Houston Appellate Court Holds that Policy Misrepresentation Claims Need Not Be Severed from Underinsured Motorist Claims

In an opinion issued today, the Texas First Court of Appeals in Houston held that the trial judge in an underinsured motorist insurance case did not abuse his discretion by declining to sever and abate the plaintiff’s claims under the Texas Insurance Code for misrepresentation of policy terms. This case is a significant development in an area where such “extra-contractual” claims have routinely be held to be severable.

In this case, In re Allstate County Mutual Insurance Company, the plaintiffs, Raymond and Stacy Briers, whose son was killed as a passenger in a single-vehicle accident, filed an underinsured motorist (“UIM”) claim under a business auto policy issued to Raymond’s employer. Under UIM coverage, an insurance carrier is required to pay a claim when an “insured” is injured or killed due to the negligence of a driver when the driver’s auto liability insurance is insufficient to cover all of the damages. In this case, however, the carrier denied the Briers’ claim, stating that neither Raymond nor Grant met the definition of an “insured” under the policy language and that they therefore did not fall under the policy’s underinsured motorist coverage.

The Briers sued the carrier seeking payment under the UIM coverage. In addition, the Briers sued the carrier under the Insurance Code’s consumer protection provisions, including bad faith, unfair settlement, and failure to promptly pay a claim. The Briers also sued both the carrier and the insurance agents who sold the policy under the Insurance Code for “policy misrepresentation,” claiming that the carrier and agents represented that the Briers were covered under the policy when they were not.

In a familiar move, the defendants moved to sever all of these “extra-contractual” claims, arguing that the basic UIM claim should be tried first, and that the extra-contractual claims should only be litigated if and when the Briers win on the UIM claim. The trial court denied the defendants motion, and the defendants filed a petition for writ of mandamus, arguing that the trial court abused its discretion.

Since the Texas Supreme Court’s 2006 landmark decision in Brainard v. Trinity Universal Ins. Co.-in which it held that an auto insurance carrier has no contractual duty to pay a UIM claim until the insured obtains a judgment establishing the liability and underinsured status of the other driver-Texas appellate courts have routinely held that trial courts abuse their discretion by failing to sever and abate extra-contractual claims in UIM cases. The reasoning is that a carrier cannot have violated the Insurance Code or its duty of good faith in failing to fairly settle or promptly pay a claim when it hasn’t been established that they had a contractual duty to pay.

In a unanimous opinion signed by Chief Justice Sherry Radack, the three judge panel of the First Court of Appeals, also consisting of Justices Terry Jennings and Evelyn Keyes, partly followed this trend and held that the trial court abused its discretion in failing to sever the Briers’ bad faith, prompt pay, and unfair claims settlement claims. The Court ordered the trial judge to sever and abate these claims.

However, in a break with recent tradition, the Court of Appeals did not order all of the extra-contractual claims severed, and held that the trial judge did not abuse his discretion with regard to the policy misrepresentation claims. The Court reasoned that, unlike the other claims, the policy misrepresentation claims were not based on any contractual obligation under the insurance policy and did not require the Briers to prevail on their UIM claim. Instead, these claims were based on alleged misrepresentations by the carrier’s agents regarding whether the Briers were covered under the policy.

By holding that not all extra-contractual claims are automatically severable, the First Court of Appeals has, however slightly, changed a game that has been stacked in favor of insurance companies since Brainard. After Brainard, which removed the possibility of carriers being liable for attorney’s fees or interest when they lose UIM cases, there have been few incentives for auto insurance carriers to work in good faith to pay valid UIM claims. This is why many people seriously injured by an underinsured driver have been unpleasantly surprised to find that it is often easier to obtain payment from the other driver’s insurance (who at least still runs the risk of a Stowers claim) than to get paid by the company to whom they pay UIM premiums every month.

This case will only directly apply in a few cases-most UIM cases involve disputes over damages or the liability of the other driver, and not coverage disputes such as the Briers’. However, today’s opinion suggests that not every customer will need to wait for their day in court when their insurance carrier violates the law.

If you or someone you know is involved in an insurance dispute, contact an attorney at Abraham, Watkins, Nichols, Agosto, Aziz & Stogner by calling (713) 222-7211 or 713-222-7211.