The Jury Charge in Insurance Cases: The PJC and Beyond. Mark L. Kincaid

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1 The Jury Charge in Insurance Cases: The PJC and Beyond Mark L. Kincaid Kincaid & Horton, L.L.P. 114 West 7th Street, Ste Austin, Texas / / fax South Texas College of Law CLE 16th Annual Texas Insurance Law Symposium January 19-20, 2012 Houston, Texas

2 THE JURY CHARGE IN FIRST PARTY CASES Mark L. Kincaid & Michael W. Huddleston I. Introduction This paper offers forms and a practical discussion of the principles that apply when drafting questions and instructions to submit the most common issues in first party insurance cases. Topics covered include breach of contract, unfair and deceptive practices, good faith and fair dealing, fraud, and negligence, as well as agency, defenses, and damages. II. General Principles There really is no way to discuss Texas jury charges without at least mentioning the ongoing debate over the extent to which questions should be broadly worded the broad form called for by Tex. R. Civ. P. 277 or should be granulated that is, broken down into separate elements. A full discussion is beyond the scope of this paper, but a few general comments are called for. In an insurance case with implications for how all jury questions are submitted, the Texas Supreme Court held it was reversible error to submit a single question that included both valid and invalid legal theories. Crown Life Insurance Co. v. Casteel, 22 S.W.3d 378, 388 (Tex. 2000). In Casteel the plaintiff-insurance agent submitted one liability question with instructions taken from the DTPA, which required consumer status, and instructions from the Insurance Code, which do not require consumer status. The court held that the agent could sue as a person under the Insurance Code, but not as a consumer under the DTPA. The single question submitting liability under both statutes was harmful error, the court held, because there was no way to tell if the agent won on a valid or invalid theory. Thus, Casteel requires a step away from broad form questions, at least to the extent of separately submitting different liability theories. Then, in Harris County v. Smith, 96 S.W.3d 230 (Tex. 2002), the court extended the Casteel rationale to require separate submission of damage elements when some elements were not supported by the evidence. While the Texas Supreme Court decisions vary in how the principle is applied, the court nevertheless continues to assert its commitment to broad form questions. For example, even though the majority in Harris County v. Smith held it was reversible error not to submit damage elements separately requiring a step away from broader damage questions the majority denied any retrenchment from our fundamental commitment to broad-form submission. The court continued: This Court began moving toward modern broad-form practice in 1973, when we amended Texas Rule of Civil Procedure 277 to abolish the requirement that issues be submitted separately and distinctly, thereby granting trial courts the discretion to submit issues broadly. Over the years, we have repeatedly expressed our general preference for broad-form submission.... Our current rule, amended in - 1 -

3 1988, more strongly reflects our preference for broad-form questions, mandating that the court shall, whenever feasible, submit the cause on broad-form questions. TEX. R. CIV. P When properly utilized, broad-form submission can simplify charge conferences and provide more comprehensible questions for the jury.... But we recognize that it is not always practicable to submit every issue in a case broadly. As Professors Muldrow and Underwood observe, broader is not always better.... For example, we have suggested that broad-form submission may not be feasible when the governing law is unsettled.... In such an instance, submitting alternative liability standards permits the appellate court to settle the law and render the correct judgment. Similarly, it would be contrary to judicial economy to insist on broad-form submission when a specific objection raises substantial concern that a particular theory of liability will infect the proposed broad-form question with error.... And in a case such as this one, asking the jury to record its verdict as to each element of damages when there is doubt as to the legal sufficiency of the evidence will permit the losing party to preserve error without complicating the charge or the jury s deliberations. Whether a granulated or broad-form charge is submitted, the trial court s duty is to submit only those questions, instructions, and definitions raised by the pleadings and the evidence S.W.3d at (citations omitted). It seems the prevailing rule is still that questions should be submitted as broadly as possible, but sometimes what is possible may not be very broad. Another principle to bear in mind is that just because something is a correct legal statement or because it appears in a reported decision doesn t mean it belongs in the jury charge. As Chief Justice Pope explained in Lemos v. Montez: This court s approval and adoption of the broad issue submission was not a signal to devise new or different instructions and definitions. We have learned from history that the growth and proliferation of both instructions and issues come one sentence at a time. For every thrust by the plaintiff for an instruction or an issue, there comes a parry by the defendant. Once begun, the instructive aids and balancing issues multiply. Judicial history teaches that broad issues and accepted definitions suffice and that a workable jury system demands strict adherence to simplicity in jury charges. 680 S.W.2d 798, 801 (Tex. 1984). Often, less belongs in the charge, and more should be left for arguments to the jury. 1 1 For additional discussion of the history, evolution, and current status of the broad form versus granulated issue debate, see Christopher W. Martin, Jury Charge Landmines in Insurance Cases: Beyond the PJC, in STATE BAR OF TEX. 4TH ANN. ADVANCED INSURANCE LAW COURSE 22-4 TO 22-6 (2007), and Charles R. Skip Watson, - 2 -

