State Farm Life Ins. Co. v. Beaston, D-4454

Citation907 S.W.2d 430
Decision Date27 October 1995
Docket NumberNo. D-4454,D-4454
Parties38 Tex. Sup. Ct. J. 947 STATE FARM LIFE INSURANCE COMPANY and Ted H. Heaton, III, Petitioners, v. Terri BEASTON, Respondent.
CourtSupreme Court of Texas

Larry G. Black and Ranelle M. Meroney, Austin, for petitioners.

Mark L. Kincaid, Joe K. Longley and Philip K. Maxwell, Austin, for respondent.

OWEN, Justice, delivered the opinion of the Court in which GONZALEZ, HECHT, CORNYN, and ENOCH, Justices, join.

PHILLIPS, Chief Justice, and SPECTOR, Justice, join in Parts III, IV, and V.

We are called upon to interpret the terms of a life insurance policy and to decide whether a plaintiff can recover mental anguish damages from an insurance company for a violation of Article 21.21 of the Texas Insurance Code absent a finding that the defendant acted knowingly. Because we hold that the plaintiff is not entitled to benefits under her husband's policy and that a finding of knowing conduct is required to recover mental anguish damages under Article 21.21, we reverse the judgment of the court of appeals, 861 S.W.2d 268, and render judgment that the plaintiff take nothing.

I

In 1982, Terri and David Beaston bought life insurance policies from Ted Heaton, a State Farm Life Insurance Company agent. The Beastons failed to pay the premium on David's policy due on December 28, 1983. His policy lapsed as of December 28, 1983, and the thirty-one day grace period expired on January 28, 1984. Three days after the expiration of the grace period, David died in an automobile accident. State Farm refused to pay the benefits under his life insurance policy, claiming that coverage had expired before his death.

As the sole beneficiary of her husband's graded premium whole life policy, Terri brought suit against both State Farm and Heaton, asserting, among other claims, that they had violated Article 21.21. She also contended that the terms of the policy guaranteed payment of a dividend at death which should have been used to pay a part of the premium that was in arrears and thereby "cure" the policy's lapse.

The case was tried to a jury. At the close of the evidence, the trial court granted an instructed verdict in Terri's favor on the issue of coverage, finding that the policy was ambiguous and construing it to provide for dividends that "would have been sufficient to avoid the asserted lapse." (The basis of the trial court's ruling is set forth in its judgment.)

Issues were submitted to the jury on Terri Beaston's other claims. The jury found that the defendants had engaged in unfair or deceptive acts and that such conduct was a producing cause of damages to Terri Beaston. The jury failed to find, however, that State Farm or Heaton (1) had engaged in any false, misleading, or deceptive act or practice, (2) had engaged in any unconscionable action or course of action, (3) was negligent, or (4) was grossly negligent. There was a finding that State Farm had not waived any lapse under the policy. An issue as to whether State Farm or Heaton had knowingly engaged in any unconscionable conduct was conditioned on an affirmative response to the question that asked whether either defendant had engaged "in any unconscionable action or course of action that was a producing cause of damages to Terri Beaston." Because the jury responded negatively, it did not reach the question asking whether the defendants had engaged in knowing conduct. No objection was made to the conditional submission.

In response to the damage issue, the jury awarded no policy benefits, but awarded $200,000 for mental anguish in the past. The jury was asked to and did award attorney's fees as a percentage of Terri Beaston's recovery, finding that forty percent was a reasonable fee, with increased percentages if the case were appealed to the court of appeals and to this Court.

The trial court rendered judgment in Terri Beaston's favor, awarding the face amount of the policy benefits ($250,000), and prejudgment interest ($147,171). A statutory delay penalty in the amount of twelve percent ($30,000) was added pursuant to Article 3.62 of the Texas Insurance Code, for a total of $427,171, and forty percent of that total ($170,868.40) was included in the judgment as attorney's fees. The trial court stated in its judgment that it "finds no cases that would allow the award of mental anguish damages absent a finding that the conduct of the Defendants was committed knowingly, and therefore ... mental anguish damages will not be awarded, and the jury's answer to Question 8(b) [concerning mental anguish damages] will be disregarded." The trial court additionally refused to treble the actual damages and refused to award attorney's fees based on a calculation that Terri Beaston contended was equal to forty percent of the "recovery" (which would result in attorney's fees of $284,780.87 as calculated by Beaston) as opposed to only forty percent of the damages, including penalty and interest.

