October 24, 2002 Volume 3, No. 6
The Texas Supreme Court closed its summer term by upholding the enforceability of the appraisal provision in the Texas Personal Automobile Policy in a suit brought against Allstate, Farmers, and Progressive, In re Allstate County Mutual Insurance Company. In other matters indirectly related to insurance law litigation, the Court concluded that: (1) the delay in attempting to compel arbitration does not constitute a waiver of arbitration, In re Service Corporation International; (2) no cause of action exists against an employer for negligent investigation of an at-will employee’s misconduct, Texas Farm Bureau Mutual Insurance Company v James Sears; and (3) the warranty of habitability can be waived by a homeowner in only limited circumstances, Centex Homes and Centex Real Estate Corporation v Buecher.
I. THE APPRAISAL PROVISION IN THE TEXAS PERSONAL AUTOMOBILE INSURANCE POLICY IS ENFORCEABLE
In In re Allstate County Mutual Insurance Company (decided August 29, 2002), the Court held that the appraisal provision of a personal automobile insurance policy is enforceable.
A. FACTS OF CASE
Terri Shields’ car was stolen. Renita Washington's and Lucilia Hernandez's vehicles were involved in accidents. Their insurance companies, Allstate, Farmers, and Progressive, respectively, hired CCC Information Services, Inc., to assess the values of their cars. The plaintiffs, Ms. Shields, Ms. Washington, and Ms. Hernandez alleged that the insurance companies directed CCC to assess low values for their vehicles, knowing that the plaintiffs would unlikely challenge the values due to the expense of hiring an independent appraiser. The plaintiffs also alleged that the insurance companies misrepresented their coverage under their personal automobile insurance policies by representing that the actual cash value would be paid for their vehicles. The plaintiffs claimed that the insurance companies hired CCC to intentionally undervalue their vehicles, which resulted in offers of less than the full value of their vehicles. Ms. Washington and Ms. Hernandez accepted the values determined by CCC for their vehicles. Ms. Shields did not accept any funds from Allstate for her stolen vehicle.
The plaintiffs sued their insurance companies for fraud, fraudulent concealment, Texas Deceptive Trade Practices Act and Texas Insurance Code violations, breach of the duty of good faith and fair dealing, breach of contract, and civil conspiracy. The insurance companies answered and filed a plea in abatement and a motion to invoke the appraisal provision in the plaintiffs’ personal automobile insurance policies. Under this provision, the insured or the insurer may invoke the appraisal process in the event of a dispute over the value of the insured’s vehicle. The insured and insurer each hire their own appraiser. If the two appraisers cannot agree on the value, the appraisers select a third appraiser to umpire or a district judge may appoint the third appraiser if the appraisers cannot agree on an umpire. A decision on the value of the vehicle that is signed by two of the appraisers is binding on the insured and insurer.
The trial court denied the defendants’ motion, holding the appraisal provision unenforceable. The Court of Appeals denied the writ of mandamus filed by the insurance companies, who then petitioned the Court for mandamus relief.
B. APPRAISAL OF PROPERTY DAMAGES IS ENFORCEABLE
The issue before the Court was whether the trial court abused its discretion in holding the appraisal provision unenforceable. The trial court determined that the appraisal provision, drafted by the Texas Department of Insurance, was equivalent to an agreement to arbitrate and against public policy.
The Court explained that the appraisal provision at issue did not involve arbitration. The Court relied on its prior decision in Scottish Union & National Insurance Company, in which the Court held that arbitration determines the rights and liabilities of parties white appraisal binds the parties to have the amount of a loss determined in a particular manner. In Scottish Union the Court held the appraisal provision enforceable. The Court emphasized that it is well-settled law in Texas that appraisal clauses are enforceable.
The Court stated that the parties contractually agreed to appraisal as the method to determine whether a breach of contract occurred. The Court explained that if the appraisal determined that the value of the vehicle was the same as the value offered by the insurance company, there would be no breach of contract.
C. ANALYSIS OF OPINION
This opinion echoes the previous decisions of the Court which distinguished between arbitration and appraisal and held appraisals enforceable.
