Will the Texas Supreme Court overturn Vail?

Publication December 2015

In a move that could clarify Texas bad faith law, the Fifth Circuit has asked the Supreme Court of Texas to decide whether a claim under Chapter 541 of the Texas Insurance Code against an insurer for wrongfully withholding policy benefits or engaging in unfair settlement practices must show damages beyond the denied benefits.  Because a claim under Chapter 541 allows for treble damages under certain circumstances, and Texas courts have not uniformly addressed the issue, a clarifying answer from Texas’ high court could have significant ramifications for both insurers and policyholders.

The Fifth Circuit’s certified question arose as a consequence of a coverage dispute between Cameron International Corporation and Liberty Insurance Underwriters, Inc. in the In re: Deepwater Horizon litigation.  See In re Deepwater Horizon, No. 114-31321, 2015 WL 7421978, at *1 (5th Cir. Nov. 19, 2015).  As part of the underlying suit concerning the blowout preventer, Cameron entered into a settlement with BP in which BP agreed to indemnify Cameron in exchange for $250 million and Cameron’s insurers waiving their subrogation rights against Transocean.  Liberty objected and refused to tender its $50 million policy limit towards the settlement, arguing that the policy’s “Other Insurance” clause provided that Liberty’s obligation to pay under the policy was not triggered until Cameron exhausted its indemnification remedies against Transocean.
Cameron ultimately sued Liberty for breach of contract and violations of the Texas Insurance Code.  The Fifth Circuit affirmed the district court’s grant of summary judgment on Cameron’s breach of contract claim, holding that the “Other Insurance” clause did not require Cameron to “exhaustively litigate other potential sources of coverage before Liberty’s payment obligation [was] triggered.”  In re Deepwater Horizon, 2015 WL 7421978, at *4.  However, the panel declined to rule on Cameron’s claim under Chapter 541 of the Texas Insurance Code, on which the district court had granted summary judgment in favor of Liberty.  The district court had relied on Great American Insurance Co. v. AFS/IBEX Financial Services, Inc., in which the Fifth  Circuit stated that its case law required a claim under Chapter 541 to assert a separate injury beyond the denial of insurance proceeds.  612 F.3d 800, 808 & n. 1 (5th Cir. 2010) (citing Parkans Int’l LLC v. Zurich Ins. Co., 299 F.3d 514, 519 (5th Cir. 2002)).

On appeal, Cameron argued the district court’s ruling and Great American were wrongly decided because the Supreme Court of Texas had held in an earlier decision, Vail v. Texas Farm Bureau Mutual Insurance Company, that a policyholder who proves a claim for unfair settlement practices need only show a denial of policy benefits to establish injury.   In re Deepwater Horizon, 2015 WL 7421978, at *6 (citing Vail v. Texas Farm Bureau Mutual Insurance Co., 754 S.W.2d 129, 136 (Tex. 1988) (“We hold that an insurer's unfair refusal to pay the insured's claim causes damages as a matter of law in at least the amount of the policy benefits wrongfully withheld.”)).
But the In re Deepwater Horizon panel found recent decisions from the Supreme Court of Texas and intermediate appellate courts had not been entirely consistent about the continued vitality of Vail, and therefore the parties’ argument raised an important question of Texas law.  Thus, the panel certified a question to the Supreme Court of Texas to determine whether Vail remains good law and whether a claim under Chapter 541 must allege and prove an injury independent of denied policy benefits.  Vail was the Texas decision that allowed a private cause of action for Insurance Code violations.  Many commentators have criticized the decision and its progeny.  This case may offer an opportunity for the Texas Supreme Court to either overrule Vail, or limit its holding.        

Of course, the Supreme Court of Texas may ultimately decline to answer the Fifth Circuit’s question.  See Tex. R. App. P. 58.1 (“The Supreme Court may decline to answer the questions certified to it.”).  But if the Court accepts its decision will clarify the type of injury an insured must allege and prove under Chapter 541 and may forever abrogate Vail, with potentially significant consequences for insurance disputes in Texas.

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