Houston Attorneys Obtain Dismissal of All Claims for Insurer in Coverage Case

Background

The case began with an auto accident in which the insured driver was using his vehicle to carry property for compensation or a fee, a type of use which excluded coverage for the vehicle damage. Due to the type of use, and after a thorough investigation, the Defendant insurer determined that there was no coverage available for the vehicle damage. The vehicle lienholder filed suit arguing that the Loss Payable Clause preserved coverage for the lienholder. The plaintiff lienholder did not contest that the insured used the vehicle for the excluded use.

At issue was whether a named lienholder, protected under a Loss Payable Clause in the event of an insured’s fraud, may recover insurance proceeds after an accident involving the insured vehicle, in which the insurer denies coverage due to a policy exclusion based on the type of use of the vehicle, rather than due to fraud.

Loss Payable Clause Applies to Fraud, Not an Excluded Use

The policy language and facts of this case were strikingly similar to those in Old American Mut. Fire Ins. Co. v. Gulf States Finance Co. in which the vehicle lienholder brought breach of contract and violations of the insurance code claims against the insurer, based on a nearly identical loss payable clause, for damage that occurred when an excluded driver was driving the insured’s vehicle. After the trial court granted the lienholder’s motion for summary judgment and denied the insurer’s motion, the insurer appealed. The appellate court then held that the loss payable clause, which was nearly identical to the instant loss payable clause, did not protect the lienholder. The court reasoned that there are several types of loss payable clauses—an “open clause,” which ultimately means that the loss payee stands in the shoes of the insured, and a less common clause that gives the loss payee greater rights to recovery than the insured. However, the Court used the clause in said policy, which was almost identical to the clause in the pending lawsuit.

In the instant case, the insured was not covered due to the Policy exclusion concerning hauling property for compensation or a fee, as Plaintiff admitted. Similarly, as has been previously adjudicated in nearly identical cases, Plaintiff, as the lienholder, is also not covered—the coverage denial was not due to fraud, as contemplated by the Loss Payable Clause, but instead due to the insured’s excluded use of the vehicle for hauling for compensation at the time of the accident, resulting in no coverage to anyone for the resulting vehicle damage. The facts in Old American were materially indistinguishable from the case at hand.

Further, Plaintiff’s extra-contractual claims were without merit, considering they were based on the failure to properly pay benefits under the policy, in which an exclusion applied. Thus, since Plaintiff failed to establish that it was entitled to benefits under the policy, it also had no right to recover under its extra-contractual theories. Therefore, the court dismissed all claims with prejudice.