COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 02-10-00063-CV
COLUMBIA LLOYDS INSURANCE COMPANY
APPELLANT
AND APPELLEE
V.
ROBERT MAO AND VACHANA MAO
APPELLEES
AND APPELLANTS
————
FROM THE 342ND DISTRICT COURT OF TARRANT COUNTY
————
MEMORANDUM OPINION1
———-
I. INTRODUCTION
Columbia Lloyds Insurance Company issued a Texas Dwelling Policy that named Vachana Mao as insured and covered a rental house that she owned. After a fire occurred at the dwelling, Vachana reported the loss to Columbia Lloyds; Columbia Lloyds denied Vachana’s claim based on a vacancy clause in
1See Tex. R. App. P. 47.4.
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the policy. This litigation ensued, and the trial court granted Columbia Lloyds’s traditional and no-evidence motion for summary judgment on the Maos’ extracontractual claims; the trial court also granted the Maos’ motion for partial summary judgment on their breach of contract claim and awarded them actual damages of $30,000. The trial court granted Columbia Lloyds’s summary judgment on the Maos’ claim for attorney’s fees and for violations of the Prompt Payment of Claims Act (PPCA).
Columbia Lloyds and the Maos both perfected appeals. In one issue, Columbia Lloyds contends that the trial court erred by granting summary judgment for the Maos and by denying summary judgment for Columbia Lloyds on the Maos’ breach of contract claim because Columbia Lloyds conclusively established that the dwelling was vacant, triggering the vacancy exclusion of the policy. In three points, the Maos argue that the trial court erred by granting summary judgment for Columbia Lloyds on the Maos’ claim for attorney’s fees, their claim that Columbia Lloyds had violated the PPCA, and their extracontractual claims. For the reasons set forth below, we will reverse and remand in part and affirm in part.
II. FACTUAL AND PROCEDURAL BACKGROUND
The policy issued by Columbia Lloyds covered rental property located at 1109 Bewick in Fort Worth; a detached garage was also covered by the policy. The policy period was from January 19, 2006 to January 19, 2007, and the policy limit was $30,000 with a $300 deductible. The policy contained a vacancy clause
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that stated, ―During the policy term, if an insured building is vacant for 60 consecutive days immediately before a loss, we will not be liable for a loss by the perils of fire and lightning or vandalism or malicious mischief. Coverage may be provided by endorsement to this policy.‖
Judy Romero, a claims manager for Columbia Lloyds, received a phone call from Vachana on November 3, 2006, reporting that a fire had damaged the insured dwelling at 1109 Bewick on October 28, 2006. Romero noted on the ―Property Loss Notice‖ form that ―[t]he house was vacant per insured[––]tenant moved out in Feb.‖ Romero assigned the claim to Orena Claims Service.
Robert Orena inspected the dwelling on November 7, 2006, and took photographs; he determined that there were no contents in the house. Orena orally explained the vacancy clause to Vachana. Orena thereafter told Romero that the house was a total loss, that the origin of the fire was undetermined, and that the house had been vacant for more than sixty days.
Romero made the decision to deny the claim based on the vacancy clause in the policy and the facts supporting the vacancy (i.e., no contents in the house and no tenants in the house), and Romero told Orena to write a denial letter. Orena sent a letter dated November 10, 2006, to Vachana denying the claim based on the vacancy clause.
Following the letter, the Maos’ attorney sent a letter to Columbia Lloyds disputing the definition of ―vacancy‖ it had used. Romero printed out the definitions of ―vacancy‖ and ―unoccupied,‖ sent them to the Johnston Legal
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Group to obtain a legal opinion, and requested an examination under oath from Vachana.
During her examination under oath on May 14, 2007, Vachana stated that as of June 8, 2006, all of the prior tenant’s furniture had been moved out, and the insured dwelling was ―completely vacant.‖ She said that there was a sofa, an old bed, a gas range, and a refrigerator in the detached garage2 but that these appliances were not ―hooked up.‖ She explained that the house was in the process of being remodeled and that although the contractor’s proposal said that he would finish by July 12, 2006, she did not think that he had finished the work by that date because he kept coming in and out of the house.
On September 20, 2007, Romero sent a second denial letter to the Maos because the legal opinion that she had received from the Johnston Legal Group following the examination under oath confirmed that the vacancy clause applied.
The Maos filed suit against Columbia Lloyds, alleging claims for breach of contract, breach of the duty of good faith and fair dealing, common law fraud, violations of the Deceptive Trade Practices Act (DTPA), violations of the insurance code, and violations of the PPCA. The Maos also claimed they were entitled to attorney’s fees for their breach of contract and PPCA violation claims.
Columbia Lloyds answered, and in due course, the parties filed competing motions for summary judgment. The Maos moved for partial summary judgment
2Vachana said that the ―garage not burned down, just a little bit.‖
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on their breach of contract claim, arguing that as a matter of law the insured dwelling was not vacant at the time of the fire as the term ―vacant‖ is defined by Texas law. Columbia Lloyds moved for summary judgment on the Maos’ breach of contract claim, arguing that as a matter of law the property was vacant for sixty consecutive days prior to the fire. The Maos also moved for summary judgment on their extracontractual claims and on their claim for a violation of the PPCA. Eventually, the trial court signed a final judgment granting Columbia Lloyds’s motion for summary judgment on the Maos’ extracontractual claims and claim for violations of the PPCA and granting the Maos’ motion for partial summary judgment on their breach of contract claim; the trial court denied the Maos’ request for attorney’s fees under any theory of recovery.
III. STANDARD OF REVIEW
A. No-Evidence Summary Judgment Standard of Review
After an adequate time for discovery, the party without the burden of proof may, without presenting evidence, move for summary judgment on the ground that there is no evidence to support an essential element of the nonmovant’s claim or defense. Tex. R. Civ. P. 166a(i). The motion must specifically state the elements for which there is no evidence. Id.; Timpte Indus., Inc. v. Gish, 286 S.W.3d 306, 310 (Tex. 2009). The trial court must grant the motion unless the nonmovant produces summary judgment evidence that raises a genuine issue of material fact. See Tex. R. Civ. P. 166a(i) & cmt.; Hamilton v. Wilson, 249 S.W.3d 425, 426 (Tex. 2008).
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When reviewing a no-evidence summary judgment, we examine the entire record in the light most favorable to the nonmovant, indulging every reasonable inference and resolving any doubts against the motion. Sudan v. Sudan, 199 S.W.3d 291, 292 (Tex. 2006). We review a no-evidence summary judgment for evidence that would enable reasonable and fair-minded jurors to differ in their conclusions. Hamilton, 249 S.W.3d at 426 (citing City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005)). We credit evidence favorable to the nonmovant if reasonable jurors could, and we disregard evidence contrary to the nonmovant unless reasonable jurors could not. Timpte Indus., Inc., 286 S.W.3d at 310 (quoting Mack Trucks, Inc. v. Tamez, 206 S.W.3d 572, 582 (Tex. 2006)). If the nonmovant brings forward more than a scintilla of probative evidence that raises a genuine issue of material fact, then a no-evidence summary judgment is not proper. Smith v. O’Donnell, 288 S.W.3d 417, 424 (Tex. 2009).
B. Traditional Summary Judgment Standard of Review
In a summary judgment case, the issue on appeal is whether the movant met the summary judgment burden by establishing that no genuine issue of material fact exists and that the movant is entitled to judgment as a matter of law. Tex. R. Civ. P. 166a(c); Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848 (Tex. 2009). We review a summary judgment de novo. Mann Frankfort, 289 S.W.3d at 848.
We take as true all evidence favorable to the nonmovant, and we indulge every reasonable inference and resolve any doubts in the nonmovant’s favor.
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20801, Inc. v. Parker, 249 S.W.3d 392, 399 (Tex. 2008); Sw. Elec. Power Co. v. Grant, 73 S.W.3d 211, 215 (Tex. 2002). We consider the evidence presented in the light most favorable to the nonmovant, crediting evidence favorable to the nonmovant if reasonable jurors could, and disregarding evidence contrary to the nonmovant unless reasonable jurors could not. Mann Frankfort, 289 S.W.3d at 848. We must consider whether reasonable and fair-minded jurors could differ in their conclusions in light of all of the evidence presented. See Wal-Mart Stores, Inc. v. Spates, 186 S.W.3d 566, 568 (Tex. 2006); City of Keller, 168 S.W.3d at 822–24.
The summary judgment will be affirmed only if the record establishes that the movant has conclusively proved all essential elements of the movant’s cause of action or defense as a matter of law. City of Houston v. Clear Creek Basin Auth., 589 S.W.2d 671, 678 (Tex. 1979). If uncontroverted evidence is from an interested witness, it does nothing more than raise a fact issue unless it is clear, positive and direct, otherwise credible and free from contradictions and inconsistencies, and could have been readily controverted. Tex. R. Civ. P. 166a(c); Morrison v. Christie, 266 S.W.3d 89, 92 (Tex. App.—Fort Worth 2008, no pet.).
When competing motions for summary judgment are filed, and one is granted while the other is denied, we first review the order granting summary judgment. Hartford Cas. Ins. Co. v. Morton, 141 S.W.3d 220, 225 (Tex. App.––Tyler 2004, pet. denied). If we determine the order granting summary judgment
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was erroneous, we then review the trial court’s action in overruling the denied motion. Id. We determine all questions presented and may reverse the trial court’s judgment and render such judgment as the trial court should have rendered, including rendering judgment for the other movant. See Mann Frankfort, 289 S.W.3d at 848; Jones v. Strauss, 745 S.W.2d 898, 900 (Tex. 1988).
IV. A GENUINE ISSUE OF MATERIAL FACT EXISTS
ON THE APPLICABILITY OF THE POLICY’S VACANCY CLAUSE
In a single issue, Columbia Lloyds argues that the trial court erred when it granted a traditional summary judgment for the Maos on their breach of contract claim because the summary judgment evidence fails to conclusively establish that the dwelling was not vacant and that the trial court erred when it denied Columbia Lloyds’s traditional motion for summary judgment on the Maos’ breach of contract claim because the summary judgment evidence conclusively established that the dwelling was vacant for sixty consecutive days prior to the fire, triggering the vacancy exclusion in the policy.
As set forth above, the vacancy clause excluded coverage for fire damage occurring when the dwelling was vacant for sixty consecutive days before a fire. The policy does not define ―vacant.‖ The term vacant has been defined by case law as an ―entire abandonment, deprived of contents, empty, that is, without contents of substantial utility.‖ See Jerry v. Ky. Cent. Ins. Co., 836 S.W.2d 812, 815 (Tex. App.––Houston [1st Dist.] 1992, writ denied); Knoff v. United States
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Fid. & Guar. Co., 447 S.W.2d 497, 501 (Tex. Civ. App.––Houston [1st Dist.] 1969, no writ).
The summary judgment evidence on the vacancy issue included the Maos’ Request For Admission No. 11 asking Columbia Lloyds to admit ―[t]hat the fire on our [sic] about October 28, 2006 caused damage to the dwelling and contents in the dwelling at the property.‖ Columbia Lloyds answered, ―Denied. Answering further: Defendant admits that the fire caused damage to the dwelling but because there were no contents in the house, no contents were destroyed.‖ Deposition excerpts from Romero’s deposition indicate that the adjuster’s photos documented that nothing was in the actual dwelling, although a few items were in the detached garage. Romero also stated that she did not have any information that the Maos had abandoned the property; she knew that they were remodeling the home and that they were trying to sell it.
Vachana stated in her May 2007 examination under oath that as of the date of the fire, all of the prior tenant’s furniture had been moved out, and the insured dwelling was ―completely vacant.‖ She said that there was a sofa, an old bed, a gas range, and a refrigerator in the detached garage; that the appliances were not ―hooked up‖; and that the garage had no heating or air-conditioning and was not designed to be lived in. Vachana explained that although the remodeler’s proposal said that he would finish by July 12, 2006, she did not think that he had finished the work by that date because he kept coming in and out of the house.
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The remodeler, Valentin Leos, said that he started the remodel on July 12, 2006, and that he finished the job ―a month or month and seven days‖ before Vachana called and told him that the house had burned. Leos recalled that there was a refrigerator and a stove in the home, and he thought that there was a washer and dryer, but he was not sure if there was a dishwasher.
In her March 2009 summary judgment affidavit, Vachana averred that the home was in the process of being renovated until September 2006 but that it was not complete at the time of the fire because Leos still needed to put in new windows. She said that the utilities were connected because she showed the home to potential buyers approximately twice a week, that she had been to the home the week before the fire, and that she went to the home at least once a week. Vachana averred that there was a refrigerator, a washer, a dryer, and a dishwasher in the house and that there was a sofa, a heater, a bed, a refrigerator, and a range in the garage.
Generally, when contradictory summary judgment evidence exists on whether a dwelling was vacant within the meaning of the policy’s vacancy clause, it is a question for the jury. Germania Farm Mut. Aid Ass’n v. Anderson, 463 S.W.2d 24, 25 (Tex. Civ. App.––Waco 1971, no writ) (refusing to hold vacancy was established as a matter of law); accord Lundquist v. Allstate Ins. Co., 732 N.E.2d 627, 631 (Ill. App. Ct. 2000) (―[W]hether the subject dwelling was vacant or unoccupied at the time of the loss is a question of fact.‖); Cavin v. Charter Oak Fire Ins. Co., 384 N.E.2d 441, 443 (Ill. App. Ct. 1978) (holding fact issues existed
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regarding whether insured’s building was vacant and reversing summary judgment for the insurer where evidence showed that, at the time of loss, no tenants remained in the property, the property was furnished, the property was being renovated, and the insured was storing building materials in the dwelling); 6 Lee R. Russ & Thomas F. Segala, Couch on Insurance § 94:108 (3d ed. 1996) (―Whether or not insured premises have become vacant, unoccupied, or the like within the meaning of a forfeiture provision in an insurance policy is usually a question for the jury.‖).
Viewing all of the summary judgment evidence in the light most favorable to Columbia Lloyds, the nonmovant on the Maos’ traditional motion for summary judgment on their breach of contact claim that was granted, a genuine issue of material fact exists concerning whether the dwelling was not vacant for more than sixty consecutive days prior to the fire. That is, viewing the summary judgment evidence in this light, reasonable and fair-minded people could differ in their conclusions on whether the dwelling was not vacant for sixty consecutive days prior to the fire. See Wal-Mart Stores, Inc., 186 S.W.3d at 568. Based on the fact that no one lived in the dwelling; based on Orena’s photos of the dwelling after the fire; based on the remodeler’s proposal indicating repairs would be complete by July 12, 2006; and based on Vachana’s statement to Romero when she reported the fire that the dwelling was vacant, a reasonable and fair-minded person could conclude that the dwelling was abandoned, deprived of contents, and empty, that is, without contents of substantial utility for more than sixty days
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prior to the October 28, 2006 fire. Thus, the trial court erred by granting a traditional summary judgment for the Maos on their breach of contract claim.
We next address whether, viewing all of the summary evidence in the light most favorable to the Maos––the nonmovants on Columbia Lloyds’s traditional motion for summary judgment on the Maos’ breach of contract claim––the evidence conclusively establishes that the dwelling was vacant for more than sixty consecutive days prior to the fire. Viewing the summary judgment evidence in this light, reasonable and fair-minded people could differ in their conclusions on whether the dwelling was vacant for sixty consecutive days prior to the fire. Based on Vachana’s testimony that the dwelling was being remodeled, based on the remodeler’s testimony that he did not think he had completed the remodeling more than forty-five days prior to the fire, and based on Vachana’s testimony that she was trying to sell the dwelling and was showing it weekly to potential buyers, a reasonable and fair-minded person could conclude that the dwelling was not abandoned, deprived of contents, and empty, that is, without contents of substantial utility for more than sixty days prior to the October 28, 2006 fire. See Spates v. Republic Ins. Co., 756 S.W.2d 88, 91 (Tex. App.––San Antonio 1988, no writ) (holding fact question concerning date homeowners vacated the insured house precluded summary judgment for insurer based on vacancy clause).3
3See also Walch v. USAA, No. 02-01-00146-CV, 2002 WL 31628179, at *8 (Tex. App.––Fort Worth Nov. 21, 2002) (holding genuine issue of material fact existed concerning applicability of vacancy clause when unoccupied rental house was being renovated, contained appliances and building materials, utilities were
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Thus, the trial court did not err by denying Columbia Lloyds’s traditional motion for summary judgment on the Maos’ breach of contract claim.
Because––viewing the summary judgment evidence in the light most favorable to Columbia Lloyds––a genuine issue of material fact exists on whether the dwelling was not vacant for sixty consecutive days prior to the fire, we sustain Columbia Lloyds’s sole issue to the extent it seeks reversal of the summary judgment on the Maos’ breach of contract claim. Because––viewing the summary judgment evidence in the light most favorable to the Maos––a genuine issue of material fact exists on whether the dwelling was vacant for sixty consecutive days prior to the fire, we overrule Columbia Lloyds’s sole issue to the extent it seeks reversal of the trial court’s denial of its traditional motion for summary judgment on the Maos’ breach of contract claim. We will remand the Maos’ breach of contract claim to the trial court.
V. NO REVERSAL OF SUMMARY JUDGMENT
ON THE MAOS’ EXTRACONTRACTUAL CLAIMS
Columbia Lloyds filed a combined no-evidence and traditional motion for summary judgment addressing each of the Maos’ extracontractual claims. The no-evidence portion of Columbia Lloyds’s motion for summary judgment
on, and owner checked on house a couple times a week), op. withdrawn on denial of reh’g, 2003 WL 302220 (Tex. App.––Fort Worth Feb. 13, 2003, no pet.). Although the Walch opinion has been withdrawn and thus has no precedential value, we include it here because the Maos discuss it and attached a copy of the opinion to their brief. See Pearson v. K-Mart Corp., 755 S.W.2d 217, 219 (Tex. App.––Houston [1st Dist.] 1988, no writ) (discussing withdrawn supreme court opinion because both parties had referred to it in their briefs).
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specifically sets forth the elements of each of the Maos’ extracontractual claims: the breach of the duty of good faith and fair dealing claim, the DTPA and insurance code violation claims, and the common law fraud claim. Concerning the breach of the duty of good faith and fair dealing claim, Columbia Lloyds asserted that no evidence existed that Columbia Lloyds knew that its liability had become reasonably clear or that Columbia Lloyds had no reasonable basis to deny the Maos’ claim. Concerning the DTPA and insurance code violation claims, Columbia Lloyds asserted that no evidence existed that it had ―engaged in any unfair or deceptive act or practice in violation of Chapter 541, Subchapter B, of the Texas Insurance Code or § 17.46(b) of the Texas Business and Commerce Code.‖ Concerning the common law fraud claim, Columbia Lloyds asserted that no evidence existed that it made a false representation to the Maos with the intent that the Maos rely on it.
In their third point, the Maos argue that the trial court erred when it granted summary judgment for Columbia Lloyds on the extracontractual claims. The Maos’ brief challenges the trial court’s summary judgment on their breach of the duty of good faith and fair dealing claim, arguing that summary judgment evidence exists that Columbia Lloyds did not conduct a reasonable investigation. The Maos do not, however, separately address their alleged DTPA and insurance code violation claims or their common law fraud claim.4
4The Maos’ brief does not mention their fraud claim at all; their brief’s only mention of their DTPA and insurance code claims is the following sentence, ―The
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On appeal, an appellant must attack every ground upon which summary judgment could have been granted to obtain a reversal. Malooly Bros., Inc. v. Napier, 461 S.W.2d 119, 121 (Tex. 1970). A broad issue challenging the propriety of a summary judgment is sufficient to place all grounds for summary judgment before the appellate court, but does not relieve the appellant of the burden to challenge in his brief each of the grounds on which for the summary judgment could have been granted and to present argument and authorities for each possible basis for summary judgment. See, e.g., Cruikshank v. Consumer Direct Mortg., Inc., 138 S.W.3d 497, 502–03 (Tex. App.––Houston [14th Dist.] 2004, pet. denied); Pena v. State Farm Lloyds, 980 S.W.2d 949, 958 (Tex. App.—Corpus Christi 1998, no pet.).
Here, the Maos raise a general point on appeal that the trial court erred by granting summary judgment for Columbia Lloyds on all of its extracontractual claims, but––with the exception of their claim for breach of the duty of good faith and fair dealing––the Maos’ brief does not address each extracontractual claim separately nor point to specific summary judgment evidence constituting more than a scintilla of evidence on the specific element of each extracontractual claim challenged by Columbia Lloyds in the no-evidence portion of its motion for summary judgment. See Worldwide Asset Purchasing L.L.C. v. Rent-A-Center
crux of Plaintiff’s extra-contractual claims (breach of duty of good faith and fair dealing, Insurance Code/DTPA) go to whether or not Defendant conducted a reasonable investigation of the claim.‖
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East, Inc., 290 S.W.3d 554, 569 (Tex. App––Dallas 2009, no pet.). Accordingly, because on appeal the Maos do not challenge the specific no-evidence grounds on which the trial court could have granted summary judgment for Columbia Lloyds on the Maos’ DTPA and insurance code violation claims and common law fraud claim, we are required to affirm the summary judgments on those claims. See, e.g., Rangel v. Progressive County Mut. Ins. Co., No. 08-09-00138-CV, 2010 WL 3312624, at *4 (Tex. App.––El Paso Aug. 24, 2010, pet. denied); Juarez v. Longoria, 303 S.W.3d 329, 330 (Tex. App.––El Paso 2009, no pet.).
We next address the Maos’ challenge to the trial court’s summary judgment for Columbia Lloyds on the Maos’ breach of the duty of good faith and fair dealing claim. As previously mentioned, the Maos argue on appeal that more than a scintilla of summary judgment evidence exists on this claim because reasonable and fair-minded people could differ in their conclusions on whether Columbia Lloyds performed a reasonable investigation. The Maos argue that Columbia Lloyds’s conduct after its initial denial letter was ―pretextual‖ to retroactively support its unreasonable investigation and denial.
An insurer breaches its duty of good faith and fair dealing by denying or delaying a claim when the insurer’s liability has become reasonably clear. State Farm Fire & Cas. Co. v. Simmons, 963 S.W.2d 42, 44 (Tex. 1998) (citing Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 56 (Tex. 1997)). The focus is not on whether an insured’s claim was valid, but on the reasonableness of the insurer’s conduct in rejecting the claim. See Lyons v. Millers Cas. Ins. Co., 866
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S.W.2d 597, 601 (Tex. 1993). Evidence of coverage, standing alone, will not constitute evidence of bad faith denial. Provident Am. Ins. Co. v. Castaneda, 988 S.W.2d 189, 194 (Tex. 1998). Evidence showing only a bona fide coverage dispute does not rise to the level of bad faith. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Dominguez, 873 S.W.2d 373, 376 (Tex. 1994). Nor is bad faith established when a trier of fact, using hindsight, decides the insurer was simply wrong about the proper construction of the terms of the policy. See Lyons, 866 S.W.2d at 601. As long as an insurer has a reasonable basis to deny payment of a claim, even if that basis is eventually determined to be erroneous, the insurer is not liable for the tort of bad faith. Id. at 600. But insurers do have a duty to conduct a reasonable investigation of a claim and cannot insulate themselves from bad faith liability by investigating a claim in a manner calculated to construct a pretextual basis for denial. Simmons, 963 S.W.2d at 44. To withstand a no-evidence motion for summary judgment, a plaintiff in a bad faith case must present evidence that the insurer failed to attempt a prompt, fair settlement when the insurer’s liability has become reasonably clear. See Giles, 950 S.W.2d at 55.
The Maos argue that remodeling was taking place in the dwelling prior to the fire and that had Romero performed a reasonable investigation, she would have discovered evidence that Leos was working on the home during the sixty days prior to the fire. The Maos argue that ―Columbia Lloyds conducted little or no investigation prior to the November 10, 2006 denial.‖ And finally, the Maos argue that the action taken by Columbia Lloyds after its November 10, 2006
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initial denial letter was ―clearly done as a pretext to back-up Columbia Lloyd[s]’s denial, including Ms. Romero’s computer research and the EUO taken of the Maos.‖
To the extent that the Maos implicitly argue that Romero should have investigated the case herself, case law has held that an insurer can use information gathered by another party to fulfill its duty to conduct an investigation. See Pioneer Chlor Alkali Co. v. Royal Indem. Co., 879 S.W.2d 920, 941 (Tex. App.––Houston [14th Dist.] 1994, no writ) (holding that insurer conducted reasonable investigation by utilizing information gathered by its insured and therefore did not breach its duty of good faith and fair dealing). To the extent that the Maos argue that Romero’s investigation was insufficient, inadequate, or pretextual, the summary judgment evidence establishes that she relied on the adjuster’s photos and report, which revealed that there was nothing in the actual dwelling, as well as Vachana’s representation that the dwelling was vacant when she reported the claim. Viewing the summary judgment evidence in the light most favorable to the Maos, no summary judgment evidence exists that Orena’s report was not objectively prepared. See State Farm Lloyds v. Nicolau, 951 S.W.2d 444, 448–50 (Tex. 1997) (recognizing evidence casting doubt on reliability of expert’s report may support bad faith). No summary judgment evidence exists that it was unreasonable for Romero to rely on Orena’s investigation and report. Cf. Lyons, 866 S.W.2d at 601 (recognizing insurer’s reliance on report will not automatically shield insurer from bad faith finding when
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evidence exists that report was not objectively prepared or insurer’s reliance on report was unreasonable). No summary judgment evidence exists that Vachana did not tell Romero when she reported the fire that the dwelling was vacant. No summary judgment evidence exists that Columbia Lloyds conducted no investigation. No summary judgment evidence exists that Columbia Lloyds ignored certain information it possessed at the time of the denials or that the information it possessed was unreliable. See Castaneda, 988 S.W.2d at 197–98 (recognizing no evidence existed of pretextual denial of claim because no evidence existed that insurer ignored information that would lead a reasonable person to conclude that liability under the policy was reasonably clear or that there was no reasonable basis to deny the claim); Simmons, 963 S.W.2d at 47 (recognizing insurer repeatedly ignored evidence that its insureds did not burn down their home, resulting in outcome-oriented investigation); see also Spicewood Summit Office Condos. Ass’n, Inc. v. Am. First Lloyd’s Ins. Co., 287 S.W.3d 461, 470 (Tex. App.—Austin 2009, pet. denied) (recognizing insurer was entitled to summary judgment on insured’s DTPA and insurance code claims and on breach of duty of good faith and fair dealing claim when no evidence existed that inspector’s reports were not objectively prepared or that insurer’s reliance on reports was unreasonable); USAA v. Croft, 175 S.W.3d 457, 471 (Tex. App.––Dallas 2005, no pet.) (recognizing legally insufficient evidence existed to support bad faith finding when insurer relied upon engineer’s report and no evidence
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existed that report was not objectively prepared or that insurer’s reliance on report was unreasonable).
Viewing all of the summary judgment evidence in the light most favorable to the Maos, no summary judgment evidence exists that Columbia Lloyds denied the Maos’ claim when its liability had become reasonably clear or that Columbia Lloyds had no reasonable basis for denying the Maos’ claim. The trial court did not err by granting Columbia Lloyds’s no-evidence motion for summary judgment on the Maos’ breach of the duty of good faith and fair dealing claim.
We overrule the Maos’ third point.
VI. PPCA CLAIMS MUST BE REMANDED
In their first point, the Maos argue that the trial court erred by granting summary judgment for Columbia Lloyds on their claim for Columbia Lloyds’s violation of the PPCA. Because, as set forth above, we must remand the Maos’ breach of contract claim to the trial court, we also reverse the trial court’s grant of summary judgment to Columbia Lloyds on the Maos’ PPCA claim and remand that claim to the trial court. See Spicewood Summit Office Condos. Ass’n, 287 S.W.3d at 471 (remanding insured’s PPCA claim because insured’s breach of contract claim was reversed and remanded); Cater v. USAA, 27 S.W.3d 81, 84 (Tex. App.––San Antonio 2000, pet. denied) (holding that an insurance company’s good faith defense does not relieve the insurer from liability for damages for late payment, as long as the insurer is finally found liable for the claim); see also State Farm Lloyds v. Page, 315 S.W.3d 525, 531 (Tex. 2010)
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(recognizing that liability under the PPCA is premised on a finding of policy coverage); Higginbotham v. State Farm Mut. Auto. Ins. Co., 103 F.3d 456, 461 (5th Cir. 1997) (interpreting article 21.55 and its predecessor to conclude that an insurer’s good faith defense did not relieve the insurer of liability for damages for late payment, as long as the insurer is ultimately found liable for the claim). We sustain the Maos’ first point.
VII. REQUEST FOR ATTORNEY’S FEES MUST BE REMANDED
In their second point, the Maos argue that the trial court erred when it determined that they were not entitled to attorney’s fees. Because the Maos requested attorney’s fees based on their claims for breach of contract and for violations of the PPCA and because we are reversing and remanding those claims, we also remand the issue of attorney’s fees to the trial court for further consideration. See Spicewood Summit Office Condos. Ass’n, 287 S.W.3d at 471 (reversing and remanding the insured’s attorney’s fees in addition to its PPCA and breach of contract claims).
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VIII. CONCLUSION
Having disposed of all issues and points presented in both appeals, we reverse the trial court’s judgment with respect to the Maos’ claims for breach of contract, penalties under the PPCA, and attorney’s fees and remand for further proceedings consistent with this opinion; we affirm the trial court’s judgment with respect to the Maos’ extracontractual claims.
SUE WALKER JUSTICE
PANEL: WALKER, MEIER, and GABRIEL, JJ.
DELIVERED: March 24, 2011

