June 12, 2002Just in case you noticed, we have not published a newsletter since February. Contrary to what some people were thinking, we were not waiting for Kevin Costner to have a "hit" movie before publishing another newsletter (if that were the case, we probably would never publish another newsletter). The members of the Texas Supreme Court were busy campaigning in the spring. As a result, there were few opinions issued by the Supreme Court during the primary and run-off election periods. The Supreme Court issued two opinions in May that affect those of us in the insurance industry. The Court in Mid-Century Insurance Company v Boyte held that an insurance carrier no longer owes a duty of good-faith and fair dealing to its insured once a judgment is rendered against the insurance carrier by the insured. In ROCOR International v National Union Fire Insurance Company the Court recognized a statutory cause of action on behalf of an insured against its insurance carrier for failing to promptly effectuate a settlement on a third-party claim. In the area of employment law, the Supreme Court applied a restrictive interpretation of the Whistleblower Act in TxDOT v Needham. Finally, in the area of evidence law, in Guadalupe-Blanco River Authority v Kraft, the Court continued its conservative interpretation of when an expert witness will be allowed to testify. I. THERE IS NO DUTY OF GOOD FAITH AND FAIR DEALING TO SETTLE A CASE ONCE THE INSURED OBTAINS A JUDGMENT AGAINST AN INSURANCE CARRIER The Court in Mid-Century Insurance Company of Texas v Randy Boyte and Margaret Boyte (decided on May 23, 2002) held that once an insured obtains a judgment against an uninsured motorist carrier the relationship between the insured and the insurance carrier changes from an insured-insurer relationship to a judgment debtor-judgement creditor relationship. The common law and statutory duties of good faith and fair dealing are extinguished upon entry of the judgment so that the insurance carrier does not have a duty to settle the judgment "in good faith" while the insurance carrier is appealing the judgment.
This case is a "third generation" law suit. In the "first generation" claim, Randy Boyte sustained back injuries in an automobile accident in 1992. Boyte settled with the insurance carrier for the negligent driver for $100,000.00 and then filed an uninsured motorist claim. Mid-Century Insurance Company of Texas determined that Boyte's claim was valued at $120,000.00. Mid-Century tendered the $20,000.00 difference after taking the off-set for the $100,000.00 paid by the carrier for the negligent driver. Boyte rejected this offer and proceeded to trial. Boyte had a $200,000.00 uninsured limit. In the "second generation" uninsured motorist claim the jury found that Boyte's damages totaled $180,000.00, which, after deducting the $100,000.00 offset, resulted in a $80,000.00 judgment against Mid-Century. After judgment was rendered Boyte advised Mid-Century that he needed back surgery but that he could not afford to pay for the surgery. Mid-Century offered to pay for the surgery (the cost of the surgery was $23,400.00), but refused to pay the remaining $56,600 on the $80,000.00 judgment while the appeal was pending. Boyte refused the offer by Mid-Century to pay the cost of the surgery. The appeal was ultimately affirmed and Mid-Century paid the judgment. Boyte then filed this "third generation" suit against Mid-Century, claiming common law and statutory violations of the duty of good faith and fair dealing due to the failure of Mid-Century to settle the $80,000.00 judgment. The issue before the jury in the "third generation claim" dealt solely with Mid-Century's post-judgment conduct in failing to pay the $80,000.00 judgment. Boyte contended that Mid-Century knowingly failed to attempt a fair settlement when its liability became reasonably clear after the jury verdict and judgment in 1995, and that the two-plus year delay in payment injured him. The jury found that Mid-Century had violated its common law and statutory duties of good faith and fair dealing, and awarded damages and attorney's fees. A judgment was then rendered against Mid-Century for $458,748.04.
