Buckle Up: More Independent Injury Turbulence
By Amy Kincaid Berry
Churning the already choppy seas of Insurance Code damages case law, the Dallas Division of the U.S. District Court for the Northern District of Texas recently issued an opinion in Charla G. Aldous PC and Charla Aldous v. Teresa Lugo and Darwin National Assurance Company, supporting the Fifth Circuit’s so-called “independent injury requirement.” 2014 U.S. Dist. LEXIS 159684 (N.D. Tex. Nov. 12, 2014). The purported requirement arises with respect to claims brought against insurers under Chapter 541 of the Texas Insurance Code, as well as to claims under the corresponding section of the Texas Deceptive Trade Practices Act (“DTPA”). It imposes a burden–not required by the statutes–that an insured must show injury separate and apart from injury caused by the breach of an insurance contract in order to recover extra-contractual damages.
In Aldous, the plaintiffs (collectively “Aldous”) sought coverage for legal malpractice claims from their insurer, Darwin National Assurance Company, under a professional liability policy. A dispute arose between Aldous and Darwin concerning Darwin’s obligation to pay Aldous’ attorney’s fees. Aldous sued Darwin alleging, among other things, breach of contract and violation of Texas Insurance Code section 541.060 (unfair settlement practices) and section 541.061 (misrepresentation of insurance policy). Darwin brought a Rule 12(b)(6) motion to dismiss Aldous’ Insurance Code (and certain other) claims. Darwin asserted “Aldous suffered no injury independent from the denial of her [insurance] claim”.
Citing the independent injury requirement, the district court granted the portion of Darwin’s motion dealing with the insured’s section 541 claims. The court relied primarily on a line of Fifth Circuit district and appellate court opinions issued after the Texas Supreme Court’s 1998 Castaneda opinion and extrapolated that Castaneda “left no doubt that an independent injury was required to recover under the Texas Insurance Code.”
By way of background, Castaneda held that where denial of coverage is not wrongful, claims under the Insurance Code are valid only if they have caused separate and distinct injury. Provident American Insurance Company v. Castaneda, 988 S.W.2d 189 (Tex. 1998). The insured in Castaneda had not sued for contractual relief; the only theories of liability were extra–contractual–a circumstance that has caused confusion in the application of Castaneda. Accordingly, a number of later cases have advanced the type of across-the-board independent injury rule applied in Aldous–a rule that, no matter what, requires an insured to show independent injury in order to recover on its Insurance Code claims.
For the most part, these cases simply have ignored the 1988 Texas Supreme Court opinion of Vail v. Texas Farm Bureau Mutual Insurance Company, 754 S.W.2d 129 (Tex. 1988). In Vail, the high Texas court stated: “The fact that the Vails have a breach of contract action against Texas Farm does not preclude a cause of action” under the Insurance Code. Citing the applicable statutes, the court further noted: “Both the DTPA and the Insurance Code provide that the statutory remedies are cumulative of other remedies.” The court declared that not allowing recovery of damages when the insurer wrongfully refuses to pay a valid claim “would be in contravention of the remedial purposes of the DTPA and the Insurance Code.”
The $35,000 wrongful denial of coverage injury suffered by the Vails was the same injury under both their contract and Insurance Code theories of recovery. The court held that the $35,000 constituted “actual damages,” and allowed recovery of the actual damages, along with trebled damages, under the Insurance Code via the DTPA. Notably, a recent opinion from the Houston Court of Appeals followed Vail, rejecting the independent injury requirement in the case of wrongful denial of benefits. In that opinion, United National Insurance Company v. AMJ Investments, LLC, 447 S.W.3d 1 (Tex. App.—Houston, June 26, 2014, pet. filed), the court held that the insured may elect its remedy when the damages are the same under both breach of contract and Insurance Code violation theories.
Aldous, distinguishing itself from other independent injury cases out of the Fifth Circuit, actually discusses Vail, but–interestingly–the court renounces Vail. Cutting across the wake of AMJ, Aldous applies Castaneda in a manner that incorrectly supplants the rule of Vail. The decision rests on two problematic bases.
1. Nature of Vail
First, Aldous says that Vail is not an independent injury case and characterizes Vail as a damages case that “does not address what constitutes a sufficient allegation under the DTPA and Texas Insurance Code.” This muddies the waters because the concepts of damages and sufficiency of allegations are intertwined. Aldous does not flesh out the distinction in its discussion of various other independent injury cases, possibly because the other cases also are “damages” cases. For instance, Castaneda dealt with sufficiency of evidence for jury findings and a damages award.
Moreover, Vail actually did address extensively the sufficiency of pleading a violation of the Insurance Code. At the outset, it explained that (1) the Vails contended they properly pleaded under the Insurance Code; (2) the insurer, Texas Farm, claimed that “the Vails failed to adequately plead [statutory] violations”; and (3) Texas Farm further asserted that “the Vails failed to state a cause of action under Texas law.” The court painstakingly analyzed those contentions and concluded that the Vails stated causes of action under both the Insurance Code and the DTPA.
Then, Vail addressed Texas Farm’s argument that “the amount due under the policy solely represents damages for breach of contract and does not constitute actual damages in relation to a claim of unfair settlement practices.” The ensuing supreme court analysis goes to the very heart of the independent injury rule in the case of wrongful denial–and requires rejection of the rule.
2. Scope of Castaneda
Next, Aldous rejects as too restrictive the idea that Castaneda’s independent injury requirement should not apply when an insurer has breached its contract. The opinion does not acknowledge there was no finding of breach of contract in Castaneda but notes that subsequent cases “apply [Castaneda] more broadly than [Plaintiffs] suggest it should be.” On that note, it references two Texas appellate court cases–USAA v. Gordon, 103 S.W.3d 436, 442 (Tex. App.—San Antonio 2002, no pet.), which cited MacIntire v. Armed Forces Benefit Association, 27 S.W.3d 85, 92 (Tex. App.—San Antonio 2000, no pet.)–implying these decisions eclipse Vail and validate an expansion of Castaneda. Yet, Aldous makes no mention of the more recent Texas appellate AMJ opinion that follows Vail and disagrees with such a broad application of Castaneda. It concludes the court is bound by Fifth Circuit precedent, citing the case that initiated the stretch of Castaneda’s independent injury language, Parkans International, LLC v. Zurich Insurance Company, 299 F.3d 514 (5th Cir. 2002) (citing Castaneda).
However, none of the cases cited by Aldous trump Vail, which the Texas Supreme Court has never overruled. Vail and Castaneda, viewed together, provide a coherent scheme that safeguards the bad faith (or unfair insurance practices) recovery plan of the Texas Insurance Code. When it comes to cases of wrongful denial of policy benefits, Vail controls and no independent injury requirement should apply.
Aldous, with its rejection of Vail and its stretching of Castaneda, is a prime example of the very real need for course correction. Fortunately, hope lies on the horizon: petitions for review of opinions dealing with this issue, including AMJ, recently have been filed with the Texas Supreme Court. The court now has the opportunity to debunk the blanket independent injury requirement and clarify that Vail, in tandem with Castaneda, honors the remedies established under Texas law for insureds.