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.