Boyte contended that once the judgment was rendered against Mid-Century it had a duty to "attempt a fair settlement when its liability became reasonably clear after the jury verdict and judgment." Boyte claimed that the duties of good faith and fair dealing extended after the judgment was rendered against Mid-Century. The Supreme Court rejected this argument. The Court held that once judgment was rendered against Mid-Century, its status was ". . . transformed . . . from insurer to judgment debtor such that Boyte's former status as an insured became that of a judgment creditor". The Court concluded that once a judgment is rendered against the insurance carrier by its insured the duties of good faith and fair dealing end. Therefore, the Court held that Boyte had no cause of action against Mid-Century for failing to pay the judgment in the uninsured motorist claim
This decision represents the realization by the Supreme Court that any party, including an insurance carrier, should be able to appeal a judgment and not be subjected to a second lawsuit for failing to settle the case while on appeal. II. AN INSURANCE CARRIER HAS A STATUTORY DUTY TO SETTLE A THIRD PARTY CLAIM In ROCOR International, Inc. v National Union Fire Insurance Company of Pittsburgh, Pennsylvania (decided on May 23, 2002), the Court held that Insurance Code Art. 21.21 creates a duty on behalf of an insurance carrier to settle a third-party claim. Nevertheless, the Court found that under the facts of this case there was insufficient evidence to uphold a judgment against the insurance carrier.
ROCOR sued its excess carrier, National Union Fire Insurance Company, for reimbursement of defense costs and expenses that it incurred while defending a claim that was ultimately settled. The underlying claim resulted when an off-duty driver for ROCOR was involved in a DWI "hit and run" accident in which he hit two DPS officers who had stopped a drunk driver on the side of the road. Both DPS officers were killed. The driver attempted to flee the accident scene. It was later determined that the driver had a blood alcohol concentration of 0.16. ROCOR had the following self-insured retention and insurance coverages:
___________________________________ Total Coverage - $10 million The accident in question occurred in May 1989. The families of the DPS officers hired an attorney who informed ROCOR's attorney in June 1989 that he considered this a "policy limits case". The case was set for mediation in January 1990 when National Union took over all settlement negotiations but cancelled the mediation. National Union's attorney then engaged in settlement negotiations with the plaintiffs' attorney. The Supreme Court recognized that the plaintiffs did make a written offer on May 4, 1990, to settle the case for the entire $10 million in insurance. The plaintiffs' attorney, however, admitted that his $10 million demand was not a "serious demand". The Court also noted that the subsequent status of negotiations was unclear. The claims of the children ultimately settled for $1.8 million in December 1990. The claims of the widows went to mediation and finally settled for $4.6 million in March 1991. ROCOR then filed suit against National Union to recover its defense costs and expenses resulting from National Union's alleged failure to "promptly effectuate the settlement". The case went to trial and the jury found in favor of ROCOR, concluding that National Union violated its common law duties to promptly effectuate a settlement of a third-party claim as well as its statutory duties under Art. 21.21 to promptly effectuate a settlement of a third party claim. The trial court granted judgment NOV against ROCOR. The Court of Appeals, by a divided court, held that ROCOR had a common law negligence claim against National Union for failing to promptly settle the claim, but did not have a statutory claim against National Union. Both ROCOR and National Union therefore petitioned for review by the Supreme Court.
The first issue before the Court was whether Art. 21.21, as it applied at the time of the underlying accident, permitted ". . . an insured to recover defense costs it incurred because its insurer unreasonably delayed settling a third-party liability claim." As the Court pointed out, Art. 21.21 was amended in 1995, allowing such a cause of action. Nevertheless, National Union contended that if a cause of action did exist under Art. 21.21 for failing to promptly settle a claim that such cause of action only applied to first-party claims. The Supreme Court disagreed with this position and held that the duty under Art. 21.21 to effectuate a prompt, fair, and equitable settlement of a claim extended to both first-party claims and third-party claims.
