The U.S. Fifth Circuit Court of Appeals has concluded that its prior holdings requiring an insured seeking policy benefits as actual damages under Chapter 541 of the Texas Insurance Code to establish injury separate and apart from an insurer’s denial of those benefits are not consistent with Texas Supreme Court jurisprudence. Lyda Swinerton Builders, Inc. v. Oklahoma Surety Co., 877 F.3d 600 (5th Cir. 2017).

In a construction defect claim, the district court found (and the Fifth Circuit agreed) that a general contractor was an additional insured under a subcontractor’s insurance policies and was wrongfully denied a defense thereunder. The general contractor sued the insurers and the district court found that the insurers had a duty to defend it in underlying litigation against it. However, based on then existing Fifth Circuit jurisprudence, the district court denied the general contractor recovery of defense costs as actual damages under Chapter 541 of the Texas Insurance Code because the general contractor had not adduced evidence that it suffered injury separate and apart from the denial of a defense. The general contractor cross-appealed on this basis.

The Fifth Circuit concluded that Texas Supreme Court jurisprudence, reaffirmed in USAA Texas Lloyd’s Co. v. Menchaca, 2017 WL 1311 752 (Tex. Apr. 7, 2017) rehearing pending, requires that where an insured establishes a right to benefits it can recover those benefits as damages under Chapter 541. The insurers argued that the general contractor still had to prove independent injury in order to recover policy benefits as damages under Chapter 541, but the Fifth Circuit concluded that this requirement limits recovery of only “other” damages that flow from the denial of policy benefits, and not the benefits themselves. The Fifth Circuit reversed and remanded for further proceedings consistent with its opinion and Menchaca. It also reversed that part of the district court judgment that the 18% penalty under Chapter 541 was imposed until payment thereof, holding that Fifth Circuit jurisprudence is that the penalty stops accruing on the date of the judgment imposing it. The Fifth Circuit noted, however, that if the general contractor were successful in obtaining a judgment for its Chapter 541 claim after remand, the 18% penalty would continue to accrue through the date of that new judgment.