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1. 07-05-00188-CV

IN THE COURT OF APPEALS
FOR THE SEVENTH DISTRICT OF TEXAS
AT AMARILLO
PANEL E

JUNE 20, 2007

______________________________

YORKSHIRE INSURANCE CO., LTD., AND

OCEAN MARINE INSURANCE CO., LTD., APPELLANTS

V.

ROY SEGER, INDIVIDUALLY AND SHIRLEY FAYE HOSKINS,

INDIVIDUALLY AND AS ADMINISTRATOR OF THE ESTATE OF

RANDALL JAY SEGER, DECEASED, AND ALL AS ASSIGNEES OF

DIATOM DRILLING CO., A TEXAS LIMITED PARTNERSHIP, APPELLEES

_________________________________

FROM THE 84^TH DISTRICT COURT OF HUTCHINSON COUNTY;

1. 33,355; HONORABLE JOHN LAGRONE, JUDGE

_______________________________

Before QUINN, C.J., and HANCOCK, J., and BOYD, S.J. ⁽¹⁾

OPINION

We grant the Segers’ motion for rehearing. We withdraw our opinion of April 30, 2007, and substitute the following in its place.

Appellants, Yorkshire Insurance Co., Ltd., and Ocean Marine Insurance Co., Ltd., appeal a judgment entered against them awarding $26,732,876.71 in actual damages, $10,041,307.94 in pre-judgment interest, post-judgment interest at the rate of five percent per annum from the January 3, 2005 date of judgment, and costs, to appellees, Roy Seger and Shirley Faye Hoskins, individually and as administrator of the estate of Randall Jay Seger (collectively, “the Segers”). We affirm in part and reverse and remand for further proceedings.

Because of the complexity of the issues presented on appeal, we will outline the facts and circumstances leading to this appeal and identify other pertinent facts in our discussion of the specific issues presented.

Background

This is an appeal of a Stowers ⁽²⁾ action. The underlying incident giving rise to this action was the death of Randall Jay Seger. Randall did drilling work for two related companies, Diatom Drilling Co., L.P. (Diatom), and Employer’s Contractor Services, Inc. (ECS). ECS was a corporation established by Diatom’s general partner, Cynthia Gillman, to provide oil field services to Diatom and other drilling contractors. On July 13, 1992, while employed by ECS but providing services to Diatom, Randall was killed when a Diatom rig he was working on collapsed. Diatom, who was insured by a Lloyd’s of London-type comprehensive general liability (CGL) insurance policy at the time of the accident, notified the subscribing insurers (collectively, “the CGL insurers”) of the accident. Yorkshire and Ocean Marine (collectively, “Insurers”) were members of this group.

In June of 1993, Randall’s parents, the Segers, filed suit against Diatom, its partners, and ECS alleging negligence and gross negligence. The CGL insurers were not specifically notified of the suit at the time that it was filed. The suit sat virtually dormant until 1998. In 1998, Diatom demanded that the CGL insurers provide a defense to the Segers’ suit. The CGL insurers refused to provide a defense, contending that Randall’s death was not a covered occurrence and that Diatom failed to provide timely notice of suit.

After the CGL insurers refused to provide Diatom a defense, the Segers offered to settle their suit against Diatom for $500,000, the policy limits of the CGL policy. Diatom made demand on the CGL insurers to settle the claim based on this offer. The CGL insurers notified Diatom that two of the insurers had become insolvent and, therefore, the demand exceeded the available policy limits of the CGL policy. Based on this additional information, the Segers offered to settle the suit for $368,190, the policy limits available from the solvent CGL insurers. The Segers subsequently lowered their settlement offer to $250,000. The CGL insurers refused each of these settlement demands.

Prior to trial in the underlying lawsuit, the Segers non-suited Gillman, and Diatom’s counsel withdrew from representation. On March 27, 2001, the underlying suit was tried. Gillman was subpoenaed to attend and did attend as a witness. Gillman testified that she was appearing as the pro se representative of Diatom. However, the record reflects that Gillman’s participation in the proceeding was consistent with that of a witness rather than a party. Gillman’s limited “representation” of Diatom is evidenced by the fact that Diatom was not represented by counsel, presented no opening or closing argument, called no witnesses and presented no evidence. Gillman testified and, at the conclusion of her testimony, was dismissed. As a result of this trial, the trial court entered judgment against Diatom and awarded the Segers $15,000,000, plus pre- and post-judgment interest.

Following the entry of judgment in the underlying suit, Gillman contacted Diatom’s CGL insurers to inquire what they intended to do about the judgment. When Gillman received no response to her inquiry, she assigned Diatom’s rights against the CGL insurers to the Segers. The assignment reserved Diatom’s right to recover its attorney’s fees incurred in defense of the underlying suit, but otherwise assigned all of Diatom’s rights against the CGL insurers to the Segers. Following the assignment, the Segers filed suit against the CGL insurers seeking damages based on the insurers’ wrongful refusal to defend Diatom and negligent failure to settle the Segers’ claim when demand was made within policy limits.

Prior to trial on the Stowers action, the Segers settled their assigned claims against all of the remaining solvent CGL insurers, except Yorkshire and Ocean Marine, and the settling insurers were dismissed from the suit. As the Stowers litigation against Insurers moved toward trial, both the Segers and Insurers filed multiple motions for summary judgment. The trial court heard these motions, denied all of Insurers’ motions, and granted the Segers’ motion for partial summary judgment on the issues of “coverage, demand within limits, fully adversarial relationship, and trial.” Because each of these issues were resolved prior to trial, the only issues at the Stowers trial were the determination of Insurers’ negligence, causation, and damages. During the trial, the trial court directed the verdict as to damages based on the judgment the Segers obtained against Diatom in the underlying suit. The issues of negligence and causation were submitted to a jury. The jury returned a verdict in favor of the Segers.

Insurers appeal the trial court’s rulings on certain procedural issues, the competing motions for summary judgment, the denial of Insurers’ motion for directed verdict, and the granting of the Segers’ motion for directed verdict on damages. Insurers present six issues on appeal. Identifying these issues in the order that they will be addressed, Insurers contend that (1) the trial court erred in striking Insurers’ defenses for violations of the Insurance Code, (2) Randy’s death was not covered by the CGL policy because of the “leased-in worker” exclusion contained in the policy, (3) the Segers failed to make a settlement demand within Insurers’ several policy limits, (4) the Segers failed to conclusively establish their damages, (5) evidence of collusion between Diatom and the Segers was improperly concealed, and (6) the trial court judge should have recused himself and the Segers’ trial counsel should have been disqualified.

Summary Judgment Issues

Three of Insurers’ issues relate to matters that were decided by the trial court by summary judgment. These issues are the statutory preclusion of Insurers’ contract defenses, coverage, and demand within limits. ⁽³⁾ Each of these rulings will be reviewed using the same standard of review.

1. Standard of Review

When both parties to a suit move for summary judgment, each party bears the burden of establishing that it is entitled to judgment as a matter of law. City of Garland v. Dallas Morning News, 22 S.W.3d 351, 356 (Tex. 2000). When the trial court grants one party summary judgment and denies the other, we review both parties’ summary judgment evidence, determine all questions presented, and render the judgment the trial judge should have rendered. FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 872 (Tex. 2000). When the trial court does not specify the basis on which it granted summary judgment, the judgment will be affirmed on any meritorious ground expressly presented in the motion and which is preserved for appellate review. State Farm Fire & Cas. Co. v. S.S., 858 S.W.2d 374, 380 (Tex. 1993).

Both parties moved for summary judgment on traditional and no-evidence grounds. See Tex. R. Civ. P. 166a. We review a summary judgment de novo to determine whether the prevailing party has established its right to summary judgment as a matter of law. See Dallas Cent. Appraisal Dist. v. Cunningham, 161 S.W.3d 293, 295 (Tex.App.-Dallas 2005, no pet.). In reviewing a summary judgment, we must examine the entire record in the light most favorable to the nonmovant, indulging every reasonable inference and resolving any doubts against the motion. See City of Keller v. Wilson, 168 S.W.3d 802, 824-25 (Tex. 2005).

1. Global Preclusion of Insurers’ Contract-Based Defenses

In 1992, Insurance Code article 1.14-1, section 8, provided, “Except for lawfully procured surplus lines insurance . . . any contract of insurance effective in this state and entered into by an unauthorized insurer is unenforceable by such insurer.” See Act of Apr. 27, 1967, 60th Leg., R.S., ch. 185, § 1, 1967 Tex. Gen. Laws 400, 401, amended by, Act of May 27, 1993, 73rd Leg., R.S., ch. 999, § 3, 1993 Tex. Gen. Laws 4373, 4374, repealed by, Act of Apr. 30, 1999, 76th Leg., R.S., ch. 101, § 5, 1999 Tex. Gen. Laws 486, 538 (current version at Tex. Ins. Code Ann. § 101.201 (Vernon Supp. 2006) ⁽⁴⁾). ⁽⁵⁾ In 1993, this section was amended and the language of the exception was changed from “lawfully procured surplus lines insurance” to “insurance procured by a licensed surplus lines agent from an eligible surplus lines insurer.” However, under both the former and amended versions of article 1.14-1, section 8, whether the exception applied to a particular transaction was determined by reference to the requirements for “Surplus Lines Insurance,” contained in article 1.14-2. See Act of Apr. 27, 1967, 60th Leg., R.S., ch. 185, § 1, 1967 Tex. Gen. Laws 400, 408-14, amended by, Act of May 27, 1993, 1993, 73rd Leg., R.S., ch. 999, § 16, 1993 Tex. Gen. Laws 4373, 4376-81, repealed by, Act of May 22, 2003, 78^th Leg., R.S., ch. 1274, § 26, 2003 Tex. Gen. Laws 3611, 4138 (current version at § 981.001-.222). ⁽⁶⁾

The Segers contend that Insurers cannot enforce any defenses derived from the CGL policy, as a matter of law, because Insurers were unauthorized insurers when the policy was issued. Insurers contend that, even though they were and are unauthorized insurers, the statute does not preclude an unauthorized insurer’s reliance on contract-based defenses in suits initiated by the insured ⁽⁷⁾ or, if the statute does preclude an unauthorized insurer from asserting its contract-based defenses, the preclusion is inapplicable to Insurers because they met the surplus lines insurance exception.

Initially, because the surplus lines exception changed with the 1993 amendments, we must determine the law applicable to the current case. The Segers contend that, because the policy at issue was entered into in 1992, the laws existing at the time the contract was made became part of the contract and govern the transaction. Insurers contend that the 1993 amendments were procedural or remedial in nature and, therefore, are properly applied retroactively. Courts generally presume that an amendment to a statute is to be applied prospectively and not retroactively. Subaru of Am., Inc. v. David McDavid Nissan, Inc., 84 S.W.3d 212, 219 (Tex. 2002). However, this general rule does not apply when the amendment is procedural or remedial, unless the retroactive application of the amendment would affect a party’s vested rights. Id. at 219-20.

