While the November 8, 2018 Court of Appeal of Texas, Fort Worth Division opinion reverses a trial court’s judgment on grounds of legal insufficiency and standing, the court’s analysis and application of current Texas bad faith law is of much more interest. The trial court judgment held that Old American Insurance Company violated both the Texas Unfair Settlement Practices and the Prompt Payment of Claims Acts by failing to promptly pay benefits owed under the life insurance policy assigned to Lincoln Factoring, LLC (assignee of beneficiary’s policy benefits). But the appellate court reversed, concluding that as a matter of law Lincoln could not recover damages on the claims it plead. Old Am. Ins. Co. v. Lincoln Factoring, LLC, No. 02-17-00186-CV, 2018 WL 5832111, at *1 (Tex. App.—Fort Worth Nov. 8, 2018).
In 2011, Rebecca Barnes purchased a life insurance policy from Old American that provided that upon proof of a “covered death” the policy would pay a general benefit of $10,000 upon her death, and an additional $10,000 benefit upon proof that her death was “accidental.” Barnes died on September 28, 2014. On October 12, 2014, Barnes’s fiancé and the policy’s sole beneficiary assigned his entitlement to $4,725 of the proceeds to the funeral home who, in turn, assigned those proceeds to Lincoln. Lincoln sent the notarized assignments and claim forms to Old American, who acknowledged receipt but responded that it “need[ed] a copy of the death certificate” to pay the claim. The death certificate received stated that the manner of death was pending investigation.
Old American refused to pay until it received a death certificate with the final determination of the cause of death. Lincoln objected, asserting the basis for the “delay” was an “out of contract demand [that Old American had] no basis to make.” Lincoln threatened suit. Old American responded that it could not determine whether the accidental death benefit was payable, as the death certificate listed manner of death as pending investigation; therefore, payment was not due.
In March 2015, Lincoln filed suit in justice court, asserting the delay breached the policy and violated several provisions of Chapters 541 and 542 of the Texas Insurance Code, as well as the DTPA and the common law duty of good faith and fair dealing. Old American received the final death certificate in June 2015, which listed the cause of death as hypertensive cardiovascular disease. Within days, Old American paid all benefits under the policy.
After trial, the justice court signed a judgment that Lincoln take nothing. Lincoln then filed a de novo appeal to the district court, with each party filing competing motions for summary judgment. In granting Lincoln’s motion, the court ordered Old American to pay $9,450 in “treble damages,” $1,050 in “interest,” $12,000 in attorney fees, and costs. Aggrieved, Old American appealed.
The appeal court began with Lincoln’s Chapter 541 and common law bad faith claims. The court agreed that since Lincoln sustained no actual damages (policy proceeds were paid), there was no violation and treble damages or other relief was not available.
In so holding, the court cited USAA Texas Lloyds Company v. Menchaca explaining that “Chapter 541 claims and claims for breach of the duty of good faith and fair dealing are tort claims that are independent from a claim for breach of an insurance contract.” 545 S.W.3d 479, 489 (Tex. 2018). Applying Menchaca and the “independent injury” analysis, the court held:
Here, perhaps because the evidence conclusively showed that Old American paid all benefits under [the policy], the trial court did not award any actual damages. And under the cases cited above, the trial court could not have awarded such damages because the record does not contain any allegation or proof that [Lincoln] suffered an injury that was independent of the benefits it sought under the policy; instead, the record conclusively shows that the damages for which [Lincoln] pleaded and presented evidence flowed from the denial of policy benefits.
Lincoln Factoring, 2018 WL 5832111, at *5.
Next, the court considered Lincoln’s Chapter 542, Prompt Payment of Claims, assertion with its 18% per annum interest damages. Old American argued that, under the plain statutory language, Lincoln lacked standing. The court agreed, holding that Lincoln was not a person or entity afforded protection under the Act because it was not an “insured or policyholder” or “beneficiary named in the policy or contract,” as specified in the statutes. See Tex. Ins. Code § 542.051(2)(A)-(B).
Lastly, the court evaluated Old American’s argument that payment of the policy benefits, albeit later than Lincoln may have requested, foreclosed its breach of contract claim. The appellate court agreed, holding that because Old American fully paid the policy benefits, Lincoln could not prove a breach of contract claim. See, e.g., Minn. Life Ins. Co. v. Vasquez, 192 S.W.3d 774, 776 (Tex. 2006) (“As the claim was paid shortly after suit was filed, no breach of contract claim remains.”)
Lincoln is significant with respect to Chapter 541 (Unfair Settlement Practices) and common law bad faith claims in Texas, in that the appellate court provides a detailed tracing of the “independent injury” analysis framework, both from a historical perspective, and up-to and including the Texas Supreme Court’s recent Menchaca decision.
And, regarding Chapter 542 (Prompt Payment of Claims), the court applied the plain language of the statutes in evaluating the standing issue, giving deference to legislative intent. While the court did not expressly state public policy supports limiting Chapter 542 damages to an “insured or policyholder” or “beneficiary named in the policy or contract,” the cases the court cited do. See Lincoln Factoring, 2018 WL 5832111, at *7 (citing DeLeon v. Lloyd’s London, 259 F.3d 344, 354 (5th Cir. 2001) (“The legislature has framed the claim-processing deadlines of [the prompt pay statute] in terms of the primary relationship between the insurer and the ‘named’ beneficiary—not the lawful, yet unnamed beneficiary . . . . The purpose of the statutory deadline[s] [are] to guarantee the prompt payment of claims made pursuant to policies of insurance; not to create a statutory windfall . . . .”) (internal citations omitted)).
We will keep you informed as to any further developments on this interesting opinion, and whether the parties seek an appeal to the Texas Supreme Court, as the ruling was only just entered on November 8.