For the third consecutive session, legislation has been filed reversing in part the 2006 Texas Supreme Court decision in Brainard v. Trinity Universal Insurance Company, 216 S.W.3d 809 (Tex. 2006).
Brainard held that an underinsured motorist carrier “is under no contractual duty to pay benefits until the insured obtains a judgment establishing the liability and underinsured status of the other motorist.” Brainard, 216 S.W.3d at 816. The Court held further that the insurer’s obligation to pay benefits may be determined in a direct action against the insurer, if not determined otherwise. More recently, SCOTX ruled that the insurer’s contractual obligation under a UIM policy may be determined in an action under the Uniform Declaratory Judgment Act. Allstate Insurance Company v. Irwin, 627 S.W.3d 263 (Tex. 2021). In a divided opinion over a strong dissent by Chief Justice Hecht, the Court concluded that the UDJA was an appropriate vehicle for determining the insured and insurer’s rights and duties under the insurance contract prior to a breach. One practical effect of Irwin was to make attorney’s fees recoverable in a dispute over UIM coverage, as the UDJA (Chap. 37, CPRC) gives a trial court discretion to award them to either party. Because Brainard held that no breach of contract action existed until the other motorist’s liability and underinsured status were adjudicated and the insurer subsequently refused to present payment, the insured could not recover attorney’s fees under Chapter 38, CPRC, if the insurer paid the claim.
HB 1320 directly addresses Brainard by providing that a judgment or other legal determination of the other motorist’s liability or the extent of the insured’s damages is not a prerequisite to recovery in an action under § 541.151, Insurance Code, for an unfair claims settlement practice under § 541.060. In other words, the bill allows an insured to litigate the question of whether the insured “fail[ed] to attempt in good faith to effectuate a prompt, fair, and equitable settlement of . . . a claim with respect to which the insurer’s liability has become reasonably clear.” § 541.060(a)(2)(A). Other claims could be part of such an action as well, but the main point is that the bill removes Brainard’s bar against recovery against the insurer until the other motorist’s liability has been adjudicated. This action would also make attorney’s fees recoverable by the prevailing plaintiff under § 541,152. Another provision in the bill provides that the only extracontractual cause of action available to an insured in regard to a claim for uninsured or underinsured motorist coverage is under § 541.151 to recover damages under §541.152 for a violation of § 541.060.
Prior to the Brainard decision, Texas intermediate appellate courts split over whether a UM/UIM dispute should be treated like any other breach of contract action. Three courts (Texarkana, Waco, and San Antonio) ruled that it should be, and that the date of presentment of the insured’s claim (thus triggering Chapter 38’s attorney fee provision) was the date the insured presented a UM/UIM claim to the insurer. Five courts (Austin, Dallas, Houston [14th], Eastland, and Corpus Christi), as SCOTX did in Brainard, ruled that UM/UIM policies differed from ordinary contracts in that a contractual duty to pay did not arise until the underinsured motorist’s liability was legally determined. Thus, as long as the insurer paid the claim promptly in accordance with Chapter 38 as soon as that happened, no breach of contract action existed upon which to recover attorney’s fees.
So, as it appears to us, the crux of the matter is determining the best way to resolve a UM/UIM claim in a prompt and efficient manner. Under current law, as we understand it, an insured has a choice between litigating against the other motorist all the way to a judgment (or “legal determination”) or filing a declaratory judgment action against the insurer, in which the other motorist’s liability may be determined. Option A would foreclose the recovery of attorney’s fees against the insurer if the insurer paid the claim based on the judgment of the other motorist’s liability. Option B would make attorney’s fees available to a prevailing insured on a discretionary basis. HB 1320 would allow the insured to bypass Option A and proceed with a direct action against the insurer, which mandates an award of attorney’s fees to a prevailing insured. It is unclear to us at this point what would happen to Option B (dec action) if HB 1320 became law. Nothing in HB 1320 would preclude an insured from filing a dec action, since the bill limits only extracontractual causes of action. Consequently, at least by its express terms, HB 1320 does not appear necessarily to reduce litigation, which has been one of the primary rationales for the bill.
We should note that under the Erwin case nothing prevents an insurer from filing a declaratory judgment action to determine its obligation to the insured under a UM/UIM policy (i.e., whether the other motorist was liable and the extent of the insured’s damages). Although probably unlikely, an insurer might likewise recover attorney’s fees if it prevails. What’s good for the goose is good for the gander. Of course, this would not forestall the insured from bringing a § 541.151 action if HB 1320 becomes law, so we still have the two-lawsuit problem and an independent ground of liability against the insurer beyond the insurance contract.
We should note further that a big part of the problem revolves around the insured’s attorney’s fees. As we have seen, Brainard shut the door, Erwin opened it, and HB 1320 removes it from its hinges. Is there a reasonable compromise, short of just throwing out Brainard, that could be struck here? If there is, it would have to address both the insured’s attorney’s fee problem and the issue of how to determine the insurer’s contractual duty to pay a claim. Perhaps we’re naïve, but from an outsider’s perspective, our first question would be whether these issues could be determined in a single lawsuit that would adjudicate: (1) the other motorist’s liability; (2) the insurer’s compliance with the policy; and (3) any extracontractual claims that the insured may have sufficient grounds to assert. In other words, let the parties sort it out and recover attorney’s fees if they can. If, as the Brainard and Erwin courts stated, UM/UIM claims are “unique” because the insurer’s obligation to pay a claim depends on the liability of a third party, then why can’t we come up with an equally unique proceeding that puts everybody in the same room at the same time?