in Re Colonial County Mutual Insurance Company ( 2019 )

Opinion issued November 5, 2019
In The
Court of Appeals
For The
First District of Texas
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NO. 01-19-00391-CV
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IN RE COLONIAL COUNTY MUTUAL INSURANCE COMPANY, Relator
Original Proceeding on Petition for Writ of Mandamus
MEMORANDUM OPINION
Relator, Colonial County Mutual Insurance Company (“Colonial”), has filed
a petition for writ of mandamus challenging the trial court’s order denying abatement
of certain extra-contractual claims arising from an uninsured/underinsured motorist
coverage dispute.1 We conditionally grant relief.
1
The underlying case is Abigail Shelger v. Lisselotte Ortiz and Nationwide Insurance
Company, cause number 2018-10671-A, pending in the 295th District Court of
Harris County, Texas, the Honorable Donna Roth presiding.
Background
This original proceeding arises from a personal injury lawsuit filed by Abigail
Shelger against Lisselotte Ortiz for damages arising from a motor vehicle accident.
Shelger later added Colonial as a defendant, asserting that Colonial failed to pay
uninsured/underinsured motorist (UIM) benefits under a policy issued by Colonial.2
Shelger asserted causes of action against Colonial for breach of contract, as well as
extra-contractual causes of action for breach of the common law duty of good faith
and fair dealing, and violations of the Texas Insurance Code and Texas Deceptive
Trade Practices Act.
Colonial filed a motion to sever and abate Shelger’s extra-contractual claims
from her underlying UIM claim. Shelger filed a response agreeing that severance
and abatement of her common law bad faith claims was proper but requested that
her claims for statutory violations only be severed and not abated. The then-
presiding judge, the Honorable Caroline Baker, granted Colonial’s motion in part,
signing an order severing the extra-contractual claims but abating discovery only as
to Shelger’s common law bad faith claim. The order provides that discovery is not
abated as to the severed causes of action for violation of Sections 541 and 542 of the
2
Shelger incorrectly named Colonial as “Nationwide Insurance Company” in her
suit.
2
Texas Insurance Code and violation of the Texas Deceptive Trade Practices Act
(collectively, the “Statutory Extra-contractual Claims”).
Colonial later filed a motion to reconsider with the successor trial court judge,
the Honorable Donna Roth, requesting that the court similarly abate the Statutory
Extra-contractual Claims as it abated the common law bad faith claim. After a
hearing on the motion, the trial court denied Colonial’s motion to reconsider. This
mandamus petition followed. Our Court requested a response to the petition from
the real party in interest but no response was filed.
Standard of Review
Mandamus will issue only to correct a trial court’s clear abuse of discretion
for which the relator has no adequate remedy at law. In re Prudential Ins. Co. of
Am., 148 S.W.3d 124, 135-36 (Tex. 2004) (orig. proceeding); Walker v. Packer, 827
S.W.2d 833, 839–40 (Tex. 1992) (orig. proceeding). A clear abuse of discretion
occurs when the trial court’s decision is so arbitrary and unreasonable that it amounts
to clear error. See Walker, 827 S.W.2d at 839-40 (quoting Johnson v. Fourth Court
of Appeals, 700 S.W.2d 916, 917 (Tex. 1985)). Because a trial court has no discretion
in determining what the law is, the trial court abuses its discretion if it clearly fails
to analyze or apply the law correctly. See id. at 840. “To satisfy the clear abuse of
discretion standard, the relator must show ‘that the trial court could reasonably have
reached only one decision.’” Liberty Nat’l Fire Ins. Co. v. Akin, 927 S.W.2d 627,
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630 (Tex. 1996) (orig. proceeding) (quoting Walker, 827 S.W.2d at 840). “In
determining whether appeal is an adequate remedy, [we] consider whether the
benefits outweigh the detriments of mandamus review.” In re BP Prods. N. Am.,
Inc., 244 S.W.3d 840, 845 (Tex. 2008) (orig. proceeding).
Abatement of Extra-contractual Claims
In most circumstances, a trial court’s decision to grant or deny a motion to
abate is within the court’s discretion. See Project Eng’g USA Corp. v. Gator Hawk,
Inc., 833 S.W.2d 716, 724 (Tex. App.—Houston [1st Dist.] 1992, no writ); In re Am.
Nat. Cnty. Mut. Ins. Co., 384 S.W.3d 429, 435 (Tex. App.—Austin 2012, orig.
proceeding). Colonial asserts that the trial court abused its discretion in denying
abatement of discovery regarding the severed Statutory Extra-contractual Claims.
We agree.
