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NUTS AND BOLTS OF A FIRST PARTY INSURANCE SUIT Mark L. Kincaid I. INTRODUCTION ing coverage. Issues may also arise about the truthfulness of the This paper gives an overview of issues applicant or agent in disclosing that arise in first party insurance cases. Part information requested by the in- 1 covers the legal theories, and Part 2 dis- surer. cusses practice and procedure. 1 • Underwriting: At this stage the Part 1 – Legal Theories insurer considers the application and determines whether the ap- II. OVERVIEW OF FIRST PARTY plicant is an acceptable risk. Cer- THEORIES OF RECOVERY tain types of discrimination based on risk are legitimate and are in- A. DIFFERENT PARTS OF THE herent in the process of providing INSURANCE TRANSACTION insurance. Other types of dis- crimination, such as distinctions To understand the different ways dis- based on gender, ethnicity, or putes can arise, it is helpful to consider the disability are unlawful. sequence of events that is likely to occur. At its very simplest, an insurance transaction • Policy administration: During can be divided into the initial sale of the pol- the course of the insured/insurer icy, and subsequent handling of claims. relationship, disputes may arise These can be broken down further to in- even if there is no claim. For ex- clude: ample, the insurer may choose to cancel or not renew the policy. • The sale of the policy: Initially, The insurer may demand a pre- the consumer and insurer or in- mium that is higher than the in- surer’s agent must communicate sured was lead to expect. to establish a contractual rela- tionship. Disputes may arise over • Claims: If a claim arises under what was asked for by the appli- the policy, the parties may fall cant, what was represented by the into disagreement over the scope insurer or agent, or the timeliness of coverage, the amount of pay- of the insurer or agent in provid- ment, the insurer’s failure to pay, or the timeliness of a payment. An insurance claim may also 1 Substantial portions of this paper are adapted, give rise to disagreements based with permission, from copyrighted materials in Mark L. Kincaid & Christopher W. Martin, Texas Practice on the difference between the Guide: Insurance Litigation, ch. 4, 6, 14-22 (West coverage promised by the insurer 2010). The author wishes to acknowledge the contri- or its agent at the time of sale butions by the book’s co-author, Chris Martin. The contrasted with the coverage giv- book is available on Westlaw in the “TXPG-INS” en at the time of the claim. database. In addition, Suzette Selden provided valu- able assistance in updating the paper. 1 NUTS & BOLTS OF A FIRST PARTY INSURANCE SUIT B. THEORIES OF RECOVERY coverage accepted by the insurer is less than the coverage promised at the time of sale. 1. Common elements Depending on the facts of the case, a repre- sentation by the insurer or its agent may lead Insurance transactions tend to resemble to liability for breach of contract, unfair in- one another, so disputes arising from them surance practices, deceptive trade practices, tend to resemble one another. There are only negligence, or fraud. so many ways that an insurer and an insured can get crossways. Most cases present recur- 3. Nondisclosures ring problems that can be grouped into cate- gories. Insurance law is even more prece- Closely related to misrepresentation is dent-driven than other areas, as courts try to the theory that the insurer, agent, or insured construe similar policy language consistent- failed to disclose information. For example, ly. It is not surprising that cases start to look if an exclusion is not adequately disclosed, alike. the insurer may be liable for breach of con- tract by relying on the exclusion to deny a The key is to find good authorities that claim. Failing to adequately disclose limita- match your facts, or to emphasize the facts tions or exceptions to coverage may also that match good authorities. make the insurer or agent liable for unfair insurance practices or deceptive trade prac- Of course, the starting point is the con- tices. tract itself. The initial inquiry almost always begins with the language of the contract to 4. Unfair settlement practices determine what is covered and what is not. Other tort and statutory theories may logi- Several statutory prohibitions are specif- cally depend on the existence of coverage, ically aimed at settlement practices. Liability or may exist independent of coverage. The may arise from failing to pay benefits that interplay between recovery for breach of are owed under the policy, for failing to pay contract and recovery under other theories is