The Court held that in order for the insured to sue its insurance carrier under Art. 21.21 for failing to settle a third-party claim, the insured must show:
In this case, the National Union policy clearly covered the claims of the family members of the DPS officers. Furthermore, all parties agreed that the liability of the insured was reasonably clear. However, given the verbal negotiations and the conflicting demands of the plaintiffs' attorney, the Court held that ROCOR never proved that the claimants had made a proper settlement demand within policy limits. The Court also found that ROCOR failed to prove that the terms of the settlement demands were such that an ordinarily prudent insurer would accept the demand. As such, the Court held that there was no evidence that National Union was "presented with a proper settlement demand". Therefore, the necessary prerequisites to Art. 21.21 liability and negligence liability did not exist. The Court did note that the plaintiffs' attorney had made a written settlement demand for $10 million, which demand was obviously within the insurance policy limits. Nevertheless, the case ultimately settled for $6.4 million. The Court concluded that given the disparity between the $10 million demand and the $6.4 million settlement, such a demand could not constitute a basis for establishing liability as the $10 million demand was not a demand that a prudent insured would accept.
National Union, as the excess carrier, did not have a duty to defend ROCOR. Nevertheless, the Supreme Court held that once National Union gained control over the settlement negotiations it still owed a duty to ROCOR to minimize ROCOR's defense costs. National Union was ". . . not exempt from liability for unfair settlement practices merely because it had no contractual duty to defend ROCOR." Under the facts of this case, the Court did not find that National Union had violated its duty to promptly settle a case.
The Supreme Court has now held that Art. 21.21 creates a duty on behalf of an insurance carrier ". . . to effectuate a prompt, fair, and equitable settlement of a claim with respect to which the insurer's liability has become reasonably clear." However, this decision does not mean that the insurance carrier must settle all third-party claims. If the insured's liability is not reasonably clear, if the claimant has not made the proper settlement demand within policy limits, or if the demand is such that an ordinarily prudent insurer would not accept the demand, then no duty to settle exists. III. WHISTLEBLOWER ACT DEFINES THE APPROPRIATE LAW ENFORCEMENT AUTHORITY TO REPORT UNLAWFUL CONDUCT The Court, in Texas Department of Transportation v. Eddie William Needham (Decided May 9, 2002), found that the Whistleblower Act, clearly defines the appropriate law enforcement authority to report unlawful conduct through the 1995 Legislature's amendments to the statute. The Court held that the Texas Department of Transportation ("TxDOT") was not the appropriate authority to which Eddie William Needham ("Needham") should have reported his co-worker's drunk driving. Accordingly, Needham did not have the protection he was seeking under the Whistleblower Act from an adverse personnel action.
As of 1996, Needham had worked with TxDOT for twenty-three years. He was the chief in TxDOT's Geodetic Control Section. He traveled around the state of Texas to perform global positioning surveys with other employees of TxDOT. On January 10, 1996, Needham was traveling from Orange to Austin, when he stopped in College Station to spend the night. Upon arriving at his hotel, he met Sam Garrett, another TxDOT crew chief and two of his crew members. They agreed to meet for dinner. One of Garrett's crew members called Needham on the radio to get directions. Needham stated that the crew member's speech was slurred. When Needham saw the crew member in person, he was weaving as he was walking into the restaurant. The crew member's breath smelled of alcohol. Needham instructed the other employee to drive this employee back to his hotel, as Needham concluded the employee was too intoxicated to drive. Needham did not immediately report this incident to the appropriate people at TxDOT. He felt that it was Garrett's responsibility to report it as the crew chief for the employee. Needham waited until February 23, 1996, to report the incident to Lewis Keller, a supervisor at the same level as Needham's supervisor. Keller told Needham that the TxDOT manual required Needham to report the incident to Needham's immediate supervisor. Needham complied with the manual and reported the incident to his supervisor, Frank Howard. On March 1, 1996, Needham met with Howard's supervisor, Leah Coffman, regarding various work related issues but did not bring up the drunk driving incident. On the same day, he met with Keller again about the drunk driving incident and was referred to Barry Six, in TxDOT Human Resources. Needham spoke with Six, who already knew about the incident. Needham was then out of work sick. Upon returning to work after his illness, he was taken by Coffman to meet with Six regarding Needham's travel and work assignment practices. A week later, after all supervisors had met and discussed the matter, Needham was given a progressive disciplinary action document charging him with thirteen violations of TxDOT policies and procedures. These violations included that Needham unnecessarily traveled to College Station with no TxDOT business to conduct, secured lodging in College Station rather than return to Austin headquarters, and encouraged other employees to do the same. As a result of these allegations, Needham was demoted and placed on probation for twelve months by his supervisor, Howard. In Needham's twenty-six years with TxDOT he had never received a reprimand.
