Expert Commentary

Burden of Proof in Coverage Litigation (Part 5)

Part 1 of this series dealt with the burden of proof of showing that a claim initially was covered by the policy. Part 2 dealt with the placement of the burden of proof for an exclusion. Part 3 dealt with placement of burden of proof on exceptions to exclusions and whether the person making the claim was an insured. Part 4 addressed who has the burden of proof to show that a claim falls within the policy period and the effect of the burden of proof on causation and allocation of damages.


Courts and Coverage
October 2014

This article addresses the burden of proof on warranties, exhaustion of limits, and the duty to defend.

Burden of Proof on Warranties

A warranty is a statement made by the insured that "is susceptible to no construction other than that the parties mutually intended that the policy should not be binding unless such statement be literally true." Underwriters at Lloyd's, Syndicate 242 v. Turtle Creek P'ship, Ltd., 716 F. Supp. 2d 633 (S.D. Tex. 2010) (citing Lane v. Travelers Indem. Co., 391 S.W.2d 399 (Tex. 1965)). To effectively constitute a warranty, the parties must have intended that the policy stand or fall on the literal truth or the falsity of the statement. If the policy contains an unambiguous warranty, a breach of that warranty makes the policy void or voidable. However, warranties that result in a forfeiture of the policy are strongly disfavored, and Texas courts typically construe policies to prevent forfeiture.

Generally, to avoid its obligation under the policy, the insurer bears the burden of pleading and proving a misrepresentation or other violation of a warranty. Texas courts have recognized this proposition since the late 1800s. In Mutual Life Ins. Co. v. Nichols, 24 S.W. 910 (Tex. Civ. App. 1894), the insured sought to recover on her husband's life insurance policy, but the insurer claimed the policy had been rendered null and void by a breach of warranty by Mr. Nichols. In the application for insurance, Mr. Nichols warranted that all the statements and answers to questions given by him were true. As part of the application process, the insurer asked whether Mr. Nichols had previously applied for insurance, whether he had been examined medically, and whether he had been denied insurance on account of disease. While Mr. Nichols answered these questions negatively, the insurer asserted that Nichols had lied and had, in fact, applied for other insurance, been examined, and been denied insurance because of disease. The insurer thus claimed Nichols had breached the warranty provision, rendering the policy null and void. The insurer also argued that the court's jury charge was erroneous because it relieved the insured from proving compliance with all warranties and conditions in the insurance application.

The court disagreed, stating that Mrs. Nichols was not required to prove that the warranties had not been broken. "Defendant set up breach of warranty affirmatively, and took the burden of proving it." Id. Though the case was remanded based on a different erroneous jury charge, the court noted that the insured had made a prima facie case for coverage.

Shortly thereafter, the Waco Court of Civil Appeals also recognized that the insurer that sets up a breach of warranty as a defense has the burden of proof on the issue. Allemania Fire Ins. Co. v. Fred, 32 S.W. 243 (Tex. Civ. App.—Waco 1895, writ dismissed). The policy at issue had a warranty provision that the insured would agree to keep business accounting books in a fireproof safe or some other secure place at night and when his store was closed. The insured's store and his business records were consumed by fire, and the insurer refused payment on the policy, claiming that the insured had breached his warranty to keep safe the business records, and the insured could not prove his losses by means of other documents.

The court affirmed the trial court's judgment for the insured and noted the general rule:

[I]n matters of defense showing that the policy has been rendered null, or that a warranty set up as a defense has been broken, the burden of proof is upon the insurer.

Id. at 245. Because the facts at trial did not show whether the fire had consumed the store during the night, during the day, or when the store was closed, the insurer had not carried its burden of proof on the breach of warranty. See also Germania Fire Ins. Co. v. Fort Worth Grain & Elevator Co., 274 S.W. 123 (Tex. 1925). (Insurer carried its burden of proof on breach of warranty by establishing that the insured failed to take inventory of his grain as required by the policy.)

Exhaustion of Limits

The insured bears the burden to prove the exhaustion of the policy's limits. St. Paul Ins. Co. v. Texas Dep't of Transp., 2001 Tex. App. LEXIS 8394 (Tex. App.—Austin Dec. 20, 2001, no pet.). In St. Paul, the Texas Department of Transportation (TxDOT) was an additional insured under general contractor Abrams's commercial general liability policy with St. Paul. Several property owners sued Abrams and TxDOT, alleging property damage from flooding caused by construction activities. TxDOT demanded that St. Paul defend, but it refused. After the trial court ruled that St. Paul had a duty to defend, Abrams and St. Paul entered into an agreement to settle with the property owners. Id. Based on the release of claims in the agreement and the exhaustion of the policy limits clause, St. Paul claimed it had no further duty to defend TxDOT.

