In a decision that could further erode SCOTX’s 2006 ruling in Brainard v. Trinity Universal Life Ins. Co., the Austin Court of Appeals has given the green light to an insured to pursue common law bad faith and statutory unfair settlement practices claims against her UM/UIM insurer, even though the insurer promptly paid policy limits once the insured obtained a judgment that established the insurer’s obligation to pay.

Burgess v. Allstate Fire and Casualty Insurance Company (No. 03-20-00088-CV; filed November 24, 2021) has straightforward facts common to most UM/UIM claims. Allstate’s insured, Burgess, was injured in a motor vehicle accident with an allegedly underinsured motorist. Burgess settled with the other driver for his policy limits of $100,000. She then filed a direct action against Allstate to determine Allstate’s liability for UIM benefits under the policy. Allstate declined Burgess’s demand to pay policy limits pending the outcome of the trial. After a jury found that Burgess was entitled to $386,008 in compensatory damages, but before the trial court signed the judgment, Allstate paid Burgess the $50,000 UIM policy limit plus interest. Burgess then claimed that Allstate breached the common law duty of good faith and fair dealing and violated Chapter 541, Insurance Code (unfair settlement practices). Allstate moved for summary judgment on the basis that its prompt payment of Burgess’s claim extinguished any extracontractual claims because it paid the claim once, as Brainard requires, its liability became “reasonably clear” and the trial itself constituted the statutorily required investigation of the insured’s claim. The trial court granted summary judgment. Burgess appealed.

In an opinion by Justice Kelly, joined by Justices Goodwin and Baker, the court of appeals reversed and remanded the case to the trial court for further proceedings. Most of the opinion is devoted to reconciling SCOTX’s decisions in Brainard and Arnold v. National Cnty. Mut. Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987). Whereas Brainard established that the insured must obtain a legal determination of the insurer’s obligation to pay UM/UIM benefits, Arnold held that an insured could sue the insurer for common law bad faith in handling a UM/UIM claim even after the insurer had paid policy limits once a trial court had rendered judgment against the uninsured motorist and insurer. The Arnold court based its decision on the unequal bargaining power between insurers and insureds and the need for a common law bad faith action to deter “unscrupulous” insurers from “tak[ing] advantage of their insureds’ misfortunes in bargaining for settlement or resolution of claims.” Noting that Brainard didn’t say anything about an insurer’s extracontractual duties of good and fair dealing and that an insured’s extracontractual claims are commonly severed from the coverage suit pending its resolution, the court of appeals held that Arnold remains good law and controls this case.

Arnold further held that mental anguish and exemplary damages are recoverable in a case for breach of the duty of good faith and fair dealing, just as they are in other tort actions. In the present case Burgess is seeking mental anguish damages from Allstate because the insurer’s initial denial of her claim forced her to endure a lawsuit establishing Allstate’s liability in the first place. She alleges that her mental anguish constitutes an “independent injury,” that is, “an injury independent of a right to benefits.” See USAA Tex. Lloyds Co. v. Menchaca, 545 S.W.3d 479 (Tex. 2018).

In Menchaca, SCOTX attempted to clarify the distinction between contractual and extracontractual claims and the circumstances under which an insured may recover under a common or statutory bad faith claim. The Court laid out the so-called “five rules” to determine the issue:

  1. An insured may not recover policy benefits for an insurer’s violation of statutory (Chapter 541) duties if the insured has no right to those benefits under the policy.
  2. An insured who demonstrates a right to receive policy benefits may recover them as actual damages under the Insurance Code if the insurer’s actions caused the loss of the benefits.
  3. If the insured cannot demonstrate a present right to receive policy benefits, the insured may still recover the benefits as damages under the Insurance Code if the insurer’s actions caused the loss of the insured’s contractual rights.
  4. If the insurer’s statutory (or in this case common law) violation caused an injury independent of the loss of benefits, the insured can recover damages for that injury (presumably including mental anguish and exemplary damages) even if the insured had no right to policy benefits.
  5. An insured cannot recover any damages if the insured cannot establish entitlement to policy benefits and did not sustain an independent injury.

As noted above, the court of appeals concluded that Burgess “has sufficiently alleged an injury independent of her right to recover policy benefits.” But what is so troubling about the court of appeals’ decision is that it appears to sanction an extracontractual claim for bad faith every time an insured brings suit to establish entitlement to UIM benefits, whichBrainard requires in the first place. If undertaking litigation to prove up rights under an insurance policy always and everywhere inflicts mental anguish on an insured, then we have a serious problem that will generate a massive wave of bad faith litigation and completely gut the Brainard rule. We can only hope and assume that Allstate will take this up to SCOTX.

We should note that the Arnold opinion, authored by former Justice C.L. Ray, came down at a time when the Court was mired in scandal and the subject of the notorious 60 Minutes exposé “Justice for Sale?” It is no secret that the Court at that time never met a plaintiff’s lawyer it didn’t like, especially if he or she was suing an insurance company. While the availability of a common law or statutory claim for bad faith is important to maintain fairness in the system, when an insurer follows the rules the courts have laid down for UM/UIM litigation, “bad faith” has to mean something more than just participating in a lawsuit to investigate and determine the insurer’s liability. Moreover, if the often unpleasant experience of the litigation process causes a sufficient level of mental anguish to establish the basis of a bad faith claim, then every breach of contract claim that ends up in a courtroom may give rise to mental anguish damages.

When paired with the Allstate Ins. Co. v. Irwin decision earlier this year, this decision presents insurers with an almost impossible dilemma. When is an insurer’s liability “reasonably clear”? What is an insurer’s responsibility to investigate when litigation has already been commenced? And once litigation is commenced, should the insurer wait until a jury verdict or final judgment establishes its liability at the risk of incurring additional liability for the “bad faith” involved in litigating the issue? One way or another, the road is open to a lot of new litigation, and the premium-paying public will have to pony up.

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