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By James W. Holbrook, III
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Section 541 of the Texas Insurance Code authorizes a private cause of action through which an insured can recover the “actual damages” caused by its insurer’s violation of the statute’s fair-claims handling provisions.[1] And, in the event the insurer commits a knowing violation of the statute, Section 541 permits the insured to recover additional statutory damages in an amount up to two times the insured’s “actual damages.”[2]

These provisions raise a critical question: Can an insurer's denial of policy benefits (i.e., damages flowing from the insurer's breach of contract) serve as the "actual damages" necessary to support an insured’s claim for extracontractual recovery under Section 541 of the Texas Insurance Code, or must the insured show that the insurer’s bad-faith conduct caused an independent injury other than the denial of policy benefits?

Courts applying Texas law — including the Fifth Circuit, the four federal district courts sitting in Texas, and several Texas courts of appeals — have answered this question in a consistent (and ostensibly uniform) way: To prevail on a claim for statutory damages under Section 541, an insured must show independent injury — i.e., harm “beyond the injury that would always occur when an insured is not promptly paid its demand.”[3] However, Houston’s Fourteenth Court of Appeals recently broke ranks with its sister courts in Houston (First Court of Appeals), San Antonio, and Texarkana, holding that unpaid policy benefits — standing alone — may serve as the “actual damages” recoverable under Section 541.

Setting the Stage — Vail and Castaneda

The Texas Supreme Court first addressed the Texas Insurance Code’s “actual damages” requirement more than 25 years ago, in Vail v. Texas Farm Bureau Mutual Insurance Co.[4] In Vail, the insureds sued their insurer for breach of contract and violations of the Texas Insurance Code.[5] The jury awarded unpaid policy benefits as damages; then, upon a finding that the insurer had knowingly violated the insurance code’s fair-claims handling provisions, trebled that amount.[6]

On appeal, the insurer argued that the insureds could not recover under the Texas Insurance Code because “the amount due under the policy solely represent[ed] damages for breach of contract and d[id] not constitute actual damages in relation to a claim of unfair claims settlement practice.”[7] The Vail court disagreed, holding that the “insurer’s unfair refusal to pay the insured’s claim cause[d] damages as a matter of law in at least the amount of the policy benefits wrongfully withheld.”[8]

Ten years later, without referencing or expressly overruling Vail, the Texas Supreme Court reached a seemingly conflicting conclusion in Provident American Insurance Co. v. Castaneda.[9] In Castaneda, the Texas Supreme Court reversed an award of statutory damages under the Texas Insurance Code and rendered a take-nothing judgment in favor of the defendant insurer on the basis that the insurer's “conduct in handling the [insured’s] claim did not cause any injury independent of the denial of policy benefits.”[10]

Houston’s Fourteenth Court of Appeals Breaks New Ground

In the wake of Castaneda, courts applying Texas law — including the Fifth Circuit,[11] the four federal district courts sitting in Texas,[12] and several Texas courts of appeals — repeatedly and consistently held that, to recover under Section 541 of the Texas Insurance Code, an insured must show the acts or omissions forming the basis of its statutory claims caused damage independent of the harm resulting from the insurer’s denial of policy benefits.[13] However, in a stark departure from these ostensibly uniform holdings, Houston’s Fourteenth Court of Appeals recently rejected the application of the independent injury requirement, holding that unpaid policy proceeds — standing alone — may serve as the “actual damages” required for recovery under Section 541.

In United National Insurance Co. v. AMJ Investments LLC,[14] AMJ Investments alleged that United knowingly underpaid its claim for hurricane damage to a seven-story office building.[15] The jury found in favor of AMJ Investments on its breach of contract and Texas Insurance Code claims, but awarded identical damages of $300,000 for both causes of action.[16] To avoid double recovery, AMJ Investments elected to recover only its statutory damages, which the jury trebled based on its finding that United knowingly violated the fair-claims handling provisions of the Texas Insurance Code.[17]

On appeal, United argued that AMJ Investments’ extracontractual claim could not stand without evidence of an injury independent of AMJ’s claim for unpaid policy proceeds.[18] Because the jury awarded AMJ Investments identical amounts for United’s breach of contract and violation of the Texas Insurance Code, United asserted that AMJ Investments sustained no independent injury and could not recover on its statutory claim. The Fourteenth Court of Appeals disagreed, citing Vail for the proposition that an insurer’s “‘unfair refusal to pay the insured’s claim causes damages as a matter of law in at least the amount of the policy benefits wrongfully withheld.’”[19]

In an effort to distinguish the Texas Supreme Court’s holding in Castaneda, the court asserted that the insured in Castaneda — unlike the insured in AMJ Investments — did not allege or establish that the insurer breached the insurance contract at issue, but rather sought “damages equivalent to policy benefits [for] the insurer[’s] fail[ure] to acknowledge communications or to adopt reasonable standards for investigating claims.”[20]

The Fourteenth Court of Appeals thus concluded that Castaneda’s independent injury requirement extends only to cases in which the insured alleges insurance code violations separate and distinct from the denial of policy proceeds (e.g., failure to conduct adequate investigation of claim), not matters in which the insured alleges and establishes a right to recover under the applicable insurance policy.[21]

However, in reaching this conclusion, the court did not mention (let alone square its holding) with the many cases in which the Fifth Circuit, federal district courts, and other Texas courts of appeals applied Castaneda’s independent injury requirement to matters in which the insured — like the insured AMJ Investments — proved its insurer wrongfully withheld policy benefits.[22]

AMJ Investments’ Impact on the Legal Landscape

AMJ Investments is undoubtedly at odds with the litany of post-Castaneda cases that applied the independent injury requirement to Section 541 cases involving claims for unpaid policy proceeds. But what is the likely impact and reach of the opinion? Is AMJ Investments an anomalous holding that should be regarded by only those practitioners litigating insurance disputes in trial courts subject to the jurisdiction of the Fourteenth Court of Appeals? Or has the opinion breathed new life into Vail, which — prior to AMJ Investments — had, in practical effect, been overruled sub silentio by Castaneda and its progeny on the independent injury issue.

