Maryland Ins. Co. v. Head Indus. Coatings and Services, Inc.

• Decision Date: 31 August 1995
• Docket Number: No. 06-94-00071-CV,06-94-00071-CV
• Citation: 906 S.W.2d 218
• Parties: MARYLAND INSURANCE COMPANY, Appellant, v. HEAD INDUSTRIAL COATINGS AND SERVICES, INC., Appellee.
• Court: Texas Court of Appeals

Page 218

906 S.W.2d 218

MARYLAND INSURANCE COMPANY, Appellant, v. HEAD INDUSTRIAL COATINGS AND SERVICES, INC., Appellee.

No. 06-94-00071-CV.

Court of Appeals of Texas,

Texarkana.

Aug. 31, 1995.

Portia J. Bott, R. Brent Cooper, Cooper, Huddleston, Aldous, Dallas, for appellant.

Scott Patrick Stolley, Thompson, Coe, Cousins, Irons, Dallas, for Gans & Smith.

Winford L. Dunn, Jr., Smith, Stroud, McClerkin, Dunn, Texarkana, for Head Industrial.

Before CORNELIUS, C.J., and BLEIL and GRANT, JJ.

OPINION

GRANT, Justice.

This is a bad faith insurance case with liability premised on violations of the Insurance Code. Maryland Insurance Company appeals from a judgment rendered in favor of its insured, Head Industrial Coatings and Services, Inc., and also appeals from a take-nothing judgment rendered against it on its third-party action against Gans & Smith Insurance Agency. The primary issues on appeal involve the existence of a viable cause of action under the Insurance Code for unfair claims settlement practices and bad faith conduct by an insurer on a third-party liability policy, the sufficiency of the evidence to support the jury's determination that Maryland engaged in unfair or deceptive acts, the amount of the jury finding of damages, the effect of a settlement agreement, and the assessment of a statutory interest penalty against Maryland because of its tardy payment of a claim.

Head Industrial Coatings and Services, Inc. is one of two family-owned businesses that together provide vacuuming, sandblasting, and coating services to various industries, including Texas Utilities (TU), that utilize storage tanks and towers. As a prerequisite to working for TU, Head agreed to indemnify TU for any injury claims arising out of services Head performed and to purchase contractual liability insurance coverage to protect TU against claims arising out of work performed by Head at TU facilities.

Head contacted its local insurance agent, Hermes Payne of Gans & Smith Insurance Agency, and purchased a commercial general liability policy with a $500,000 policy limit. Maryland Insurance Company was the insurance carrier. Head intended to purchase contractual liability insurance as part of the policy and communicated this intent to Payne, who is one of the owners of Gans & Smith. There is evidence indicating that Head paid the premiums for a policy that included the contractual liability insurance. Payne committed a clerical error, however, and the policy actually issued to Head did not include the proper endorsement to create such coverage.

The underlying cause of the present litigation is a suit filed in 1989 against TU and Head by Don Nelson, a Head employee, who was injured while working on TU's premises during the time period covered by the insurance policy. The suit papers were forwarded to Maryland's Dallas claims office. Maryland assigned the matter to one of its claims adjusters, Bob Smith, and also employed an attorney to defend Head against Nelson's claims.

In February 1990, TU sent a demand letter to Head, requesting that Head indemnify TU and provide it with a defense in the Nelson suit as agreed, and later filed a cross-claim against Head in the Nelson suit based on contractual indemnity. Head forwarded the demand letter to Smith. Smith consulted an attorney, who correctly opined that TU's cross-claim was not covered under the general commercial liability policy issued to Head. The claims adjuster sent Head a reservation-of-rights letter advising Head of potential coverage problems concerning both Nelson's personal injury claims and any contractual indemnity claims. Head contacted Payne, who assured Head that TU's contractual liability claim was covered.

After receiving a copy of the reservation-of-rights letter, Payne reviewed the file and discovered his error in failing to secure insurance coverage to protect TU. Payne was embarrassed and attempted to contact a friend, Tom Southard, who is the Texas claims manager for Maryland Insurance Company. Payne left a message requesting that Southard call him about a problem with a claim, but did not specify what claim was troublesome. Southard did not return the call and denied receiving the message. Payne made no further effort to inform Maryland about the error. Some time after the judgment was rendered in the Nelson suit (over two years later), Payne finally talked to Southard but did not disclose his error in excluding the promised contractual liability coverage from Head's policy. Payne explained that by the time he spoke with Southard he was represented by an attorney and did not know what he could or could not tell Southard.