Contractual UIM Claims
Uninsured/underinsured motorist cases differ from other insurance disputes
because, unlike most first-party cases in which the terms of the policy alone dictate
the outcome, UIM coverage hinges on the liability of the alleged
uninsured/underinsured, at-fault third-party motorist under applicable tort
law. See Brainard v. Trinity Universal Ins. Co., 216 S.W.3d 809, 818 (Tex. 2006)
(citing Henson v. S. Farm Bur. Cas. Ins. Co., 17 S.W.3d 652, 653-54 (Tex. 2000)).
Consequently, “the insurer’s contractual obligation to pay benefits does not arise
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until liability and damages are determined.” Id.; see also In re United Fire Lloyds,
327 S.W.3d 250, 255 (Tex. App.—San Antonio 2010, orig. proceeding). “Neither
requesting UIM benefits nor filing suit against the insurer triggers a contractual duty
to pay.” Brainard, 216 S.W.3d at 818.
To recover benefits under a UIM policy, a policy beneficiary must show (1)
that the insured has UIM coverage, (2) that the underinsured motorist negligently
caused the accident that resulted in the covered damages, (3) the amount of the
insured’s damages, and (4) that the underinsured motorist’s insurance coverage is
deficient. See In re Liberty Cty. Mut. Ins. Co., 537 S.W.3d 214, 220 (Tex. App.—
Houston [1st Dist.] 2017, orig. proceeding) (citing Brainard, 216 S.W.3d at 818).
Accordingly, “a claim for UIM benefits is not presented until the trial court signs a
judgment” resolving these issues. Brainard, 216 S.W.3d at 818.
In the underlying case, there has been no judgment or other judicial
determination of Ortiz’s liability or the amount of damages she caused. Absent such
a judgment, Colonial has no contractual obligation to pay UIM benefits.
Furthermore, as discussed below, Shelger cannot recover on extra-contractual claims
arising from the failure to pay such benefits.
Extra-contractual Claims
“An insured’s claim for breach of an insurance contract is ‘distinct’ and
‘independent’ from claims that the insurer violated its extra-contractual common-
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law and statutory duties.” USAA Tex. Lloyds Co. v. Menchaca, 545 S.W.3d 479, 489
(Tex. 2018); see also United States Fire Ins. Co. v. Millard, 847 S.W.2d 668, 672
(Tex. App.—Houston [1st Dist.] 1993, orig. proceeding) (“[A] breach of an
insurance contract claim is separate and distinct from bad faith, Insurance Code or
DTPA causes of action. Uninsured motorist claims and bad faith claims have been
recognized as separate and distinct causes of action which might each constitute a
complete lawsuit within itself.”) (internal citations omitted).
An insured must first establish that the insurer is liable on the contract before
the insured can recover on extra-contractual causes of action against an insurer for
failing to pay or settle a UIM insurance claim. See In re Liberty Cty. Mut. Ins. Co.,
537 S.W.3d at 220.3 Thus, our Court and others have required extra-contractual
claims to be severed and abated until the UIM breach of contract claim is determined.
See In re Liberty Cty. Mut. Ins. Co., 537 S.W.3d at 220; In re Allstate Cnty Mut. Ins.
3
See also In re Progressive Cnty. Mut. Ins. Co., 439 S.W.3d 422, 426–27 (Tex.
App.—Houston [1st Dist.] 2014, orig. proceeding) (stating that “extra-contractual
liability could only accrue if [insurer] is found liable on the contract”); In re Old
Am. Cnty. Mut. Fire Ins. Co., No. 13–12–00700–CV, 2013 WL 398866, at *4 (Tex.
App.—Corpus Christi Jan. 30, 2013, orig. proceeding) (“[T]o prevail on their extra-
contractual claims against [insurer], plaintiffs must first demonstrate that [insurer]
was contractually obligated to pay their uninsured motorist claim.”); In re State
Farm Mut. Auto. Ins. Co., 395 S.W.3d 229, 238 (Tex. App.—El Paso 2012, orig.
proceeding) (quoting Smith v. Allstate Ins., No. H–03–0651, 2007 WL 677992, at
*5 (S.D. Tex. Feb. 27, 2007)) (“Texas insurance law generally conditions recovery
for bad faith and extracontractual claims on a recovery for breach of the insurance
contract itself.”).
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Co., 447 S.W.3d 497, 504; In re Progressive, 439 S.W.3d at 428. The rationale for
requiring severance and abatement of these types of claims is that they may be
rendered moot by a determination of underlying liability. See U.S. Fire Ins. Co. v.
