Underwriters Life Ins. Co. v. Cobb

• Citation: 746 S.W.2d 810
• Decision Date: 21 January 1988
• Docket Number: No. 13-86-456-CV,13-86-456-CV
• Parties: UNDERWRITERS LIFE INSURANCE COMPANY, Appellant, v. Terrell B. COBB and Wife, Edith M. Cobb, Appellees.
• Court: Texas Court of Appeals

Page 810

746 S.W.2d 810

UNDERWRITERS LIFE INSURANCE COMPANY, Appellant, v. Terrell B. COBB and Wife, Edith M. Cobb, Appellees.

No. 13-86-456-CV.

Court of Appeals of Texas Corpus Christi.

Jan. 21, 1988.

Rehearing Denied Feb. 25, 1988.

Second Rehearing Denied March 24, 1988.

Don Black, Charles W. Blount, III, Dallas, for appellant.

Joe K. Longley, Tim Lakadi, Mark Kincaid, Austin, for appellees.

Before DORSEY, UTTER and KENNEDY, JJ.

OPINION

DORSEY, Justice.

The Underwriters Life Insurance Company appeals the judgment for Terrell and Edith Cobb arising from Underwriters' refusal to pay Edith Cobb's medical claim under a medical insurance contract. After trial before a jury, the Cobbs recovered $1,088,230.00, including $1,000,000.00 in punitive damages. We order a remittitur of $500,000.00 of exemplary damages, but otherwise affirm.

In 1982, Roy Fowler became an insurance agent for Underwriters. An employee of his, Donovan Cherrette, contacted Terrell and Edith Cobb and persuaded them to cancel their existing medical insurance policy with another company and purchase accident and sickness insurance from Underwriters on August 31, 1982. When Cherrette sold the policy to the Cobbs, he was not licensed to sell insurance in the state.

Mrs. Cobb was hospitalized in 1984 and incurred expenses for medical services covered by the Underwriters policy in the amount of $6,249.69. Underwriters refused to pay her claims on the basis that she had failed to fully disclose her medical history on the policy application. This refusal gave rise to the litigation resulting in this appeal.

According to the Cobbs, Cherrette filled out the insurance application for them after receiving their truthful answers to questions concerning Mrs. Cobb's medical history. Roy Fowler signed the policy application as agent and forwarded the application to Underwriters, which subsequently issued the policy. The Cobbs testified that Cherrette failed to write on the application the medical information that they had given him concerning Mrs. Cobb's medical history and that they signed the application without reading it.

The Cobbs sued Underwriters for breach of the insurance contract, breach of the duty of good faith and fair dealing, negligence, and for violations of the Texas Insurance Code and the Deceptive Trade Practices Act. The jury found all issues in favor of the Cobbs, who were awarded damages in the amount of their original claim, $6,249.69, plus a statutory twelve percent penalty under the Insurance Code, $25,000.00 each for mental anguish, $1,000,000.00 in exemplary damages, and attorney's fees.

In its answers to special issues, the jury found that:

1. (S.I. 1) Donovan Cherrette had authority to deal with the Cobbs on behalf of Underwriters;

2. (S.I. 2, 3, & 4) Underwriters knowingly misrepresented the terms and requirements of its insurance policy to the Cobbs, and that such was the producing cause of damages to the Cobbs;

3. (S.I. 5 & 6) Underwriters refused to pay the Cobb's claim without conducting a reasonable investigation, and that such refusal was a producing cause of damages;

4. (S.I. 7 & 8) Underwriters failed to act in good faith to effectuate a prompt, fair, and equitable settlement of the plaintiffs' claims and that such was a producing cause of damages;

5. (S.I. 9) Such a failure was a breach of the duty of good faith and fair dealing and a proximate cause of damages;

6. (S.I. 11) Underwriters failed to instruct, supervise, or scrutinize the character of Fowler and Cherrette and that such constituted negligence and the proximate cause of damages to the Cobbs;

7. (S.I. 14 & 15) Such negligence was an unfair practice in the business of insurance and a producing cause of damages to the Cobbs;

8. (S.I. 16) The conduct found in issues 5, 7, or 11 exhibited such an entire want of care to raise the belief that its conduct was the result of conscious indifference to the rights or welfare of the Cobbs.

By its first four points of error, Underwriters challenges the legal theories supporting the Cobbs' recovery. By points of error two and three, Underwriters charges that there is no private cause of action by an insured against her insurer for a breach of the duty of good faith and fair dealing for the company's failure to act in good faith to effectuate a prompt, fair, and equitable settlement.