On appeal, TxDOT argued that St. Paul had the burden of proving the applicability of any policy defenses, such as the exhaustion provision. St. Paul argued that the exhaustion provision was not a policy defense, but rather a qualification on the duty to defend that manifested the parties' intent to limit the duty to the time before the policy limits were exhausted. The court agreed with St. Paul that the policy provisions on exhaustion of limits were not defenses or exceptions, but rather conditions upon the duty to defend. Once St. Paul raised the issue that the settlement exhausted the policy limits, TxDOT had the burden to negate that issue. The court concluded that TxDOT did not carry its burden and the trial court should not have granted its motion for summary judgment. The court remanded because there was an issue of material fact as to whether the agreement between the property owners, St. Paul, and Abrams constituted a settlement that would exhaust the policy limits.

In this duty to defend context, the court made clear that the insured had the burden of proof on the issue of exhaustion of the policy limits. See also Fina, Inc. v. Travelers Ins. Co., 184 F. Supp. 2d 547 (N.D. Tex. 2002). ("[E]xhaustion is not an affirmative defense or policy exception to the duty to defend. Rather, it is a condition on the duty to defend which limits the duty to the time before the policy limits are exhausted.")

More recently, the federal court for the Eastern District of Texas discussed what quantum of proof was necessary to establish exhaustion of limits in a motion for summary judgment. LSG Techs., Inc. v. U.S. Fire Ins. Co., 2010 U.S. Dist. LEXIS 140879 (E.D. Tex. Sept. 2, 2010). Plaintiffs Loma Alta and Longhorn Gasket were defendants in numerous asbestos cases, and Trinity provided primary comprehensive general liability policies to the plaintiffs. U.S. Fire, an excess coverage insurer, argued that the plaintiffs had not met their burden to show that all primary coverage had been exhausted. U.S. Fire claimed that the plaintiff was required to present proof "such as the location of employment of the plaintiff, medical history and records, employment records, product design or manufacture dates, product sales dates, product use dates, or yet other information." Id. The plaintiffs argued that the policy only required notice of exhaustion, not proof of exhaustion. The court agreed with the plaintiffs, noting that the "excess policies do not condition coverage on substantive proof of the validity of the underlying claims." Id. The excess policy only required notice of the exhaustion of the underlying policy, and the simple fact that the underlying insurer paid the policy limits triggered U.S. Fire's duties. Thus, U.S. Fire was not entitled to a "mini-trial" on the underlying claims paid.

But the court also stated that the plaintiffs and Trinity had not met their burden to show that no question of material fact existed with respect to the number of occurrences. It was unclear to the court which policies were implicated by the underlying claims.

Trinity must still demonstrate the policy period for which coverage is sought and show that the relevant underlying primary policy has been exhausted by specific payments.

Id. The plaintiffs also failed to correlate claims payments to specific occurrences.

Plaintiffs have not sufficiently demonstrated exhaustion to meet their summary judgment burden. In order to demonstrate exhaustion, Plaintiffs or Trinity could, for example, first establish the number of occurrences, i.e., which claimants were exposed to the gaskets at the same time and location, and then which policy or policies are triggered by that occurrence or occurrences.

Id. While U.S. Fire might not have been entitled to a "mini-trial" on the underlying claims, the insureds still had the burden to tie occurrences to specific policies to demonstrate exhaustion.

Duty To Defend

The duty to defend is an obligation arising in contract. See Farmers Tex. Cnty. Mut. Ins. Co. v. Griffin, 955 S.W.2d 81 (Tex. 1997). Texas courts apply the "eight-corners" rule to determine whether an insurer has a duty to defend its insured. National Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139 (Tex. 1997); GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006). The court compares the allegations in the live pleading to the policy language without regard to the truth, falsity, or veracity of the allegations. Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487 (Tex. 2008). If the pleadings allege facts stating a cause of action potentially falling within the insurance policy's scope of coverage, the insurer has a duty to defend. United Nat. Ins. Co. v. Hydro Tank, Inc., 497 F.3d 445 (5th Cir. 2007). The duty to defend is a question of law. See State Farm Gen. Ins. Co. v. White, 955 S.W.2d 474 (Tex. App.—Austin 1997, no writ).