The 1993 amendments to articles 1.14-1 and 1.14-2 were intended to provide “reasonable and practical safeguards” to protect Texas consumers. Amended article 1.14-2, § 1. An unauthorized insurer who issues a policy to a Texas consumer is penalized by, among other things, being precluded from enforcing any defenses contained within the unauthorized policy. See amended article 1.14-1, § 9; Lexington Ins. Co., 209 S.W.3d at 89. However, because surplus lines insurance is sometimes necessary to insure risks for which coverage cannot be obtained from a licensed, resident insurer, see amended article 1.14-2, § 1; Mid-Am. Indem. Ins. Co. v. King, 22 S.W.3d 321, 322 (Tex. 1995), unauthorized insurers may become “eligible” to issue surplus lines policies to Texas consumers, provided that the insurer complies with strict capitalization and registration requirements. See amended article 1.14-1, § 8; amended article 1.14-2, § 3; Mid-Am. Indem. Ins. Co., 22 S.W.3d at 323. As these surplus lines insurers remain unauthorized insurers, they are subject to the remedial penalties imposed on an unauthorized insurer conducting the business of insurance in the state, including the loss of their contract-based defenses, unless they strictly comply with the eligibility requirements of amended article 1.14-2. See Lexington Ins. Co., 209 S.W.3d at 89. Because the 1993 amendment to article 1.14-1, section 8, affects only the remedies available to an insured when article 1.14-2 is violated by the insurer, we hold that the amended versions of these articles apply to the present case. ⁽⁸⁾

While the parties and the foregoing analysis cite the former and amended articles 1.14-1 and 1.14-2, these articles were repealed and recodified by the 76th and 78th Legislatures. See Act of Apr. 30, 1999, 76th Leg., R.S., ch. 101, § 5, 1999 Tex. Gen. Laws 486, 538; Act of May 22, 2003, 78th Leg., R.S., ch. 1274, § 26, 2003 Tex. Gen. Laws 3611, 4138. However, the Legislature expressly indicated that no substantive change in the law was intended by either Act. See Act of Apr. 30, 1999, 76th Leg., R.S., ch. 101, § 6, 1999 Tex. Gen. Laws 486, 538 (“This Act is intended as a recodification only, and no substantive change in law is intended by this Act.”); Act of May 22, 2003, 78th Leg., R.S., ch. 1274, § 27, 2003 Tex. Gen. Laws 3611, 4139 (same). As a result and based on our determination that the 1993 amendments should be applied retroactively, we will refer to the current codification of the law when possible.

It is undisputed that Insurers were unauthorized insurers at all times relevant to the present case. Section 101.201(a) provides that, “An insurance contract effective in this state and entered into by an unauthorized insurer is unenforceable by the insurer.” ⁽⁹⁾ However, the former article 1.14-1, § 8, the amended article 1.14-1, § 8, and the recodified section 101.201(b) provide an exception to this prohibition for surplus lines insurance. The Segers contend that Insurers could produce no evidence that the CGL policy in this case was “lawfully procured surplus lines insurance” or, alternatively, the Segers conclusively established that the CGL policy was not “lawfully procured surplus lines insurance” and, therefore, Insurers are precluded from asserting their contract-based defenses under former article 1.14-1, § 8. Insurers contend that they were entitled to rely on their contract-based defenses because they established that they met the surplus lines exception of amended article 1.14-1, § 8, as a matter of law.

The Segers’ motion for summary judgment states that, for an insurer to raise any contractual defense in a suit on the policy, the insurer must prove that it was either authorized to do business in Texas or that the insurance at issue was “lawfully procured surplus lines insurance.” The Segers indicate that all references to provisions of the Insurance Code in their motion are references to the version in effect when the coverage was issued in 1992, i.e., the pre-amended versions of articles 1.14-1 and 1.14-2. The Segers then allege that the CGL policy was issued in violation of former article 1.14-2, §§ 2, 5, 6(a), 6(c), 6(d), 6(e), 6A(a6), ⁽¹⁰⁾ 7(a), 7(b), and 8. Ultimately, the Segers contend that, because Insurers could present no evidence that they met the “lawfully procured surplus lines insurance” exception or because the Segers had conclusively established that the CGL policy was not “lawfully procured surplus lines insurance,” the Segers were entitled to summary judgment precluding Insurers from relying on their contractual defenses as a matter of law.

Because we have already held that the 1993 amendments to articles 1.14-1 and 1.14-2 were procedural or remedial and are to be applied retroactively, any violation of former article 1.14-1 or 1.14-2 are of no effect on Insurers’ ability to enforce its contract-based defenses in the policy. As we held above, the pre-amendment law, relied upon by the Segers to support its motion for summary judgment, was rendered ineffective by the 1993 amendments and, as a result, violations of the pre-amendment provisions would not result in a preclusion of Insurers’ contract-based defenses. Therefore, we conclude that the Segers’ motion failed to expressly present grounds that would entitle the Segers to summary judgment on coverage based on Insurers being precluded from asserting their contract-based defenses. See Tex. R. Civ. P. 166a(c). Further, because the Segers’ motion cites ineffective law, we conclude that the Segers’ motion failed to state the elements upon which Insurers could produce no evidence relating to Insurers’ right to assert its contract-based defenses. See Tex. R. Civ. P. 166a(i). Because the Segers’ summary judgment motion presents no grounds upon which the trial court could have granted summary judgment, we conclude that, to the extent the trial court based its grant of summary judgment on coverage on the global preclusion of Insurers’ contract-based defenses, the trial court erred.

Insurers appeal the denial of their motion for partial summary judgment on coverage. Because surplus lines insurance is excepted from the general statutory restriction on unauthorized insurers, the burden of proving every fact essential to the invocation of the exception rests on Insurers. See Cramer v. Sheppard, 140 Tex. 271, 167 S.W.2d 147, 155 (1942); Risk Managers Int’l, Inc. v. State, 858 S.W.2d 567, 570 (Tex.App.-Austin 1993, writ denied). Thus, for Insurers to be entitled to summary judgment on coverage, Insurers must establish that Insurers were eligible surplus lines insurers and that the CGL policy was procured through a licensed surplus lines agent as a matter of law, see § 101.201(b), and that the Segers’ claims are not covered by the CGL policy.

We will initially review the evidence regarding whether Insurers established that they were eligible surplus lines insurers as a matter of law. An “eligible surplus lines insurer” must comply with the requirements of sections 981.051-.065 of the Insurance Code. See § 981.002(1). The record contains a certification from Kathy A. Wilcox, Registration Officer of the Texas Department of Insurance, that indicates, at all times pertinent to the present case, both Yorkshire ⁽¹¹⁾ and Ocean Marine ⁽¹²⁾ were unlicensed insurers which were eligible to provide surplus lines insurance under each iteration of the statute and at all times pertinent to the present case. We conclude that, because these certifications were uncontroverted, the evidence conclusively established that Insurers were eligible surplus lines insurers. ⁽¹³⁾

However, more is required to meet the exception of section 101.201(b). In addition to the insurer being eligible to provide surplus lines insurance, the insurance must be procured through a licensed surplus lines agent. § 101.201(b). The record includes a statement from Matt Ray, Deputy Commissioner of the Licensing Division of the Texas Department of Insurance, indicating that London American Risk Specialists, Inc. (LARSI), held a surplus lines agency license that was issued on February 14, 1984 and was due to expire October 25, 2005, if not timely renewed. Notably, the cover note for the CGL policy specifically indicates that the insurance was placed through LARSI. However, the Segers correctly indicate that this evidence identifies LARSI as holding a license as a managing general agency. Section 981.220(b) restricts a surplus lines agent whose license is granted to it as a managing general agent, that is not also licensed under Article 21.14 of the Insurance Code, ⁽¹⁴⁾ to business that originates through a licensed general property and casualty agent. Thus, for LARSI’s surplus lines agent license to meet the exception found in section 101.201(b), the transaction must have been directed through an agent that was a licensed general property and casualty agent. § 981.220(b).

No record evidence establishes that the CGL policy was directed through an agent that was a licensed general property and casualty agent. ⁽¹⁵⁾ As such, Insurers have failed to prove every fact essential to the invocation of the section 101.201(b) surplus lines insurance exception and the trial court did not err in overruling Insurers’ partial summary judgment motion on coverage. See Cramer, 167 S.W.2d at 155; Risk Managers Int’l, Inc., 858 S.W.2d at 570. We affirm the trial court’s denial of Insurers’ partial summary judgment on the issue of coverage.

1. Coverage

While we have held that the trial court erred in granting the Segers summary judgment on the issue of coverage to the extent that summary judgment was based on the preclusion of Insurers’ contract-based defenses, because the trial court did not specify the grounds upon which it granted summary judgment on the issue of coverage, we must affirm the judgment if it is supported by any meritorious ground expressly presented in the motion and preserved for appellate review. S.S., 858 S.W.2d at 380. In their motion for summary judgment, the Segers alternatively contended that Insurers could produce no evidence to support any of the contract-based defenses they alleged and, inter alia, contended that the “Excluding Leased-In Employees/Workers” language does not exclude the Segers’ claims from coverage as a matter of law. ⁽¹⁶⁾ As such, a determination that Insurers failed to present more than a scintilla of evidence of any of the defenses alleged or that the Segers affirmatively negated each defense would require affirmation of the trial court’s summary judgment on the issue of coverage. ⁽¹⁷⁾

The CGL policy includes, in its cover note, an exclusion of “Leased-In Employees/Workers.” This phrase is not defined by the policy. Insurers contend that a standard “leased worker” exclusion was not included in the policy because a standard “leased worker” exclusion was not established until 1993. Of note, the policy does include a standard employee exclusion. The employee exclusion specifically excludes any liability for claims asserted by, or on behalf of, Diatom/ECS employees from coverage under the policy. Insurers contend that either Randall was actually an employee of Diatom and, therefore, the Segers’ claim is excluded by the standard employee exclusion or Randall was “leased in” by Diatom from ECS and coverage is excluded based on the leased-in worker exclusion contained on the CGL cover note.

The Segers claims are for bodily injury to Randall. The CGL policy generally covers claims for bodily injury or property damage. Thus, there is no dispute that the CGL policy generally covers the kind of claims alleged by the Segers. However, the parties hotly contest the application of the leased-in worker/employee exclusion to the Segers’ claim. Once general coverage is established, the burden of proving the existence and applicability of a policy exclusion rests with Insurers. Tex. R. Civ. P. 94; Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 193 (Tex.App.-Houston [14^th Dist.] 2003, pet. denied); Venture Encoding Serv., Inc. v. Atl. Mut. Ins. Co., 107 S.W.3d 729, 733 (Tex.App.-Fort Worth 2003, pet. denied).

The interpretation of insurance policies is governed by the same rules of construction applicable to other written contracts. State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 433 (Tex. 1995). In construing a written contract, the court’s primary concern is to ascertain the true intentions of the parties as expressed in the instrument. Id.; Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). Terms in an insurance contract will be given their ordinary meaning unless the policy shows that the words were meant in a technical or different sense. Sec. Mut. Cas. Co. v. Johnson, 584 S.W.2d 703, 704 (Tex. 1979). We must read all parts of the contract together and must strive to give meaning to every sentence, clause, and word to avoid rendering any portion inoperative. Balandran v. Safeco Ins. Co. of Am., 972 S.W.2d 738, 741 (Tex. 1998). If, after applying these rules of construction, an insurance policy remains ambiguous, we are to construe the language in a manner that favors coverage. Beaston, 907 S.W.2d at 433.

Looking to the CGL policy, the phrase “Leased-In Employees/Workers” is not defined anywhere in the policy. No standard leased worker exclusion is included in the policy. Reading all of the parts of the policy reveals that every exclusion in the contract excludes coverage for claims of insureds’ liability related to or arising from the event or persons identified by the various exclusions. The ordinary meaning of “lease” is an agreement for possession or use of property for a specified period or at will in exchange for a specified rent or compensation. See Merriam-Webster’s Collegiate Dictionary 798 (Frederick C. Mish, ed., 11^th ed. 2003); Black’s Law Dictionary 898 (7^th ed. 1999). The ordinary meaning of “worker” is a person that “exerts strength or faculties to do or perform something.” Merriam-Webster’s Collegiate Dictionary 1442-43 (Frederick C. Mish, ed., 11^th ed. 2003). The ordinary meaning of the word “in,” when used as a modifier, is directed toward some destination or place. Merriam-Webster’s Collegiate Dictionary 627 (Frederick C. Mish, ed., 11^th ed. 2003). Therefore, we conclude that, applying the ordinary meaning to the words used in the CGL policy and striving to give meaning to every part thereof, the condition “Excluding Leased-In Employees/Workers,” as a matter of law, unambiguously excludes from coverage all claims for a named insured’s liability for bodily injury or property damage brought by or on behalf of persons that perform work for the insured under an agreement with another allowing temporary use of the worker, even though the leased worker would not be an employee of insured. ⁽¹⁸⁾

Looking to the testimony of Cynthia Gillman at the underlying Seger v. Diatom trial, Gillman testified that ECS had a Contract for Personnel Services with Diatom by which ECS would supply workers to perform work in fulfillment of Diatom’s drilling contracts. Gillman testified that Randall Seger was an employee of ECS that was doing work at the Diatom drilling site at the time of his death. Considering this evidence in the light most favorable to Insurers and indulging all reasonable inferences in their favor, we conclude that there is more than a scintilla of evidence that the Segers’ claims were excluded by the CGL policy. Further, we cannot say that the Segers have negated the applicability of the CGL policy’s “Excluding Leased-In Employees/Workers” condition as a matter of law. Therefore, we conclude that the trial court erred in granting the Segers summary judgment on the issue of coverage.

The Segers contend that the leased-in worker exclusion is ambiguous because the exclusion could reasonably be construed to exclude leased-in workers from being “insureds” under the policy, claims made by leased-in workers, or all claims, including wrongful death claims asserted by survivors of the leased-in worker, arising from the leased-in worker relationship. However, as indicated above, when the CGL policy’s provisions are read together, we conclude that the exclusion excludes from coverage all claims for a named insured’s liability for bodily injury or property damage brought by or on behalf of persons that perform work for the insured under an agreement with another allowing the temporary use of the worker. Thus, our construction of this condition excludes coverage for all claims for bodily injury or property damage whether brought by or on behalf of leased-in workers. We do not find the Segers’ interpretation of the condition as excluding leased-in workers from being “insureds” reasonable, since the CGL policy specifically identifies those parties, Diatom and ECS, that were “insureds” and would not need to specifically identify others as not being “insureds.” ⁽¹⁹⁾

Having concluded that the trial court erred in granting summary judgment on the issue of coverage, we reverse that portion of the summary judgment. We affirm the trial court’s denial of Insurer’s motion for summary judgment on the issue of coverage.

1. Demand Within Limits

To prove an insurer’s negligent failure to settle a claim, i.e., a Stowers claim, the insured must establish that (1) the claim is within the scope of coverage, (2) a demand was made that was within policy limits, and (3) the demand was such that an ordinary prudent insurer would have accepted it, considering the likelihood and degree of the insured’s potential exposure to an excess judgment. Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994). A demand that exceeds the policy limits, even though reasonable, does not trigger the insurer’s duty to settle. Id. Insurers contend that, since the policy provided that each insurer was severally liable, the Segers’ collective settlement offers were ineffective to trigger Insurers’ Stowers liability because the Segers failed to make settlement demands within the several limits of Yorkshire and Ocean Marine. The Segers contend that their collective settlement demands were within the solvent policy limits available under the CGL policy and were sufficient to meet the second Stowers element. Further, the Segers rely on the CGL insurers’ admission that the Segers made a demand that was within the available policy limits.

The terms of the CGL policy provided that, in exchange for premium payments totaling $10,850, ⁽²⁰⁾ the CGL insurers would provide coverage for the period of January 23, 1992 through January 23, 1993, with policy limits of $500,000 per accident/occurrence. The cover note, which was incorporated into the policy, indicated that Yorkshire insured 16.472 percent of the policy and that Ocean Marine insured 10 percent of the policy. It is undisputed that the Segers did not make demands upon Yorkshire and Ocean Marine separately that would fall within their proportionate share of the policy’s limits. However, it is also undisputed that the Segers did make demand for the stated policy limits, $500,000, and subsequently made demands for $368,190 and $250,000. In fact, at Insurers’ request, the trial court took judicial notice that the Segers offered to settle the underlying case for $250,000. Thus, the facts related to this issue are not in dispute. Rather, the question presented is whether the Segers’ collective settlement demand for $250,000 was sufficient to meet the “demand within policy limits” element of a Stowers action or were the Segers required to make separate demands upon each of the CGL insurers within each insurer’s proportionate share of the policy’s limits.

In a typical Stowers action, an insured brings suit against his insurer for the insurer’s negligent failure to settle a covered claim asserted against the insured for an amount within the applicable policy limits when the covered claim results in a judgment in excess of the policy limits. However, before an insured can prevail in a Stowers action, the claimant in the underlying proceeding must have made a settlement demand that was within the applicable policy limits. Id. Thus, it is the claimant in the underlying suit that determines whether the second element of a Stowers claim can be met by the insured. As a result, we believe that a claimant should be entitled to rely on the specific provisions of an insurance policy in making a settlement demand that is within the coverage of the policy. That it is the policy that dictates whether a settlement demand was within policy limits is bolstered by the Texas Supreme Court’s indication that a settlement demand that proposes to release the insured for “the policy limits,” in lieu of a demand for a sum certain, is sufficient to satisfy the “demand within limits” element of a Stowers action. See Id. at 848-49. Further, when a claimant makes such a demand and it is rejected by the insurer, we believe that proof that a settlement demand that was within the limits stated in the policy and that was rejected by the insurer is all that is necessary to satisfy the “demand within limits” element of a Stowers claim. Thus, in the present case, we conclude that the Segers’ collective settlement demand of $250,000, which falls within the $500,000 limit stated in the policy, was sufficient to satisfy the second element of a Stowers action against Insurers. ⁽²¹⁾ As the undisputed facts establish that the Segers made a settlement demand that was within the CGL policy limits as a matter of law, we affirm the trial court’s grant of summary judgment in favor of the Segers on this issue.

Damages

Insurers contend that the Segers presented no evidence to establish that Diatom suffered injury as a result of any negligence on the part of Insurers and, therefore, the trial court’s grant of directed verdict as to damages was in error. Insurers contend that (1) Diatom was judgment proof and, therefore, was not injured by Insurers’ negligence, (2) directed verdict was an improper method to determine damages, and (3) because the underlying judgment was not the result of a fully adversarial trial, it constituted no evidence of damages. The Segers contend that Diatom’s financial condition is immaterial to Insurers’ Stowers liability and that, because the damages awarded in the underlying judgment were the result of a fully adversarial trial, the damages awarded in that judgment are conclusive of the damages Diatom suffered as a result of Insurers’ negligence. We will address each of Insurers’ subpoints regarding this issue in the order in which they were presented.

In reviewing the granting of a no-evidence summary judgment, we must decide whether any probative evidence was presented that would raise a genuine issue of material fact regarding the issue upon which the summary judgment was granted. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 241-42 (Tex. 2001) (per curiam). This is the same standard utilized in reviewing a directed verdict. See King Ranch, Inc. v. Chapman, 118 S.W.3d 742, 750-51 (Tex. 2003). In determining if the evidence raises a genuine issue of material fact, we review the evidence in the light most favorable to the party against whom the verdict is rendered. Morgan v. Anthony, 27 S.W.3d 928, 929 (Tex. 2000).

Insurers contend that, because Diatom was unable to pay any damages awarded by the judgment, the Segers cannot prove that Diatom suffered any harm as a result of Insurers’ negligent refusal to settle the Segers’ claims when demand was made within policy limits. The record does establish that Diatom is and was judgment proof. Diatom ceased doing business in 1993, sold all of its assets to make payments to creditors, and was involuntarily dissolved. As a result, Diatom possessed no assets from which it could pay any damages awarded to the Segers.

Insurers’ contention is analogous to the argument made by the insurer in YMCA of Metro. Fort Worth v. Commercial Standard Ins. Co., 552 S.W.2d 497 (Tex.Civ.App.-Fort Worth 1977, writ ref’d n.r.e.). In YMCA, the insurer argued that, because its insured had entered into a covenant with the plaintiffs not to execute the judgment against the insured, the insured had no obligation to pay the judgment and, consequently, was not harmed by the insurer’s negligent refusal to settle. Id. at 501. The court analyzed the language in the policy at issue and concluded that the policy was a liability policy rather than an indemnity policy. Id. at 504. Notably, the court cited the policy’s provision that, “The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages . . . .” After discussing the differences between a liability policy and an indemnity policy, ⁽²²⁾ the court concluded that the policy was a liability policy and that the covenant not to execute did not release the insurer from liability, even though the insured was under no legal obligation to pay the damages awarded. See id.

The CGL insurance policy involved in the present case includes the exact language cited above in the YMCA policy. From this and other provisions of the policy, we conclude that the CGL policy is a liability policy rather than an indemnity policy. Therefore, we conclude that Diatom’s inability to pay the damages awarded in the underlying judgment does not affect Diatom’s liability under the judgment. See id. at 504. Thus, the fact that Diatom was judgment proof does not establish Insurers’ right to directed verdict on damages.

