Recent state court decisions throughout the Gulf Coast help clarify the law of insurance. Many of these cases deal with disputes arising in the aftermath of storms from the first decade of the 21st century—most notably Hurricanes Katrina and Ike. In this update, Stephen Pate and James Hartle from our Houston office summarise some of the most important cases from the past year in the hope that insurance lawyers, insurers, and insureds can better understand and account for risk before devastating storms bear down on the region once again.

Appraisal

A pair of recent cases demonstrate Texas courts’ strong preference for enforcing appraisal provisions in insurance contracts. In the case of In re Public Service Mutual Insurance Company1, an insurer invoked an appraisal provision in the insurance contract six months after the insured brought suit for wrongful denial of its claim. The trial court stayed the proceedings and ordered a mediated appraisal. The insured then sought mandamus relief from the Austin Court of Appeals.

On appeal, the Court first reiterated Texas courts’ preference for enforcing appraisal provisions absent illegality or waiver before rejecting the insured’s argument that a dispute between the parties over coverage made the appraisal provision unenforceable. The Court explained that the process of appraisal inherently involves determinations of causation for coverage purposes, and that to hold that a coverage dispute makes the appraisal provision inapplicable would invalidate all appraisal provisions. The Court then turned to the insured’s two waiver arguments. The Court rejected the insured’s waiver-by-futility argument on the ground that the parties were still negotiating, and rejected the waiver-by-delay argument on the grounds that a six month delay was not unreasonable and that the insured was not prejudiced by the delay. Finally, the Court, in a fairly terse manner, rejected the insured’s various common law contract unenforceability arguments.  

In a similar case, In re Texas Windstorm Insurance Association2, much like in the case above, the 14th Court of Appeals upheld the enforcement of an appraisal provision. The Court reinforced the proposition that disputing coverage does not take an insurance dispute out of the scope of a standard appraisal provision. The Court also rejected several waiver arguments, including the claim that the insurer waived appraisal by compelling it seven days after receiving the insured’s notice of intent to sue.

Bad faith

Two recent cases help clarify the bad faith tort in Florida and Alabama. In Hunt v. State Farm Florida Insurance Company3, a home owner obtained an appraisal award against his insurer. The homeowner then sued the insurer for bad faith for denying his initial claim. The insurer sought to dismiss the suit on the ground that an appraisal award is not a “favourable resolution” for the insured, which is a necessary element for maintaining a bad faith claim in Florida. The trial court agreed and the homeowner appealed. On appeal, the 2nd District Court of Appeals of Florida reversed the trial court decision citing prior cases to show that an arbitration award constitutes a “favourable resolution,” and extended that precedent in holding that an appraisal award does as well.

The Alabama case, State Farm Fire and Casualty Co. v. Brechbill4, arose out of a dispute between a homeowner (Brechbill) and his insurer, State Farm. After State Farm denied Brechbill’s claim, Brechbill sued on two theories: (1) “normal” bad faith refusal-to-pay; and (2) “abnormal” bad faith failure-to-investigate. At trial, Brechbill did not oppose State Farm’s motion for summary judgment on the refusal-to-pay claim, but he did oppose the motion with respect to the failure-to-investigate claim. The trial court granted the unopposed part of the motion, but let the case proceed to the jury on the failure-to-investigate claim. Brechbill won at trial, and State Farm appealed.  

On appeal to the Alabama Supreme Court, State Farm asserted that the bad faith tort was a single tort, and that the trial court’s grant of State Farm’s motion for summary judgment on bad faith refusal-to-pay precluded Brechbill’s recovery on the bad faith failure-to-investigate claim. Brechbill countered by citing Jones v. Alfa Mutual Insurance Company, 1 So.3d 23 (Ala. 2008), for the proposition that his two theories constitute two separate torts, and that the dismissal of a bad faith refusal-to-pay claim does not preclude an award for bad faith refusal-to-investigate.

The Alabama Supreme Court first clarified the law by holding that the bad faith tort constitutes a single tort that can be proved in two different ways. A plaintiff seeking to establish the tort on the bad faith refusal-to-pay theory must establish: (1) breach of insurance contract; (2) refusal to pay on the claim; (3) absence of legitimate reason for refusal; and (4) insurer knowledge of such absence. Alternatively, a plaintiff can establish the tort on the bad faith failure-to-investigate theory by demonstrating that the insurer intentionally failed to determine whether there was a legitimate or arguable reason to refuse to pay on the claim. Under either theory, the tort requires proof of absence of a legitimate reason to deny the claim.

The Court went on to distinguish this case from Jones by noting that, in Jones, evidence for the insurer’s denial was gathered after the denial was made. In contrast, here, because State Farm investigated the claim before denying it, and because State Farm had arguable grounds for the denial, the trial court erred by letting the jury hear Brechbill’s claim for bad faith failure-to-investigate. The Court thus reversed and remanded the action to the trial court.

Causation analysis

Florida law on the proper causation analysis in first-party insurance disputes where there is no concurrent-cause exclusion in the policy has been clarified by American Home Assurance Co. v. Sebo5. In this case, Florida’s 2nd District Court of Appeals noted that the trial court’s application of concurrent-cause theory would effectively nullify all exclusions in an all-risk policy because “a covered peril can usually be found somewhere in the chain of causation.” The Court, unwilling to abide by that rule, remanded the action for a new trial where the trial court would analyse causation under the efficient proximate cause theory.

