory claim for alleged misrepresentations. Because there were no benefits due, any damages would have had to be "independent damages." While the ruling was correct, the language swept more broadly than the facts before the court. Nonetheless, federal courts have treated that language as fully authoritative, even in cases where policy benefits had been wrongfully withheld. Great Am. Ins. Co. v. AFS/IBEX Fin. Servs. Inc., 612 F.3d 800, 808 n.1 (5th Cir. 2010) (treating Parkans as authoritative on the point, but remanding based on the possibility that independent damages might be shown); Powell Elec. Sys., Inc. v. Nat'l Union Fire Ins. Co., 2011 U.S. Dist. LEXIS 96848, at *24-25 (S.D. Tex. Aug. 29, 2011) (finding for insured on coverage but dismissing Chapter 541 claim based on lack of independent damages).
Some Texas courts of appeals have held that independent damages are required. E.g., Laird v. CMI Lloyds, 261 S.W.3d 322, 327-28 (Tex. Ct. App. 2008) (affirming summary judgment on extracontractual claims based on lack of independent damages, while remanding for further proceedings on policy benefits that might remain due); DaimlerChrysler Ins. Co. v. Apple, 265 S.W.3d 52, 69-70 (Tex. Ct. App. 2008) (affirming judgment for insurer on extracontractual claims, while finding coverage under one policy), aff’d in part and rev’d in part, Chrysler Ins. Co. v. Greenspoint Dodge of Houston, Inc., 297 S.W.3d 248 (Tex. 2009) (NO. 08-0780),rehrg. denied (2009).
These cases, like Parkans,rely on Provident American Insurance Co. v. Castenada,988 S.W.2d 189, 198-99 (Tex. 1998). Provident denied coverage under some exclusions whose interpretation was disputed. Castenada obtained a verdict for violations of Chapter 541 and the Deceptive Trade Practices Act. There must have been no claim of contract breach, for the court said nothing about whether benefits were due, yet directed a take-nothing judgment. The jury found failure to attempt settlement when liability had become reasonably clear, but the court found that Provident had had a reasonable basis to deny the claim.
Castenada contended that she was nonetheless entitled to a judgment equivalent to policy benefits, because Provident failed to acknowledge communications about the claim and failed to adopt reasonable standards for investigating claims. The court responded by pointing to Republic Insurance Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995), in which it had held that there ordinarily can be bad faith liability if no policy benefits were wrongfully delayed or denied. But a concurrence in Stoker did recognize "the possibility that in denying the claim, the insurer may . . . cause injury independent of the policy claim." 903 S.W.3d at 342, 345 (concurring op.). But that possibility could not save Castenada'a claims for failure to acknowledge communications or establish proper investigation standards, because Castenada had proven no damages independent of the contract. Castenada, 988 S.W.2d at 199.
Thus, like Parkans, Castenada was a case where no improper denial or delay of policy benefits had been established. In the absence of such a denial or delay, there could be no damages at all unless there were damages independent of the contract. Accordingly,Castenada neither says nor implies that independent damages are necessary if contractual damages are present.
Curiously, the Texas Supreme Court specifically rejected an independent damage requirement in Vail v. Texas Farm Bureau Mutual Insurance Co., 754 S.W.2d 129, 136 (Tex. 1988).This does not appear ever to have been overruled.
In AMJ Investments,a Texas court of appeals rejected any requirement of independent damages and affirmed a judgment based on Chapter 541. It relied on Vail and distinguished Castenada on the ground that no contract damages had been found. Thus, there is now a split of authority.
(This N&D is adapted from material that will appear in the next release of William T. Barker & Ronald D. Kent, Insurance Bad Faith Litigation, Second Edition.)
Keywords: insurance, coverage, litigation, Texas, bad faith, damages
William T. Barker is with Dentons, Chicago.