I recently defeated a motion to sever and abate breach of contract from extra-contractual claims filed by a carrier. I thought it would be good to blog a refresher on this issue. My client (“Insured”) owns a home in Houston. Insured was a long-time customer of a local agent and the carrier he was licensed to sell for. Insured had a separate auto and homeowner’s policy such that premiums were paid separately. Both premiums were automatically drafted from insured’s bank card monthly. In December 2015, the card was stolen. Insured replaced her card, but forgot to inform agent and carrier. In January 2016, insured starting getting calls from agent and notices from carrier. Insured went to agent’s office and gave agent new card information. Unknown to insured, the agent attached the new card information to the automobile policy premium, but failed to do so for the homeowner’s policy. Therefore, when the insured saw notices from the carrier about her insurance lapsing she thought they had crossed in the mail since she went to agent’s office to give him credit card information.
On February 28, 2016, insured’s policy was cancelled but insured had not yet received notice. On March 3, 2016, insured’s house burned to the ground. She reported the claim to the agent and carrier and the claim was denied on the basis that the policy had lapsed and she had no insurance to cover the claim. I sued the agent and carrier for breach of contract, bad faith, and violation of the Texas Prompt Payment Act. The carrier filed a motion to sever and abate arguing that all of the extra-contractual claims were contingent on the insured first proving either there was insurance to cover the loss or there was a breach of contract. The carrier cited many underinsured motorist (UM) cases and a few first-party property damage cases to support its argument.
Severances are routinely granted in the UM context because in those cases the insured first must prove her case against the third-party driver and that her damages exceed the third-party’s insurance limits before she can proceed against the UM carrier. In my case, the carrier argued that the facts were essentially the same. There was no policy of insurance and, therefore, we had to prove a duty before we could ever get to bad faith. However, I pointed out this case was still a breach of contract case because we argued that failing to apply premiums was a breach of contract. I also pointed out that in Liberty National v. Akin,1 the Texas Supreme Court recognized that in the first-party property context, breach of contract and extra-contractual claims are interwoven and should not be severed:
With these standards and the facts of this case in mind, we hold that the trial court did not abuse its discretion in denying Liberty National’s motions for severance and abatement. Contrary to Liberty National’s arguments, Brodrick’s claims are largely interwoven, most of the evidence introduced will be admissible on both claims, and any prejudicial effect can be reasonably ameliorated by appropriate limiting instructions to the jury. (emphasis added).
The Allstate v. Hunter case out of Corpus Christi is also a great case on the issue.2 In Hunter, the court said:
We disagree, however, with the Wilborn and Millard courts that severance is required in every case or that judicial economy somehow mandates a severance. There is no general prohibition against trying contract and bad faith claims together, nor is severance of such claims always required…We see no difference between the joinder of contract/bad faith claims and the joinder of other such claims which are contingent or generally dependent upon an underlying claim, yet which may be joined and tried together with that underlying claim. Moreover, certain derivative claims must generally be tried together with the underlying claim from which they are derived. See Rocha v. Ahmad, 676 S.W.2d 149, 154 (Tex.App.—San Antonio 1984, writ dism’d) (suit for attorney’s fees not ordinarily maintainable as a separate cause of action). However, the rationale of Millard would suggest that a contingent or dependent claim may never be joined and tried together with the underlying claim because of the possibility that the underlying claim may fail, and thus the time and effort spent on the contingent claim would have been wasted. We do not believe this is the law in Texas, nor do we believe that it should be. Trial of the contingent claim together with the underlying claim, may be judicially efficient in more cases than it would be wasteful. If all claims were tried together and the claimant recovered on the underlying claim, the contingent claim would become viable and there would be no need for a second trial. (emphasis added)
It seems clear from these cases that no extra-contractual claims in a first-party property damage case should ever be severed and abated from the breach of contract claim.
1 Liberty National Fire Ins. Co. v. Akin, 927 S.W.2d 627, 630 (Tex. 1996).
2 Allstate Ins. Co. v. Hunter, 865 S.W.2d 189, 193 (Tex. App. – Corpus Christi, 1993).