In April, 1996, Needham initiated an administrative appeal of the adverse employee decision. Needham retired in December, 1996. He abandoned his administrative appeal and filed suit against TxDOT and alleged, among other things, a claim under the Whistleblower Act. TxDOT moved for summary judgment on the Whistleblower Act claim. The trial court denied the motion for summary judgment. The jury returned a verdict in favor of Needham. The trial court entered a judgment on the verdict. TxDOT appealed claiming that there was insufficient evidence to support the finding that TxDOT violated the Whistleblower Act. The Court of Appeals held: 1. TxDOT's disciplinary action policy gives it the power to discipline an employee "on account of alleged violations being reported."; 2. TxDOT qualified as an appropriate law enforcement authority; 3. There was sufficient evidence for a jury to find that "Needham's report of the co-worker's conduct constituted a good faith report of a violation of the law to an appropriate law enforcement authority."; and 4. The evidence was sufficient to support a finding that TxDOT retaliated against Needham because of his report. The Supreme Court granted TxDOT's petition for review to determine if the Court of Appeals correctly applied the Whistleblower Act in concluding that Needham reported the violation, in good faith, to the entity he believed was the appropriate law enforcement authority.
The Texas Legislature amended the Whistleblower Act in 1995 to add a definition for the term "appropriate law enforcement authority" as follows: (a) In this section, a report is made to an appropriate law enforcement authority if the authority is part of a state or local governmental entity or the federal government that the employee in good faith believes is authorized to: (1) Regulate under or enforce the law alleged to be violated in the report; or (2) Investigate or prosecute a violation of the law. Before the 1995 amendment to the Whistleblower Act, the term "appropriate law enforcement authority" was not defined. This allowed courts to determine the appropriate law enforcement authority on a case by case basis, relying upon pre-1995 case law for its application. The 1995 statutory definition limited the appropriate law enforcement authority to a governmental entity authorized to "regulate under or enforce the law alleged to be violated in the report." It would be a governmental entity authorized to "investigate or prosecute a violation of criminal law." It was not enough that the entity has the authority to regulate, enforce, investigate, or prosecute within its own structure. The governmental entity must be able to pursue the prosecution to the fullest extent based upon the violation being reported. The question before the Court was whether TxDOT has the authority to regulate, enforce, investigate or prosecute the violation of DWI laws. The Court found that TxDOT does not have the authority to enforce criminal laws.
Needham could claim protection under the Whistleblower Act if he in "good faith" believed TxDOT was the appropriate law enforcement authority as defined by the statutes. Good faith means that (1) the employee believed that the conduct reported was a violation of law and (2) the employee's belief was reasonable in light of the employee's training and experience. There are two elements to this test. The first element is the "honesty in fact" test which determines whether the employee actually believed he was reporting a violation of the law. The second element is whether a reasonably prudent employee in similar circumstances would have believed that the facts as reported were a violation of law. These terms should be interpreted through the language of the definition provided in the Whistleblower Act. The Court found that there was insufficient evidence to support the claim that Needham could believe that he was reporting the behavior to the appropriate authorities. A reasonable person would report driving while intoxicated to the local authorities for prosecution, and not solely to company/agency supervisors.
