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Court Denies Rehearing; 21.55 Analysis Stands: TIG Insurance Company v. Dallas Basketball, Ltd.
10.15.05

Insurers offering liability coverage in Texas have been unsure of whether Texas’ prompt payment of claims statute (formerly Article 21.55 of the Texas Insurance Code and now recodified in substantially the same form) applies to claims for defense under a liability policy. Although more than a dozen federal court opinions have answered the question “yes,” there has been virtually no analysis from state appellate courts. Some argue that the Corpus Christi Court of Appeals has explicitly answered the question in the affirmative, but that court’s opinion on the subject does not make it clear that the parties argued the issue and contains little analysis. See Northern Co. Mut. Ins. Co. v. Davalos, 84 S.W.3d 314 (Tex.App.—Corpus Christi 2002), rev’d on other grounds, 140 S.W.3d 685 (Tex. 2004).

Late last year, the Dallas Court of Appeals issued a thorough opinion rejecting Article 21.55’s application to defense claims. In TIG Insurance Company v. Dallas Basketball, Ltd., the court of appeals devoted almost four pages of a nine page opinion to the Article 21.55 issue. See 129 S.W.3d 232 (Tex.App.—Dallas 2004, 2 pets. denied). The court reached its answer on the basis that “the entire structure of Article 21.55 presumes a tangible, measurable loss suffered by the insured for which he seeks payment from the insurance company” and because it determined that applying Article 21.55 to defense claims is “unworkable.”

The court’s analysis detailed multiple features of Article 21.55’s structure in support of its conclusions. The court initially reasoned that a demand for a defense is not a claim for payment, “prompt or otherwise.” It also reasoned that the statute defines a “claim” as a “first party claim . . . that must be paid by the insurer directly to the insured or beneficiary,” and that claims for defense generally do not involve payment to the insured. The court rejected the argument that an insured’s claim for reimbursement of defense costs suffices, reasoning that such a claim is really a breach of contract claim under a liability policy. It supported its conclusions by reasoning that Article 21.55’s deadlines and consequences for failure to meet deadlines presume a “covered loss,” rather than a defense. For example, the court noted that the statute’s deadlines run from the time an insurer receives “proof of loss,” something the court reasoned is unknowable at the time a defense claim is made.

In reaching its holding, the court of appeals rejected federal opinions and the Corpus Christi Court of Appeals’ Davalos opinion. The Dallas court reasoned that “few of these cases... provide any analysis. And those that do discuss the issue only cursorily.” The court also stated that, to the extent the prior cases set forth reasoning, they offered faulty reasoning. For example, the court of appeals noted that most of the cases simply describe a defense claim as a “first party claim” without addressing the statutory requirement that such claims be payable directly to the insured.

While insurers hoped for guidance from the Supreme Court, the Court denied review and rehearing on the Article 21.55 issue. In doing so, the Court let stand the Dallas Court’s opinion rejecting the application of 21.55 to defense costs. Texas judicial opinions since TIG Insurance Co. v. Dallas Basketball, Ltd. have been mixed. Two federal courts were not persuaded by the Dallas Court of Appeals’ opinion. See Housing Auth. of Dallas v. Northland Ins. Co., 333 F.Supp.2d 595 (N.D. Tex. 2004); RX.Com, Inc. v. Hartford Fire Ins. Co., 364 F.Supp.2d 609 (S.D.Tex. 2005). However, a recent state appellate decision seems to agree with the Dallas Court of Appeals. See Lennar Corp. v. Great Am. Ins. Co., No. 14-02-00860-CV, 2005 WL 1324833 (Tex.App.—Houston [14th Dist.] 2005, no pet.) (mem. op.) (recognizing the disagreement between federal courts and, possibly, the Corpus Christi Court of Appeals on the one hand, and the Dallas Court of Appeals, on the other, in holding that Article 21.55 does not apply to a claim for indemnification (as opposed to defense) under a liability policy. The Supreme Court’s denial of review technically indicates there was no error so important it required correction. Those seeking a definitive answer will have to continue to wait for the Texas Supreme Court to speak authoritatively on the issue.

Thompson Coe filed an amicus brief on behalf of Property Casualty Insurers Association of America.