Coverage

Over the course of the past year, US courts have handed down a number of decisions determining coverage under complex insurance policies. JAW the Pointe6, a recent Texas case, has garnered significant publicity for its application of a concurrent-cause exclusion.

In JAW the Pointe, the 14th District Court of Appeals of Texas overturned an award against an insurer because of a concurrent-cause exclusion. Lexington insured the Pointe, a Galveston apartment complex, against losses due to wind and for rebuilding costs caused by operation of ordinance or other law. The policy-at-issue also contained flood and concurrent-cause exclusions. After Hurricane Ike swept over the Texas coast and severely damaged the Pointe, the City of Galveston ordered the Pointe to rebuild to certain specifications. In its letter ordering rebuilding, the City noted that the Pointe had sustained enough damage for an ordinance to require rebuilding of the complex, but the City did not differentiate between flood and wind damage in its damage assessment. After Lexington denied the Pointe’s claim, the Pointe sued for bad faith and won. The Court of Appeals overturned the verdict, holding, amongst other things, that the Pointe failed to prove that the ordinance would have come into effect to cause the loss absent the non-covered flooding that undoubtedly contributed to the damage, a showing necessary to avoid the concurrent-cause exclusion in the policy.

While JAW the Pointe may have some insureds concerned, insurers have their own cases to worry about. InAmerican National Property & Casualty Co. v. Fredrich 2 Partners, Ltd.7, the Court of Appeals of El Paso reinforced the importance of sound policy drafting lest the policy be interpreted against the insurer. Fredrich owned and leased out commercial properties insured by American National. The policy expressly excluded damage caused by frozen plumbing unless Fredrich did its “best to maintain heat in the building or structure” or “drain[ed] the equipment and shut off the supply if the heat [was] not maintained.” During a cold spell, the pipes above an unoccupied, unheated unit within one of Fredrich’s buildings froze and broke, causing water damage to the building. After American National denied its claim, Fredrich sued, arguing that it did “its best to maintain heat” because a tenant in a different unit in the same building had done so. Fredrich was successful at trial. On appeal, the Court upheld the verdict ruling that heat had been maintained “in the building”, and that Fredrich, by giving its tenant the electricity and gas with which to keep one unit heated, had lived up to its obligations under the policy.

Another case, this one from Mississippi, should also have insurers’ full attention. In Coastal Hardware & Rental Co. v. Certain Underwriters at Lloyd’s of London8, the Court of Appeals of Mississippi upheld the trial court’s determination that the Underwriters had agreed to cover wind damage in an insurance binder. Coastal had worked through its agent to obtain an all-risk quote from the Underwriters. The quote binder expressly excluded mould damage, but did not expressly exclude wind damage. However, in several places where deductibles were discussed, the binder did state that wind was either “excluded” or “not required.” Concerned about whether wind was or was not a covered cause of loss, Coastal called the Underwriters’ American agent, who refused to express an opinion. Coastal accepted the quote and paid the premium anyway. It had no independent wind carrier, and before the formal policy arrived, Hurricane Katrina struck, destroying Coastal’s retail operation.

In the ensuing litigation, the trial court granted partial summary judgment in Coastal’s favour, finding that the Underwriters had agreed to cover wind damage under the terms of the binder. On appeal, the Court of Appeals of Mississippi upheld that ruling, stating that: (1) the binder served as the insurance policy until the formal policy was received; (2) the circumstances did not make the parties’ intent clear; (3) the binder’s terms were ambiguous; and (4) the trial court properly construed the terms to cover wind damage. The Court placed a particular emphasis on the fact that the binder-at-issue contemplated an “all-risk” policy and lacked an unambiguous wind exclusion.

A final coverage case of note for insurers is In Cheetham v. Southern Oak Insurance Co.9 The Florida courts tangled with the issue of how to interpret an exclusion for loss caused by water or water-borne material backing up through sewers or drains. The 3rd District Court of Appeals of Florida held that a loss resulting from the deterioration of the piping inside a home that caused debris to build up causing a leak in said home was covered. The Court, reading the “back-up” exclusion in conjunction with provisions covering on-premises leaks and excluding off-premises discharges or overflows, held that the exclusion contemplated backup resulting from off-premises water leaks, not on-premises leaks.

Coverage limitation

A Louisiana case demonstrates the importance for insureds of adhering to limitations provisions in that state, and the danger of not doing so. In Orleans Parish School Board v. Lexington Insurance Company10, the Orleans Parish School Board (OPSB) sought to have its excess insurers cover the increased costs of repairing numerous public schools in the New Orleans area that were severely damaged by Hurricane Katrina. The insurers, citing a two-year limitation provision in the relevant policy, refused to pay. The trial court granted summary judgment to the insurers based on the limitation provision.

On appeal, OPSB argued, amongst other things, that the provision contemplated an impossible and therefore unenforceable condition under Civil Code Art. 1769. OPSB asserted that the process of gaining approval for reconstruction, doing due diligence on the contracts, and making the actual repairs was not possible within two years of the loss. The 4th Circuit Court of Appeals of Louisiana was not persuaded, stating that Art. 1769 concerns itself with “absolute impossibility,” not impossibility under the facts of a given case.