An employee must first look at the behavior that he is going to report. He must next determine what rules, regulations, policies or laws have been violated, whether they be internal company/agency rules and/or regulations or state laws. The governmental authority must be able to prosecute the offense to its fullest extent in order for the protection provided by the Whistleblower Act to take effect. IV. STATUTORY WAIVER OF IMMUNITY FROM SUIT AGAINST A COUNTY MUST BE CLEAR AND UNAMBIGUOUS: INVOKING CONTRACTUAL PROVISION DOES NOT WAIVE COUNTY'S IMMUNITY FROM SUIT In Travis County v Pelzel & Associates, Inc.(decided on May 9, 2002), the Court held that §89.004 of the Local Government Code is not a statutory waiver of immunity from suit against a county. A statutory waiver of immunity from suit against a county must be stated in clear and unambiguous language. The Court further held that Travis County's conduct, invoking the liquidated-damages-clause of its contract with Pelzel & Associates, Inc., did not waive its immunity from suit.
Travis County contracted with Pelzel & Associates, Inc. (hereinafter referred to as "Pelzel"), to construct an office building in Austin, Texas, with an original completion date for construction of October 21, 1994. Travis County and the architect agreed to extend the original completion date to December 8, 1994. Pelzel contended that it did not agree to the new completion date. On December 29, 1994, Pelzel substantially completed construction on the building. Travis County then accepted and occupied the building. Travis County paid $414,164.80 and withheld $5,500.00 in liquidated damages by invoking the liquidated-damages-clause of the contract. This clause permitted Travis County to retain $250.00 per day that Pelzel failed to substantially complete construction beyond December 8, 1994. Section 89.004 of the Local Government Code requires a party to present its claims against a county to the commissioners court prior to filing suit in district court. Pursuant to §89.004, Pelzel presented its claim against Travis County to the Travis County Commissioners Court. Pelzel sought payment of the balance due under the contract, interest and $136,508.56 in damages. Travis County refused to pay Pelzel's claim, after which Pelzel sued Travis County in District Court. Travis County filed a plea to the jurisdiction on grounds of sovereign immunity. The trial court denied Travis County's plea. Travis County brought an interlocutory appeal. The Court of Appeals affirmed the decision of the trial court, holding that Travis County waived its immunity by its conduct. The Court of Appeals further held that Pelzel's compliance with §89.004 of the Local Government Code conferred jurisdiction on the trial court. Travis County petitioned for a review before the Supreme Court.
The first issue before the court was whether §89.004 of the Local Government Code provided Pelzel with express legislative consent to sue Travis County. The Court held that §89.004 did not waive Travis County's immunity from suit. The Court noted that this section functions merely as a condition precedent to suit, requiring claims against a county to be presented to the Commissioners Court prior to filing suit. The Court explained that express legislative consent to sue must be stated in clear and unambiguous language. Absent clear and unambiguous statutory language, a county retains its sovereign immunity from suit. The second issue before the Court was whether Travis County waived its immunity from suit by its conduct. Pelzel took the position that it fully performed under the terms of the contract and argued that Travis County waived its immunity from suit by accepting the building without paying the full contract price of the building. The Court rejected the waiver-by-conduct exception to immunity from suit for a breach-of-contract claim against a county. The Court held that Travis County did not waive its immunity from suit when Travis County invoked the liquidated-damages-clause and reduced the full contract price of the building. The Court explained that when a county adjusts a contract price under the express terms of contract, the county does not, by its conduct, waive its immunity from suit, even if the amount of the adjustment is disputed.
This opinion established that (1) a county's statutory waiver of immunity to suit must be in clear and unambiguous language; and (2) a county does not waive its immunity from suit by its conduct of invoking contractual provisions. V. UNDERLYING DATA SUPPORTING EXPERT'S OPINION MUST BE RELIABLE AND NOT BASED UPON HYPOTHETICAL IN ORDER FOR EXPERT'S OPINION TO BE ADMISSIBLE IN COURT In Guadalupe-Blanco River Authority v. Kraft, 2002 WL 924452 (May 9, 2002,) the Texas Supreme Court remanded a condemnation case to the trial court after deciding that the condemnee's expert opinion regarding the value of the proposed condemned tract of property was not based upon reliable underlying facts. Therefore, the expert should not have testified at the condemnation trial.
