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Bad Faith Liability for Delaying Payment of Undisputed Uninsured Motorist Claims

Bad Faith Liability for Delaying Payment of Undisputed Uninsured Motorist Claims

State Farm Mut. Auto. Ins. Co. v. Cook (Tex.App. –San Antonio, 2019)

In a recent opinion from the 4th Court of Appeals of Texas (San Antonio), the Court addressed two issues that routinely arises on Uninsured and Underinsured Motorist Claims.   In that case, the Court addressed:

  1. Can an insured on an Uninsured Motorist (UM) claim bring a common law or a statutory claim for “bad faith” against an insurer that withholds payment of UM benefits until such time as the insured obtains a judgment against the insurance company on the Uninsured Motorist?  Yes.
  2. Can an insured on an Uninsured Motorist (UM) claim bring a claim for violations of the Prompt Payment of Claims Act against a UM insurer that “promptly” pays the claim after the insured obtains a judgment establishing the insured is legally entitled to recover damages on the UM claim?  No.

Background:

Veatrice Cook was injured when her vehicle was struck by an uninsured motorist.  Following the collision, Cook made a UM claim with State Farm and demanded payment of her policy limits of $100,000.  State Farm refused to pay policy limits but offered to pay $15,255.00.  

Cook then sued both the uninsured motorist and State Farm and asserted bad faith claims against State Farms.  The bad faith claims were severed and abated from the underlying uninsured motorist claim.

At trial, State Farm stipulated that the negligence of the uninsured motorist proximately caused the collision and that the uninsured motorist was uninsured.  The jury determined that Cook’s damages totaled $308,514.05. The judge then entered judgment in Cook’s favor against State Farm but limited the amount of the judgment to $100,000 because that is the amount of Cook’s policy limits with State Farm.

State Farm then filed a Motion for Summary Judgment on Cook’s bad faith claims arguing that as a matter of law, State Farm could not be liable for such alleged bad faith.  The court denied State Farm’s Motion and State Farm appealed.

On both its Motions, State Farm relied on the holdings in Brainard v. Trinity Universal Ins. Co., 216 S.W.3d 809 (Tex. 2006 and the holding in Wellish v. USAA, 75 S.W.3d 53, 57 (Tex.App.-San Antonio, 2002, writ denied).  In contrast, Cook relied on the holdings in Hamburger v. State Farm Mut. Ins. Co., 361 F.3d 875 (5th Cir. 2004).

The Court agreed with Cook that an insurance company owes its insured a duty of good faith and it acts in bad faith when it fails to effectuate a prompt, fair and equitable settlement of a claim with respect to which the insurer’s liability is reasonably clear.  “Reasonably clear” means “the insurer knew or should have known it was reasonably clear that the claim was covered.”  The delay or denial of payment of the claim and whether the insurer conducted a reasonable investigation are usually questions of fact for a jury.  

In Brainard, the Texas Supreme Court held that “a UIM insurer is under no contractual duty to pay benefits until the insured obtains a judgment establishing the liability and underinsured status of the other motorist.”  In Wellish, the Court of Appeals held that a UIM insurer has the right to withhold payment of UIM benefits until the insured’s legal entitlement is established.  State Farm used these holdings to argue that a UIM insurer’s liability cannot be reasonably clear until such time as a judgment is entered [on the UIM claim] and therefore State Farm cannot have acted in bad faith.  The Court of Appeals disagreed with State Farm because in Hamburger the court held that for the insured to prevail on a bad faith claim, the insured need only show:

(1) the insurance company knew or should have known that liability was reasonably clear, 

(2) that the claim was covered, and 

(3) that the insurance company failed to effectuate a prompt, fair and equitable settlement.   

The Hamburger Court noted that there are no cases which have squarely held that liability can never be reasonably clear before there is a court determination of proximately caused damages.  The Court also noted there have been multiple court decisions that have rejected the argument that Brainard eliminates a bad faith claim unless and until there is a judgment establishing legal liability and damages.   In cases where liability is reasonably clear, the insurer can be found to be in bad faith.

As a result, an insurer can be held liable for bad faith conduct for withholding payment of UM claim if liability is reasonably clear.   Thus, under §541.060 Tex. Ins. Code, an insured would have a right to sue the UM insurer for not paying what it admits it owes on a claim where liability is reasonably clear and where the claim is a covered claim.  This would allow an insured to recover “actual damages” (the wrongfully withheld benefits) plus a penalty of up to three times those actual damages if the violation is a “knowing” violation plus reasonable attorney’s fees where the UM insurer refuses to pay the undisputed portion of the claim if liability is reasonably clear and the claim is covered.

Prompt Payment of Claims Act

The Court then addressed whether the same delay in payment of the undisputed portion of the claim is also a violation of the Prompt Payment of Claims Act (§542.058 Tex. Ins. Code) which imposes a penalty, in addition to the amount of the claim, of 18% per annum plus attorney’s fees for delays of payment in excess of 60 days.  Based on the holdings in Brainard and in Wellish, the Court found that State Farm’s payment of the claim within 9 days of the date of the judgment which established the uninsured motorist’s liability for Cook’s damages is not a violation of the Prompt Payment of Claims Act.

Editor’s Note:

This case is very likely to be appealed by State Farm to the Texas Supreme Court.   In the meantime, the impact of this decision will hopefully encourage more insurance companies to pay at least the undisputed portions of the UM/UIM claim.