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Fifth Circuit Certifies Vail Actual Damages Issue to Texas Supreme Court

by Linda M. Dedman

Casenote: Cameron International Corporation v. Liberty Insurance Underwriters

Co-author: Floyd Clardy, III

The Fifth Circuit has acknowleged that it may have erred in denying claims under the Texas Insurance Code when there is evidence that an insurer failed to pay a claim when coverage was reasonably clear but the only damage the insured suffered was the insurer’s failure to pay policy benefits.

In Cameron International Corporation v. Liberty Insurance Underwriters, No. 14-31321, 2015 WL 7421978  (5th Cir. Nov. 19, 2015), the Fifth Circuit certified to the Texas Supreme Court the important question of whether the district court erred in dismissing Cameron’s claim under Chapter 541 of the Texas Insurance Code. Chapter 541 authorizes policyholders to file private actions against insurers to recover “actual damages” caused by an insurer’s “unfair method of competition or an unfair or deceptive act or practice in the business of insurance,” and permits treble damages in certain circumstances. Tex. Ins. Code Ann. §§ 541.151, 541.003.

Cameron alleged that Liberty (its own insurance carrier) violated Chapter 541 by wrongfully denying its claim under the policy. As actual damages, Cameron claimed only the policy benefits that Liberty denied and its attorney’s fees related to this action. Liberty argued that under this court’s decision in Great American Insurance Co. v. AFS/IBEX Financial Services, Inc., 612 F.3d 800, 808 & n.1 (5th Cir. 2010), that to maintain a Chapter 541 claim, Cameron was required to assert some injury other than the policy benefits and attorney’s fees.  In AFS/IBEX the district court denied the plaintiff the opportunity to seek treble damages under the Insurance Code finding AFS had suffered no damage except policy benefits and attorney’s fees. As in Cameron, the district court dismissed AFS’s extra-contractual damage claims under the Insurance Code, stating that since AFS’s damages all potentially flowed from GAIC’s breach of its insurance contract, the same damages could not, according to the district court, as a matter of law, satisfy the damage element for AFS’s extra-contractual claims.

On appeal, the Fifth Circuit affirmed AFS’s damages for breach of contract, but upheld the district court’s ruling dismissing AFS’s claims under the Insurance Code.  In Cameron and in AFS both parties argued that the Insurance Code supports extra-contractual damages independent of damages for breach of contract. The issue in both cases centered on whether Vail v. Texas Farm Bureau Mutual Insurance Co., 754 S.W.2d 129 (Tex. 1988) is good law.  In Vail, the Supreme Court of Texas held that an insured who is wrongfully denied policy benefits may recover under the Insurance Code and need not show any injury independent from the denied policy benefits. 754 S.W.2d at 136. Unlike the judge in AFS, in Cameron the district court agreed that Cameron may recover under the Insurance Code and need not assert any injury independent from the policy benefits as actual damages. Even so, the district court held that it was bound by the decision in AFS and granted judgment for Liberty on Cameron’s Chapter 541 claim.

Cameron argued on appeal that Vail is good law and that the decision in AFS was an incorrect description of Texas law. Liberty argued that the Supreme Court of Texas has sub-silentio overruled Vail. Because this issue turns on an important question of Texas state law, and because subsequent decisions from the Supreme Court of Texas and its appellate courts arguably cast doubt on Vail’s continued vitality, the Fifth Circuit Court of Appeals certified the question to the Supreme Court of Texas. See Tex. Const. art. V, § 3–c(a); Tex. R. App. P. 58.1.

The result in the Supreme Court of Texas will potentially have a significant impact.  The stakes are particularly high for commercial policyholders who typically cannot prevail on claims for mental anguish or other soft damages that a jury could treble.  The issue is also under the scrutiny of state lawmakers. During this year’s legislative session, companion bills (SB1628; HB3787) that would have revised the Insurance Code to require an injury other than the loss of policy benefits were proposed, but failed.

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