The attorney Maryland hired to represent Head in the Nelson suit contacted Smith, the claims adjuster, and said that Boyce Head, the president of Head Industrial, was irate because he had been promised contractual liability coverage. Southard testified that insureds tend to be upset when coverage is denied. Southard also testified that copies of all communications were sent to Gans & Smith and that, in his experience, an agent who believes that the adjuster is wrong in his assessment of coverage usually contacts the claims adjustment office with his concerns. Southard had known Payne to raise such coverage questions in the past.

In May 1990, Maryland denied coverage for the contractual liability claim asserted by TU. Maryland's denial of coverage also caused Head to lose the coverage it had under an excess insurance policy issued by another company.

The Nelson suit proceeded to trial before the court. In May 1992, the trial court rendered judgment in favor of Nelson against TU, and in favor of TU on its indemnity cross-claim against Head for approximately $1,889,000, which is the amount of Nelson's judgment plus TU's attorney's fees and costs. In the meantime, Head had filed suit against Maryland, Payne, and Gans & Smith in 1991, alleging wrongful denial of its claim under the commercial liability policy.

Head moved for and was granted a nonsuit without prejudice in August 1992, after entering into two settlement agreements. In the first, Nelson, TU, TU's workers' compensation carrier, and Head entered into a settlement arrangement whereby Head assigned its rights against Maryland to Nelson and guaranteed Nelson a recovery of $500,000. In exchange, Nelson promised not to execute against Head's assets. ¹ In the second settlement agreement, executed by Head, TU, and Gans & Smith, Gans & Smith guaranteed $500,000 to Head. In return, Head promised to hold Gans & Smith harmless as to any amounts in excess of $500,000 and to indemnify Gans & Smith as to any claims brought against it by Maryland. Head then refiled suit against Maryland and dropped Payne and Gans & Smith from the case. Maryland, asserting that its agent had breached its fiduciary duties as well as the agency agreement, brought Gans & Smith back into the suit as a third-party defendant.

In a deposition in April 1993, Payne testified about the clerical error and promises of contractual liability coverage made to Head. At trial, some three years after the denial of coverage, Maryland admitted that Head's claim should have been honored and represented to the court and jury that it was willing to pay the policy benefits. The trial court found that contractual liability coverage existed as a matter of law and did not submit the coverage issue to the jury.

The jury found that Maryland had engaged in various unfair or deceptive acts in violation of the Insurance Code, but had not acted knowingly. ² The jury awarded Head actual damages of $1,800,000. The jury found that Gans & Smith had not breached any fiduciary duty owed to Maryland and had not breached its agency contract with Maryland.

The trial court rendered judgment against Maryland for Head's actual damages plus defense costs that Head incurred in TU's cross-action in the Nelson suit. The trial court also imposed a statutory penalty under Article 21.55 of the Insurance Code. ³ A take-nothing judgment was rendered against Maryland in its third-party action.

VIABILITY OF A CAUSE OF ACTION

Maryland contends that the trial court erred in rendering judgment on the jury's finding that it failed to attempt in good faith to effectuate a prompt, fair, and equitable settlement of the claim against its insured because allegations of unfair claims settlement practices do not give rise to a private cause of action. The jury question was based on Article 21.21-2 of the Insurance Code, which regulates claims settlement practices. See TEX.INS.CODE ANN. art. 21.21-2 (Vernon 1981 & Supp.1995).

The Texas Supreme Court has expressly held that Article 21.21-2 is subject to enforcement only by the State Board of Insurance and does not give rise to a private cause of action. See American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 847 & nn. 10-11 (Tex.1994); Allstate Ins. Co. v. Watson, 876 S.W.2d 145, 148 & n. 6 (Tex.1994); see also CNA Ins. Co. v. Scheffey, 828 S.W.2d 785, 791 (Tex.App.--Texarkana 1992, writ denied). Head Industrial concedes this point in its brief. This point of error is sustained.

Maryland also challenges the existence of a cause of action under the Insurance Code for an insurance carrier's failure to process a claim in good faith and breach of the duty of good faith and fair dealing. Maryland cites Watson, 876 S.W.2d 145. In Watson, the Texas Supreme Court ruled that third parties do not have standing to proceed directly against an insurance company under Section 16 of Article 21.21 of the Insurance Code for unfair claims settlement practices. Id. at 150. The court emphasized that its decision in Vail ⁴ was predicated upon the special insurer-insured relationship. Id. at 149. The court reaffirmed Vail as the law governing claims for alleged unfair claims settlement practices brought by insureds against their insurers, but determined that a third-party claimant has no basis for demanding the extracontractual...