As support for its contention, Insurers cite Foremost County Mut. Ins. Co. v. Home Indem. Co., 897 F.2d 754, 757 (5^th Cir. 1990), as holding that an underlying judgment constitutes no evidence of damages in a Stowers action if the judgment is accompanied by a covenant not to execute against the insured. ⁽²³⁾ The Foremost court, however, recognized the general rule that “[i]n Texas a covenant not to execute by an insured does not release an insurance carrier from liability.” Id. at 758 (citing YMCA, 552 S.W.2d at 504-05). Further, the Foremost court specifically indicated that, “under our decision not to extend the YMCA rule the insurer who negligently refuses to settle will be able to use a covenant not to execute only to the disadvantage of another insurer that has breached its duty to the insured . . . and not to the disadvantage of its insured.” Id. at 760 (emphasis added). We conclude that the Foremost opinion is not controlling because it is clearly distinguishable from the present case. See Tex. Farmers Ins. Co. v. Soriano, 844 S.W.2d 808, 824-25 (Tex.App.-San Antonio 1992), rev’d on other grounds, 881 S.W.2d 312 (Tex. 1994) (discussing the limited application of the holding in Foremost). We affirm the trial court’s denial of Insurers’ motion for directed verdict as to damages.

Next, we must consider whether the trial court erred in giving conclusive effect to the damages found in the underlying judgment. ⁽²⁴⁾ By directing verdict on the issue of damages in accordance with the damages found in the underlying judgment, it is evident that the trial court found that the judgment set Diatom’s damages as a matter of law. Insurers’ contention that directed verdict was an inappropriate vehicle to establish damages is premised on their position that the evidence that Diatom was judgment proof raised a fact issue regarding whether Diatom was damaged by the excess damages awarded in the underlying judgment. However, for the reasons discussed above, we conclude that Diatom’s financial status is immaterial to Diatom’s liability and, therefore, fails to raise a fact issue regarding damages in the present suit.

A directed verdict is appropriate only when “reasonable minds can draw only one conclusion from the evidence.” Collora v. Navarro, 574 S.W.2d 65, 68 (Tex. 1978). Review of a directed verdict requires that the evidence be viewed in the light most favorable to the party against whom judgment was entered and that all reasonable inferences from that evidence be resolved in that party’s favor. Morgan, 27 S.W.3d at 929.

The general rule is that, in a Stowers action, damages are fixed as a matter of law in the amount of the excess of the judgment rendered in the underlying suit in favor of the plaintiff over the applicable limits of the policy. See Allstate Ins. Co. v. Kelly, 680 S.W.2d 595, 606 (Tex.App.-Tyler 1984, writ n.r.e.). See also Rocor Int’l, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 77 S.W.3d 253, 271 (Tex. 2002) (Baker, J., dissenting); State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696, 713 (Tex. 1996). Thus, absent evidence that the underlying judgment is not reliable evidence of the damages suffered by the insured in the underlying suit, the judgment conclusively establishes the damages suffered by the insured and is sufficient evidence to support a directed verdict.

While the general rule is that a judgment obtained by a plaintiff against an insured is conclusive to establish the amount of damages suffered by the insured in a subsequent Stowers action, see Kelly, 680 S.W.2d at 606, the Texas Supreme Court has created an exception to this general rule when the insured assigns his Stowers action to the plaintiff in the underlying suit, see Gandy, 925 S.W.2d at 714. When such an assignment occurs, the underlying judgment is not only not conclusive, but is inadmissible as evidence of damages, unless rendered as the result of a “fully adversarial trial.” Id. Insurers contend that they presented evidence that would raise a fact question as to whether the judgment from the underlying suit was the result of a fully adversarial trial and, therefore, that the trial court erred in directing the verdict on damages in accordance with the underlying judgment.

Prior to trial, the Segers filed a motion for partial summary judgment in which they contended, inter alia, that the evidence established that the parties to the underlying suit were in a “fully adversarial relationship at the time of trial” and that an “actual trial” had occurred. The trial court granted the Segers’ motion. However, we conclude that these findings by the trial court do not resolve whether the judgment in the underlying suit was the result of a fully adversarial trial. ⁽²⁵⁾

At the close of evidence in the Stowers action, the Segers offered the judgment in the underlying suit for the court’s review only and moved the trial court for directed verdict on damages based on the judgment. Insurers objected to admission of the judgment contending that it was not the result of a fully adversarial trial. The trial court overruled Insurers’ objection and granted the Segers’ motion for directed verdict on damages.

Directed verdict was proper, in this situation, only if no probative evidence was presented that would raise a genuine issue of material fact regarding the amount of damages suffered by Diatom as a result of Insurers’ negligent failure to settle the underlying suit. See Dow Chem. Co., 46 S.W.3d at 242. As the Segers’ only evidence of damages in the Stowers action was the judgment in the underlying suit, the trial court could only direct the verdict on damages if Insurers failed to raise a genuine issue of material fact regarding the reliability of the judgment as evidence of Diatom’s damages.

Insurers raised the question of whether the judgment in the underlying action was the result of a fully adversarial trial. As evidence that it was not, Insurers correctly indicated that Diatom was not represented by counsel at the trial in the underlying suit, made no opening or closing statements, offered no evidence, and conducted no cross-examination of the Segers’ witnesses. Further, Insurers cite the trial court’s own characterization of this proceeding as a nihil dicit prove up.

We conclude that this evidence is sufficient to raise a genuine issue of material fact regarding whether the underlying judgment upon which the trial court directed the verdict on damages was the result of a fully adversarial trial. See Gandy, 925 S.W.2d at 714. ⁽²⁶⁾ As such, we reverse the damages portion of the judgment.

Evidentiary Exclusions

Insurers contend that they were denied evidence of collusion between the Segers and Diatom in the underlying proceeding because the trial court abused its discretion in sustaining Diatom’s assertions of attorney-client privilege and work product privilege. As Insurers’ issue challenges the exclusion of those documents that specifically relate to the underlying judgment and subsequent assignment, we will limit our review to those documents. ⁽²⁷⁾ We must determine whether the trial court abused its discretion in upholding Diatom’s assertions of privilege and, if so, whether the exclusion of this evidence harmed Insurers. See May v. Barton’s Pump Serv., Inc., 153 S.W.3d 469, 477-78 (Tex.App.-Amarillo 2004, no pet.).

Some of the evidence sought by Insurers was included in the appellate record in this cause. These documents were made part of the record on December 28, 2004. They were included in the appellate record after Diatom asserted its claims of privilege. Nothing in this court’s file evidences any attempt by Diatom to recall these documents as privileged. ⁽²⁸⁾ See Tex. R. Civ. P. 193.3(d). Therefore, for the present litigation, we conclude that Diatom’s prior assertion of privilege as to these documents has been waived.

Using these disclosed documents, Insurers contend that other documents relating to the underlying proceeding are discoverable and admissible. After reviewing all of the documents provided to the trial court for in camera inspection, the documents Insurers seek by this issue are duplicates of the documents that were included in the appellate record. As Diatom’s prior assertions of privilege regarding these documents have been waived, we overrule Insurers’ issue as moot.

Recusal of Judge

Insurers contend that the denial of their motion to recuse Judge LaGrone was an abuse of discretion because, as the judge that presided over the underlying trial, Judge LaGrone was a vital material witness in the Stowers suit and had personal knowledge of disputed material facts. The denial of a motion to recuse is reviewed for abuse of discretion. Brosseau v. Ranzau, 81 S.W.3d 381, 399 (Tex.App.-Beaumont 2002, pet. denied). Insurers contend that the Segers’ citation to Judge LaGrone’s statement in the underlying trial transcript that “The Court will call for trial in Cause No. 30,110, . . .” made Judge LaGrone a vital material witness in the Stowers action. However, the complete transcript of the underlying proceeding, which includes the statement Insurers complain of, was admitted into evidence in the Stowers action. Further, Judge LaGrone’s calling the underlying proceeding for trial did not constitute his participation “as . . . material witness in the matter in controversy.” Tex. R. Civ. P. 18b(2)(d). Certainly, as addressed above, Insurers may refute Judge LaGrone’s characterization of the underlying proceeding as a “trial,” but we do not conclude that the trial court abused its discretion in denying Insurers’ motion for recusal on this basis.

Additionally, Insurers contend that Judge LaGrone must have knowledge of disputed evidentiary facts regarding whether the underlying proceeding was, in fact, a fully adversarial trial. However, Insurers fail to identify any specific knowledge of disputed evidentiary facts purportedly held by Judge LaGrone. We will not find recusal appropriate solely on the basis of speculation regarding facts that may or may not be known by the presiding judge.

We overrule Insurers’ challenge to the denial of their motion to recuse.

Disqualification of Counsel

Finally, Insurers contend that two attorneys in the Segers’ counsel, Brian Heinrich and Joe Hayes, were disqualified from representing the Segers in their Stowers action because each (1) were witnesses in the Stowers action, see Tex. Disc. R. Prof. Cond. 3.08, and (2) were to be paid on a contingent basis, see Tex. Disc. R. Prof. Cond. 3.04. The denial of a motion for disqualification is reviewed for abuse of discretion. See Metro. Life Ins. Co. v. Syntek Fin. Corp., 881 S.W.2d 319, 321 (Tex. 1994). As both parties to the present dispute acknowledge, the disqualification of counsel is a severe remedy, which is not to be invoked lightly. See In re Nitla S.A. de C.V., 92 S.W.3d 419, 422 (Tex. 2002). Even if challenged counsel has committed a disqualifying act, the party requesting disqualification must demonstrate that counsel’s conduct caused actual prejudice. Id.

Assuming, without deciding, that Heinrich and/or Hayes were lawyer-witnesses such that they would be disqualified from representing the Segers in the Stowers action, Insurers have failed to present any evidence that they were harmed. Insurers cite a deposition of Professor Bob Schuwerk, which is not a part of the record, as concluding that Heinrich and Hayes violated Rules 3.04 and 3.08 of the Texas Disciplinary Rules of Professional Conduct. However, proof that an attorney violated a Rule of Professional Conduct, without a further showing of harm, is insufficient to justify disqualification. Id. Nothing in Insurers’ discussion of Schuwerk’s deposition identifies how they were harmed by any alleged violation of the Rules by either Heinrich or Hayes.

Insurers contend that the trial court took certain unrelated actions to avoid having to rule that Heinrich and Hayes were disqualified to represent the Segers in the Stowers action, however, this contention is wholly unsupported by evidence and is purely speculative. See Miller v. Hood, 536 S.W.2d 278, 285 (Tex.Civ.App.-Corpus Christi 1976, writ ref’d n.r.e.) (presumption of regularity and validity of trial court rulings unless facially invalid or invalidity shown in the record). Additionally, while Insurers contend that Hayes and Heinrich were disqualified because they were witnesses whose payment was contingent upon the outcome of the case, Insurers fail to identify any evidence establishing that Hayes or Heinrich were being paid on a contingent basis.

We overrule Insurers’ issue regarding the denial of their motion to disqualify Hayes and Heinrich.

Conclusion

We affirm the trial court’s denial of Insurers’ motion to recuse, denial of Insurers’ motion to disqualify counsel, and grant of summary judgment on the issue of whether the Segers made a sufficient settlement demand within the CGL policy limits. In all other respects, we reverse the judgment and remand this cause for new trial consistent with this opinion.

Mackey K. Hancock

Justice

1. John T. Boyd, Chief Justice (Ret.), Seventh Court of Appeals, sitting by assignment.
2. See generally G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544, 548 (Tex.Comm’nApp. 1929, holding approved).
3. We note that the trial court also entered summary judgment regarding issues related to damages, but, as the damages issue was ultimately decided by directed verdict, we will address it separately.
4. Further reference to current provisions of the Insurance Code will be by reference to “section __” or “§ __.”
5. Further citation to the pre-amendment version of article 1.14-1 will be by reference to “former article 1.14-1, § __.” Further citation to the post-amendment version of article 1.14-1 will be by reference to “amended article 1.14-1, § __.”
6. Further citation to the pre-amendment version of article 1.14-2 will be by reference to “former article 1.14-2, § __.” Further citation to the post-amendment version of article 1.14-2 will be by reference to “amended article 1.14-2, § __.”
7. Recently, the Texas Supreme Court clarified that the effect of the post-amendment provisions applicable to this case is to preclude unauthorized insurers from enforcing its policies. See Lexington Ins. Co. v. Strayhorn, 209 S.W.3d 83, 89 (Tex. 2006). Thus, we conclude that the Texas Supreme Court has specifically rejected Insurers’ contention that the applicable provisions do no more than preclude an unauthorized insurer from bringing suit.
8. Other Texas courts have likewise applied post-amendment unauthorized and surplus lines insurance provisions retroactively, even when the policies were issued prior to 1993. See Lexington Ins. Co., 209 S.W.3d at 85, 89-90 (applying post-amendment article 1.14-1, § 11, to case involving insurance tax dispute covering taxes accruing from 1992 through 1995); Mid-Am. Indem. Ins. Co., 22 S.W.3d at 325 (requiring eligibility under post-amendment article 1.14-2 as prerequisite to bond exemption, even though the exemption specifically required eligibility at the time coverage issued, which was prior to 1993 amendments); Wheelways Ins. Co. v. Hodges, 872 S.W.2d 776, 779, 784 n.10 (Tex.App.-Texarkana 1994, no writ) (applying amended article 1.14-1, § 8, to case involving accident occurring in 1989 with suit against insurer filed in 1991).
9. The same restriction on the enforcement of unauthorized insurance contracts may be found in both the former and amended law. See amended article 1.14-1, § 8; former article 1.14-1, § 8.
10. Reference to the pre-amendment version of article 1.14-2, reveals that there was no section 6A. As section 6A was added by the 1993 amendments, but it did no more than authorize the establishment of the Surplus Lines Stamping Office. See amended article 1.14-2, § 6A.
11. Specifically, the certification provides that Yorkshire was “an unlicensed insurer which is an eligible insurer for providing surplus lines insurance under article 1.14-2, Texas Insurance Code from September 1, 1989 thru November 12, 2001 and from July 1, 2002 thru the present.”
12. Specifically, the certification provides that Ocean Marine was “an unlicensed insurer which is an eligible insurer for providing surplus lines insurance under article 1.14-2, Texas Insurance Code from November 1, 1989 thru the present.”
13. Further, we note that the Segers do not contest Insurers’ general eligibility to provide surplus lines insurance.
14. Relating to local recording agent licenses.
15. We note that evidence was offered relating to this issue by Insurers, but this evidence was objected to by the Segers, the objection was sustained by the trial court, and Insurers failed to challenge the trial court’s ruling on appeal.
16. By their appeal, Insurers urge error only in regard to the leased-in worker exclusionary defense to coverage. Thus, any objection to any other contractual defense has been inadequately briefed and is waived. See Knie v. Piskun, 23 S.W.3d 455, 460 (Tex.App.-Amarillo 2000, pet. denied); Lewis v. Deaf Smith Elec. Co-op., Inc., 768 S.W.2d 511, 512-13 (Tex.App.-Amarillo 1989, no writ.).
17. As we have previously determined that Insurers have failed to establish their right to assert their contract-based defenses, Insurers would not be entitled to summary judgment on coverage, even if they established that a contractual provision excluded coverage as a matter of law. See Tex. R. App. P. 47.1.
18. We focus on the term “worker” in an effort to harmonize the provisions of the policy. Claims for bodily injury by a leased-in worker that concurrently holds the status of an employee would be covered under the standard employee exclusion contained in the CGL policy. Thus, an exclusion for a leased-in employee would be redundant.
19. We note that the Segers’ present no alternative interpretation of the phrase “leased-in employee/worker.” Other than the interpretation identified in this opinion, we can identify no other reasonable interpretation of this phrase and, therefore, conclude that the phrase is unambiguous.
20. No issue has been raised regarding the timely payment of these premiums.
21. We express no opinion regarding what, if any, effect the insolvency of certain severally liable insurers would have on whether a demand within stated policy limits, but exceeding the solvent insurers’ proportionate share of coverage, would have on the establishment of a “demand within limits” in the context of a subsequent Stowers action. In the present case, it is undisputed that, when the Segers made their $250,000 demand, the demand was within the available policy limits of the solvent CGL insurers.
22. An insurer in a liability policy agrees to defend the insured and protect it from liability. If the insurer is unsuccessful in protecting insured from liability and must settle or, if a judgment is rendered against the insured, the insured is not required to pay the obligation before the insurer is required to pay. If a judgment is rendered against the insured, the insurer’s liability to pay attaches at that time. This obligation to pay continues until the judgment is satisfied.

Conversely, an indemnity policy provides that the insurer’s liability does not attach unless the judgment against the insured has actually been paid.

See id. at 504.

23. While the Segers entered into a covenant not to execute the judgment against Gillman in the present case, we understand Insurers’ argument to analogize a covenant not to execute with a judgment proof insured. However, we conclude that the analysis and the result would be the same if Insurers were contending that the covenant not to execute precluded proof of harm to Diatom.
24. Insurers contend that it was error for the judgment to have been admitted into evidence for the judge’s eyes only. However, the judgment was admitted into evidence. Because the trial court gave the judgment conclusive effect on the issue of damages and rendered a directed verdict in accordance with that judgment, the fact issue of the amount of damages suffered by Diatom was removed from the jury’s consideration. Therefore, whether the trial court erred in the manner in which it admitted the judgment is subsumed within the issue of whether the trial court erred in directing damages in accordance with this judgment and will be addressed below.
25. In reviewing the Segers’ motion relating to these points, we note that the “fully adversarial relationship” issue in no way addressed the events occurring at the underlying trial. While the Court did not define “fully adversarial trial” in Gandy, we believe that a determination of whether a hearing constitutes a “fully adversarial trial” requires a review of the extent to which the parties to the proceeding participated. See Gandy, 925 S.W.2d at 713. When the judgment is an agreed judgment, default judgment, or when the underlying defendant’s participation is so minimal as to evidence that the hearing was not adversarial, the judgment resulting from that hearing may not be admitted as evidence of damages in the Stowers action. See id. at 713, 714. As such, the determination of whether the hearing was fully adversarial requires review of the underlying proceedings.
26. “In no event, however, is a judgment for plaintiff against defendant, rendered without a fully adversarial trial, binding on defendant’s insurer or admissible as evidence of damages in an action against defendant’s insurer by plaintiff as defendant’s assignee” (emphasis added).
27. The documents submitted for the trial court’s in camera review include documents that were prepared for the purpose of facilitating the rendition of legal services in defense of Insurers’ third-party action against Diatom. These documents appear to be privileged under Texas Rule of Evidence 503(b), but, in any event, are not sought by Insurers through this issue.
28. However, the conclusion that Diatom has not attempted to “snap back” these documents is not a determination that it has waived its claim of privilege. Because Diatom is no longer a party to the present action, Insurers’ identification of the disclosure of these documents does not necessarily result in Diatom’s actual knowledge of the disclosure.

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Court of Appeals of Texas,

Houston (14th Dist.).

Charles HARTLAND, Appellant

v.

PROGRESSIVE COUNTY MUTUAL INSURANCE COMPANY, Appellee.

No. 14-07-00955-CV.

April 23, 2009.

Chief Justice HEDGES and Justices ANDERSON and SEYMORE.

MAJORITY OPINION

JOHN S. ANDERSON, Justice.

Appellant, Charles Hartland, filed suit against appellee, Progressive County Mutual Insurance Company, after the denial of an auto-insurance claim for a single-car accident. The jury found appellant did not mail the premium to renew the policy until after the policy had expired; therefore, appellant did not have insurance when the accident occurred. On appeal, appellant contends the parties formed a contract under the terms of the original renewal policy when appellee accepted his premium payment, and therefore, the policy cov-ered the accident. In addition, appellant argues appellee violated the Texas Administrative Code when it denied his claim. We affirm.

1. Factual and Procedural Background

Appellant, Charles Hartland, obtained auto insurance through appellee, Progressive County Mutual Insurance Company. Policy number 37156966-1 began on November 9, 2003, at 12:01 a.m. and ended on May 9, 2004, at 12:01 a.m. Appellee sent appellant a renewal bill on April 14, and a renewal reminder on April 23, stating the renewal policy period would run from May 9 to November 9. Appellant claimed he mailed a check in the amount of the renewal premium on May 8; appellee attached a lockbox report to its counter-claim for declaratory judgment showing the postmark date was May 11. Joan Hartland, appellant’s wife, was in a single-car accident on May 9, 2004 at approximately 8:00 a.m., damaging a car covered under the initial policy.

Appellee presented evidence that it received appellant’s check on May 16, and on May 18, appellee sent appellant a revised renewal declarations page. Policy number 37156966-2 listed coverage dates from May 12, 2004, at 12:01 a.m. to November 12, 2004, at 12:00 a.m., excluding coverage for the date of the accident. Appellant requested review by appellee of the denial of the claim. On August 6, appellee again denied the claim, stating the policy was not in effect at the time of the loss. On December 29, appellant’s attorney sent a letter asking appellee to reconsider; appellee denied the claim once again.