The insured has the initial burden to show coverage for purposes of the duty to defend. Hydro Tank, 497 F.3d at 448; Merchants Fast Motor Lines, 939 S.W.2d at 141. The law favors coverage in the determination of a duty to defend:

[I]n case of doubt as to whether or not the allegations of a complaint against the insured state a cause of action within the coverage of a liability policy sufficient to compel the insurer to defend the action, such doubt will be resolved in insured's favor.

Merchants Fast Motor Lines, Inc., 939 S.W.2d at 141 (quoting Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d 22 (Tex. 1965)). Thus, the insurer has a more onerous burden for establishing the absence of coverage.

Similarly, because the insurer bears the burden of proof on establishing a policy exclusion, if the insurer relies on a policy exclusion to defeat the duty to defend, then the insurer has the burden of proof on that issue. See Hochheim Prairie Cas. Ins. Co. v. Appleby, 255 S.W.3d 146 (Tex. App.—San Antonio 2008, pet. dismissed); Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365 (5th Cir. 2008); Tex. Ins. Code § 554.002.

An early decision by the Texas Commission of Appeals illustrates an absence of the duty to defend based on both the scope of coverage and a policy exclusion. U.S. Fid. & Guar. Co. v. Baldwin Motor Co., 34 S.W.2d 815 (Tex. Comm'n App. 1931). Baldwin brought suit against its insurer U.S. Fidelity to recover expenses incurred in defending itself in a negligence suit arising from a child's death in Lufkin. The petition alleged that a 15-year-old boy, while in the company's employ and operating one of its automobiles, negligently ran over and killed the plaintiff's child. The insurer refused to defend on the ground that the policy protected only the branches of the Baldwin Motor Company at the places named in the policy and that Baldwin's Lufkin branch was not named in the policy. The insurer further argued that the policy expressly excluded damages caused by a person under 16 years of age.

The court noted that it must enforce the plain language of the policy and that its language did not include a duty to defend against suits arising from damages occurring at a location not named in the policy. Because the plaintiff's pleadings alleged an accident that had occurred in Lufkin, the pleadings "did not present a cause of action which the insurance company was required to defend, under the terms of the policy." Id. at 819. The plaintiffs not only failed to show coverage for purposes of the duty to defend, but their allegations affirmatively showed that a policy exclusion negated the duty to defend. The plaintiffs alleged that the accident had been caused by a 15-year-old driver, and the policy expressly excluded liability for damages caused by an automobile driven by anyone under the age of 16.

Conditions

Any condition precedent to recovery under an insurance policy will be governed by Tex. R. Civ. P. 54. That rule allows the insured to aver generally that all conditions precedent required by the policy have been performed or have occurred. Thus, the insured has the burden to generally or specifically plead compliance with conditions precedent. However, when the insured generally pleads compliance with conditions precedent, the rule requires that the insured prove only those conditions precedent that have been specifically denied by the insurer.

The Dallas Court of Appeals addressed the plaintiff's burden of proof on conditions precedent in an insurance policy in Trevino v. Allstate Ins. Co., 651 S.W.2d 8 (Tex. App.—Dallas 1983, writ ref'd n.r.e.). Trevino claimed injury based on the negligence of Henry, Allstate's insured. After Trevino filed suit against Henry, he did not tender a defense to Allstate, but instead filed bankruptcy. The bankruptcy judge allowed a $10,000 claim against Henry, based solely on Trevino's petition in the underlying suit and oral argument. Allstate argued that it had no notice of the bankruptcy proceeding or of Trevino's action in the bankruptcy court; thus, Allstate claimed that all conditions precedent had not been met because Henry failed to forward suit papers as required by the policy. In her suit against Allstate, Trevino had not pleaded specifically that the suit papers had been forwarded, nor did she generally plead that all conditions precedent to recovery had been performed. Allstate made a general denial. The policy required that the insured forward all suit papers and that no suit would be sustained unless all policy requirements had been performed.

The court first ruled that the requirement of forwarding suit papers was a condition precedent, and to maintain the action, "the fact of performance or excuse of nonperformance must be alleged and proved in order to warrant a recovery." Id. at 11 (citing Southwestern Associated Tel. Co. v. City of Dalhart, 254 S.W.2d 819 (Tex. Civ. App.—Amarillo 1952, writ ref'd n.r.e.)). Furthermore,

when a plaintiff avers generally that all conditions precedent have been performed, he is required to prove the performance of only those conditions precedent specifically denied by the defendant. The effect of this rule is to shift the burden of pleading to the defendant, but not the burden of proof, when the plaintiff has made a general allegation that all conditions precedent have been performed.

