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I. Introduction

The prospect of expanded recovery through the addition of extra-contractual claims to a suit on an insurance contract has led insureds to increasingly accuse defendant insurers of acting in bad faith with respect to the handling of insurance claims. In the last couple of decades, insurers in Texas have come to expect bad faith claims to accompany most insurance contract disputes. Though most insurance disputes never make it to trial, insurers tend to be understandably wary of the prospect of defending contract and bad faith claims together to a single jury. This hesitancy has resulted in a body of case law addressing the circumstances under which insurers are entitled to have contract and bad faith claims severed or tried separately. This article will examines the reasons for separation of claims, current jurisprudence on the issue and some strategies for effectuating severance.

II. The Law of Severance

The Texas Rules of Civil Procedure expressly permit the separation of previously joined claims. Rule 41 provides that "[a]ny claim against a party may be severed and proceeded with separately."FN1 Further, Rule 174 provides:

(b) Separate Trials.

The court in furtherance of convenience or to avoid prejudice may order a separate trial of any claim, cross-claim, counterclaim or third-party claim, or of any separate issue or of any number of claims, cross-claims, counterclaims, third-party claims or issues.FN2

Texas courts have developed a three part test to determine when severance is proper. Courts are to consider whether: (1) the controversy involves more than one cause of action; (2) the severed cause of action is one that would be the proper subject of a lawsuit if independently asserted; and (3) the causes are not so intertwined as to involve the identical facts and issues.FN3 Courts presented with motions to sever must also consider the extent to which a severance would serve Rule 174(b)'s stated goals of avoiding prejudice and promoting judicial economy.FN4 The decision to sever, though, is within the discretion of the trail court and will not be overturned unless that discretion is found to have been abused.FN5

III. Rationale for Severance and Abatement of Bad Faith Claims
1. Avoidance of Prejudice

The most obvious reason that an insurer might request that a bad faith claim be tried apart from a coverage claim is the potential for prejudice. An insurer defending tort and contract actions together faces possible prejudice on a number of fronts, but the most serious potential for problems exists with regards to evidentiary and strategic matters. Anytime two or more claims are heard together, litigants face the possibility that evidence that would be inadmissible to one cause of action might be presented to advance the other claim. The Texas Rules of Evidence explicitly allow for the introduction of evidence not admissible to all parties or purposes.FN6 Thus, when contract and bad faith claims are tried together, an insurer faces the specter of having a jury charged with deciding whether a claim is covered under an insurance contract hear evidence of that insurer's conduct in investigating the claim. Rule 105 does, of course, require that juries be given instructions as to the proper scope of evidence that is inadmissible on one claim.FN7 But juries often become confused when faced with evidence of limited admissibility when closely related claims are involved and frequently opt to ignore limiting instructions.FN8

A second way in which an insurer can be prejudiced when contract and bad faith claims are not severed involves the availability of defensive strategies. A combined trial presents at least two potential problems on this issue. First, a strategic decision to waive certain privileges in order to defend one claim can negatively impact the ability to defend the other claim. For example, in defense of the bad faith claim, an insurer might choose to waive attorney-client or investigative privileges to show that it acted properly in investigating a claim. In many cases, waiver of those privileges will inhibit the defense of the contract claim.FN9 A second situation when the joinder of claims might present strategic difficulties for a defendant-insurer is when that insurer determines that its interests would be best served by exercising its right to present defenses on the two claims that are not entirely consistent.FN10

2. Efficiency

TEX. R. CIV. P. 174 also establishes convenience, or efficiency, as a rationale for separation of claims. The combination of contract and bad faith claims certainly, at times, presents questions of efficiency. This is so because the outcome of the contract action determines to a large extent the viability of a bad faith claim.FN11 Texas courts have found that there can generally be no cause of action for bad faith when an insurance claim that was not, in fact, covered under the insurance policy has been promptly denied by an insurer.FN12 In an interesting case in 1995, the Texas Supreme Court went so far as to find that a bad faith claim predicated upon a denial of a claim for improper reasons could not be sustained as long as there was some valid reason to deny the claim, even if that reason was only later discovered. FN13 Thus, a viable argument for severance is that it is a waste of time and resources for parties and courts to address a tort claim that may very well be disposed of by a defense verdict on the contract claim.

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