Appellant filed an original petition, alleging breach of contract, unfair claim-settlement practice, breach of duty of good faith and fair dealing, damages, and attorney fees. Appellee filed a counterclaim for declaratory judgment, stating it owed no duty or obligation to Hartland because the policy had expired. Appellee also filed a motion for summary judgment with the same contention as the declaratory judgment. The trial court denied the motion for summary judgment and the case went to trial. The jury answered “No” to the following question: “Do you find that Charles Hartland deposited his renewal policy premium payment with the post office on or before 12:01 a.m. on May 9, 2004?”Appellant then filed a motion for judgment notwithstanding the verdict and to disregard jury findings, arguing that even if he mailed his payment after the policy period ended, appellee formed a contract based on the original terms of the renewal by accepting his payment. The trial court denied appellant’s motion and entered final judgment on the verdict.

1. Discussion

In three issues on appeal appellant contends the trial court erred when it denied appellant’s motion for judgment notwithstanding the verdict because: (1) the parties formed an enforceable contract as a matter of law; and (2) appellee violated sections of the Texas Administrative Code, making any attempts to restrict appellant’s coverage void.FN1Therefore, we will construe appellant’s three issues as actually raising two issues on appeal.

FN1. Appellant raised only the Administrative Code and has not based any assertion of error by the trial court on the provisions of the Texas Insurance Code. Therefore, we do not address what, if any, impact the Insurance Code might have on the facts found in this case. See Valadez v. Avitia. 238 S.W.3d 843, 845 (Tex.App.-El Paso 2007, no pet.)(holding that, in a civil case, an appellate court has no duty, or even the right to perform an independent review of the record and applicable law to determine whether there was error).

1. The Standard of Review

A court may disregard a jury’s verdict and render judgment notwithstanding the verdict (JNOV) if no evidence supports the jury’s findings, or if a directed verdict would have been proper. Tiller v. McClure, 121 S.W.3d 709, 713 ( Tex.2003). To determine whether a JNOV is appropriate, we apply the standards that govern “no evidence,” i.e., legal-sufficiency review. See Keller v. Wilson, 168 S.W.3d 802, 823 ( Tex.2005); Wal-Mart Stores, Inc. v. Miller, 102 S.W.3d 706, 709 ( Tex.2003).

A legal-sufficiency point must be sustained: (1) when there is a complete absence of a vital fact; (2) when rules of law or evidence preclude according weight to the only evidence offered to prove a vital fact; (3) when the evidence offered to prove a vital fact is no more than a scintilla; or (4) when the evidence conclusively establishes the opposite of the vital fact. Keller, 168 S.W.3d at 810. Under the legal-sufficiency standard, we must credit evidence that supports the judgment if reasonable jurors could, and we must disregard contrary evidence unless reasonable jurors could not. See id. at 827.If the evidence falls within the zone of reasonable disagreement, we may not invade the fact-finding role of the jurors, who alone determine the credibility of the witnesses, the weight to give their testimony, and whether to accept or reject all or any part of that testimony. See id. at 822.Unless “there is no favorable evidence” to support the challenged finding or “if contrary evidence renders supporting evidence incompetent … or conclusively es-tablishes the opposite” of the finding, we must affirm. See id. at 810-11.

1. Alleged Contract Formation

In his first issue, appellant argues that the jury’s answer to question one of the charge is immaterial because an enforceable contract exists as a matter of law. Specifically, appellant contends the parties formed a contract under the original terms of the renewal policy when appellee retained payment on the forfeited policy. Appellant raised this issue for the first time in his motion for judgment notwithstanding the verdict.

Appellee characterizes this argument as an affirmative defense of waiver and asserts that appellant cannot raise this argument on appeal because it must have been pleaded or tried by consent. Assuming without deciding that appellant has properly preserved his complaint on appeal, appellant’s first issue is without merit.

It is the general rule that a renewal of an insurance policy constitutes a separate and distinct contract for the period of time covered by the renewal. Zuniga v. Allstate Ins. Co., 693 S.W.2d 735, 738 (Tex.App.-San Antonio 1985, no writ). Any offer by the insurer to renew an insurance contract must be accepted by the insured completely and unequivocally to constitute a new contract. Viking County Mutual Ins. Co. v. Jones, No. 05-91-01815-CV, 1992 WL 211068, at *3 (Tex.App.-Dallas August 31, 1992, no writ) (not designated for publication). The payment of the premium in accordance with provisions of the insurance policy is a condition precedent to establishment of liability against the insurer. Id. The policy in this case states:

If we offer to renew or continue and you or your representative do not accept, this policy will automatically terminate at the end of the current policy period. Failure to pay the required renewal or continuation premium when due shall mean that you have not accepted our offer.

The renewal notice and bill sent by appellee provided the following payment instructions to appellant: “To renew your policy, please pay at least the minimum amount due by the due date.”The jury found that appellant did not pay his premium on time. Because appellant failed to timely pay the renewal premium, the condition for acceptance of the renewal policy was not met and the policy did not begin, leaving appellant without insurance coverage when the accident occurred. See Id. at *4 (holding because insured did not timely pay renewal premium, policy was not canceled but expired under its own terms and once insured paid renewal premium insurer properly renewed policy effective on the date of the insured’s payment); Zuniga, 693 S.W.2d at 738 (holding that since the renewal payment was not made in accordance with the terms of the policy, the renewal policy never came into existence); Southern Farm Bureau Cas. Ins. Co. v. Davis, 503 S.W.2d 373, 377 (Tex.App.-Amarillo 1973, writ ref’d n.r.e.) (stating offer for renewal of auto insurance could not come to fruition until premium paid); Trinity Universal Ins. Co. v. Rogers, 215 S.W.2d 349, 352 (Tex.App.-Dallas 1948, no writ) (stating no completed contract when insured did not indicate acceptance of renewal policy).

Relying heavily on the Texas Supreme Court case Bailey v. Sovereign Camp, W.O.W., appellant con-tends the parties formed an enforceable contract when appellee accepted appellant’s late premium payment. Bailey was a member of Sovereign Camp, W.O.W., a fraternal benefit society. Bailey v. Sovereign Camp, W.O.W., 116 Tex. 160, 165, 286 S.W. 456, 456 (1926). As part of his membership, Bailey was issued a benefit certificate for $2,000, payable to his wife upon his death. Sovereign Camp, W.O.W. v. Bailey, 277 S.W. 782, 783 (Tex.App.-Texarkana 1925), rev’d, 116 Tex. 160, 286 S.W. 456 (1926). After Bailey died, his wife made a claim for the benefit certificate. Id. at 783.The organization denied the claim, stating that Bailey was never legally reinstated after his suspension for failure to pay his May dues. Id.

Under the organization’s bylaws, Bailey could have been reinstated within 10 days after default if he paid all arrearages and dues and presented a warranty of good health. Bailey, 116 Tex. at 165, 286 S.W. at 456-57. Although Bailey mailed the money order on the tenth day, it was not received until the twelfth day. Bailey, 116 Tex. at 165, 286 S.W. at 457. As a result, Bailey’s payment was untimely because payment had to be received by the agent within the 10-day period. Bailey, 116 Tex. at 165-66, 286 S.W. at 457. Despite Bailey’s late payment, the organization reinstated his membership and did not require the warranty of good health. Bailey, 116 Tex. at 167, 286 S.W. at 457. The court held the organization waived the requirement of good health when it accepted the late payment. Bailey, 116 Tex. at 168, 286 S.W. at 458. In doing so, the court set forth three conditions for waiver of a forfeiture:

First. The insurer must have knowledge of the facts constituting the forfeiture of the certificate. Second. The forfeiture must be complete and absolute. Third. There must be some unequivocal act on the part of the insurer which recognizes the continuance of the policy, or which is wholly inconsistent with the forfeiture.

Bailey, 116 Tex. at 166, 286 S.W. at 457.

The Bailey case is distinguishable from the facts before us. Here, appellant failed to pay a premium to continue his auto-insurance coverage. Appellant’s initial policy had expired as indicated on the renewal bill: “Your current policy will expire on May 9, 2004 at 12:01 a.m.” Appellant has conceded, for the sake of this argument, that his payment was not made until after the expiration of the initial policy and after his wife’s accident. Appellant’s policy provides:

If we offer to renew or continue and you or your representative do not accept, this policy will automatically terminate at the end of the current policy period. Failure to pay the required renewal or continuation premium when due shall mean that you have not accepted our offer.

When the initial policy expired, the relationship between appellant and appellee had ended according to the terms of the initial policy. In Bailey, the organization chose to reinstate Bailey as a member, giving him the right to his existing benefit certificate. In this case, there was no policy in existence. When appellant paid the renewal premium, appellee issued a new policy effective on the date of payment. Unlike Bailey, appellant did not forfeit the right to an existing policy by not paying the premium and then resurrect it when appellee accepted the premium; the policy expired and a new policy did not begin until appellant paid the premium. See Davis, 503 S.W.2d at 377 (holding no insurance coverage on day of auto accident when insured paid renewal premium one day after accident); Rogers, 215 S.W.2d at 352, (holding no insurance coverage on day of auto accident when insured paid renewal premium three days after accident).

Therefore, we overrule appellant’s first issue on appeal.

1. Alleged Texas Administrative Code Violations

In his second issue, appellant asserts appellee violated various sections of the Texas Administrative Code in its handling of appellant’s policy. Appellant did not raise this issue until his reply to appellee’s response to his motion for judgment notwithstanding the verdict. Assuming without deciding appellant properly preserved his complaint on appeal, appellant’s second issue is also without merit.

Appellant is correct that Texas Administrative Code section 5.7005(c) provides “[p]ersonal automobile policies which are written for a period of less than one year must be renewed, at the option of the insured, for additional periods so as to accumulate a minimum of 12 months’ continuous coverage.”28 Tex. Admin. Code § 5.7005(c) (2008). However, coverage can terminate if premium payments are not made to renew the policy before the initial policy expires. See Viking County Mutual Ins., 1992 WL 211068, at *3 (con-cluding that even though policies written for less than a year must be renewed at the option of the insured, a policy terminates under its own terms if the insured does not timely pay the renewal premium); Longoria v. Greyhound Lines, Inc., 699 S.W.2d 298, 304 (Tex.App.-San Antonio 1985, no writ) (concluding policies written for less than one year must be renewed unless premium payments are not made before expiration of initial policy). Here, appellee offered to renew appellant’s six-month policy for an additional six months; however, appellant exercised his option to not renew the policy by failing to make a timely payment to renew the policy, thus ensuring continuous coverage for a one year period of time. Therefore, because the policy expired under its own terms when appellant failed to timely remit his payment to renew his policy, appellee did not violate section 5.7005(c) of the Texas Administrative Code.

*5 Appellant also claims appellee violated section 5.7007 of the Texas Administrative Code. According to section 5.7007(a), “[a] policy must be renewed at expiration, at the option of the policyholder, unless the company has mailed written notice to the policyholder of its intention to decline renewal at least 30 days in advance of the policy expiration date.”28 Tex. Admin. Code § 5.7007(a). Appellee did not have an intention to decline renewal; in fact, appellee offered to renew the policy, at the option of appellant, by sending appellant the notice of renewal. A notice of cancellation is not required when a policy expires under its own terms. See Zuniga, 693 S.W.2d at 738. Because appellant’s policy had expired under its own terms, we hold appellee was not obligated to comply with the cancellation procedures found in section 5.7007(a) of the Texas Administrative Code.

Appellant next contends appellee violated sections 5.7011 and 5.7014 of the Texas Administrative Code. However, pursuant to section 5.7001(b), sections 5.7011 and 5.7014 apply to all automobile insurance policies except personal automobile policies. 28 Tex. Admin. Code § 5.7001(b). Since appellant’s policy was a personal automobile insurance policy, sections 5.7011 and 5.7014 do not apply and appellee was not required to comply with any procedures found therein.

Appellant also contends appellee’s conduct violated section 5.7004 of the Texas Administrative Code. Section 5.7004 provides:

Any company that declines to recognize or put into effect additional coverage to which an insured is entitled under the provisions of an existing policy, or that attempts to reduce or restrict coverage under the provisions of an existing policy by endorsements or by any other means, is in violation of these sections if such acts are performed without the consent of the insured, and shall be subject to the same penalties as a policy that is cancelled in violation of these sections.

28 Tex. Admin. Code § 5.7004.

Because appellant’s policy expired under its own terms, appellee did not (1) impose a restriction or reduction on his coverage; or (2) decline to recognize or put into effect additional coverage. See Zuniga, 693 S.W.2d at 738. Therefore, we hold appellee did not violate section 5.7004 and overrule appellant’s second issue on appeal.

III. Conclusion

Having overruled appellant’s issues on appeal, we affirm the judgment of the trial court.

