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December 21, 2017

Lyda Swinerton Builders v. Oklahoma Surety Co.

This case is interesting on a number of levels. First, it is a federal 5th Circuit Court of Appeals case that has a decidedly favorable bent towards the policyholder which is quite unusual for such a conservative court. The underlying case was a real donnybrook of a construction defect claim on a commercial building. The principal issues concern the duty to defend an additional insured and whether there could be statutory ‘bad-faith’ without independent damages. The subcontract in issue not only was marked up, signed and sent back to the general contractor but it went unsigned by the general contractor who then claimed additional insured status. The 5th Cir ruled the insurance policy did not require a signed insured contract just a written one and written doesn’t necessarily mean signed. Here the court only looked to whether there was mutual assent to the additional insured provision in the contract—not the entirety of insured contract. “But as this court has held, a party may qualify as an additional insured even if the ‘insured contract’ is not enforceable [Gilbane v. Admiral].” Instead, it depends on whether the named insured agreed to assume the tort liability of another party. The facts there was a handwritten modification to the insured contract and that it was unsigned by the party seeking to enforce it did not matter.

Next the court used some ‘inferences’ to find a duty to defend which is not unexpected when courts consider the very broad nature of interpreting a duty to defend.

The insurer also seemed to have a sound argument on “anti-stacking” of policies but the Texas Supreme Court has not directly held that anti-stacking applies in a duty to defend context so here the court ruled the facts and circumstances meant it should not be applied.

The Prompt Payment of Claims Act applies to the duty to defend—nothing new there. (The 18% penalty interest was applied to non-payment of defense costs.)

Where this case gets very interesting is the court used the Texas Supreme Court’s not-yet-released-for-publication opinion in USAA Texas Lloyds v. Menchaca (2017 WL 1311752, Apr 7, 2017) for the proposition that the insured need not show injury independent from the breach of insurance contract claim in order to get statutory ‘bad-faith’ damages under the Texas Insurance Code. (This is despite recognizing such opinion is subject to revision or withdrawal.) The Menchaca case represents a significant turn in Texas jurisprudence with regard to principles of statutory good faith and fair dealing. If Menchaca ultimately is released for publication as is, there will no longer be a requirement to show injury that is independent of the breach of the insurance contract to obtain actual damages under the Texas Insurance Code that can then be a potential basis for a claim for treble damages. (Of course, for there to be treble damages the insured will still have to show a knowing violation.) For the 5th Circuit to assume the Menchaca opinion will be released as it stands is not a ‘conservative’ move that typically might be expected from the 5th Circuit. Here the case was sent back to the trial court to take up the alleged ‘bad-faith’ issues.

If you have a Texas Insurance Code case, this opinion is worth the time it will take to read it.

(These are my personal views and are not attributable to clients, the firm or anyone else.)