II. IN ONLY LIMITED CIRCUMSTANCES MAY A HOMEOWNER WAIVE THE WARRANTY OF HABITABILITY, BUT THE WARRANTY OF GOOD WORKMANSHIP MAY BE WAIVED WHEN THE AGREEMENT SUFFICIENTLY DESCRIBES THE MANNER, QUALITY, AND DETAILS OF CONSTRUCTION
In Centex Homes and Centex Real Estate Corporation v. Michael A. Buecher (decided August 29, 2002), a group of homeowners entered into contracts with Centex that generally disclaimed the warranties of workmanship and habitability. The homeowners sued Centex individually and as a potential class. Centex filed special exceptions to the class pleadings, which were granted. The homeowners appealed and the appellate court ruled in their favor. Centex then appealed to the Supreme Court. The Court affirmed the Court of Appeals’ remand to the trial court, but disagreed with its reasoning. The Supreme Court held that the implied warranty of good workmanship may be disclaimed by parties when their agreement sufficiently details the manner and quality of the desired construction. However, the Court held that the warranty of habitability may not be generally disclaimed as to latent defects. The warranty of habitability may only be disclaimed as to defects, even substantial ones, that are known by or expressly disclosed to the buyer.
A. FACTS OF CASE
Michael Buecher and other homeowners purchased new homes built by Centex. Each of the homeowners signed Centex’s standard form sales agreement. The agreement contained a one-year limited express warranty provision in lieu of the implied warranties of habitability and good and workmanlike construction. The provision was as follows:
PURCHASER AGREES TO ACCEPT SAID HOMEOWNER’S WARRANTY AT CLOSING IN LIEU OF ALL OTHER WARRANTIES, WHATSOEVER, WHETHER EXPRESSED OR IMPLIED BY LAW, AND INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF GOOD WORKMANLIKE CONSTRUCTION AND HABITABILITY. PURCHASER ACKNOWLEDGES AND AGREES THAT SELLER IS RELYING ON THIS WAIVER AND WOULD NOT SELL THE PROPERTY TO THE PURCHASER WITHOUT THIS WAIVER.
The homeowners sued Centex alleging fraud, misrepresentation, negligence, violation of the Texas Deceptive Trade Practices Act, and sought to certify a class action. Centex filed a special exception and motion to dismiss the proposed class action. Centex contended that under G-W-L, Inc. v Robichaux, 643 S.W.2d 392 (Tex. 1982), a homeowner can disclaim warranties of good and workmanlike construction and habitability if the language waiving the warranties is clear and free from doubt. Centex asserted that its waiver was clear and free from doubt. Centex additionally asserted that its waiver does not violate the anti-waiver provision of the DTPA, as the DTPA does not create an implied warranty of either good and workmanlike construction or habitability, but only provides an additional remedy if those warranties are breached.
The homeowners announced in court they could not amend to meet the special exception. The trial court granted the special exception, struck the class allegations, severed the class claims from the individual claims, and dismissed the proposed class action. The homeowners appealed and a divided Court of Appeals, sitting en banc, held that a homeowner may not waive the implied warranties of good workmanlike construction and habitability. Centex then appealed to the Supreme Court of Texas.
B. MAY A HOMEOWNER WAIVE THE WARRANTY OF HABITABILITY, BUT THE WARRANTY OF GOOD WORKMANSHIP MAY BE WAIVED WHEN THE AGREEMENT SUFFICIENTLY DESCRIBES THE MANNER, QUALITY AND DETAILS OF CIRCUMSTANCES
The Supreme Court analyzed its holding in G-W-L, Inc. v Robichaux, as asserted by Centex, with Melody Home Manufacturing Co. v Barnes 741 S.W.2d 349, 355 (Tex. 1987), raised by the homeowners. In Robichaux, the Court concluded that the “Humber warranty” could be disclaimed or waived if intent was clearly expressed in the parties’ agreement. Robichaux, 643 S.W.2d at 393. Centex argued that the Court of Appeals’ holding that the implied warranties of good workmanlike construction and habitability cannot be waived conflicts with Robichaux. The homeowners responded that Robichaux is no longer valid law, because it was overruled by Melody Home Manufacturing Co. vs Barnes. Melody Home recognized for the first time an implied warranty of good workmanship in the repair or modification of tangible goods or property and the Court stated that this implied warranty for repair services could not be waived or disclaimed. Id. at 355. The Court purported to overrule Robichaux “[t]o the extent that it conflicts with this opinion.”Id.
In Centex, the Court considered the apparent conflict between the opinions, concluding that, in Texas, the implied warranty of habitability and the implied warranty of good workmanship provide separate and distinct protection for the new home buyer. The court noted that, as in Robichaux, “we have not always been careful to distinguish between the two.” The Court then stated that it is important to consider the purpose of each warranty when considering issues of waiver or disclaimer.
