How Many Bites at Bad Faith

On May 23, 2002, the Texas Supreme Court issued its opinion in Mid-Century Insurance Company of Texas v. Boyte, a case that arose out of an underinsured motorist claim. The Court addressed the issue of whether the common law and statutory duties of good faith and fair dealing extend beyond entry of judgment. The court reasoned that judgment modifies the relationship of the insured and the insurer to that of judgment creditor and debtor. Accordingly, the Court concluded that the “special relationship” which gives rise to good faith and fair dealing no longer existed, and the duty ceased to exist.

In the case, Boyte sustained injuries in two automobile accidents, on successive days. He settled with both liability insurers and asserted an underinsured motorist claim with his own carrier, Mid-Century, for the claims arising from the first accident. While Boyte demanded the $100,000 limit, Mid-Century valued the claim at $120,000 and tendered the $20,000 in excess of the limit of liability insurance. The case proceeded to trial, and the jury found that Boyte was entitled to the remaining $80,000 in policy benefits.

Mid-Century appealed from the judgment, and filed a supersedeas bond. After judgment, but while the appeal was pending, Boyte informed Mid-Century that he was in urgent need of back surgery. Mid-Century offered to pay for the surgery and therapy, in the amount of $23,400, but refused to pay the full $80,000 judgment. Ultimately, Mid-Century lost the appeal, and the Supreme Court denied review. Mid-Century then paid the judgment.

Boyte then filed a new suit alleging common law and bad faith in violation of Article 21.21 of the Insurance Code. In regard to both claims, Boyte asserted that Mid-Century knowingly failed to attempt settlement once its liability had become reasonably clear. Boyte asserted that Mid-Century’s liability was clear after the jury verdict and judgment, effectively arguing that Mid-Century’s appeal of the uninsured motorist case constituted bad faith.

During trial, the parties stipulated that Boyte was seeking damage only for post-judgment conduct. The jury found common law bad faith and statutory violations and awarded additional damages for knowing violations. Ultimately, a “bad faith” judgment was rendered on the “bad faith” claims in the amount of $458,748.04. The Court of Appeals affirmed, holding that the duty of good faith and fair dealing extended beyond judgment.

On petition for review, the Supreme Court reversed and rendered judgment that Boyte take nothing. The court relied, largely, on its prior decision in Stewart Title Guaranty Company v. Aiello, 941 S.W. 2d 68 (Tex. 1997). In Aiello, the court concluded that no duty of good faith and fair dealing existed after the insured and insurer entered into an agreed judgment which reduced the insurance obligation to payment of a sum of money. Although Boyte attempted to distinguish Aiello—because the agreed judgment followed a settlement, and because the judgment was subject to immediate execution—the court found these distinctions irrelevant.

The court concluded that, upon judgment, the parties’ relationship to each other became that of judgment debtor to judgment creditor, and that the duty of good faith was replaced by traditional mechanisms for enforcement of judgment. In contrast to the relative disparity and bargaining power which gives rise to the duty of good faith and fair dealing, the court concluded that the balance between litigants allowed by the procedural rules, including the right to supersede a judgment by posting bond, placed all judgment creditors and debtors in the same position upon appeal. There was no disparity in power that would require the continued application of the duty of good faith.

The court performed a limited analysis, contending that the only issue before it was whether bad faith existed after a judgment, and that the issue was controlled by its prior decision in Aiello. Aiello involved a dispute under a title insurance policy. After the homeowners discovered a utility easement on their property, that was not mentioned in the title insurance policy, the title company refused to honor the claim. The homeowners sued and eventually settled with the title company. Under the terms of the settlement, the title company agreed to pay a total sum of $319,000, plus court costs and a $100 per day until the judgment was finally executed and paid. The court signed an agreed judgment in accordance with these terms, but Stewart Title refused to respond to attempts to complete the settlement. After the Aiellos obtained a writ of execution and attempted to execute the writ, the title company finally delivered a proposed deed and, several months after the judgment was rendered, paid the principal amount due. Ultimately, the Aiellos delivered the deed, without receiving delay damages or post-judgment interest, and then sued the title company for breach of the duty of good faith and fair dealing, violations of the Deceptive Trade Practices Act, and violations of Article 21.21 of the Insurance Code, as well as other breach of contract, negligence and gross negligence. Stewart Title also counterclaimed for breach of contract.

At trial, the Aiellos prevailed on their claim for breach of the duty of good faith and fair dealing. The Aiellos obtained both actual and exemplary damages, as well as treble damages under the DTPA and Article 21.21. Stewart Title appealed, asserting that the bad faith and exemplary damages were inappropriate. Analyzing the claims, the court reviewed the history of good faith and fair dealing, and its origination in the “special” relationship between an insurer and insured, arising out of the parties’ unequal bargaining power inherent in an insurance contract. The court also noted that, ordinarily, a suit on an agreed judgment would sound in contract, and not tort.

The court concluded that the duty of good faith and fair dealing was necessary where a disparity of bargaining power gave the insurer exclusive control over the processing of claims. The same duty was not necessary, however, in the judgment creditor/judgement debtor context. The court noted that the Aiellos were not left vulnerable, but had the legal remedies available to all judgment creditors, including execution, garnishment, turnover and attachment.

The court also distinguished Aetna Cas. & Sur. Co. v. Marshall, 724 S.W.2d 770 (Tex. 1987). Marshall involved a workers compensation claim. Under the terms of the settlement, Aetna, the workers compensation carrier, was required to pay for both past and future medical bills. Aetna failed to fulfill its obligations and was sued for breach of a duty of good faith and fair dealing and violations of the Texas Insurance Code. The court distinguished Marshall, in part, on the basis that Marshall involved an insurer undertaking an obligation to pay future claims, and thus continuing to serve in its capacity as insurer.

The court’s limited decision in Boyte leaves open multiple questions that arise about what duties are owed in the suit pre-judgment litigation context. That analysis, in the context of underinsured motorist claims, is further limited by the Supreme Court’s opinion in Henson v. Southern Farm Bureau Cas. Ins. Co., 17 S.W.3d 652 (Tex. 2000). In Henson, the court held that an insurer was not legally obligated to pay UIM benefits until the jury established the underinsured driver’s liability in the underlying case. Therefore, in an underinsured motorist context, there is at least an argument that there could be no “bad faith” until the underlying case was resolved.

Outside of the underinsured motorist context, however, the law is far from clear. When an insurer has denied a claim, can it continue to commit bad faith by maintaining that denial through the litigation process? Certainly, policyholder lawyers take this position, urging a continuing duty of good faith. If this is correct, what about the juxtaposition of the insurer’s duties, with the attorney’s duty of zealous representation and the attorney-client privilege?

Boyte may, ultimately, leave open more questions than it resolves. It does, however, provide at least one finite point at which the duty of good faith and fair dealing ceases to exist.

Bradley is a partner in the Dallas office of Thompson, Coe, Cousins & Irons, L.L.P. She is a member of the Insurance Litigation and Coverage Section and leads the firm’s coverage practice. She has represented agents in disputes with policyholders and insurers in evaluating and litigating coverage issues under general and professional liability policies, commercial auto and trucking policies, commercial property policies and homeowners policies.

Topics Lawsuits Carriers Texas