The court of appeals reversed the judgment of the trial court, holding that Terri Beaston was not required to obtain a jury finding that State Farm or its agent had knowingly violated Article 21.21 as a prerequisite for the recovery of mental anguish damages. 861 S.W.2d at 275. The court of appeals reinstated the jury's award of $200,000 in mental anguish damages and concluded that the trebling of those damages was mandatory under former Article 21.21, which governed this case. 1 The court affirmed the award of policy benefits, prejudgment interest, and a twelve-percent delay penalty, 2 but increased the amount of the judgment to include prejudgment interest and attorney's fees based on Terri Beaston's increased recovery. The court of appeals also modified the manner in which attorney's fees were calculated, rejecting the trial court's method in favor of the method proffered by Beaston. The court of appeals held that "the contingency fee percentage should be calculated on the total recovery and not on the total damages." 861 S.W.2d at 279 (emphasis in original).

State Farm brings forth several points of error, including challenges to the finding of coverage under the policy, the award of mental anguish damages, and the calculation of attorney's fees.

II

Although it is undisputed that her husband's policy would have otherwise lapsed on December 28, 1983, Terri claims that the policy remained in force because of its dividend-at-death provision. The policy provides, in relevant part:

Nonpayment of Premium. If a premium has not been paid by the end of its grace period, the Accumulations to Avoid Lapse and, if chosen, the Automatic Premium Loan provisions will apply. If neither of these provisions apply, this policy will lapse as of the due date of any amount of unpaid premium. With such lapse, all coverage ceases....

Accumulations to Avoid Lapse. If a premium has not been paid by the end of its grace period, any available dividend accumulations will be used to pay all or part of that premium....

Premium Adjustment When Insured Dies. If the Insured dies during a grace period, any part of a premium due will be paid from the proceeds....

Annual Dividends. State Farm Life may apportion and pay dividends each year. Any such dividends will be paid at the end of the policy year if all premiums due have been paid....

Dividend Options. The Owner may choose one of the options listed below....

3. Dividend Accumulation. Left to accumulate.... Accumulations plus interest to the Insured's death will be part of the proceeds.

Dividend at Death. A dividend for the period from the start of the policy year to the Insured's death will be part of the proceeds.

It is undisputed that David had not accumulated any dividend following the first year of the policy or that he died before its second anniversary. State Farm argues that the terms of David's policy make clear that the payment of any dividend is contingent on the insured's payment of all premiums due. Since David had not paid the last premium on his policy prior to the expiration of its grace period, he was entitled to no dividend that could be used to cure his unpaid premium. The trial court held, however, that the terms of the policy were ambiguous because they could reasonably be taken to mean that State Farm would pay David a dividend at his death, regardless of his arrearages. The court of appeals affirmed. 861 S.W.2d at 276-77.

We disagree. As we explained in Forbau v. Aetna Life Insurance Co., 876 S.W.2d 132 (Tex.1994), the interpretation of insurance contracts is governed by the same rules of construction applicable to other contracts. Id. at 133 (citations omitted). When construing a contract, courts must strive to give effect to the written expression of the parties' intent. Id. (citations omitted). To do so, they must read all parts of a contract together. Id. (citations omitted). Indeed, courts must be particularly wary of isolating from its surroundings or considering apart from other provisions a single phrase, sentence, or section of a contract. See id. at 133-34 (citations omitted). Only if an insurance policy remains ambiguous despite these canons of interpretation should courts construe its language against the insurer in a manner that favors coverage. See, e.g., National Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex.1991); Blaylock v. American Guar. Bank Liab. Ins. Co., 632 S.W.2d 719, 721 (Tex.1982); Ramsay v. Maryland Am. Gen. Ins. Co., 533 S.W.2d 344, 349 (Tex.1976).

Terri Beaston interprets David's policy to mean that State Farm would pay a pro-rated dividend at his death, regardless of how many premium payments had been missed or whether the policy was inside or outside its grace period following the nonpayment of a premium. However, as we recognized in Forbau:

[N]ot every difference in the interpretation of a contract or an insurance policy amounts to an ambiguity. Both the insured and the...

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