Millard, 847 S.W.2d 668, 673 (Tex. App.—Houston [1st Dist.] 1993, orig.
proceeding) (“Abatement of the bad faith claims must necessarily accompany
severance of those claims from the contract claim. Without abatement, the parties
will be put to the effort and expense of conducting discovery and preparing for trial
of claims that may be disposed of in a previous trial.”); In re State Farm Mut. Auto.
Ins. Co., 553 S.W.3d 557, 564–65 (Tex. App.—San Antonio 2018, orig. proceeding)
(“[B]ecause extra-contractual claims in a UIM case can be rendered moot, abatement
is necessary to avoid litigation expenses and conserve judicial resources.”); In re
United Fire Lloyds, 327 S.W.3d at 254 (holding that abatement of insured’s extra-
contractual claims was required to “do justice, avoid prejudice, and further
convenience.”); Am. Nat’l Cnty., 384 S.W.3d at 439 (concluding that trial court
abused its discretion in failing to abate extra-contractual claims until UIM contract
claim was resolved).
Independent Injury Claims
In opposing abatement of her Insurance Code and DTPA claims, Shelger
argued to the trial court that these statutory claims are not “extra-contractual” and
that Colonial could be liable for them even absent coverage. Shelger’s August 30,
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2018 opposition brief filed with the trial court cites the Texas Supreme Court’s
opinion in USAA Texas Lloyds Co. v. Menchaca, No. 14-0721, 2017 WL 1311752
(April 7, 2017) for the proposition that an insured can recover on a statutory violation
claim without any determination of the underlying coverage dispute. The opinion
cited by Shelger had previously been withdrawn and susperseded by the Texas
Supreme Court’s opinion on rehearing issued on April 13, 2018. See USAA Texas
Lloyds Co. v. Menchaca, 545 S.W.3d 479 (Tex. 2018). To the extent that the trial
court relied on Menchaca in denying abatement of the Statutory Extra-contractual
Claims, such reliance was misplaced.
At the outset, Menchaca is distinguishable because it did not involve a UIM
claim or whether contractual and extra-contractual claims should be severed and
abated. Instead, it involved a first-party claim by the insured against her insurer for
storm damage to the insured’s home. The question before the Court was “whether
the insured can recover policy benefits based on the insurer’s violation of the Texas
Insurance Code even though the jury failed to find that the insurer failed to comply
with its obligations under the policy.” Menchaca, 545 S.W.3d at 484. In Brainard,
the Court noted the unique nature of UIM claims and drew a distinction between
first-party insurance contract claims and UIM contracts: “Unlike many first-party
insurance contracts, in which the policy alone dictates coverage, UIM insurance
utilizes tort law to determine coverage. Consequently, the insurer’s contractual
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obligation to pay benefits does not arise until liability and damages are
determined.” Brainard, 216 S.W.3d at 818.
But even assuming, arguendo, that Menchaca applies to UIM claims, the
decision does not support the trial court’s denying abatement of the Statutory Extra-
contractual Claims. In its opinion on rehearing, the Court “clarif[ied] and affirm[ed]
the general rule that an insured cannot recover policy benefits as actual damages for
an insurer’s statutory violation if the insured has no right to those benefits under the
policy.” Menchaca, 545 S.W.3d at 495. The Court further explained that, regardless
of whether an insured is entitled to benefits under a policy, this general rule does not
preclude the possibility of an insured recovering damages for a statutory violation
that causes an injury independent from the loss of the benefits:
There are two aspects to this independent-injury rule. The first is that,
if an insurer's statutory violation causes an injury independent of the
insured's right to recover policy benefits, the insured may recover
damages for that injury even if the policy does not entitle the insured to
receive benefits . . . . The second . . . is that an insurer’s statutory
violation does not permit the insured to recover any
damages beyond policy benefits unless the violation causes an injury
that is independent from the loss of the benefits.
Id. at 499–500 (emphasis added). The violation must be “some act, so extreme, that
[it] would cause injury independent of the policy claim.” Id. at 499 (quoting Republic
Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995)).
This “independent-injury rule” applies only if damages are truly independent
of the insured’s right to receive policy benefits. Id. at 499-500. It does not apply if
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the insured’s statutory or extra-contractual claims “are predicated on [the loss] being
covered under the insurance policy” or if the damages “flow” or “stem” from the
denial of the claim for policy benefits. Id. at 500. When an insured seeks to recover
damages that “are predicated on,” “flow from,” or “stem from” policy benefits, the
general rule applies and precludes recovery unless the policy entitles the insured to
those benefits. Id.