Until the Texas Supreme Court addresses the issue, or other Texas courts adopt the Fourteenth Court of Appeals’ recently staked position on the independent injury requirement, AMJ Investments is best viewed as an outlier — not a significant alteration of the legal landscape concerning Section 541 claims.

—By James W. Holbrook, III, Zelle Hofmann Voelbel & Mason LLP

James Holbrook is a partner in Zelle Hofmann's Dallas office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] TEX. INS. CODE § 541.151.

[2] TEX. INS. CODE § 541.152(b).

[3] Walker v. Fed. Kemper Life Assur. Co., 828 S.W.2d 442 (Tex. App.—San Antonio 1992, writ denied).

[4] 754 S.W.2d 129 (Tex. 1988).

[5] Vail, 754 S.W.2d at 131.

[6] See id. at 131.

[7] Vail, 754 S.W.2d at 136.

[8] Id.

[9] 988 S.W.2d 189 (Tex. 1998)

[10] Castaneda, 988 S.W.2d at 199.

[11] See Great Am. v. AFS/IBEX Fin. Servs., 612 F.3d 800, 808 n.1 (5th Cir. 2010) (upholding dismissal of Section 541 claims because the insured failed to plead and prove injuries separate from those that flowed from the insurer’s breach of contract); Parkans Int’l v. Zurich Ins. Co., 299 F.3d 514, 519 (5th Cir. 2002) (noting that “[t]here can be no recovery for extracontractual damages for mishandling claims unless the complained of actions or omissions caused injury independent of those that would have resulted from a wrongful denial of policy benefits”).

[12] See, e.g., Bell v. State Farms Lloyds, No. 3:13–cv–1165–M, 2014 WL 1516254, *4-5 (N.D. Tex. April 18, 2014) (granting summary judgment for insurer on Section 541 and common law bad-faith claims because “[t]here[was] no evidence of an act by [insurer] that [was] so extreme that it caused injury to [insured] independent of the [insured’s] claims under the policy”); Button v. Chubb Lloyds Ins. Co., No. 4:11CV536, 2013 WL 394886, *5 (E.D. Tex. Jan. 31, 2013) (granting summary judgment for insurer on Section 541 claims because the insured failed to show the “complained of acts or omissions ... cause[d] injury independent of the injury resulting from a wrongful denial of policy benefits”); Powell Electrical Systems v. Nat’l Union Fire Ins., 2011 WL 3813278, *9 (S.D. Tex. 2011) (applying Texas law) (granting summary judgment for insurer on Section 541 claims because insured could not show damages other than those flowing from the insured’s breach of the insurance policy); Tapatio Springs Builders Inc. v. Maryland Cas. Ins. Co., 82 F.Supp.2d 633, 647 (W.D. Tex. 1999) (granting summary judgment for insurer on Texas Insurance Code claims because “[n]othing in the record indicated [insurer’s] conduct in denying coverage was so extreme as to cause injuries independent of the policy claim”).

[13] See, e.g., DaimlerChrysler Ins. Co. v. Apple, 265 S.W.3d 52, 69-70 (Tex. App. – Houston [1st Dist.] 2008), aff’d in part, rev’d in part on other grounds, 297 S.W.3d 248 (Tex. 2009) (reversing extracontractual damages award because the extracontractual damages claimed by the insured were the same as those allegedly owed to the insured under its policies of insurance); Laird v. CMI Lloyds, 261 S.W.3d 322, 327-28 (Tex. App. – Texarkana 2008, pet dism’d w.o.j.) (affirming summary judgment for insurer on Section 541 claims because insured failed to present evidence of damages independent of his claim for policy benefits); Bailey v. Progressive County Mut. Ins. Co., No. 05-01-00822-CV, 2004 WL 1193917, *1 (Tex. App. – Dallas June 1, 2004 – no pet.) (affirming summary judgment on insurance code claims because insureds failed to assert how [insurer’s] actions support[ed] a claim independent from their claim under the policy”); USAA v. Gordon, 103 S.W.3d 436, 442 (Tex. App.—San Antonio, 2002, no pet.);.

[14] -- S.W.3d ---, No. 14-12-00941-CV, 2014 WL 2895003 (Tex. App.—Houston [14th Dist.] June 26, 2014, no. pet. h.)

[15] See AMJ Investments, 2014 WL 2895003 at *1.

[16] See id. at *1, *3.

[17] See id. at *3.

[18] See id. at *8.

[19] Id. at *9 (quoting Vail, 754 S.W.2d at 136).

[20] AMJ Investments, 2014 WL 2895003 at *9.

[21] See id.

[22] See, e.g., AFS/IBEX Fin. Servs., 612 at 808 n.1; Gordon, 103 S.W.3d at 442; DaimlerChrysler Ins. Co., 265 S.W.3d 52, 69-70; Laird v. CMI Lloyds, 261 S.W.3d at 327-28.