How Many Times Can A Claim Be Denied?

In Stewart Title Guarantee Co. v. Hadnot, 101 S.W.3d 642 (Tex. App. – Houston [1st Dist.], Feb. 27, 2003, pet. filed), the Houston appellate court weighed in on the application of the statute of limitations involving a denial of claim and reversed the trial court’s decision in favor of the insureds.

Thomas and Gay Hadnot entered into a contract with Gibraltar Homes to construct a residence. After the home was finished, the Hadnots paid Gibraltar, obtained a mortgage loan, and bought a title insurance policy. A few months after closing on the residence, the Hadnots received letters and mechanic’s lien affidavits from several subcontractors who alleged that Gibraltar had failed to pay them for the work completed on the Hadnots’ home. Ultimately, the subcontractors sued the Hadnots, and a judgment was rendered against the Hadnots in November 1995. The Hadnots subsequently sued Stewart Title under the title policy. Stewart Title sought summary judgment based in part upon the application of the statute of limitations, but the trial court granted judgment for the Hadnots. On appeal, the Hadnots also asserted an estoppel argument that was summarily rejected.

The Hadnots submitted four notices or proofs of loss under the title insurance policy. The first notice and proof of loss was submitted October 6, 1994 immediately after receiving notice from the unpaid subcontractors; Stewart Title denied the claim on October 21, 1994. The second notice was sent while appeal was pending with respect to the subcontractors’ judgment against the Hadnots; Stewart Title again denied the claim. The third notice and proof of loss was sent to Stewart Title after the subcontractors’ judgment was affirmed; Stewart Title denied coverage a third time. Finally, a fourth and final proof of loss was sent to Stewart Title on February 18, 1998 setting forth the exact amounts owed under the judgment, the interest that had accrued, and attorney’s fees. On February 19, 1998, Stewart Title rejected the fourth proof of loss. On August 15, 2001, the Hadnots filed suit against Stewart Title for breach of contract.

Stewart Title successfully argued to the appellate court that the Hadnots’ limitations period expired on October 21, 1998, four years after coverage was initially denied. Citing to Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826, 828 – 29 (Tex. 1990), the appellate court began its analysis by recognizing well-settled law that a cause of action accrues, and limitations begin to run, on the date coverage is denied. The Hadnots argued that the cause of action accrued on February 19, 1998, the date of Stewart Title’s final denial.

The Hadnots also argued that limitations could not have been triggered until after a final judgment had been entered in the subcontractors’ suit. Relying upon the language of the court’s disposition in the subcontractors’ suit, the Hadnots argued that their first proof of loss claim was submitted prematurely and, consequently, Stewart Title’s initial denial was moot. Because a final judgment is required before a mechanic’s lien is established or foreclosed, the Hadnots argued they had not sustained any “out of pocket” losses until the subcontractors’ suit was final. The Hadnots also argued that until the suit was final and they had actually sustained losses, Stewart Title had no obligation to pay them. The court rejected the Hadnots’ argument and recognized that the policy provided not only a duty to indemnify but also a duty to defend. After a review of the policy language, the court determined that the alleged injury to the Hadnots accrued at the time of the refusal to defend the suit, not the later refusal to pay the claim.

The Hadnots also relied on language in the policy stating that, “We do not have to pay your claim until your case is finally decided.” The court rejected this argument, concluding that when an insurer chooses to pay a claim is an issue separate from what event triggers the running of a limitations period. As support, the court looked to Farmers Texas County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81 (Tex. 1997), in which the Texas Supreme Court held that a duty to indemnify can be decided by declaratory judgment before the rendition of a judgment in the underlying suit.

In a final attempt to circumvent limitations, the Hadnots, relying upon Pena v. State Farm Lloyds, 980 S.W.2d 939 (Tex. App. – Corpus Christi 1998, pet. denied), contended that even if the initial denial triggered the running of limitations, their subsequent notice and second proof of loss were claims for “additional payments,” and began the statute of limitations running anew.

In Pena, the insured made a claim for damages related to slab foundation movement in his home which was denied. The insured later made another claim for foundation problems, which resulted in a partial payment by the insurer. The insurer conceded that the two claims were the same, both arising out of the continuing problem of foundation movement. The Pena court concluded that the insurer’s subsequent reinvestigation and partial payment for the same reported problems established that the denial was “effectively reconsidered and withdrawn” and did not start limitations. The court in Hadnot reasoned that, unlike the insured in Pena, the injury to the Hadnots occurred when the first claim was denied and limitations was not restarted as Stewart Title’s first denial was not effectively reconsidered and withdrawn by the subsequent denials.