As the Court pointed out, in carving out the independent injury rule in Stoker,
the Court was merely allowing for “the possibility” of such an injury and expected
that it would be rare; indeed, so rare that the Court had never seen such an
independent injury:
[o]ur reference in Stoker to “the possibility” that a statutory violation
could cause an independent injury suggested that a successful
independent-injury claim would be rare, and we in fact have yet to
encounter one . . . This is likely because the Insurance Code offers
procedural protections against misconduct likely to lead to an improper
denial of benefits and little else . . . We have further limited the natural
range of injury by insisting that an injury is not “independent” from the
insured’s right to receive policy benefits if the injury “flows” or “stems”
from the denial of that right.
Id. at 500.
Here, Shelger’s petition contains no allegation that she has suffered damages
unrelated to or independent of her contract claim for the denial of UIM benefits.
Rather, Shelger’s Statutory Extra-contractual Claims are predicated upon the denial
of UIM benefits. For example, Shelger’s First Amended Petition demonstrates that
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her Statutory Extra-contractual Claims are based upon allegations that Colonial
“failed to attempt to effectuate a prompt, fair and equitable settlement of a claim,”
“failed to adopt and implement reasonable standards for prompt investigation of
claims arising under its policies,” and “refused to pay a claim without conducting a
reasonable investigation with respect to the claim.” Accordingly, the general rule
applies and Shelger cannot recover on her Statutory Extra-contractual Claims based
on the denial of UIM benefits unless she first demonstrates that she has a right to
those benefits under the policy.
As stated above, Colonial “is under no contractual duty to pay benefits until
[plaintiff] obtains a judgment establishing the liability and underinsured status of the
other motorist.” Brainard, 216 S.W.3d at 818; In re United Fire Lloyds, 327 S.W.3d
at 256. Here, liability for Shelger’s UIM claim has not been judicially determined in
her breach of contract case. Accordingly, the severed extra-contractual claims are
not yet ripe and could be rendered moot by the underlying liability determination in
the breach of contract case. The trial court was, therefore, required to abate the
Statutory Extra-contractual Claims asserted against Colonial and abused its
discretion by denying abatement of the claims.
Adequate Remedy by Appeal
We further conclude that Colonial lacks an adequate remedy by appeal
because if mandamus is not granted it stands to lose substantial rights by being
11
required to engage in discovery and prepare for claims that may be rendered moot
and may have not even yet accrued.
Here, the discovery Shelger served on Colonial underscores the necessity of
severance and abatement of all her extra-contractual causes of action. Among other
things, Shelger has served Colonial with interrogatories, requests for production and
requests for admissions aimed at her extra-contractual causes of action against
Colonial. For example, Shelger seeks discovery of Colonial’s investigation into her
UIM claim, specific identifying and employment history of Colonial’s UIM
adjusters, a history of Colonial’s UIM claim investigations and customer complaints,
UIM claims handling training, UIM claims handling policies and procedures,
underwriting materials, documents demonstrating Colonial satisfied its Texas
Insurance Code duties and obligations in this case, and information regarding
Colonial’s net worth and reserves set aside for Shelger’s UIM claim.
Insurers have a substantial right not to undergo the expense of litigating and
conducting discovery on issues that ultimately may be unnecessary because of the
result in the underlying tort case. See In re Liberty Cty. Mut. Ins. Co., 537 S.W.3d at
223; see also In re Old Am. Cnty. Mut. Ins. Co., 2012 WL 506570 at *5. Accordingly,
insurers lack an adequate remedy by appeal when they are required to litigate and
engage in discovery regarding extra-contractual claims that may be rendered moot
by the determination of the breach of contract claims. See In re Liberty Cty. Mut.
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Ins. Co., 537 S.W.3d at 223; In re Allstate, 447 S.W.3d at 504; In re Progressive,
439 S.W.3d at 427–28; see also In re United Fire Lloyds, 327 S.W.3d at 256
(concluding that insurer lacked adequate remedy by appeal because, if writ of
mandamus was not granted, insurer stood to lose substantial rights by being required
to prepare for claims that might be rendered moot and never even accrue). If
mandamus is not granted, Colonial would be required to prepare for and respond to
discovery concerning claims that similarly lack justiciability. See In re Liberty Cty.
Mut. Ins. Co., 537 S.W.3d at 223.
Conclusion
For the forgoing reasons, we conditionally grant the petition for writ of
mandamus and direct the trial court to (1) vacate the portion of its order denying
abatement of the severed Statutory Extra-contractual Claims and (2) grant Colonial’s
request to abate the severed Statutory Extra-contractual Claims. We are confident
that the trial court will promptly comply, and our writ will issue only if it does not.
We dismiss any pending motions as moot.
PER CURIAM
Panel consists of Justices Lloyd, Goodman, and Landau.
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