In essence, the Court found that the implied warranty of good workmanship focuses on the builder’s conduct, while the implied warranty of habitability focuses on the state of the completed structure. The implied warranty of good workmanship serves as a “gap-filler” or “default warranty”; it applies unless and until the parties express a contrary intention. However, the implied warranty of habitability is a result-oriented concept based upon specific public policy considerations. These considerations include shifting costs of defective construction from consumers to builders, who are presumed better able to absorb such costs; the nature of the transaction which involves the purchase of a manufactured product, a house; the buyer’s inferior bargaining position; the foreseeable risk of harm resulting from defects to consumers; consumer difficulty in ascertaining defective conditions; and justifiable reliance by consumers on a builder’s expertise and implied representations. In other words, this implied warranty protects new home buyers from conditions that are dangerous, hazardous, or detrimental to their life, health or safety. “The warranty of habitability represents a form of strict liability since the adequacy of the completed structure and not the manner of performance by the builder governs liability.”
Therefore, the Court held:
… that the implied warranty of good workmanship may be disclaimed by the parties when their agreement provides sufficient detail on the manner and quality of the desired construction. We further hold that the warranty of habitability may not be disclaimed generally. This latter implied warranty, however, only extends to defects that reder safety of the residence. Further, the implied warranty of habitability extends only to latent defects. It does not include defects, even substantial ones, that are known by or expressly disclosed to the buyer.
C. ANALYSIS OF OPINION
While the Court of Appeals considered the contract an adhesion contract, the Supreme Court focused on the nature of the warranties sought to be waived. The Court removed the confusion in prior decisions concerning the warranty of good workmanship and the warranty of habitability. The Court holds that the implied warranty of habitability extends only to latent defects. In other words, the parties can negotiate and waive certain standards of workmanship and particular defects in habitability that are apparent and known. However, it is against public policy to generally waive habitability as there may be latent defects unknown to the consumer that can endanger their life, health or safety.
III. A DELAY IN MOVING TO COMPEL ARBITRATION AND OPPOSING A REQUEST FOR A TRIAL SETTING DO NOT AMOUNT TO A WAIVER OF ARVITRATION
In In re Service Corporation International (decided August 29, 2002), the Supreme Court held that a delay in moving to compel arbitration and opposing a request for a trial setting did not amount to a waiver of arbitration.
A. FACTS OF CASE
Service Corporation International and Equity Corporation agreed to merge in a stock-for-stock transaction in January 1999. One week after the merger, SCI announced that its earnings for the prior quarter were lower than expected; as a result of the announcement, the stock fell. In the days that followed, a number of identical class actions were filed in federal courts against SCI and three of its officers, hereinafter referred to as SCI, alleging securities fraud. In August of 1999, a class that included SCI shareholders, other than its officers at the time of the merger, was certified. SCI filed a motion to dismiss the complaint. The motion to dismiss stayed the proceedings in federal court.
James P. Hunter, III and the James P. Hunter, III Family Trust, hereinafter referred to as the Hunters, were major shareholders in ECI and received SCI stock as a result of the merger. The Hunter Family Trust was part of the class in federal court; however, James P. Hunter, III was excluded because he had become an officer of SCI during the merger. In November 1999, the Hunter Family Trust filed suit against SCI in state court for allegations which were factually similar, but not identical to, the allegations in federal court.
In December 1999, SCI moved the federal court to stay all discovery in state court. In May of 2000, the federal court heard the motion and amended the class definition to include James P. Hunter, III, as well as, stayed all discovery in state court. However, the federal court did not stay all proceedings in state court. The Hunters then moved the state court for a preferential trial setting. In February 2001, the state court heard the Hunters’ motion for preferential setting. On the same day, SCI filed a motion to compel arbitration of the Hunters’ state law claims pursuant to a clause in the merger agreement. The clause stated that upon the request of any party, any dispute arising out of the merger agreement shall be resolved by mandatory and binding arbitration. The Hunters argued that SCI had waived their rights to arbitration by delaying their request for arbitration, opposing a trial setting, and proceeding in federal court. The trial court denied the motion to compel arbitration, and the court of appeals denied mandamus relief.
B. COURTS WILL NOT FIND THAT A PARTY HAS WAIVED ITS RIGHT TO ENFORCE AN ARBITRATION CLAUSE BY MERELY TAKING PART IN LITIGATION UNLESS IT HAS SUBSTANTIALLY INVOKED THE JUDICIAL PROCESS TO ITS OPPONENT’S DETRIMENT
The Supreme Court noted that both parties agreed that the arbitration clause was governed by the Federal Arbitration Act (9 U.S.C. sec. 1-307). The Court further noted that unless a party has substantially invoked the judicial process to its opponent’s detriment, the court will not find that a party has waived its right to enforce an arbitration clause. In the present case, the Court noted that during the delay in requesting arbitration, SCI sought no relief from state court, and in opposing a trial setting, SCI expressed an intent to avoid the state judicial process. Accordingly, the Court found that neither event involved a substantial invocation of the state judicial process.