4 As will be discussed below, much of the debate between policyholder and carrier lawyers regarding the charge revolves around the extent to which controlling legal rules should be submitted to the jury. Some of these rules are used as a part of appellate review. Some involve the core issue to be submitted to the jury. Separating them is difficult, especially since the reviewing court must judge evidentiary sufficiency from the perspective of the sufficiency of the evidence to support the question, with instructions, actually submitted. Tension is added to this debate by the general jury charge rule barring the use of legally correct statements in instructions that tilt or nudge and thus amount to a comment on the weight of the evidence. Acord v. General Motors Corp., 669 S.W.2d 111 (Tex. 1984). In Acord, the instruction at issue was rendered superfluous by prior judicial rulings as to the pertinent jury inquiries in a products liability case. Thus, while the instruction was legally correct, it involved a balancing of factors approach, which had previously been rejected as a proper role for a products liability jury. Pattern questions and instructions exist for many of the theories that are likely to come up in insurance litigation. See State Bar of Texas, Texas Pattern Jury Charges Business, Consumer, Insurance & Employment (2006). The relevant provisions are found in: PJC to Contracts. PJC to Unfair Insurance Practices. PJC Unconscionable Conduct. PJC Good Faith and Fair Dealing. PJC to Fraud. PJC , , , and Damages and Attorneys Fees. Several courts have approved jury instructions based on these forms. See Certain Underwriters at Lloyd s Subscribing to Policy No. WDO v. KKM, Inc., 215 S.W.3d 486, 489 (Tex. App. Corpus Christi 2006, pet. denied); Riggs v. Sentry Insurance, 821 S.W.2d 701 (Tex. App. Houston [14th Dist.] 1991, writ denied); Bard v. Charles R. Myers Insurance Agency, Inc., 811 S.W.2d 251, 259 (Tex. App. San Antonio 1991, no writ). As we will discuss, some of the Pattern Jury Charge forms are more helpful than others. Another resource with a wealth of form instructions spanning a broad array of insurance issues is the Appleman on Insurance treatise. See 22 & 22A John A. Appleman & Jean Appleman, Insurance Law & Practice (Lexis Law Pub & Supp. 2007). Another recently published source to consider is L. Murphy, A. Downs, & J. Levin, ABA Property Insurance Litigator s Handbook, sec et seq. (2007). Jr., The Future of Jury Submission in Insurance Cases, in STATE BAR OF TEX., 1999 ULTIMATE INSURANCE SEMINAR J-3 TO J-7 (1999)

5 III. Breach of Contract A. General Contract Questions The basic format in the Texas Pattern Jury Charges to submit a breach of contract is to ask, as needed, whether the parties had an agreement and whether one or both of the parties failed to comply with the agreement. See PJC and Defenses are submitted by asking whether the failure to comply was excused and then instructing on excuses, such as the plaintiff s material breach, anticipatory repudiation, waiver, estoppel, duress, mistake, etc. See PJC For example, using this format, a set of questions in an arson case might ask: QUESTION 1: Did Paul Payne and Insurer Inc. agree that Payne s home would be insured for damage caused by fire? QUESTION 2: Did Insurer Inc. fail to comply with the agreement? You are instructed that Insurer Inc. failed to comply with the agreement if it failed to pay for the damage caused by the fire. QUESTION 3: Was Insurer Inc. s failure to comply excused? For its failure to comply to be excused, Insurer Inc. must show that the fire in question was intentionally caused by any act, design, or procurement on the part of Paul Payne? 2 This format may not be well-suited for many, if not most, suits on insurance contracts. There is seldom a dispute over the existence of the agreement. The policy is almost always admitted and in evidence. The insurer s refusal to pay is often undisputed. A fairly generic breach of contract question, unadorned by instructions on the contract terms passed muster in State Farm Lloyds v. Nicolau, 951 S.W.2d 444, 451 (Tex. 1997). In Nicolau, a suit over the insurer s failure to pay for foundation damage, the jury was asked the following question. QUESTION: Did State Farm breach the insurance contract with Ioan and Liana Nicolau which breach was a proximate cause of damage, if any, to Ioan and Liana Nicolau? Nicolau v. State Farm Lloyds, 869 S.W.2d 543, 549 ((Tex. App. Corpus Christi 1993), affirmed, 951 S.W.2d 444 (Tex. 1997). The insurer argued that the trial court should have submitted instructions that tracked the disputed insurance provisions. The supreme court held that instructions about the specific terms of the insurance contract were not necessary. 951 S.W.2d at 451. The supreme court recognized that Rule 277 affords the trial court considerable discretion in deciding what instructions are necessary and proper in submitting issues to the jury. Id. The supreme court noted that the policy itself was in evidence, and the relevant exclusions were 2 Questions 1 and 2 are based on PJC and Question 3 is based on PJC , and the instruction is based on Lundy v. Allstate Insurance Co., 774 S.W.2d 352, 353 (Tex. App. Beaumont 1989, no writ)