Id. at 11.

Because Trevino made neither a specific allegation that the suit papers were forwarded by Henry nor a general allegation that all conditions precedent had been met, the burden of pleading and proving the performance of conditions precedent remained with Trevino. While Allstate had waived any objection to the failure of pleading, this did not waive Trevino's requirement of proof of that fact. The appellate court held that Trevino failed to present competent evidence that the suit papers had been forwarded to Allstate; thus, judgment for Allstate was affirmed. On rehearing, the court concluded that the forwarding of suit papers is not a matter of avoidance or affirmative defense but a fact Trevino needed to prove as an essential element of her case. And the condition precedent was not an exclusion/exception that Allstate was required to plead. Texas courts have repeatedly ruled that notice of claims and proof of loss are conditions precedent that must be pleaded by the insured and proved by the insured when denied by the insurer. See American Teachers Life Ins. Co. v. Brugette, 728 S.W.2d 763 (Tex. 1987); Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651 (Tex. App.—Houston 14th Dist. 2006, pet. denied).

In contrast, the insured typically need not prove compliance with conditions subsequent, since an insurer's claim of noncompliance constitutes a matter of defense. Finger v. Home Ins. Co. of N.Y., 379 S.W.2d 950 (Tex. Civ. App.—Houston 1964, no writ). Therefore, the burden is upon the insurer to show a violation of a provision invalidating the policy. R.B. Co. v. Aetna Ins. Co., 299 F.2d 753 (5th Cir. 1962); Continental Ins. Co. of N.Y. v. Nabors, 6 S.W.2d 151 (Tex. Civ. App.—Fort Worth 1928, writ ref'd). Nabors sought recovery under a Continental policy after fire destroyed her house. The policy stated:

This entire policy shall be void if the building herein described, whether intended for occupancy by owner or tenant, be, or become vacant, or unoccupied, and so remain for 10 days.

Id. at 152. Continental claimed that the policy was voided because the building became vacant for more than 10 days before the fire, while Nabors claimed a new renter had taken over the property just before the fire. The evidence regarding the house's occupancy was conflicting, but the jury found that the house was not vacant or unoccupied for 10 days prior to the fire.

On appeal, Continental argued that Nabors had the burden to prove compliance with the policy's occupancy condition. But the court determined that the policy provisions regarding occupancy could not be construed as a continuing warranty; rather, those provisions were "subsequent clauses inserted as conditions" that might render the policy void. The insurer pleaded these clauses as a defense and thus assumed the burden of proving the condition—that is, vacancy of the building for more than 10 days prior to the fire. The insurer failed to carry this burden, and thus the appellate court affirmed the judgment. See also Commercial Union Ins. Co. of Am. v. Stanmike Inv. Co., 475 S.W.2d 295 (Tex. Civ. App.—Waco 1971, writ ref'd n.r.e.) (policy provision avoiding liability for increased risk was a condition subsequent for which the insurer bore the burden of pleading and proof); Knoff v. U.S. Fid. & Guar. Co., 447 S.W.2d 497 (Tex. Civ. App.—Houston 1st Dist. 1969, no writ) (policy provisions on vacancy and increased risk constituted conditions subsequent upon which the insurer had the burden of pleading and proof).

Prejudice

An insurer may attempt to avoid liability on the grounds that the insured's actions have prejudiced the insurer. As noted above, Texas courts have ruled that notice of claims and proof of loss are conditions precedent that must be pleaded by the insured and proved by the insured when denied by the insurer. See American Teachers Life Ins. Co. v. Brugette, 728 S.W.2d 763 (Tex. 1987); Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651 (Tex. App.—Houston 14th Dist. 2006, pet. denied). An insurer's claim of noncompliance with these conditions precedent is not itself sufficient to avoid liability; rather, the insurer must also demonstrate that the noncompliance with the notice or proof loss requirements prejudiced the insurer. Struna v. Concord Ins. Servs. Inc., 11 S.W.3d 355 (Tex. App.—Houston 1st Dist. 2000, no pet.). Whether an insurer is prejudiced by its lack of notice is typically a question of fact. See also Duzich v. Marine Office of Am. Corp., 980 S.W.2d 857 (Tex. App.—Corpus Christi 1998, pet. denied); P.G. Bell Co. v. U.S. Fid. & Guar. Co., 853 S.W.2d 187 (Tex. App.—Corpus Christi 1993, no writ).