The Supreme Court has recognized a common law duty of insurers to deal fairly and in good faith with their insureds; a cause of action exists when no reasonable basis for denial of the claim or delay in payment exists, or the insurer fails to determine whether there is any basis for the denial or delay. Arnold v. National County Mutual Fire Insurance Co., 725 S.W.2d 165 (Tex.1987). Underwriters argues that the Arnold holding is limited and that a suit for breach of this duty may only be brought after a separate suit for breach of the underlying contract has been successful, citing Linkenhoger v. American Fidelity & Casualty Co., 152 Tex. 534, 260 S.W.2d 884, 887 (1953). However, in a footnote in Arnold during a discussion of Linkenhoger, the Supreme Court noted, "This does not mean that a contract claim and a claim of the duty of good faith and fair dealing may not be tried together when possible." Arnold, 725 S.W.2d at 168 n. 1. We find this language persuasive. The doctrine of judicial economy mandates the joinder whenever possible of related claims when it may be done without undue prejudice to the rights of the parties. Points of error two and three are overruled.

By its point of error number one, Underwriters maintains that there is no private cause of action for an insurance company's failure to conduct a reasonable investigation of a policy claim.

Tex.Ins.Code Ann. art. 21.21, § 16 (Vernon Supp.1987) grants a private right of action to any person who has sustained actual damages as a result of another's engaging in an act or practice: (1) declared in Section 4 of Article 21.21; (2) declared in rules or regulations lawfully adopted by the State Board of Insurance to be unfair or deceptive acts or practices in the business of insurance; or (3) defined by Section 17.46 of the Business Commerce Code (Deceptive Trade Practices Act).

The Cobbs argue that the State Board of Insurance has adopted rules concerning unfair claims settlement practices by adoption of Board Orders 41060 and 41454, the latter of which in Section 1.003 provides "Unfair Claim Settlement Practices. No insurer shall engage in unfair claim settlement practices. Unfair claim settlement practices means committing or performing with such frequency as to indicate a general business practice any of the following: ... (15) Refusing to pay claims without conducting a reasonable investigation based upon all available information." (Emphasis added).

Chitsey v. National Lloyds Insurance Co., 738 S.W.2d 641, 643 (Tex.1987) held that such a cause of action for damages exists, and the failure to investigate must be done with such frequency as to indicate a general business practice. However, as we have found that recovery may be predicated solely on Underwriters' breach of the duty of good faith and fair dealing, we will only address those points of error that are germane to that ground of recovery. Accordingly, the first point of error is overruled. Underwriters' fourth point of error is likewise overruled as not dispositive.

Underwriters' seventh point of error complains of the admissibility of several pieces of evidence introduced by the Cobbs. We shall discuss each complaint separately.

A. Evidence of Underwriters' denial of other claims

The Cobbs introduced the applications for insurance by other clients of Fowler and the letters sent to them by Underwriters notifying them that their claims had been denied. In each instance, the letters stated that the claims were denied because of the insured's failure to disclose past medical history or preexisting conditions. Underwriters also contends that its log of complaints filed against its agents was inadmissible as was a Texas map with the residences of these insureds circled in red. Underwriters contends that this evidence was immaterial, irrelevant, constituted improper character evidence, and was highly prejudicial.

Underwriters' denial of other claims around the same time as its denial of the Cobbs' claim, and on the same basis, was admissible to show that Underwriters' refusal to pay the Cobbs' claim was " 'commit[ted] or perform[ed] with such frequency as to indicate a general business practice.' " Chitsey, 738 S.W.2d at 643. Such a showing was necessary to recover under the Cobbs' pleaded cause of action for breach of Underwriters' duty to reasonably investigate. Id. It is also relevant and material under Arnold to prove the Cobbs' cause of action for Underwriters' breach of duty of good faith and fair dealing; these routine denials on the same grounds were sufficiently similar to indicate a failure by Underwriters to determine whether there was any basis to deny the Cobbs' claim. See Arnold, 725 S.W.2d at 167; see also Texas Farm Bureau Mutual Insurance Co. v. Baker, 596 S.W.2d 639, 643 (Tex.Civ.App.--Tyler 1980, writ ref'd n.r.e.); cf. Group Hospital Services, Inc. v. Daniel, 704 S.W.2d 870, 879-80 (Tex.App.--Corpus Christi 1985, no writ).

Further, the doctrine of res inter alios acta does not prevent admissibility, as Underwriters asserts. This rule provides that each act or transaction sued on must be established by its own particular facts and circumstances. State v. Buckner Construction Co., 704 S.W.2d 837, 848 (Tex.App.--Houston [14th Dist.] 1985, writ ref'd n.r.e.). However, an exception to this rule exists; prior acts or transactions with other persons are admissible to show a party's intent where material, if they are so connected with the transaction at issue that they may all be parts of a system, scheme or plan. See, e.g., Baker, 596 S.W.2d at 642-43; Payne v. Hartford Fire...