Martin Kraft owned 272 acres of unimproved property in Hays County which he used for grazing cattle. The Guadalupe-Blanco River Authority ("Authority") began condemnation proceedings against Kraft seeking a permanent easement across the property in order to lay part of a 20 mile water pipeline which was going to a water treatment plant in San Marcos, Texas. The easement was to consist of a strip 30 feet wide by 4,600 feet long, with temporary easements 35 feet wide running along either side and cutting diagonally across Kraft's property. However, the narrow easement did not impact the property's continued use as grazing land. Kraft contested the value placed upon his condemned property and a trial was held on that issue. Kraft called Kirby Gholson, an appraisal expert, to testify regarding the valuation of the narrow easement. Mr. Gholson testified that he used a comparable sales approach to determine the easement's market value. The approach consisted of (1)searching the market for what is considered to be sales comparable to the subject property and (2) making a decision as to what the subject property is worth based upon current sales. However, there were no comparable sales of narrow easements in the local market. Gholson configured a hypothetical rectangular tract of 3.2 acres to fit his analysis. As such, Gholson testified that the value of the property taken through the easement was $64,400. The Authority's expert, Albert Menn, testified that because the condemned property could not stand on its own as a marketable unit, the property was worth $7,630. A jury agreed with Gholson's expert opinion and awarded Mr. Kraft $64,400. The Authority appealed to the Third Court of Appeals claiming that the admission of Gholson's testimony was in error as it was unreliable. The Court of Appeals upheld the admission of Gholson's testimony. The Authority then appealed to the Texas Supreme Court.
Kraft claimed that the Authority did not properly preserve any objection to admission of Gholson's testimony because the objection made by the Authority was not clear. Prior to the testimony of Mr. Gholson, the Authority's attorney objected, stating "I am going to make an objection based upon the failure of the witness' methodology to meet the reliability standards as articulated by the Supreme Court in Gammill v. Jack Williams Chevrolet as applied to all expert testimony." The Supreme Court found that this objection was clear and was sufficient to preserve error on appeal.
The Supreme Court noted that the underlying data used to evaluate property values must be reliable. An expert's "bald assurance" regarding his underlying data is insufficient to show that the opinion of the expert is reliable and consequently admissible. In this case, the court noted that the underlying data used by Gholson was unreliable as he did not use comparable condemned easements to show the market value of the strip actually taken. Rather, Gholson configured a hypothetical tract, from which he extrapolated a value. As the court noted, Gholson's comparison of current sales to a hypothetical tract vastly dissimilar from the easement taken was not the judicially accepted method for finding the value of that easement. Therefore, the Supreme Court reversed and remanded this case to the trial court for a hearing regarding the value of the land in accordance with State v. Windham 837 S. W. 2nd 73, 75-76 (Tex. 1992). The formula set forth in Windham is to have a land owner designate property around a proposed easement so that the tract property will form a marketable unit, which could then be reasonably compared to local sales of similar units in order to determine market value. The court noted that the Authority had used this method in its valuation of the condemned Kraft easement. The court concluded that Gholson could not give an opinion based upon a hypothetical tract of land and therefore remanded this case to the trial court so that a jury could make a decision given evidence supported by admissible expert testimony.
In sum, the court concluded that the underlying data supporting an expert's opinion must be reliable and not based upon a hypothetical (i.e. able to be independently evaluated.) Should the underlying data not be reliable, the expert's opinion cannot be reliable and is therefore inadmissible. The Court has given practitioners another avenue in which to challenge expert's testimony by challenging the underlying data as being unreliable. Please feel free to call any of our partners or associates with any questions that you may have at 361-881-9217 or fax us at 361-882-9437. |
- Insurance Defense and Litigation
- Commercial Trucking Accidents Defense and Litigation
- Professional Malpractice
- Healthcare Malpractice
- Employment Law
- Constitutional Torts and Civil Rights
- Environment and Toxic Torts - Medical Devices
- Construction Defects
- Oilfield and Offshore Platform Accidents
- Business and Commercial Litigation
Volume III, No. 3
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