No Bad Faith Recovery Unless Insured Demonstrates Acts Were A Producing Cause Of Damages

A jury found that Mid-Continent committed five separate violations of the Texas Insurance Code and awarded $2 million to the insured as compensation for the amount it paid to settle third-party claims.  The trial court, however, granted Mid-Continent’s motion for judgment to overturn the jury verdict.  Mid-Continent Cas. Co. v. Eland Energy, Inc., 795 F. Supp.2d 493 (N.D. Tex. 2011).  The insured appealed, and the United States Court of Appeals for the Fifth Circuit affirmed the award in favor of Mid-Continent.  Mid-Continent Cas. Co. v. Eland Energy, Inc., 2013 WL 656631 (5^th Cir. Feb. 22, 2013).

In reaching its decision, the court recognized that under Texas law there is no common law  cause of action for an insurer’s mishandling of third-party claims.  “The only previously recognized common law claim is for breach of the duty to settle a third-party claim within policy limits [Stowers].”  2013 WL 656631 at *4.  In the third-party context, an insured’s remedies are limited to the insurance contract and statutory claims.

Although the jury found that Mid-Continent committed five separate violations of the Texas Insurance Code, the trial court found and the appellate court affirmed that none of the unfair settlement practices was a “producing cause” of the $2 million that the insured paid to settle third-party class claims.

For example, the jury found that Mid-Continent violated § 541.060(a)((3) of the Texas Insurance Code by failing to provide notice of its settlement offer to one of the claimants and failed to explain the offer reasonably to the insured.  The insured argued Mid-Continent’s offer was excessive, not communicated to the insured for over a month and that Mid-Continent’s explanation was unreasonable because the offer was not justifiable based on expert reports concerning the claimant’s damage.

The court found it critical that the insured did not demonstrate that had Mid-Continent provided notice and explained to the insured the basis of its offer to the claimant, the claimant could have been persuaded not to join the class action, become the class representative or discuss his claim with other property owners.  The court held that a producing cause “cannot be based on speculation.”  Id. at 8.  The court stated that the insured must show an “unbroken causal connection” between the alleged violation of the Texas Insurance Code and injuries suffered by the insured.  The court also held: “It is not enough to merely show that Mid-Continent was a bad actor. * * *  The evidence does not establish that any of Mid-Continent’s misrepresentations were the producing cause of an increased settlement for [the class action].” Id. at *9.

Since the insured failed to demonstrate a “direct connection” between the misstatements by the insurer and the amount paid by the insured to settle the third-party claims, it was not entitled to recover bad faith damages under the Texas Insurance Code.