benefits that were promised by the agent, for discussed below. Beyond suits for breach of failing to act promptly to settle once liability contract, most insurance cases can be is reasonably clear, for paying too little, or grouped into these categories: for paying too slowly. Liability may also arise from the insurer’s failure to adequately misrepresentations; investigate the claim. nondisclosures; 5. Other misconduct unfair settlement practices; and Other disputes may arise that do not fit neatly within the preceding categories, such other misconduct. as unreasonable cancellation of a policy, un- conscionable conduct, or unfair discrimina- 2. Misrepresentations tion. One of the most common bases for an insurance dispute is the complaint that C. WHO CAN SUE? someone misrepresented something. After a The theories of liability discussed in the claim arises, the insured may feel that the following chapters may vary depending on - 2 - NUTS & BOLTS OF A FIRST PARTY INSURANCE SUIT who is seeking recovery. It may make a dif- damage as a result of the breach. ference whether the plaintiff is the insured, a named beneficiary, an intended beneficiary, Southwell v. University of the Incarnate or an injured person seeking recovery under Word, 974 S.W.2d 351, 354-55 (Tex. App.– another’s liability policy. Questions also San Antonio 1998, pet. denied); St. Paul Ins. arise whether an agent can sue his own in- Co. v. Rakkar, 838 S.W.2d 622, 629 (Tex. surance company, and under what theories, App.–Dallas 1992, writ denied). and whether other persons affected by the insurer’s conduct can sue. Example: The first and second ele- ments in Rakkar were satisfied by uncontro- D. WHO CAN BE SUED? verted testimony that the house was insured at the time of the fire, that the insured had Liability may also vary depending on paid his premiums, that the insurer had re- who is the defendant. The sections that fol- fused to pay, and that the amount that would low discuss the liability of insurers, agents, have been paid was the policy limits. The and adjusters, under different theories. insurer denied the claim, contending that the insured intentionally caused the fire. When III. BREACH OF CONTRACT the jury rejected this defense, that estab- lished the third element – the insurer’s A. ELEMENTS OF CAUSE OF breach of the contract. St. Paul Ins. Co. v. ACTION – BREACH OF Rakkar, 838 S.W.2d 622, 630 (Tex. App.– CONTRACT Dallas 1992, writ denied). Insurance policies are contracts, and as B. ORAL CONTRACTS such are subject to rules applicable to con- tracts generally. Hernandez v. Gulf Group An oral contract to insure is valid and Lloyds, 875 S.W.2d 691, 692 (Tex. 1994). enforceable. Pacific Fire Ins. Co. v. Donald, 148 Tex. 277, 224 S.W.2d 204, 206 (1949); A plaintiff seeking to recover on an in- First Preferred Ins. Co. v. Bell, 587 S.W.2d surance contract must prove that the contract 798, 802-803 (Tex. Civ. App.–Amarillo was in force at the time of the loss. Also, a 1979, writ ref’d n.r.e.). The oral agreement party who claims under a policy is required “is presumed to be made in contemplation of to produce the insurance contract upon a policy containing the terms and conditions which he sues or to prove its terms. E.g., in customary use, and impliedly to adopt the Hartford Acc. & Indem. Co. v. Spain, 520 same, and it is on this ground that such S.W.2d 853, 855 (Tex. Civ. App.–Tyler agreements are sustained as complete and 1975, writ ref’d n.r.e.). To prove a breach of binding contracts.” Pacific Fire Ins. Co. v. contract, the insured has to establish: Donald, 148 Tex. 277, 224 S.W.2d 204, 207 (1949). the existence of the contract sued upon; Example: The insurer’s agent agreed to insure Donald’s hay. The agent’s usual prac- compliance with the terms of the tice was to send a bill the next month, or contract; even the month after that. The hay burned before any bill was sent to Donald. The the insurer’s breach of the con- court found sufficient evidence of an oral tract; and - 3 - NUTS & BOLTS OF A FIRST PARTY INSURANCE SUIT contract based on the agent’s agreement to if the contract had been performed.” Repub- provide insurance. It did not matter that rates lic Bankers Life Ins. Co. v. Jaeger, 551 were not agreed to, because the rates were S.W.2d 30, 31 (Tex. 1976); Allbritton v. Co- set by law. The change in the insured loca- lonial Life & Accident Ins. Co., 2000 WL tion also did not matter, because that would 769225 (N.D. Tex. 2000). only affect the rate, not whether there was coverage. Pacific Fire Ins. Co. v. Donald, D. RELATIONSHIP OF BREACH 148 Tex. 277, 224 S.W.2d 204, 205-07 OF CONTRACT TO OTHER (1949).

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