SEYMORE, J., dissenting without opinion.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas insurance defense attorneys in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 08-10450
KIMBERLY-CLARK CORPORATION
Plaintiff – Appellee
v.
FACTORY MUTUAL INSURANCE COMPANY
Defendant – Appellant
Appeal from the United States District Court
for the Northern District of Texas
Before GARWOOD, DENNIS, and PRADO, Circuit Judges.
DENNIS, Circuit Judge:
This case concerns defendant-appellant Factory Mutual’s decision in
October 2003 to distribute to its policyholders a $325 million membership credit
that was contingent on policy renewal. Factory Mutual is a mutual insurance
company and plaintiff-appellee Kimberly-Clark was a policyholder for almost 1
United States Court of Appeals
Fifth Circuit
F I L E D
April 27, 2009
Charles R. Fulbruge III
Clerk
(unpublished) (same).
2
30 years with Factory Mutual and its predecessor company. The district court
concluded that Factory Mutual breached its contract with Kimberly-Clark when
it denied Kimberly-Clark its equitable share of the $325 million distribution.
The district court held that because Kimberly-Clark was a policyholder and
member in good-standing on the distribution’s record date, Kimberly-Clark
should be accorded its equitable share. We agree and AFFIRM the district
court’s judgment.
BACKGROUND
Factory Mutual’s charter stipulates that the company, like all mutual
insurance companies, will “establish and maintain a surplus against
extraordinary losses and other contingencies, by appropriating from time to time
such sums as the board of directors may determine” “in addition to any unearned
premium or reinsurance.” In accordance with the charter, Factory Mutual
maintains a surplus fund that includes appropriated sums and unearned
premiums to cover extraordinary losses and other contingencies. In mid-2003,
Factory Mutual initiated internal discussions regarding a membership credit for
its policyholders. One major reason for a membership credit was the unexpected
growth in the surplus funds.
At about the same time, after extensive discussions with Factory Mutual,
Kimberly-Clark indicated to Factory Mutual during a meeting with Factory
Mutual on August 26, 2003, that it intended not to renew its policy. Kimberly-
Clark’s policy expired on October 1, 2003.
On October 8, 2003, Factory Mutual informed the Rhode Island
Department of Business Regulation (“DBR”) that it was planning a proposed
membership credit. On October 9, 2003, Factory Mutual’s Board of Directors
3
approved the proposed $325 million membership credit. Factory Mutual publicly
announced the credit on October 20, 2003. In a series of documents, Factory
Mutual described the membership credit to its policyholders. Factory Mutual set
eligibility for the distribution as follows: “[a]ll Factory Mutual Insurance
Company policyholders . . . on the date of record will be eligible to receive the
membership credit when their policies renew during the membership credit
period.” (emphasis added). Factory Mutual thereby conditioned the distribution
of the membership credit on a policyholder’s future act — signing a policy
renewal before the policy expired. Factory Mutual also established the “date of
record” (or record date) as September 30, 2003.
In its notices to policyholders, Factory Mutual specifically linked the
membership credit to its surplus growth and framed the distribution as a reward
or return from that growth. In an October 20, 2003 press release, Factory
Mutual stated:
Policyholders of commercial and industrial property insurer FM
Global will receive a collective US$325 million in savings on their
premium beginning January 1, 2004 as a result of lower than
expected property losses during recent years, resulting in higher than
projected surplus growth. The return will be disbursed to FM Global
policyholders as a membership credit on premium for 2004 policy
renewals.
(emphasis added). Factory Mutual specifically apportioned shares of the
membership credit distribution based on the amount of each policyholder’s
premium contribution on the record date and the number of years the
policyholder held a policy with the company. The distribution acted akin to a
mutual insurance company’s typical distribution of surplus capital as a return
to policyholders in proportion to their past contributions, except that Factory
See, e.g., In re MetLife Demutualization 2 Litig. 495 F. Supp. 2d 310, 313 (E.D.N.Y.
2007) (“A mutual insurance company’s role with respect to its policyholders is to apportion the
company’s surplus — created in part from the payment of premiums paid by the policyholders
— equitably among policyholders in proportion to their contributions thereto.”); RUSS &
SEGALLA, 3 COUCH ON INS. § 39:18 (“As a general rule, the ‘surplus’ of a mutual company
belongs equitably to the policyholders who contributed to it, in the proportion in which they
contributed.”).
4
Mutual’s distribution was contingent on policy renewal.2
On the distribution’s record date, Kimberly-Clark was a Factory Mutual
policyholder in good standing, but it had decided not to renew its policy when the
policy expired on October 1, 2003. Because it was a policyholder in good standing
on the distribution’s record date, Kimberly-Clark requested a portion of the 2004
membership credit in cash, which Factory Mutual denied. Subsequent
negotiations between the parties failed to resolve the dispute. Kimberly-Clark
therefore filed suit on September 30, 2005, in the 116th Judicial District Court
of Dallas County, Texas, against Factory Mutual, alleging breach of contract,
fraud, negligent misrepresentation, unjust enrichment, and violations of the
Texas Insurance Code. On October 24, 2005, Factory Mutual filed a notice of
removal to the United States District Court for the Northern District of Texas.
On October 5, 2006, the parties entered into a joint stipulation, dismissing with
prejudice the fraud and negligent misrepresentation claims along with several
Texas Insurance Code claims. On December 15, 2006, both parties filed crossmotions
for summary judgment on the breach of contract, unjust enrichment,
and remaining Texas Insurance Code claims.
On September 21, 2007, the district court issued a Memorandum Order
granting summary judgment in favor of Kimberly-Clark on the breach of
contract claim awarding Kimberly-Clark $3,062,776.90 in damages. The
damages reflect the share of the distribution that Kimberly-Clark would have
received had it been accorded a share. The district court found that the charter
5
of the company, the by-laws, and the policy unambiguously confirmed that
Kimberly Clark “bargained for coverage by and membership in a mutual
insurance company (as opposed to a stock insurance company) and all of the
rights and benefits that typically accompany membership in a mutual insurance
company.” The district court therefore concluded that:
Thus, the Court infers that under the Policy, upon purchasing a
policy and obtaining membership in the Company, a policyholder
gains an interest in the surplus and has a right to its equitable
share in any distribution of such surplus as declared by the Board,
so long as the policyholder is a member of the company on the
relevant date. Consequently, refusing to provide Kimberly-Clark its
equitable share of the surplus, even though the company was a
member of Factory Mutual on the record date, breaches the Policy.
Factory Mutual timely appeals on two grounds: (1) that the district court
erroneously considered the plaintiff’s claims within a breach-of-contract
framework rather than under a corporate governance framework; and (2) if the
claims are considered within a breach-of-contract framework, the district court
erred in concluding that Factory Mutual breached its contract.
STANDARD OF REVIEW
This court reviews a district court’s grant of summary judgment de novo,
applying the same standards as the district court: A party is entitled to
summary judgment only if “the pleadings, the discovery and disclosure materials
on file, and any affidavits show that there is no genuine issue as to any material
fact and that the movant is entitled to judgment as a matter of law.” FED. R. CIV.
P. 56(c). On a motion for summary judgment, the court must view the facts in
the light most favorable to the non-moving party and draw all reasonable
inferences in its favor. See Hockman v. Westward Commc’ns, LLC, 407 F.3d 317,
325 (5th Cir. 2004). In reviewing the evidence, the court must therefore “refrain
from making credibility determinations or weighing the evidence.” Turner v.
“The pr 3 ecise content of the Business Judgment Rule is provided by state law but,
generally speaking, ‘[u]nder this familiar rule of American jurisprudence, the courts refrain
from second guessing business decisions made by corporate directors in the absence of a
showing of fraud, unfairness or overreaching.’” Hoffman v. Kramer, 362 F.3d 308, 317 n.4 (5th
Cir. 2004) (quoting Capital Bancshares, Inc. v. F.D.I.C., 957 F.2d 203, 207 (5th Cir. 1992))
(alteration in original).
6
Baylor Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir. 2007).
ANALYSIS
I. Kimberly-Clark’s claims are properly analyzed under contract law
Factory Mutual contends that Kimberly-Clark’s claims for a portion of the
surplus distribution implicate corporate governance law, specifically the
“business judgment rule,” and therefore should not be considered under a 3
breach-of-contract framework. This choice between viewing a mutual insurance
policyholder’s claims as a matter of contract or as a matter of internal corporate
governance originates with the policyholder’s dual roles vis-a-vis the mutual
insurance company: the policyholder is both an insured customer and also a
controlling member of the insurer-company. See, e.g., Keystone Auto. Club Cas.
Co. v. Comm’r, 122 F.2d 886, 889-90 (3d Cir. 1941); Ohio Farmers Indem. Co. v.
Comm’r, 108 F.2d 665, 667 (6th Cir. 1940); Hutchins Mut. Ins. Co. of D.C. v.
Hazen, 105 F.2d 53, 57 (D.C. Cir. 1939). Kimberly-Clark’s claims against Factory
Mutual can be framed as either a breach of Kimberly-Clark and Factory
Mutual’s contractual relationship or as Kimberly-Clark’s disagreement with
other co-members about corporate governance and internal affairs.
Kimberly-Clark’s underlying claims allege that Factory Mutual improperly
denied Kimberly-Clark’s right, or eligibility, to a share of an announced surplus
disbursement. Courts clearly consider a policyholder’s right to a share of a
surplus distribution as a matter governed by contract law whereas a
policyholder’s grievances with a surplus distribution’s “timing, amount, and
4 In its admissions below, Factory Mutual describes the corporate board as having
“discretion to determine the time, amount and method of distribution of the membership
credit.”
5 In Lopez v. State Farm Mutual Automobile Insurance Co., 2008 WL 2744609, at *4
(Tex. App.-Corpus Christi June 30, 2008) (unpublished), a Texas Court of Appeals in an
unpublished decision contrasted the policyholder’s contractual right to participate in
announced dividends and the corporate board’s discretion over the distribution of those
dividends: (1) “Mutual insurance policyholders do not purchase the right to receive dividends,
only the right to participate in dividends, if any, on terms and conditions fixed by the board”
and (2) “The relationship between a mutual insurance company and its policyholders is
contractual, not fiduciary, and the insurer owes no duties to the policyholders other than those
stated in the policy.”
7
method” are corporate governance matters and thereby insulated from most 4
policyholder lawsuits by the business judgment rule. See Equitable Life
Assurance Society of the U.S. v. Brown, 213 U.S. 25, 47 (1909); Brown v. Royal
Highlanders, 299 N.W. 467, 471 (Neb. 1941); see also Prudential Ins. Co. of Am.
v. Miller Brewing Co., 789 F.2d 1269, 1279 (7th Cir. 1986); Andrews v. Equitable
Life Assurance Soc. of U.S., 124 F.2d 788, 789 (7th Cir. 1941); Boynton v. State
Farm Mut. Auto. Ins. Co., 429 S.E.2d 304, 307 (Ga. Ct. App. 1993); Greeff v.
Equitable Life Assurance Soc. of U.S., 54 N.E. 712, 715 (N.Y. 1899). 5
The parties do not dispute the propriety of the timing or amount of the
distribution, but Factory Mutual contends that its corporate decisions in respect
to a policyholder’s eligibility for a surplus distribution should be considered as
part of its discretion over the “method” of a surplus distribution. At issue in this
case is whether Factory Mutual’s “method” of distribution discriminates against
a particular subset of policyholders because they chose not to renew their polices
but were otherwise in good standing and had contributed to the surplus. Such
discrimination would be clearly outside of the board’s discretion over surplus
distributions because it would contravene state policy and is thereby not
protected by the business judgment rule. See N.Y. Life Ins. Co. v. Street, 265
6 In its briefs, Factory Mutual emphasizes the fact that this case must be decided under
Rhode Island and not Texas law. However, Factory Mutual also concedes in its briefs and in
oral argument that Texas and Rhode Island’s formulations of the business judgment rule do
not conflict. Compare Cates v. Sparkman, 11 S.W. 846, 849 (Tex. 1889) with Lynch v. John W.
Kennedy Co., No. PB 03-3355, 2005 WL 1530469, at *6 (R.I. Super. Ct. June 23, 2005)
(unpublished) (announcing similar formulations of the business judgment rule). Factory
Mutual is correct that corporate governance issues must be adjudicated using the law of the
state of incorporation, in this case, Rhode Island. See Askanase v. Fatjo, 130 F.3d 657, 670 (5th
Cir. 1997). However, because the business judgment rules for Rhode Island and Texas do not
conflict, this court need not undertake a choice-of-law analysis. See Railroad Mgmt. Co., L.L.C.
v. CFS La. Midstream Co., 428 F.3d 214, 222 (5th Cir. 2005) (“Where there are no differences
between the relevant substantive laws of the respective states, there is no conflict, and a court
need not undertake a choice of law analysis.”). The parties also do not dispute that the
pertinent rules under Texas and Rhode Island contract law applicable to this case are not in
conflict. Accordingly, we also need not engage in a choice-of-law analysis for the contract
claims.
8
S.W. 397, 402-03 (Tex. Civ. App. 1924); TEX. INS. CODE § 544.052; RHODE ISLAND
GEN. LAWS § 27-8-4 (describing state policy against discrimination among
insureds of the same class). The question presented to us is therefore: whether
Factory Mutual’s discrimination breaches Kimberly-Clark’s right to a
distribution share if other policy-holders, with materially identical contracts and
materially identical rights to a share, had received their shares. Accordingly,
Kimberly-Clark’s claims for a distribution share must be analyzed under a
breach-of-contract rubric and not under the business judgment rule. 6
II. Factory Mutual breached its contract with Kimberly-Clark when it
denied Kimberly-Clark its share of the surplus distribution
The policy contract is clearly labeled a “mutual insurance” contract. The
policy is silent as to the board’s discretion over the distribution of excess surplus,
but states that “[t]his policy is issued by a mutual company having special
regulations lawfully applicable to its organization, membership, policies, or
contracts of insurance.” It also states that “[t]he insured by accepting this policy
hereby becomes a member of this Company and subject to the provisions of its
charter and by-laws, with power to vote at its meetings.” Section 5 of Factory
9
Mutual’s Charter states:
[E]ach natural person, partnership, association, corporation or legal
entity insured on the mutual plan by the Corporation shall be a
member of the Corporation during the term of its policy, but no
longer, and at all meetings of the members shall be entitled to one
vote either in person or by proxy; provided, however, that where
there is more than one insured under any policy, such insureds shall
nevertheless be deemed to be a single member of the Corporation for
all purposes. The Corporation may issue policies which do not
entitle the insured to membership in the Corporation nor to
participate in its surplus.
(emphasis added). Finally, section 10 of Factory Mutual’s charter states: “Upon
termination of the membership of any member, all his or its right and interest
in the surplus, reserves and other assets of the Corporation shall forthwith
cease.” In sum, Factory Mutual and Kimberly-Clark’s contract (1) is a “mutual
insurance” policy; (2) acknowledges the “special regulations” applicable to
mutual insurance companies; and (3) grants policyholders an entitlement as a
member for “all purposes,” which includes (4) rights and interests in the surplus
until the policy’s termination (unless the policy states otherwise, which is not the
case here).
Courts consistently describe “mutual insurance” contracts as creating
certain settled expectations between the parties. As the Wisconsin Supreme
Court noted:
Every policy-holder [of a mutual insurance company] knows, or
ought to know, that he will remain a member so long as he remains
a policy-holder and no longer. He knows, or ought to know, that as
soon as his membership relation is established he becomes
possessed of an equitable interest in the assets of the company
consisting of all accumulations prior to his time, and such as may be
added thereto during his membership, but which cannot be realized
on in possession in the absence of a necessary distribution of the
surplus on account of the company going out of business, or in some
proper way.
10
Huber v. Martin, 105 N.W. 1031, 1039 (Wis. 1906); see also Fid. & Cas. Co. of
N.Y. v. Metro. Life Ins. Co., 248 N.Y.S.2d 559, 565 (N.Y. Sup. Ct. 1963). The
Supreme Court in Pennsylvania Mutual Life Insurance Co. v. Lederer described
the mutual company in this way:
In a mutual company, whatever the field of its operation, the
premium exacted is necessarily greater than the expected cost of the
insurance, as the redundancy in the premium furnishes the
guaranty fund out of which extraordinary losses may be met, while
in a stock company they may be met from the capital stock
subscribed. It is of the essence of mutual insurance that the excess
in the premium over the actual cost as later ascertained shall be
returned to the policy holder.
252 U.S. 523, 525 (1920); see also Nat’l Chiropractic Ins. Co. v. United States,
494 F.2d 332, 334 (8th Cir. 1974); Thompson v. White River Burial Ass’n, 178
F.2d 954, 957 (8th Cir. 1950); Keystone Mut. Cas. Co. v. Driscoll, 137 F.2d 907,
911 (3d Cir. 1943). Basically, the settled expectations when entering a contract
with a mutual insurance company are: (1) the policyholders pay premiums into
a common fund to cover contingencies, and (2) if there is an accumulated excess
of capital beyond what is necessary to cover contingencies (i.e., excess surplus),
the insurance company returns the excess in surplus distributions to the
policyholders. This essential aspect of the mutual insurance company’s
relationship with its policyholders is so-called insurance at actual cost or
“insurance at cost.” See White River Burial Ass’n, 178 F.2d at 957 (“To say that
an essential of mutual insurance is that the excess of premiums received over
the actual cost of insurance shall be returned to the policyholders is but another
way of saying that the essential of mutuality is insurance at cost.”). We have
stated that “[t]he furnishing of insurance to members at cost is the chief aim and
function of a mutual insurance company, and any company which does not
return to the policyholders or members the excess of the premium over the cost
11
cannot be said to be a mutual insurance company.” Am. Ins. Co. of Tex. v.
Thomas, 146 F.2d 434, 436 (5th Cir. 1945). Texas courts also agree with
describing the mutual insurance company’s purpose as providing policyholders
insurance “at cost.” See Mercury Life & Health Co. v. Hughes, 271 S.W.2d 842,
845 (Tex. Civ. App. 1954) (“While the [mutual insurance] policyholders do not
receive dividends, they get other equally valuable benefits. It is the duty of the
directors to operate the company as economically as possible and furnish
insurance to its policyholders as near actual cost as possible.”). Other authorities
unanimously agree in describing the purpose of a mutual insurance company as
providing insurance “at cost.” See, e.g., Mut. Fire Ins. Co. of Germantown v.
United States, 142 F.2d 344, 347 (3d Cir. 1944); Fid. & Cas. Co. of N.Y., 248
N.Y.S.2d at 566 (“The distribution of divisible surplus is in reality an adjustment
of the premium in retrospect of the amount found to have been actually
necessary to cover the contingencies which materialized and it effects a
reduction in the cost of the insurance.”); Dryden v. Sun Life Assurance Co. of
Can., 737 F. Supp. 1058, 1062-63 (S.D. Ind. 1989); C.J. Simons & Co. v. Am.
Mut. Liab. Ins. Co., 257 A.2d 743, 745 (N.J. Sup. Ct. 1969); McQuade v. Thacher,
198 N.Y.S.2d 715, 718 (N.Y. Sup. Ct. 1960). See generally RUSS & SEGALLA, 1
COUCH ON INS. § 1:32 (“The object [of mutual insurance] is to provide insurance
protection at cost.”).
Consequently, because they contracted for “at cost” insurance,
policyholders who contribute to a surplus are equitably “entitled” to a share of
any announced surplus distribution as a proportionate return on their prior
contributions to the accumulated capital stock. See, e.g., In re MetLife
Demutualization Litig. 495 F. Supp.2d 310, 313 (E.D.N.Y. 2007); RUSS &
SEGALLA, 3 COUCH ON INS. § 39:18 (“As a general rule, the ‘surplus’ of a mutual
company belongs equitably to the policyholders who contributed to it, in the
12
proportion in which they contributed.”). Consistent with these authorities, we
have stated, in a diversity case involving Texas law, that:
Dividends normally belong to the stockholders, which in a mutual
company are the policyholders, but the insured though not a
stockholder may by contract be allowed to participate. This share in
profits more naturally belongs to the insured than to the
beneficiary, and is a return to him of a part of his premium which
the year’s results have shown was not necessary to have been paid
to maintain the insurance with its legal reserve.
Union Cent. Life Ins. Co. v. Williams, 65 F.2d 240, 243 (5th Cir. 1933). Similarly,
Rhode Island has defined “mutual insurance company” to “mean[ ] a corporation
in which shares are held exclusively by members to whom profits are distributed
as dividends and members are both the insurer and the insured” in a health
insurance act. R. I. GEN. LAWS § 27-66-4(9) (emphasis added). Here, Factory
Mutual’s surplus distribution was apportioned based on past contributions, and
therefore policyholders who contributed, like Kimberly-Clark, should be entitled
to a share.
Because the right to the surplus is dictated by contract and is the
policyholder’s equitable right based on past contributions, the corporate board
has no competing right to the surplus assets once they announce the surplus to
policyholders. The Kentucky Supreme Court has stated:
[W]here the company is a mutual, being conducted on the plan of
giving the cheapest safe insurance to its members, all surplus ought
to belong to the members, the policy holders. For in a purely mutual
company there are no stockholders, and no one else therefore to
whom the surplus could go than its policy holders. And it should in
equity go to those who had contributed it. The officers of such a
corporation being paid salaries for their services have no interest as
such in the surplus.
U.S. Life Ins. Co. v. Spinks, 96 S.W. 889, 894 (Ky. 1906) (emphasis added); see
13
also Carlton v. S. Mut. Ins. Co., 72 Ga. 371, 1884 WL 2172, at *21 (Ga. June 10,
1884); RUSS & SEGALLA, 3 COUCH ON INS. § 39:37. Like a trustee, the board
manages and holds the funds until the funds are distributed to the insuredbeneficiary,
at which point it no longer has a competing interest over the funds.
Summarizing these principles, Russ & Segalla, 3 Couch on Insurance § 39:40,
concludes:
Although the legal title to the property of a mutual company
is held by the company, the property is held for the benefit of its
members, policyholders, and stockholders. The funds of the company
are to be treated as a trust fund for the members. . . .
Each member has the same proportionate interest that every
other member possesses. Policyholders are entitled to participate
in the annual surplus of the company and if there is an inequitable
distribution of surplus a policyholder may sue to obtain his or her
proportionate share. The right to share in a surplus may, however,
be restricted to current policyholders.
(footnotes omitted); see also Huber, 105 N.W. at 1032. Accordingly, a corporate
board has the discretion to manage the “timing, amount, and method” of a
surplus distribution but once a distribution’s timing, amount and method is
declared, the distribution funds no longer constitute the company’s property;
instead, the funds become the joint asset held by the members who are
policyholders at the distribution’s operative date. The Wisconsin Supreme Court
stated:
All this results in a necessity that some definite time be adopted
when the rights of individuals become fixed, after which may be
applied the arithmetical process by which they become known. In
deference to such necessity, the rule has become settled as to stock
corporations that a dividend belongs to those who own the stock
when it is declared. Complete analogy exists between rights of
members in a mutual insurance company and stockholders in a
stock company in and to such a surplus. Declaring a dividend is
nothing but authoritatively deciding to distribute some or all of the
14
surplus. We therefore think it entirely logical to apply the foregoing
well-established rule, and to hold that on March 19, 1906,[the
dividend distribution] became separated from the corporate assets
and became the property of the several members then existing,
payable to each on demand when the amount to which he was
entitled had been ascertained.
Zinn v. Germantown Farmers’ Mut. Ins. Co.,111 N.W. 1107, 1108 (Wis. 1907)
(emphasis added) (citations omitted). As the Wisconsin Supreme Court
acknowledged, there is a “complete analogy” between the “rights of members in
a mutual insurance company and stockholders in a stock company in and to such
a surplus.” Id. As this court has stated in the analogous context of stockholder
dividends:
Under the law of Texas, a declaration of dividends creates a debt
owed by the corporation in favor of each stockholder which cannot
be rescinded. Although the declaration of this dividend provided
that the sums thereunder were payable to the stockholders of record
at such times and in such installments during the year as the
directors saw fit, the liability of the company accrued as of the date
of the declaration.
C.I.R. v. Cohen, 121 F.2d 348, 349 (5th Cir. 1941) (footnote omitted). In short,
when a distribution is declared, the company becomes liable to pay the
policyholders because they collectively own any announced distribution from the
surplus. Because the corporate board controls the timing of the distribution, it
necessarily establishes “some definite time . . . when the rights of [policyholders]
become fixed” and the distributed funds are owned by those policyholders who
have rights at that time. Zinn,111 N.W. at 1108.
The parties dispute the date when rights of the policyholders became fixed
for the distribution, i.e., the distribution’s operative date. Factory Mutual
contends the operative date that fixes the rights of the policyholders is the date
the corporate board declared its approval of the distribution (i.e., the
The corporate board of a mutual insurance company does not necessarily have to 7
restrict a distribution to “current policyholders” at the time of the decision or announcement;
it may choose to set a retroactive operative date. See RUSS & SEGALLA, 3 COUCH ON INSURANCE
§ 39:40 (“The right to share in a surplus may, however, be restricted to current policyholders.”
(emphasis added)). The dissent relies on a provision of the Charter that simply provides that
a policy is effective only during the effective life of the policy. The corporate board decided to
set the operative date, i.e., the “record date,” for its distribution on a date within the effective
life of Kimberly-Clark’s policy. The board also stated that “[a]ll Factory Mutual Insurance
Company policyholders . . . on the date of record will be eligible to receive the membership
credit when their policies renew during the membership credit period.” (emphasis added).
Unlike the cases cited by the dissent, the board here clearly set a record date that was
different from the declaration date. In fact, the corporate board in Spence v. Medical Mutual
Liability Insurance Society of Maryland, 500 A.2d 1066, 1067 (Md. Ct. Spec. App. 1985)
emphasized the date of record and not the declaration date as the operative date of the
distribution. As we noted above, the record date defines the set of policyholders entitled to the
distribution and the timing of the distribution, i.e., setting the record-date, is protected by the
“business judgment rule,” a point conceded by Factory Mutual.
15
“declaration date”), which was October 9. Kimberly-Clark contends the operative
date was the date of record or the record-date as described in the public notices
to members describing the distribution details, which is September 30. Factory 7
Mutual’s contention is without merit. Again, the “complete analogy” between
stockholders in stock companies and mutual insurance policyholders, as to the
distribution of a surplus, is useful. The distribution materials specifically
establish the record date as September 30, 2003, and on that date Kimberly-
Clark was a policyholder in good standing. The “declaration date” is important
only because the company incurs liability to pay its promised distribution on the
declaration date. However, we have defined the “record date” as the operative
date one uses to determine the set of stockholders who can participate in a stock
corporation’s dividend distribution, i.e., the stockholders “of record.” See, e.g.,
Caruth Corp. v. United States, 865 F.2d 644, 648 (5th Cir. 1989) (“In general,
dividend income is taxed to the shareholder who, on the record date, owns the
stock with respect to which dividends are paid and who is entitled to receive the
16
dividend.”); Cohen, 121 F.2d at 349 (noting that the company incurred its
liability to pay dividends on the declaration date to the stockholders “of record”).
See generally BLACK’S LAW DICTIONARY 423 (8th ed. 2004)(defining “record date”
to mean the “[t]he date on which a stockholder must own shares to be entitled
to vote or receive a dividend. — Also termed date of record”). The relevant state
statutes also emphasize the importance of the “record date” as the operative date
to ascertain the stockholders of record for a capital distribution in stock
corporations. See TEX. BUS. CORP. ACT ANN. art. 2.26 (describing the record date
as determining which shareholders have rights to a stock dividend); R. I. GEN.
LAWS § 7-1.2-614(a)(2) (same). Accordingly, the record date is the effective date
to determine which stockholders can partake in the distribution even though the
company accrues its liability to pay the announced distribution to those
stockholders of record on the declaration date. See, e.g., Cohen, 121 F.2d at 349.
In accordance with these general principles and the complete analogy, as to the
right to receive surplus distributions, between stockholders and mutual
insurance policyholders, Kimberly-Clark, as a policyholder of good-standing on
the record date, was entitled to participate in the distributed surplus.
Factory Mutual’s final argument against according Kimberly-Clark its
share is based on the fact that Kimberly-Clark did not renew its policy before it
expired, which the board had established as a condition precedent for
participating in the distribution. The Kentucky Court of Appeals and a New
York court, the only courts to directly confront this issue, barred the conditioning
of surplus distributions on future renewal by relying on the general principles
underlying mutual insurance we described above. See Mut. Ben. Liab. Ins. Co.
v Davis, 73 S.W. 1020, 1021 (Ky. Ct. App. 1903); Wells v. Metro. Life Ins. Co., 13
N.Y.S.2d 22, 25-26 (N.Y. City Ct. 1939); see also Aetna Liab. Ins. Co. v Hartley,
67 S.W. 19, 21, opinion modified on other grounds, 68 S.W. 1081 (Ky. Ct. App.
Factory Mutual cites Bryant v. Mutual Benefit Life Insurance Co., 109 F. 748, 756 8
(M.D. Tenn. 1901), and Petrie v. Mutual Benefit Life Insurance Co., 100 N.W. 236, 238-39
(Minn. 1904), as espousing opposing positions, i.e., permitting mutual insurance companies
to condition distributions on renewal. We disagree with Factory Mutual’s reading of those
cases. The corporate board in each case conditioned a surplus dividend on a future premium
payment because the policyholder was in arrears. In other words, the policyholders in those
cases were not members “in good standing” and therefore not on equal footing with other
members who actually contributed to the capital surplus and were therefore entitled to an
equitable share. E.g., Wells, 13 N.Y.S.2d at 25. In Bryant, the court allowed a mutual company
to refuse to credit an anticipated dividend before that same year’s contribution was paid. See
Bryant, 109 F. at 755-57. In Petrie, the Minnesota court similarly permitted the corporate
board to only apply a dividend credit to the policyholder’s delinquent account if the
policyholder paid the premium due in the year of the dividend. 100 N.W. at 239. In both cases,
the policyholders loaned from the mutual company against their policy and were in arrears;
the policyholders were thereby borrowing against and depleting the company’s capital stock.
See Bryant, 109 F. at 749-50; Petrie, 100 N.W. at 237-38. In such circumstances, a mutual
company, consistent with its general principles, can condition the policyholder’s right to
anticipated dividends on the payment of existing debts and policy renewal, because dividends
derive from accumulated contributions and excess capital stock; in other words, the past
failure to pay those contributions and the taking out of loans that deplete the capital stock can
justify the adjustment of those members’ equitable right to a dividend distribution unless they
promise to pay premiums that reduce their debt to the capital stock. See RUSS & SEGALLA,
COUCH ON INSURANCE § 77:7 (citing Bryant, 109 F. at 748; Petrie, 100 N.W. at 236). It is
undisputed that Kimberly-Clark was a policyholder in good standing on the record date and
had contributed to the accumulated capital stock. Therefore, these cases are inapposite.
Factory Mutual also references an unpublished memorandum order from a district
court in Ohio for further support. See Andersons, Inc. v. Factory Mut. Ins. Co., No. 3:01 CV
7620 (Memorandum Opinion) (N.D. Ohio Sept. 3, 2003) (unpublished).Not only is this
unpublished order’s precedential value limited, it does not provide any reasons for its
conclusion that Factory Mutual’s membership credit program is a “unilateral contract.” It also
does not consider the fact that Factory Mutual is a mutual insurance company. For these
reasons, the order is not persuasive.
17
1902). We agree with these authorities. As we noted earlier, once a surplus 8
distribution is announced, the policyholders on the record date own the surplus
and the corporate board no longer has any rights or interests in the distributed
amounts. Accordingly, Kimberly-Clark, as a policyholder of record, owned a
share of the surplus, and Factory Mutual cannot then disentitle Kimberly-Clark
based its subsequent failure to renew its policy — presumably, Kimberly-Clark
could have changed its mind and decided to renew its policy on October 1, which
18
is after the distribution’s record date. As a practical matter, Factory Mutual’s
eligibility rules effectively bar any return of excess capital to members on the
record date who no longer need insurance or cannot afford to renew their
insurance, thereby directly contravening members’ equitable rights to a
distribution from a surplus that was created, in part, by their past contributions.
Conditioning a right to a distribution on renewal would add a new condition to
the policy that substantially limits and encumbers a policyholder’s rights to a
surplus distribution without any contractual basis and undermines the settled
expectation that mutual insurance provides insurance “at cost.”
In this case, Factory Mutual declared a $325 million distribution from
excess surplus funds as a return to policyholders and it apportioned the
distribution based on the policyholders’ contribution to the accumulated capital
stock, i.e., their past premiums. Factory Mutual segregated this amount from its
capital stock on October 9, 2003, for existing policyholders of the record date:
September 30, 2003. Once Factory Mutual’s corporate board segregated the $325
million from the surplus and marked it for distribution to existing members on
the record date, those existing members became entitled to the whole amount
based on their equitable share as calculated pursuant to the board’s formulas.
The corporate board also became liable to follow through with the distribution
on the date of declaration. Furthermore, after declaring the surplus, the board
could not then condition a policyholder’s right to a share of the distribution on
a future, post-record-date act, such as policy renewal, because the board no
longer had any competing interests or rights to the distribution funds. Since
Kimberly-Clark was a policyholder on the record date, it equitably owns a share
of the distribution calculated pursuant to the board’s formula whether or not it
had renewed its policy before the policy’s expiration. Therefore, the district court
properly awarded Kimberly-Clark its properly calculated share of the
19
distribution.
For these reasons, we AFFIRM the district court’s judgment.
20
GARWOOD, Circuit Judge, dissenting.
I respectfully dissent. It is undisputed that Kimberly-Clark’s only
relevant Factory Mutual policy expired by its terms on September 30, 2003,
that prior to that time Kimberly-Clark had determined not to renew the
policy, so informing Factory Mutual in late August 2003, and that Kimberly-
Clark never attempted to renew the policy. On October 9, 2003, after the
Kimberly-Clark policy had indisputably expired, the Factory Mutual’s Board
of Directors declared a some $325 million surplus all of which would be
credited to policyholders as of September 30, 2003 as a reduction of the
premium payable on the renewal of their policy. As Kimberly-Clark’s policy
had already expired, and there was never any attempt to renew it, Kimberly-
Clark received nothing by virtue of the October 9, 2003 board action, but
nevertheless claims an entitlement to a share of the $325 million surplus.
Kimberly-Clark’s relevant policy expressly states that it is subject to
the terms of the Charter of Factory Mutual. Section 5 of the Charter provides
that a policyholder of the corporation “shall be a member of the Corporation
during the term of its policy, but no longer,” and section 10 of the Charter
states that “upon termination of the membership of any member, all his or its
right and interest in the surplus, reserves and other assets of the Corporation
shall forthwith cease.” There is no evidence that these Charter provisions
ever read otherwise at any relevant time, nor has their validity been
challenged in this case. For example, in Zinn v. Germantown Farmers’
Mutual, 111 NW 1107 (Wis. 1907), a mutual insurance company on March 19,
1906 declared a $50,000 surplus to be distributed to members “entitled
thereto.” It was held that only those who were policyholders on March 19,
1906 – the date the surplus was declared and ordered distributed – were
entitled to participate, specifically excluding, inter alia, those “who had held
21
policies and contributed toward the surplus, but whose policies had lapsed
and expired, and who were not policyholders on March 19, 1906.” See also,
e.g., Spence v. Medical Mut. Liab. Ins. Soc’y of Maryland, 500 A2d 1066, 1067
(Md. App. 1985) (“former policyholders of a mutual company . . . are not
entitled to participate in the distribution of a dividend from earned surplus
stemming from a year from which they had policies in effect.” (emphasis
added)); Russ & Segalla, 3 Couch on Insurance (2005) § 39.40 (“The right to
share in surplus may, however, be restricted to current policyholders.”).
This is not to suggest that charter provisions such as those of section 5
and 10 of the Factory Mutual Charter must be included in every mutual
insurance company’s charter. A charter which does not include such
provisions would likely not thereby be invalid. However, it strains logic well
past the breaking point to suggest, as does the majority in its footnote 7,
which simply ignores section 10 of the Charter and misreads section 5, that
once the choice is made to include such provisions in the charter of a mutual
insurance company, its Board of Directors is thereafter free to disregard
them.
At no time since September 30, 2003, has Kimberly-Clark been a
member of Factory Mutual. Consequently, Kimberly-Clark was entitled to no
share of the distribution of surplus provided for in the October 9 Board
resolution. The Board had no power to itself amend the Factory Mutual
Charter, and did not purport to do so. On October 9, the Factory Mutual
Board could have declared a surplus distribution payable to, and only to, all
who were members on that date, which would have included nothing for
Kimberly-Clark.
The fact that Factory Mutual conditioned receipt of the surplus
distribution on policy renewal, providing the distribution be only a credit on
22
the renewal premium, is nothing of which Kimberly-Clark has any right to
complain, because it had no right to any distribution of any of the surplus.
Kimberly-Clark was not a member on October 9, 2003, and was entitled
to no part of the surplus determined to then exist and then ordered to be
distributed, and it has not been a member at any time since September 30,
2003, and thus its rights were not in any way infringed by the Board
resolution of October 9, 2003.
I accordingly respectfully dissent.