In Struna, Ms. Struna sued Guillory for negligence after his car struck hers. Struna notified Guillory's insurers, Concord and Home State, of the accident, but Guillory himself did not notify the insurers of the accident or the suit. The insurers attempted on numerous occasions to talk with Guillory about the claim and pending lawsuit but were unable to reach him. Struna procured a default judgment against Guillory and sought to recover from the insurance companies as an intended beneficiary. The insurers claimed no liability under the contract because Guillory failed to notify them of the claim, while Struna argued that the insurers did not demonstrate they were prejudiced by the lack of notice.

The trial court granted the insurer's motion for summary judgment, but the appellate court reversed because the insurer's summary judgment evidence failed to establish prejudice as a matter of law. In light of the fact that the insured and her attorney had notified the insurers of the accident, the underlying suit against Guillory, the default judgment, and the impending suit against the insurers, the insurers had actual notice of the claim and adequate time to respond. The insurers had not met their burden to show prejudice, and the evidence raised a material fact issue as to prejudice, thus precluding summary judgment. Compare Members Ins. Co. v. Branscum, 803 S.W.2d 462 (Tex. App.—Dallas 1991, no writ) (while insurer had notice of a claim against its insured, insurer was prejudiced because it did not receive notice of the suit until after a default judgment), and Kimble v. Aetna Cas. & Sur. Co., 767 S.W.2d 846 (Tex. App.—Amarillo 1989, writ denied) (prejudice resulted where insured failed to forward suit papers until after the entry of judgment), with Allstate Ins. Co. v. Pare, 688 S.W.2d 680 (Tex. App.—Beaumont 1985, writ ref'd n.r.e.) (insurer not prejudiced by insured's failure to forward suit papers prior to default when insurer actually knew suit had been filed and knew that default judgment had been rendered against another defendant).

Insurers have also claimed prejudice on the grounds that the insured failed to cooperate with the investigation of a claim as required by the policy. In addition to arguing the insured's failure to give proper notice, the Struna insurers argued that Guillory's failure to cooperate with the investigation constituted prejudice. But the insurers failed to carry their burden of proof for summary judgment purposes because material fact issues existed as to whether the insurer's investigation suffered because of Guillory's failure to cooperate. The police report, two independent witnesses, and the fact that Guillory was ticketed for running a red light could have led the insurers, after their investigation, to conclude that Guillory was responsible. This was a reasonable explanation for why the insurers decided to pay Struna for certain other damages and could negate a claim of prejudice. See also Coastal Ref. & Mktg., Inc. v. U.S. Fid. & Guar. Co., 218 S.W.3d 279 (Tex. App.—Houston 14th Dist. 2007, pet. denied) (insurer failed to prove that insured did not cooperate or that such alleged failure prejudiced the insurer).

Legal Obligation To Pay

Insuring agreements often provide that the insurer will pay those sums that "the insured becomes legally obligated to pay." Disputes often arise between the insurer and insured as to whether the insured truly has a legal obligation to pay for the damages at issue and thus whether the policy provides coverage. As an issue of coverage, then, the insured must prove that it is "legally obligated to pay" the underlying claims in order to compel the insurer's indemnification duties. See Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651 (Tex. App.—Houston 14th Dist. 2006, pet. denied). Court judgments against an insured create a "legal obligation to pay," but the obligation can also arise from a contract, settlement, or statute; Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181 (Tex. App.—Houston 14th Dist. 2003, pet. denied); Texas Prop. & Cas. Ins. Guar. Ass'n v. Boy Scouts of Am., 947 S.W.2d 682 (Tex. App.—Austin 1997, no writ).

Texas courts have long recognized the insured's burden to prove its legal obligation to pay. See Travelers Indem. Co. v. Equipment Rental Co., 345 S.W.2d 831 (Tex. Civ. App.—Houston 1961, writ ref'd n.r.e.). In Travelers, Equipment sought indemnification from Travelers after Equipment had to repair a crane rented from Lee but damaged by Lummus. Certain policy exclusions prevented recovery for damages to rented property, but Equipment also claimed coverage by arguing that it was legally obligated to Lummus under a contract to maintain insurance. The court stated:

In order to bring itself under [coverage,] plaintiff had the burden of proving that it was legally obligated to pay damages because of injury to property caused by accident. If plaintiff was legally obligated to pay damages to Lummus, it was by reason of a breach of contract to maintain insurance in force, not because of injury to property.

Thus, because Equipment failed to show a legal obligation due to property injury, the policy provided no coverage. Id. at 834.