The Hunters argued that SCI waived arbitration of the state law claims by invoking the federal judicial process by filing a motion to dismiss the complaint, moving for a stay of the state court discovery, and supporting the inclusion of Hunter in the class. The Court found that SCI’s efforts in moving to dismiss and staying the discovery were to avoid litigation, not participate in it. Further, the Court found that the inclusion of Hunter in the class was at the federal court’s suggestion and agreed to by SCI. The Supreme Court, therefore, found that SCI’s conduct did not amount to a waiver of arbitration.
C. ANALYSIS OF OPINION
This case demonstrates that there is a strong presumption against waiver of the right to enforce an arbitration clause. Absent a showing that a party has substantially invoked the judicial process and has done so to the detriment of the opponent, it appears that the Court will not find that the party has waived arbitration.
IV. NO CAUSE OF ACTION EXISTS AGAINST EMPLOYERS FOR NEGLIGENT INVESTIGATION OF THEIR AT-WILL EMPLOYEES’ ALLEGED MISCONDUCT
In Texas Farm Bureau Mutual Insurance Companies v. James Sears (decided on August 30, 2002), the Supreme Court held that an at-will employee has no cause of action against his employer for the negligent investigation of the employee’s alleged misconduct.
A. FACTS OF CASE
James Sears was employed by Texas Farm Bureau Insurance Companies as an insurance agent. According to the terms of the employment agreement, either party could terminate the contract under ten days notice, with no cause required for termination.
In 1983, Sears reported to the office manager, Joe Sweat, that several Farm Bureau employees were involved in a kickback scheme. The same allegations were reported to Farm Bureau’s main office. Sears made similar reports to his superiors over the next few years, but Farm Bureau took no action. In 1990, a policyholder sent an anonymous letter to Farm Bureau and the Texas Department of Insurance alleging that Sears and other Farm Bureau employees were involved in a kickback scheme. After a review of Sears’ files revealed some irregularities, Farm Bureau decided to hire a private investigator to conduct an investigation. Sears alleged that Farm Bureau did not establish any guidelines for the investigation. Sears also claimed that the private investigator, Bill Graham, used unethical investigation methods, including contacting other insurance agencies in the local market. Although the investigation failed to uncover any evidence that directly linked Sears to the kickback scheme, Farm Bureau terminated Sears on October 1, 1990.
In 1993, Sears and his wife sued Farm Bureau alleging defamation, negligent and grossly negligent investigation, negligent and intentional infliction of emotional distress, and wrongful discharge. The trial court granted summary judgment for Farm Bureau on all claims except negligence and intentional infliction of emotional distress. Farm Bureau was found liable by the trial jury for the claims of negligent and grossly negligent investigation and for intentional infliction of emotional distress. The trial court rendered judgment on the verdict for Sears. The Court of Appeals held that Farm Bureau owed Sears a duty to use ordinary care in its investigation, but concluded that the evidence was factually insufficient to support the jury’s verdict on that claim and remanded for a new trial. The Supreme Court of Texas granted review to decide whether Farm Bureau owed a duty of ordinary care in conducting its investigation of Sears, an at-will employee.
B. THE AT-WILL DOCTRINE DOES NOT REQUIRE AN EMPLOYER TO BE REASONABLE OR EVEN CAREFUL IN MAKING ITS TERMINATION DECISIONS
The Court noted that the employment at-will doctrine does not require an employer to be reasonable, or even careful, in making its termination decisions. In declining to recognize a cause of action for negligent investigation of an at-will employee, the Court reasoned that second guessing an employer’s judgment in such a situation provides a strong disincentive for companies to investigate allegations of employee misconduct. The Court concluded that:
. . . imposing liability on Farm Bureau for taking steps to determine the validity of allegations lodged at its at-will agents creates a disincentive for insurance companies to vigorously police insurance fraud and other wrongdoing.
C. ANALYSIS OF OPINION
The Court is determined to protect the long-standing at-will employment doctrine in Texas and, as a consequence, will be extremely reluctant to impose a new common law duty which would significantly alter the at-will employment relationship.
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