1 “Mutual insurance, as its name implies, exists where several persons have joined
together for their united protection, each member contributing to a fund for the payment of
the losses and expenses. Under such an organization, each member is in a sense both an
insured and an insurer . . . The policyholders in a mutual are equivalent to stockholders in a
stock corporation in so far as rights and remedies are concerned. Like stockholders,
policyholders participate in the operation of the mutual through voting rights, and share in
the company’s financial success or failure.” LEE RUSS & THOMAS SEGALLA, 3 COUCH ON INS.
§ 39:15 (3d ed. 2008) (footnotes omitted); see also Heritage Healthcare Servs., Inc. v. Beacon
Mut. Ins. Co., No. C.A. 02-7016, 2004 WL 253547, at *4 (R.I. Super. Ct. Jan. 21, 2004)

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas insurance defense attorneys in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

EDM Office Services, Inc. v. Hartford Lloyds Ins. Co.
United States District Court,
S.D. Texas,
Houston Division.
EDM OFFICE SERVICES, INC., Plaintiff,
v.
HARTFORD LLOYDS INSURANCE
COMPANY, et al., Defendants.
Civil Action No. H–10–3754. July 1, 2011.

Opinion
MEMORANDUM AND ORDER
LEE H. ROSENTHAL, District Judge.
*1 This is a suit to recover insurance proceeds and damages
under the Texas Insurance Code and common law. The
insurer, Hartford Lloyds Insurance Company (“Hartford”)
has moved to compel appraisal under an insurance policy
issued to EDM Office Services, Inc. (“EDM”). (Docket Entry
No. 13). EDM opposes the motion on the grounds that
Hartford has not complied with the conditions precedent
identified in the insurance policy for appraisal because
it has not conducted a reasonable investigation of his
claims. Alternatively, EDM argues that Hartford waived its
contractual right to seek appraisal. EDM also argues that this
court should wait to order appraisal. (Docket Entry No. 19).
Based on a careful consideration of the record and the
applicable law, this court finds that this case involves a
dispute over the cost of repairing damaged property that is
subject to appraisal. This court also finds that EDM did not
waive its right to invoke appraisal or fail to comply with the
conditions precedent to do so. The motion to compel appraisal
is granted. The litigation is stayed pending the appraisal
process as to the valuation issues, but will proceed as to the
coverage issues.
The reasons for this ruling are set out below.
I. Background
EDM conducts its business operations from a building
in Houston, Texas. Hartford issued the insurance policy
covering the property. Hurricane Ike hit the Gulf Coast area
in September 2008. EDM claims that the hurricane damaged
the property roof and that water intrusion caused damage
throughout the building, including damages to its ceiling,
walls, insulation, flooring, and inventory. On September
22, 2008, EDM notified Hartford of the property damage.
Hartford sent Stephen Scott, an insurance adjuster, to EDM’s
property. Scott estimated that the property damages totaled
$8,136.57, though EDM points out that this estimate did not
include “overhead & profit.” (Docket Entry No. 19, Ex. C,
Scott’s First Estimate and Report); (Docket Entry No. 19, at
12). Scott’s report also stated that the damages were likely
related to “wind driven rain” and from water entering the
property under doors. (Docket Entry No. 19, Ex. C, Scott’s
First Estimate and Report). Hartford applied a recoverable
depreciation of $1,283.27 and the policy’s $50,160.00 and
did not issue payment for the building portion of the claim
because it was below the deductible.
EDM has also not been compensated for its businessloss
claims. The parties dispute the reasons for this. EDM
argues that Hartford denied the business-loss claims because
it determined that the losses were not covered under the
policy. Hartford responds that EDM failed to submit “all the
requested information from Plaintiff in order to adjust the
business personal property loss, including signed Release of
Information and/or documentation to support the cost paid by
Plaintiff for the items claimed.” (Docket Entry No. 13, at 4).
EDM filed suit in state court on September 2, 2010, and
Hartford removed to this court. The state-court petition
alleges both coverage and valuation claims. It alleges that
“Hartford wrongfully denied Plaintiff’s claim for repairs of
the property, even though the Policy provided coverage
for losses such as those suffered by Plaintiff. Furthermore,
Hartford underpaid some of Plaintiff’s claims by not
providing full coverage for the damages sustained by
Plaintiff, as well as underscoping the damages during its
investigation.” (Docket Entry No. 1, Ex. 2, State–Court
Petition, ¶ 20). The parties attempted to mediate their dispute,
but failed to reach an agreement.
*2 On May 25, 2011, Hartford moved to compel appraisal.
The policy’s appraisal provision states:
EDM Office Services, Inc. v. Hartford Lloyds Ins. Co., Slip Copy (2011)
© 2011 Thomson Reuters. No claim to original U.S. Government Works. 2
1. Appraisal
….
If we and you disagree on the amount of loss (or
net income or operating expense as regards Business
Income Coverage), either may make written demand for an
appraisal of the loss. In this event, each party will select a
competent and impartial appraiser and notify the other of
the appraiser selected within 20 days of such demand. The
two appraisers will select an umpire. If they cannot agree
within 15 days upon such umpire, either may request that
selection be made by a judge of a court having jurisdiction.
Each appraiser will state the amount of the loss. If they fail
to agree, they will submit their differences to the umpire.
A decision agreed to by any of the two will be binding as
to the amount of loss…. If there is an appraisal … we will
still retain our right to deny the claim.
(Docket Entry No. 13, Ex. A).
In his response to the motion to compel, EDM argues that
Hartford cannot demand appraisal because it failed to conduct
a reasonable investigation of his claims, which EDM asserts is
a condition precedent to invoking appraisal. EDM argues that
the following language from the insurance policy obligates
Hartford to conduct a reasonable investigation before seeking
appraisal:
(1) Claims Handling
(a) Within 15 days after we receive written notice of the claim,
we will:
(i) Acknowledge receipt of the claim. If we do not
acknowledge receipt of the claim in writing we will
keep a record of the date, method and content of the
acknowledgment;
(ii) Begin any investigation of the claim; and
(iii) Request a signed, sworn proof of loss, specify the
information you must provide and supply you with the
necessary forms. We may request more information at a
later date, if during the investigation of the claim such
additional information is necessary.
(b) We will notify you in writing as to whether:
(i) The claim or part of the claim will be paid;
(ii) The claim or part of the claim has been denied, and inform
you of the reasons for denial;
(iii) More information is necessary; or
(iv) We need additional time to reach a decision. If we need
additional time, we will inform you of the reasons for such
need.
We will provide notification, as described in (b)(i) through
(b)(iv) above within:
(i) 15 business days after we receive the signed, sworn proof
of loss and all information we requested; or
(ii) 30 days after we receive the signed, sworn time to reach
a decision, we must then either approve or deny the claim
within 45 days of such notice.
If we notified you that we need additional time to reach a
decision, we must then either approve or deny the claim
within 45 days of such notice.
(Docket Entry No. 19, Ex. H). EDM also argues that
Hartford’s investigation was not reasonable because it did
not comply with sections 542.056 and 541.060 of the Texas
Insurance Code. Section 542.056 states:
*3 (a) Except as provided by Subsection (b) or (d), an
insurer shall notify a claimant in writing of the acceptance
or rejection of a claim not later than the 15th business day
after the date the insurer receives all items, statements, and
forms required by the insurer to secure final proof of loss.
(b) If an insurer has a reasonable basis to believe that a loss
resulted from arson, the insurer shall notify the claimant
in writing of the acceptance or rejection of the claim not
later than the 30th day after the date the insurer receives all
items, statements, and forms required by the insurer.
(c) If the insurer rejects the claim, the notice required
by Subsection (a) or (b) must state the reasons for the
rejection.
(d) If the insurer is unable to accept or reject the claim within
the period specified by Subsection (a) or (b), the insurer,
within that same period, shall notify the claimant of the
reasons that the insurer needs additional time. The insurer
shall accept or reject the claim not later than the 45th day
after the date the insurer notifies a claimant under this
subsection.
EDM Office Services, Inc. v. Hartford Lloyds Ins. Co., Slip Copy (2011)
© 2011 Thomson Reuters. No claim to original U.S. Government Works. 3
TEX. INS.CODE § 542.056. Section 541.060 states:
(a) It is an unfair method of competition or an unfair or
deceptive act or practice in the business of insurance to
engage in the following unfair settlement practices with
respect to a claim by an insured or beneficiary:
….
(2) failing to attempt in good faith to effectuate a prompt, fair,
and equitable settlement of:
(A) a claim with respect to which the insurer’s liability has
become reasonably clear;
….
(3) failing to promptly provide to a policyholder a reasonable
explanation of the basis in the policy, in relation to the facts
or applicable law, for the insurer’s denial of a claim or offer
of a compromise settlement of a claim;
(4) failing within a reasonable time to:
(A) affirm or deny coverage of a claim to a policyholder; or
(B) submit a reservation of rights to a policyholder;
….
(7) refusing to pay a claim without conducting a reasonable
investigation with respect to the claim; ….
TEX. INS.CODE § 542.060(a)(2)-(4), (7). EDM argues
that Hartford failed to comply with these contractual and
statutory duties by: “not send[ing] a written acknowledgment
of the claim within 15 days of notice”; “unreasonably delay
[ing] [denial of] Plaintiff’s building damage claim, although
Plaintiff had provided Defendant with all the information
and documents requested to evaluate and settle the claim
[and] [misrepresenting] on November 20, 2008 that it had not
received the Adjuster’s report even though it was received
on October 28, 2008”; “fail[ing] to include any amount for
overhead and profit in its estimate of the damages to Plaintiffs’
building”; “misrepresent[ing] to Plaintiffs that BPP claim
was covered under the policy when Hartford in fact denied
liability for lack of coverage”; and “unreasonably delay[ing]
in denying Plaintiff’s BPP claim by sending a denial letter
on August 11, 2009, although Hartford already decided on
January 23, 2009 that no coverage existed.” (Docket Entry
No. 19, at 20). Finally, EDM argues that Hartford’s delay in
paying the claim waived its right to appraisal because the
delay prejudiced him.
II. Analysis
*4 Texas insurance policies frequently include provisions
specifying appraisal to resolve disputes about the amount of
loss under the policy. See State Farm Lloyds v. Johnson, 290
S.W.3d 886, 888–89 (Tex.2009). “An appraisal clause ‘binds
the parties to have the extent or amount of the loss determined
in a particular way .’ “ Id. at 895 (quoting In re Allstate
County Mut. Ins. Co., 85 S.W.3d 193, 195 (Tex.2002));
see also Lundstrom v. United Servs. Auto. Ass’n–CIC, 192
S.W.3d 78, 87 (Tex.App.-Houston [14th Dist.] 2006, pet.
denied) (“The effect of an appraisal provision is to estop one
party from contesting the issue of damages in a suit on the
insurance contract, leaving only the question of liability for
the court.”). An appraiser must “decide the ‘amount of loss,’
not to construe the policy or decide whether the insurer should
pay.” Johnson, 290 S.W.3d at 890. “Unless the ‘amount of
loss’ will never be needed … appraisals should generally go
forward without preemptive intervention by the courts.” Id.
at 895.
A. Conditions Precedent
Assuming, but not deciding, that Hartford failed to comply
with the “Claims Handling” provisions of the insurance
policy and with provisions of the Texas Insurance Code, this
does not prevent it from seeking appraisal because alleged
noncompliance with the “Claims Handling” provisions and
the Texas Insurance Code does not allege a failure to meet a
condition precedent to exercising appraisal rights. “In order to
determine whether a condition precedent exists, the intention
of the parties must be ascertained; and that can be done only
by looking at the entire contract.” Solar Applications Eng’g,
Inc. v. T.A. Operating Corp., 327 S.W.3d 104, 109 (Tex.2010)
(quoting Criswell v. European Crossroads Shopping Ctr.,
Ltd., 792 S.W.2d 945, 948 (Tex.1990)). “In order to make
performance specifically conditional, a term such as ‘if’,
‘provided that’, ‘on condition that’, or some similar phrase
of conditional language must normally be included.” Id.
(citing Criswell, 792 S.W.2d at 948). “While there is no
requirement that such phrases be utilized, their absence is
probative of the parties intention that a promise be made,
rather than a condition imposed.” Id. (citing Criswell, 792
S.W.2d at 948). The appraisal clause does not use conditional
language and EDM has not identified any provision in the
contract showing that the parties intended that Hartford
fully comply with the “Claims Handling” provisions and
EDM Office Services, Inc. v. Hartford Lloyds Ins. Co., Slip Copy (2011)
© 2011 Thomson Reuters. No claim to original U.S. Government Works. 4
Texas Insurance Code before seeking appraisal. See also
Butler v. Prop. and Cas. Ins. Co., Civ. A. No. H–10–3613,
2011 WL 217495, at *1 (S.D.Tex. June 3, 2011) (finding
that a similar insurance-policy appraisal provision does not
require compliance with claims handling provision before
seeking appraisal). Compliance with the “Claims Handling”
provisions and the Texas Insurance Code is not a condition
precedent to compelling appraisal.
B. Waiver
*5 The contractual right to appraisal may be waived. See,
e.g., In re Slavonic Mut. Fire Ins. Ass’n, 308 S.W.3d 556,
561 (Tex. App .-Houston [14th Dist.] 2010, orig. proceeding).
Waiver is defined as the “intentional relinquishment of a
known right.” JM Walker LLC v. Acadia Ins. Co., 356
F. App’x 744, 748 (5th Cir.2009) (per curiam) (summary
calendar) (unpublished). Courts applying Texas law follow
the standard articulated long ago in Scottish Union & Nat.
Ins. Co. v. Clancey, 71 Tex. 5, 8 S.W. 630, 632 (Tex.1888),
to determine whether an insurer’s acts amount to waiver:
“To constitute waiver, the acts relied on must be such as are
reasonably calculated to induce the assured to believe that a
compliance by him with the terms and requirements of the
policy is not desired, or would be of no effect if performed.
The acts relied on must amount to a denial of liability, or
a refusal to pay the loss.” 1 See, e.g., Woodward v. Liberty
Mut. Ins. Co., No. 3:09–CV–0228–G, 2010 WL 1186323,
at *4 (N.D.Tex. Mar.26, 2010); In re Sec. Nat’l Ins. Co. .,
No. 14–10–00009–CV, 2010 WL 1609247, at *5 (Tex.App.-
Houston [14th Dist.] Apr. 22, 2010, orig. proceeding) (mem.
op., not designated for publication); In re Slavonic Mut. Fire
Ins. Ass’n, 308 S.W.3d at 563.
1 Other cases quote similar language from Scottish Union
& Nat. Ins. Co. v. Clancey, 83 Tex. 113, 18 S.W. 439,
441 (Tex.1892): “[T]he acts relied on as constituting
a waiver should be such as are reasonably calculated
to make the assured believe that a compliance on his
part with the stipulations providing the mode of proof
of loss, and regulating the appraisement of the damage
done, is not desired, and that it would be of no effect
if observed by him.” See, e.g., JM Walker LLC, 356
F. App’x at 748; Sanchez v. Prop. & Cas., Ins. Co.
of Hartford, No. H–09–1736, 2010 WL 413687, at *4
(S.D.Tex. Jan.27, 2010).
“[W]hile an unreasonable delay is a factor in finding
waiver, reasonableness must be measured from the point of
impasse.” In re Universal Underwriters of Tex. Ins. Co.,
––– S.W.3d ––––, 2011 WL 1713278, at *3 (Tex. May
6, 2011). Determining whether the parties have reached an
impasse “requires an examination of the circumstances and
the parties’ conduct, not merely a measure of the amount of
time involved in seeking appraisal.” Id. “An impasse is not
the same as a disagreement about the amount of loss. Ongoing
negotiations … do not trigger a party’s obligation to demand
appraisal. Nor does an insurer’s offer of money to cover
damages necessarily indicate a refusal to negotiate further ….“
Id. “[M]ere delay is not enough to find waiver; a party must
show that it has been prejudiced.” Id. at *5. “Prejudice to
a party may arise in any number of ways that demonstrate
harm to a party’s legal rights or financial position.” Universal
Underwriters, ––– S.W.3d ––––, 2011 WL 1713278, at *5.
The Texas Supreme Court has observed that “it is difficult to
see how prejudice could ever be shown when the policy …
gives both sides the same opportunity to demand appraisal. If
a party senses that an impasse has been reached, it can avoid
prejudice by demanding an appraisal itself.” Id. at *7.
Waiver is an affirmative defense, and the party alleging
waiver has the burden of proof. JM Walker LLC, 356 F.
App’x at 748; Sanchez, 2010 WL 413687, at *4. Whether
certain circumstances constitute waiver is a question of law.
JM Walker LLC, 356 F. App’x at 748; see also Sanchez, 2010
WL 413687, at *4 (holding that although waiver is typically
a fact question, when the relevant facts are undisputed and
clearly established, a court may decide whether a party has
waived its contractual right to appraisal as a question of
law). “The trial court may determine whether an appraisal has
been waived as a matter of law at the preliminary stages of
litigation.” Sanchez, 2010 WL 413687, at *4 (quoting Laas v.
State Farm Mut. Auto. Ins. Co., No. 14–98–00488–CV, 2000
WL 1125287 at *6 (Tex.App.-Houston [14th Dist.] Apr. 22,
2010, orig. proceeding) (unpublished)).
*6 The parties have reached an impasse. They could
not successfully mediate their claims. EDM argues that
Hartford delayed seeking appraisal. EDM, however, has not
demonstrated prejudice. See Universal Underwriters, –––
S.W.3d ––––, 2011 WL 1713278, at *5 (“[M]ere delay is not
enough to find waiver; a party must show that it has been
prejudiced.”).
The Texas Supreme Court has explained that:
[to] constitute waiver the acts relied on must be such as
are reasonably calculated to induce the assured to believe
that compliance by him with the terms of the policy … is
not desired, or would be of no effect if performed. The acts
EDM Office Services, Inc. v. Hartford Lloyds Ins. Co., Slip Copy (2011)
© 2011 Thomson Reuters. No claim to original U.S. Government Works. 5
relied on must amount to a denial of liability or refusal to
pay the loss.
Universal Underwriters, ––– S.W.3d ––––, 2011 WL
1713278, at *2 (quoting Scottish Union, 8 S.W. at 632). “Or,”
as the court “more recently concluded, ‘[w]aiver requires
intent, either the intentional relinquishment of known right or
intentional conduct inconsistent with claiming that right.’ “
Id. (quoting In re Gen. Elec. Capital Corp., 203 S.W.3d 314,
316 (Tex.2006). The court has also explained that prejudice
can rarely be found on facts similar to those present here.
Id. at *5; see also Perry Homes v. Cull, 258 S.W.3d 580,
597 (Tex.2008) (defining prejudice for purposes of waiver
of arbitration as “the inherent unfairness in terms of delay,
expense, or damage to a party’s legal position” (quoted
in Universal Underwriters, –––S.W.3d ––––, 2011 WL
1713278, at *5)); In re Tyco Int’l Ltd. Sec. Litig., 422 F.3d
41, 47 n. 5 (1st Cir.2005) (“[A] party should not be allowed
purposefully and unjustifiably to manipulate the exercise of
its arbitral rights simply to gain an unfair tactical advantage
over the opposing party.” (quoted in Universal Underwriters,
––– S.W.3d ––––, 2011 WL 1713278, at *5); Menorah Ins.
Co., Ltd. v. INX Reinsurance Corp., 72 F.3d 218, 222 (1st
Cir.1995) (finding prejudice where party “incurred expenses
as a direct result of [opponent’s] dilatory behavior” (cited and
quoted in Universal Underwriters, ––– S.W.3d ––––, 2011
WL 1713278, at *5)). EDM has not shown prejudice. 2
2 EDM argues that Hartford’s delay prejudiced it because
“any appraisal award at this juncture would be
outside of the policy deadline for making a claim for
replacement cost.” (Docket Entry No. 19, at 24). EDM
points to a provision in his insurance policy stating that
an insured who elects, as EDM did, to make a claim
on an actual-cash-value basis has 180 days to change
the claim to a replacement-cost basis. EDM argues that
Hartford’s motion to compel appraisal prevents it from
exercising this right. EDM has identified no provision
in the insurance policy stating that an appraisal prevents
it from making its claim on a replacement-cost basis,
or that it cannot ask for a replacement-cost basis at
appraisal. This is not prejudice.
C. Whether to Stay the Litigation Pending Appraisal
EDM argues that this court should allow it additional
discovery pending appraisal on its claims that Hartford
violated the Texas Insurance Code and on its coverage claims.
“While [a] trial court has no discretion to deny the appraisal,
the court does have some discretion as to the timing of the
appraisal.” In re Allstate, 85 S.W.3d at 967. In many cases,
the litigation is stayed while appraisal is completed. See, e.g.,
Molzan, Inc. v. United Fire & Cas. Co., Civ. A. No. H–09–
01045, 2009 WL 2215092, at *5 (S.D.Tex. July 23, 2009); cf.
Johnson, 290 S.W.3d at 895 (“Unless the ‘amount of loss’ will
never be needed … appraisals should generally go forward
without preemptive intervention by the courts.”); Universal
Underwriters, ––– S.W.3d ––––, 2011 WL 1713278, at *2
(“Appraisals can provide a less expensive, more efficient
alternative to litigation ….”). But courts have held that when
a dispute involves both coverage and valuation disputes,
a court should stay the valuation portion of the case and
proceed with the coverage portion. See Glenbrook Patiohome
Owners Ass’n v. Lexington Ins. Co., 2011 WL 666517, at *10
(S.D.Tex. Feb.14, 2011) (“In this case, however, the record
makes clear that there are issues of both coverage and of loss
valuation. Under such circumstances, the part of the litigation
that involves loss valuation is appropriately stayed. The
part of the litigation that involves coverage issues, however,
should continue pending the appraisal.”). In this case, the
record makes clear that there are issues of both coverage
and of loss valuation. Under such circumstances, the part
of the litigation that involves loss valuation is appropriately
stayed. The part of the litigation that involves coverage issues,
however, should continue pending the appraisal.
III. Conclusion
*7 Hartford’s motion to compel appraisal, (Docket Entry No.
13), is granted. During the appraisal, this case will proceed on
coverage issues; the litigation on the loss valuation issues is
stayed. 3 The parties must notify this court when the appraisal
is concluded and the result within 14 days after the appraisers
issue their report.
3 In light of this court’s ruling, Hartford’s motion for
protection, (Docket Entry No. 14), is denied as moot.
EDM’s motion for leave to file excess pages, (Docket
Entry No. 18), is also denied as moot.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas insurance defense law attorneys in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Law in Nevada Requiring Disclosure Of Insurance Policy Limits Repealed