Similarly, in Houston Gen. Ins. Co. v. Owens, 653 S.W.2d 93 (Tex. App.—Amarillo 1983, writ ref'd n.r.e.), the insured failed to prove its legal obligation to pay. Owens settled a suit brought by Dean after one of Owens's trucks was involved in an accident with Dean. Owens sought recovery from its excess insurer Houston for the settlement portion not covered by the underlying insurance. The court stated, "To recover on the policy ... Owens and the corporation had to establish ... they became legally obligated to pay the $19,800 because of the Dean accident." Id. at 97. However, the evidence did not conclusively establish that Owens had a legal obligation to pay because only Owens testified that he thought the company might be liable after the accident, while the settlement agreement denied the company's liability. And Owens failed to submit a jury issue on the question of the legal obligation to pay. Id. Thus, Owens failed to meet his burden, and the appellate court reversed and rendered a take nothing judgment against Owens.

Id. at 100.

In contrast, the insured met its burden to show a "legal obligation to pay" regarding a settlement agreement in Texas Prop. & Cas. Ins. Guar. Ass'n v. Boy Scouts of Am., 947 S.W.2d 682 (Tex. App.—Austin 1997, no writ). The Boy Scouts and several of its Pennsylvania councils were sued after Post was injured and rendered quadriplegic. The Boy Scouts settled with Post and sought indemnity from Texas Guaranty, which argued that Boy Scouts was not obligated to pay a claim since it voluntarily paid the settlement. The court disagreed with Texas Guaranty, noting that a legal obligation can arise out of a settlement or contract. And the policy expressly allowed for indemnification for settlements of covered claims. The fact that the Boy Scouts did not admit liability in the settlement was not important: "The Boy Scouts was a named defendant in the underlying lawsuit and its settlement of the Post claim is therefore covered under the Mission policy." Id. Boy Scouts met its burden to show its legal obligation to pay the settlement, and the settlement was within the policy's coverage. See also Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181 (Tex. App.—Houston 14th Dist. 2003, pet. denied) (insured established its legal obligation to pay damages as a result of a settlement); Venture Encoding Serv., Inc. v. Atlantic Mut. Ins. Co., 107 S.W.3d 729 (Tex. App.—Fort Worth 2003, pet. denied) (insured was legally obligated to pay where it incurred costs to correct a printing mistake as required by its contract with a third party); but see Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651 (Tex. App.—Houston 14th Dist. 2006, pet. denied) (costs incurred for proactive removal and replacement of defective stucco, overhead costs, inspection costs, personnel costs, and attorneys' fees were not damages that the insured was "legally obligated to pay").

Notice to Insured of Misrepresentations in Application

An insurer may defend its denial of coverage by asserting that the insured made a material misrepresentation in the insurance application. Tex. Ins. Code § 705.005 (Vernon 2009). However, to use this defense, the insurer must prove that it gave notice that it refused to be bound by the policy to the insured within 90 days of discovering the falsity of the representation. This rule first appeared in 1903, when the Texas legislature added article 3096bb to the portions of the Revised Civil Statutes related to insurance. Acts 1903, 28th Leg., p. 94, ch. 69, reprinted in H.P.N. Gammel, The Laws of Texas 1822–1897, 12 (Austin, Gammel Book Co.: 1898), at 94. Article 3096bb was recodified in essentially identical language several times, including the version known as article 21.17 of the Insurance Code that was in effect from 1951 to mid-2005:

In all suits brought upon insurance contracts or policies hereafter issued or contracted for in this State, no defense based upon misrepresentations made in the applications for, or in obtaining or securing the said contract, shall be valid, unless the defendant shall show on the trial that, within a reasonable time after discovering the falsity of the representations so made, it gave notice to the assured, if living, or, if dead, to the owners or beneficiaries of said contract, that it refused to be bound by the contract or policy; provided, that ninety days shall be a reasonable time; provided, also, that this article shall not be construed as to render available as a defense any immaterial misrepresentation, nor to in any wise modify or affect Article 21.16 of this code.

Tex. Ins. Code Ann. Art. 21.17 (Vernon 2002).

