The Fourteenth Court of Appeals Muddies the Waters on Policy Benefits and Extra-Contractual Damages

United Nat’l Ins. Co. v. AMJ Investments,No. 14-12-00941-CV

(Tex. App.—Houston [14th] Dist., June 26, 2014)

The Fourteenth Court of Appeals’ decision in AMJ could have far-reaching consequences if its holding on the extra-contractual damages awarded against United National stands.  In this case, following a trial over alleged damages arising under a commercial property policy as a result of Hurricane Ike, the court submitted questions to the jury on both policy damages for breach of contract and extra-contractual damages for violations of the Texas Insurance Code.  The jury found that United had breached the policy, resulting in in a $300,000 damage award.  The jury also awarded the identical amount, $300,000, for violations of the Texas Insurance Code.  The jury found an additional $1,000,000 in damages based upon its finding that United had knowingly violated the Insurance Code.  The jury also awarded attorneys’ fees. AMJ elected to recover damages under the Insurance Code rather than under the contractual cause of action and the court entered judgment in the amount of $300,000 for violations of the Insurance Code, $178,734 in prompt payment penalties, $600,000 for knowing conduct (having been reduced pursuant to a statutory cap), and attorneys’ fees and interest. United National appealed.

United National’s appeal, in part, addressed the award of Insurance Code damages.  United National argued that the jury assessed identical damages for failure to comply with the policy and for violations of the Insurance Code, and, therefore, the insured could not recover for the Insurance Code violations.  In particular, United argued that its conduct did not cause the insured injury independent of the injury caused by the breach of contract.  United National relied upon the Texas Supreme Court’s opinion in Providence Am. Ins. Co. v. Castaneda, 988 S.W.2d 189 (Tex. 1998).  In Castaneda, the court held that extra-contractual damages were not recoverable since “none of the actions or inactions of [the insurer] was the producing cause of any damage separate and apart from those that would have resulted from a wrongful denial of the claim”—the policy benefits.

The AMJ court distinguished Castaneda, holding that “under the circumstances presented here, the absence of an independent injury does not foreclose liability for United’s violation of the Insurance Code.”  The court of appeals primarily relied upon Waite Hill Servs., Inc. v. World Class Metal Works, Inc., 959 S.W.2d 182, 184-85 (Tex. 1998) (per curiam) for the proposition that if a property insurer fails to pay the full amount of the claim as a result of an unfair claim settlement practice under the Insurance Code, the insured may elect to recover damages under a breach of contract or statutory violation theory.

In Waite Hill, the insured sued for policy damages and Insurance Code and DTPA violations, as well as common law bad faith.  The jury was asked in a single question about damages for the breach of contract and “ostensibly . . . about tort and statutory damages” in a second question, subdivided into three parts.  The second question’s three parts, however, were identical to the contractual damages—reasonable cost to repair, lost profits and cost to replace lost product.  The jury awarded the identical amounts for damages for both claims.  The trial court entered judgment for the insured for both damage figures awarded by the jury.  The insurer argued on appeal that awarding both sets of damages was an impermissible double recovery because the damages awarded were identical.  Id. at 184.  The Texas Supreme Court agreed.  The court held:

[The insured] was injured by having to pay out-of-pocket for repair costs that the policy covered.  [The insured] may have suffered some tort losses, distinct from its claims on the policy.  However, [the insured] offered no evidence, nor, as evidenced by Question 6, submitted a request for distinct tort losses.  Thus, the trial court erred when it refused Colony’s request that the [insured] elect a remedy.

Id. at 185 (emphasis added).

Despite the court of appeals’ reliance on Waite Hill, that case does not stand for the proposition that an insured can recover Insurance Code and DTPA damages or common law bad faith damages without an injury independent of the contract damages.  The court overlooked the point that statutory and common law claims would not exist but for the contractual relationship between AMJ and United National.  The only means for the insured to recover policy benefits was for a claim under the insurance contract and not under a statutory or tort cause of action.

This was a 2 to 1 decision with one justice dissenting on the grounds that AMJ did not prove its damages were reasonable and necessary, and for that reason would have reversed and rendered judgment in favor of United National.

United National currently plans to seek a rehearing en banc and appeal to the Texas Supreme Court, if necessary.