Insurance companies writing policies in Nevada have for years been required to disclose their insured’s policy limit to Plaintiff’s attorneys if certain conditions were met.  However, Nevada’s 2015 legislature repealed the law, known as NRS 690B.042.  At this point, in Nevada, insurance companies no longer are required to disclose the liability limits of their insured before a lawsuit is filed.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas insurance defense lawyers in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

REVERSE and REMAND; Opinion issued July 11, 2007

In The
Court of Appeals
Fifth District of Texas at Dallas
……………………….
No. 05-06-00100-CV
……………………….
LINDA RICHARDSON, Appellant
V.
ALLSTATE TEXAS LLOYD’S, Appellee
…………………………………………………….
On Appeal from the 160th Judicial District Court
Dallas County, Texas
Trial Court Cause No. 02-01779-H
…………………………………………………….
MEMORANDUM OPINION
Before Justices Moseley, O’Neill, and Lagarde
Opinion By Justice Lagarde   See Footnote 1

Appellant Linda Richardson sued Allstate Texas Lloyd’s (Allstate), seeking to overturn an appraisal award entered on her insurance claim for sewer damage to her home. After originally denying Allstate’s successive motions for summary judgment, upon reconsideration, the trial court granted Allstate’s second motion and dismissed Richardson’s claims with prejudice.
Richardson appeals the summary judgment order and the trial court’s denial of her motion to designate experts. For reasons that follow, we conclude the summary judgment was improperly granted and we remand this case to the trial court for further proceedings. Because all dispositive issues are settled in law, we issue this memorandum opinion. Tex. R. App. P. 47.2(a), 47.4.

Factual and Procedural Background
In December 2001, “a catastrophic pressurized infusion of raw sewage spewed through every plumbing opening” in Richardson’s home in Lancaster, Texas. Richardson’s home was insured by Allstate. Immediately after her home was flooded with sewage, Richardson contacted Allstate to make a claim under her insurance policy. Shortly thereafter, a dispute arose between Richardson and Allstate concerning the amount of Richardson’s insured loss. Accordingly, Allstate sent Richardson a written notice informing her that Allstate was invoking the appraisal provision of her insurance policy. The terms of that provision read, in pertinent part, as follows:

Appraisal. If you and we fail to agree on the actual cash value, amount of loss, or cost of repair or replacement, either can make a written demand for appraisal. Each will then select a competent, independent appraiser and notify the other of the appraiser’s identity within 20 days of receipt of the written demand. The two appraisers will choose an umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a district court of a judicial district where the loss occurred. The two appraisers will than [sic] set the amount of loss, stating separately the actual cash value and loss to each item.
. . .

If the appraisers fail to agree, they will submit their differences to the umpire. An itemized decision agreed to by any two of these three and filed with us will set the amount of such loss. Such award shall be binding on you and us.

Allstate selected Jim Greenhaw as its independent appraiser. Richardson selected C.R. Johnson as her independent appraiser. The parties then agreed to use Sally Montgomery as the umpire, and she was appointed by the trial court in March 2002. On March 25, 2002, Johnson and Greenhaw signed their names on a blank form “Appraisal Award.” The top of that one-page form contains general information about the claim, including the names of the parties, the appraisers, and the umpire. The appraiser’s signatures are in the middle of the page beneath that general information. Directly underneath the appraisers’ signatures on the form award is a chart with three columns. The first column is titled “ITEM,” and the phrase “to be determined by hygienist” is hand- written beneath that title on the first numbered line. The next two columns, titled “LOSS REPLACEMENT COST” and “LOSS ACTUAL CASH VALUE,” are blank.
According to the record, after they signed the blank form, Greenhaw and Johnson each conferred separately with the umpire during the next few months. It appears, however, that neither appraiser prepared an itemized list of the cash value and loss to each item in Richardson’s house. According to Richardson, sometime prior to June 21, 2002, Johnson sent Montgomery a written estimate totaling approximately $141,000. The written estimate itself is not in the record. On June 21, 2002, Montgomery met with Greenhaw at Greenhaw’s office. During that meeting, Montgomery or Greenhaw wrote “$39,650.75” on the form appraisal award under the column “LOSS REPLACEMENT COST,” next to the phrase “to be determined by hygienist” previously written on the form award. Montgomery and Greenhaw then dated the award June 21, 2002 and both signed it. There is no evidence in the record that Montgomery or Greenhaw discussed this award with Johnson either before or after it was entered.
On July 16, 2002, Allstate sent Richardson a check for $27,813.95, the net amount of the award after deducting the amounts already paid to Richardson and half of the umpire’s fee. The next day, Johnson and Richardson wrote to the trial court complaining about the impropriety of the appraisal award and requested a meeting with the trial judge. There is no evidence in the record about whether such meeting occurred. On October 2, 2002, Richardson cashed Allstate’s check.         Thereafter, Richardson filed a petition seeking to set aside the appraisal award. In her suit against Allstate, Richardson asserted claims against Allstate for breach of contract, breach of the duty of good faith and fair dealing, negligence, negligence per se, and violation of articles 21.21 and 21.55 of the Texas Insurance Code.         Allstate moved for summary judgment twice. In its second motion for summary judgment, Allstate asserted it was entitled to summary judgment because (i) Richardson could not establish any grounds for setting aside the appraisal award, (ii) Richardson’s claims were barred by the affirmative defense of accord and satisfaction, (iii) Richardson was estopped to assert a breach-of-contract claim, and (iv) Richardson’s extra-contractual claims were “unsupportable, as a matter of law.” The trial court denied Allstate’s first and second motions; but upon Allstate’s one-page motion to reconsider, the trial court granted Allstate’s second motion and dismissed Richardson’s claims with prejudice.
In this appeal, Richardson asserts five main points of error, each with multiple subpoints. In her first point, Richardson argues the summary judgment order is improper because the appraisal award is “void as a matter of law,” based, inter alia, on her contention that the appraisal procedure was not followed. In her second point, Richardson argues she is entitled to summary judgment on Allstate’s affirmative defense of accord and satisfaction. In her third issue, Richardson argues she is not estopped to assert her breach of contract claim. In her fourth issue, Richardson argues genuine issues of material fact preclude summary judgment dismissing her extra-contractual claims. Finally, in her fifth point, Richardson argues the trial erred in denying her motion to designate experts.

The Appraisal Procedure

1. Applicable Law

Because courts “seek to implement the intention of the parties as expressed in the language of a contract,” it has long been the rule in Texas that “[a]ppraisal awards made pursuant to the provisions of an insurance contract are binding and enforceable.” Providence Lloyds Ins. Co. v. Crystal City Ind. Sch. Dist., 877 S.W.2d 872, 875 (Tex. App.-San Antonio 1994, no writ) (citing Scottish Union and Nat’l Ins. Co. v. Clancy, 8 S.W. 630 (Tex. 1888)). “Although every reasonable presumption will typically be made in favor of an appraisal award, when reviewing a summary judgment proceeding, that rule must yield to the degree its application conflicts with the presumptions required to be made in favor of the nonmovant.” Wells v. Am. States Preferred Ins. Co., 919 S.W.2d 679, 683 (Tex. App.-Dallas 1996, writ denied) (citing Hennessey v. Vanguard Ins. Co., 895 S.W.2d 794, 797-98 (Tex. App.-Amarillo 1995, writ denied)). There are three circumstances in which an appraisal award may be set aside on appeal: (1) the award was made without authority, (2) the award was made as a result of fraud or accident, or (3) the award was not make in substantial compliance with the terms of the insurance policy. Crystal City, 877 S.W.2d at 875-76.

1. Analysis

In her first issue, Richardson argues the award in this case should be set aside because it was not made in substantial compliance with the policy. We agree. The policy expressly requires that the appraisers each make an itemized list, “stating separately the actual cash value and loss to each item.” It also requires the appraisers to submit to the umpire only the items on which the two appraisers fail to agree. The policy then requires at least two of these individuals must agree on the final appraisal award, and the final award must be “itemized.”
The record in this case does not reflect substantial compliance with this required procedure. There is no evidence in the record the appraisers made the requisite itemized lists or that they submitted only disputed items to the umpire for a decision. Instead, the record contains testimony that, prior to Montgomery and Greenhaw signing the award, Johnson never saw any written estimate from Greenhaw and did not meet with Greenhaw or Montgomery to discuss the appraisers’ disputed items. The record contains no itemized list prepared by either appraiser. There is testimony in the record that Johnson prepared a written estimate and forwarded it to the umpire, but that estimate is not in the record. There is no evidence that Johnson ever met with Greenhaw to discuss their itemized estimates so the appraisers could determine their differences. Moreover, the appraisal award signed by Montgomery and Greenhaw is not an “itemized decision” as required by the terms of the insurance policy. Instead, it merely reflects a lump-sum award written next to the phrase “to be determined by hygienist.”
Allstate argues that a document prepared by Greenhaw several days after Greenhaw and Montgomery signed the award “comprises the itemized decision upon which the appraisal award was based.” We reject this argument. A document prepared after the appraisal award was issued cannot, as a matter of common sense and law, constitute the itemized list Greenhaw was supposed to prepare before any award was issued. Allstate also argues the award is proper because “nothing in the policy requires that the two individuals agreeing on the award delineate every item to be replaced.” We agree that in a situation like this, in which raw sewage may have contaminated the entire contents of a home, it would not be necessary to list and separately appraise, for example, every item of clothing and kitchen utensil in the home. Nevertheless, we reject Allstate’s contention that the appraisers were entirely relieved of their obligation to make an itemized list that at least categorized the contents of the home in a manner customary in the insurance industry.
Under these facts, we conclude the appraisal award should be set aside because the award was not made in substantial compliance with the terms of the insurance policy. E.g., Fisch v. Transcon. Ins. Co., 356 S.W.2d 186, 189-90 (Tex. Civ. App.-Houston 1962, writ ref’d n.r.e.) (setting aside appraisal award because record contained no evidence appraisers failed to agree and only submitted disagreements to umpire, as required by policy) .

Conclusion
We reverse the trial court’s summary judgment and remand this case for further proceedings consistent with this opinion. Tex. R. App. P. 43.2(d). The ultimate disposition of this case, including Richardson’s extra-contractual claims and Allstate’s affirmative defenses, will depend on the facts developed and decisions made during the further proceedings in the trial court. Accordingly , we need not address Richardson’s remaining issues at this time. Tex. R. App. P. 47.1.

SUE LAGARDE
JUSTICE, ASSIGNED

060100F.P05

Footnote 1 The Honorable Sue Lagarde, Justice, Court of Appeals, Fifth District of Texas at Dallas, Retired, sitting by assignment.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas insurance defense lawyers in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.