Each version of the statute made clear that the insurer bears the burden of proving compliance with the 90-day notice requirement. One of the earliest decisions interpreting the notice requirement was American Natural Ins. Co. v. Fawcett, 162 S.W.10 (Tex. Civ. App.—Dallas 1913, no writ). The insurer pleaded that the life insurance policy of Ms. Fawcett had been procured by false or fraudulent representations. According to the insurer, at the time of application, Ms. Fawcett represented that she was in good health, when in fact, she had tuberculosis. The court first disagreed with the insurer's contention that, as a condition precedent to recovery, Ms. Fawcett was required to plead her good health; rather, this was a matter of defense on which the insurer had the burden of proof. And, the court noted that the insurer had discovered Ms. Fawcett's poor health 6 months before her death and yet failed to cancel the policy. See also National Life Ass'n v. Hagelstein, 156 S.W. 353 (Tex. Civ. App.—San Antonio 1913, no writ) (agreed statement of facts proved that the insurer failed to give the required statutory notice). The early cases illustrate instances where an insurer failed to give proper notice but provide little analysis as to how the insurer can meet its burden of proof.

The Texas Supreme Court later provided more insight into the insurer's burden of proof regarding the notice requirement in Womack v. Allstate Ins. Co., 296 S.W.2d 233 (Tex. 1956). Allstate alleged that the insured falsely stated in her insurance application that her driver's license had not been previously suspended. Allstate did in fact give the insured notice (by letter) of its intent to cancel the policy based on the alleged misrepresentations. However, Allstate did not establish the date on which it learned of the facts regarding the insured's prior license suspension. Instead, Allstate merely alleged that it had given the notice "within a reasonable time," and the court found this insufficient to carry the burden of proof. Without the date of discovery of the misrepresentation, Allstate could not prove that its notice letter was sent within a reasonable time as required by the statute. This proved fatal to Allstate's defense, and the court ruled that summary judgment should not have been granted in Allstate's favor.

Similarly, the San Antonio Court of Appeals ruled that the insurer failed to prove compliance with the statutory requirement. Prudential Ins. Co. of Am. v. Torres, 449 S.W.2d 335 (Tex. Civ. App.—San Antonio 1969, writ ref'd n.r.e.). The evidence suggested that Prudential investigated Torres's claim soon after it accrued in March 1967 but sent its notice of cancellation the following September. The court ruled that it was reasonable to assume that Prudential discovered Torres's health condition and the associated misrepresentations at the time of the investigation, and thus Prudential failed to establish as a matter of law that its September notice was timely. Furthermore, Prudential failed to request a jury issue on the notice requirement and thus waived its complaint. Compare Paramount Nat'l Life Ins. Co. v. Williams, 772 S.W.2d 255 (Tex. App.—Houston 14th Dist. 1989, writ denied) (insurer failed to prove compliance with notice requirement where some evidence showed insurer's early knowledge of the insured's possible misrepresentations, and where insurer failed to request jury issue regarding the notice requirement), and Myers v. Mega Life & Health Ins. Co., 2008 Tex. App. LEXIS 2803 (Tex. App.—Amarillo Apr. 17, 2008, pet. denied) (mem. op.) (trial court erred by refusing to submit a jury issue regarding the timeliness of notice where the insured presented evidence to suggest that the insurer had earlier knowledge of the misrepresentation), with Koral Indus. Inc. v. Security-Connecticut Life Ins. Co., 788 S.W.2d 136 (Tex. App.—Dallas 1990), aff'd, 802 S.W.2d 650 (Tex. 1990) (where undisputed factual evidence showed that notice was given within 90 days of insurer's knowledge of a possible misrepresentation, the insurer carried its burden to show compliance with the notice requirement despite the absence of a jury submission on the issue).

So, in cases involving misrepresentation in the application, the insurer has the burden of showing not only that there was a misrepresentation but also that the statutory notice was given in a timely fashion.

Misrepresentations in Proof of Loss or Death (Claims)

Insurance policies often contain a provision making the policy void or voidable where the insured makes a misrepresentation regarding proof of loss or death. However, such provisions are void by statute unless it is shown that the misrepresentation (1) was fraudulently made, (2) misrepresented a fact material to the question of the insurer's liability under the policy, and (3) misled the insurer and caused the insurer to waive or lose a valid defense to the policy. Tex. Ins. Code § 705.003 (Vernon 2009). This statute first appeared in 1903, when the Texas legislature added article 3096cc to the portions of the Revised Civil Statutes related to insurance. Acts 1903, 28th Leg., p. 94, ch. 69, reprinted in H.P.N. Gammel, The Laws of Texas 1822–1897, 12 (Austin, Gammel Book Co.: 1898), at 94. The statute was recodified as article 4949 and later as article 21.19 of the Texas Insurance Code prior to its enactment as § 705.003. Texas courts have held that the statute places the burden on the insurer to establish the insured's fraud, the materiality of misrepresentation, and how the insurer was misled by the misrepresentation.

The Court of Civil Appeals took up the issue of the burden of proof on misrepresentations in a claim in the early case of Fidelity-Phenix Fire Ins. Co. v. Sadau, 167 S.W. 334 (Tex. Civ. App.—Amarillo 1914, no writ). Sadau concerned loss from a fire, and the insurer argued that Sadau presented a claim for loss in excess of the actual loss, presented excessively valued items, and presented a claim for articles that were not actually destroyed in the fire. The policy contained a broad clause voiding the policy in the event of fraud or misrepresentation, whether before or after a loss. The insurer appealed the trial court's refusal of two jury instructions on the issue of Sadau's misrepresentations. The appellate court noted that no other court had interpreted the provisions of the young statute and that, prior to the statute, the insurer needed only show the falsity of a statement in order to void the policy. The new statute placed a greater burden on the insurer by requiring it to prove that the misrepresentation misled the insurer and caused it to waive or lose a valid defense. The appellate court agreed that the trial court properly refused the jury instructions because "the insurance company [had] not exhibited any pleading, nor [did] the evidence raise the issue that it [had] in any wise been misled, or on account of the proof of loss, by virtue of the misrepresentations therein … waived or lost any valid defense to said policy...." Id.

The Waco Court of Civil Appeals later ruled that an insurer seeking to avoid liability on the basis of a fraud or false swearing policy provision had the burden to show compliance with all of the statute's requirements. Fireman's Fund Ins. Co. v. Reynolds, 85 S.W.2d 826 (Tex. Civ. App.—Waco 1935, writ ref'd). Fireman's sought to avoid liability from a fire that destroyed Ms. Reynolds's house by alleging that Reynolds made false statements regarding her claim during a post-fire examination by Fireman's. The court ruled that the false statement relied upon by the insurer to work a forfeiture of the rights of the insured must have been willfully made and must not have resulted from inadvertence or mistake. The evidence however, showed only that Reynolds made inconsistent statements and could have made an honest mistake; thus, the insurer failed to carry its burden to show willful deception and could not meet the statute's requirements. Id. See also U.S. Fire Ins. Co. v. Skatell, 596 S.W.2d 166 (Tex. Civ. App.—Texarkana 1980, writ ref'd n.r.e.) (insurer failed to meet its burden to prove that the false statements were fraudulently made, were material to the issue of liability, or caused the insurers to waive or lose any valid defense to the policies); Aetna Cas. & Sur. Co. v. Guynes, 713 F.2d 1187 (5th Cir. 1983) (even if trial evidence showed fraudulent intent and materiality, the insurer failed to show it had been misled); Delta Lloyds Ins. Co. v. Williamson, 720 S.W.2d 232 (Tex. App.—Beaumont 1986, no writ) (although insured intentionally overvalued property when submitting his proof of loss, the insurer failed to prove the materiality of the misrepresentation or that the insurer was misled and waived or lost a valid defense as a result); Stokes v. State Farm Lloyds, Inc., 1997 Tex. App. LEXIS 1079 (Tex. App.—Houston 14th Dist. Mar. 6, 1997, pet. denied) (not designated for publication) (where insurer had an opportunity to fully litigate its arson defense at trial, it could not be said that the insurer lost a valid policy defense as a result of the insured's misrepresentation).

It is important to note that courts disfavor a forfeiture of coverage based on policy provisions regarding misrepresentations in proof of loss or death. In fact, courts refer to this statute as the "anti-technicality" statute. Stokes; Guynes, 713 F.2d at 1190. The statute's purpose is to make it more difficult for insurance companies to avoid abiding by the terms of the policy when a claim is made. Stokes. See also Vernon v. Aetna Ins. Co., 301 F.2d 86 (5th Cir. 1962) (noting that article 21.19 should be construed liberally to accomplish the legislative purpose of keeping insurers from denying coverage solely on the basis of any misrepresentation). Thus, the insurer bears a heavy burden to prove that a policy is void because of an insured's misrepresentations in the proof of loss or death.

Conclusion

Practitioners must continually be aware of the burden of proof in Texas insurance litigation. That burden will depend on the particular insurance issue at hand and whether the attorney represents the insurer or the insured. And that burden can shift quickly but subtly. So, at all times, the prudent practitioner must have the evidence necessary to carry its burden of proof or find a way to shift it back to the opposition.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

Like This Article?

IRMI Update

Dive into thought-provoking industry commentary every other week, including links to free articles from industry experts. Discover practical risk management tips, insight on important case law and be the first to receive important news regarding IRMI products and events.

Learn More