6 presented to the jury in an exhibit and were discussed at length. The meaning of the terms was not disputed. Id. at 542. Another similarly broad form question was approved in National Fire Ins. Co. v. Valero Energy Co., 777 S.W.2d 501 (Tex. App. Corpus Christi 1989, writ denied), where the jury was asked: QUESTION: Did a loss occur [that] was covered and payable under the policy? 777 S.W.2d at 506. In other cases, when the policy language is less clear or where the meaning is in dispute, it may make sense to submit that language. This approach of submitting the precise contractual language to the jury was used in National Union Fire Insurance Co. v. Hudson Energy Co., 811 S.W.2d 552 (Tex. 1991). The jury was asked questions essentially as follows: QUESTION 1: Was the aircraft not in flight piloted by other than a pilot or pilots designated in the declarations? QUESTION 2: At the time of the loss, was the plane not in flight piloted by a pilot lacking proper certificate, qualifications, and rating? Id. at 554. As cumbersome as this language was, it did fairly track the contract language. Deviating from the actual policy language risks altering the meaning, especially with more convoluted policies. 3 A different, very broad, approach was taken in Certain Underwriters at Lloyds v. KKM Inc., 215 S.W.3d 486, (Tex. App. Corpus Christi 2006, pet. denied). The questions were as follows: QUESTION 1 (UNDER THE INSURANCE POLICY IN QUESTION): Do you find, based upon a preponderance of the evidence, that KKM, Inc. d/b/a Strand Surplus, should recover against Certain Underwriters of Lloyd s London Subscribing to Policy WDO-10000? QUESTION 2 (EXTENT OF COVERAGE): Do you find, based upon a preponderance of the evidence that KKM, Inc. d/b/a Strand Surplus coverage under the insurance policy in question should be limited to the part of the building which actually fell to the ground, or that coverage should extend to all damages and losses caused by the collapse? ANSWER A or B below: 3 The first question submitted an exclusion. See Hudson, 811 S.W.2d at 554. At the time, it was proper to ask the question in the negative. This placed the burden of proof on the insured to show the loss was not excluded. Now, under Tex. Ins. Code , the insurer would have the burden to establish the exclusion applied, so the question would be modified to delete the not

7 A. Limited to the part of the building which actually fell to the ground. B. Coverage should extend to all damages and losses caused by the collapse. The court held that the jury s answers to these questions established the insurer s liability for breach of contract. Id. at 490. A single question with several instructions may not be adequate, because of the shifting burden of proof. In an insurance case, the insured has the burden to show the loss is covered; the insurer has the burden to show the loss is excluded; and then the insured again has the burden to show the loss fit within an exception to the exclusion. See Telepak v. United Services Auto. Ass n, 887 S.W.2d 506, 507 (Tex. App. San Antonio 1994, no writ). In Telepak, the loss was excluded, unless the insureds could show that an exception to the exclusion applied. The homeowner s policy excluded losses caused by settling, cracking, bulging, shrinkage, or expansion of foundation, walls, floors, ceilings, roof structures, walks, drives, curbs, fences, retaining walls, or swimming pools. This exclusion did not apply to Accidental discharge, leakage or overflow of water or steam from within a plumbing, heating or air conditioning system or a domestic appliance[.] Telepak, 887 S.W.2d at 507. The court submitted only the exception, as follows: Id. at 506. QUESTION: Do you find that the damage to the Telepaks residence was caused by an accidental discharge, leakage or overflow of water from within an air conditioning system? Another way to approach the covered-excluded-exception submission might be as follows: QUESTION: What amounts of damages to the house, if any, were caused by the following? You should only assign percentages to those you find caused the damages. a. Settling, cracking, bulging, shrinkage, or expansion of the foundation? b. Accidental discharge, leakage, or overflow of water from within a plumbing system? % % This question is patterned after the proportionate responsibility question in PJC , but it both finds and allocates causation. Also, the instruction deletes parts that would be inaccurate. The jury would not be instructed that the percentages had to total 100% unless the evidence dictated that result. In some cases, the jury might find that neither proffered event caused any damage. Likewise, an instruction that the answer had to be stated in whole numbers wouldn t necessarily be accurate. For example, engineers might identify parts of the house that - 6 -

8 were affected by each cause and testify to a percentage of causation that contained decimal places. The preceding question combines causation and allocates the percentages. You might go a step further and have a single question that combined causation, allocation, and damages. QUESTION: What sum of money, if any, if paid now in cash, would fairly and reasonably compensate Paul Payne for his damages, if any, that that were caused by the accidental discharge, leakage, or overflow of water from within a plumbing system? Answer in dollars and cents, if any. $ This question is roughly based on the contract damages question found in PJC This suggested version leaves out the excluded cause, because the jury doesn t really need to find damages attributable to an excluded cause, except to deduct them from the total amount sought by the plaintiff. Asking the jury to figure excluded damages might cause them to get stuck on an immaterial question. The insurer can argue to the jury that amounts caused by the excluded event should not be included in the award. The preceding question is similar to the approach taken in Hill v. State Farm Lloyds, 79 Fed. App x 644 (5th Cir. 2003) (per curiam). The district court first asked, Did a plumbing leak or leaks cause any or all of the damage to Plaintiff Junior Hill s home? 4 A second question asked what amount of money, if any, would compensate Hill for the costs of tearing out and replacing the parts of his home necessary to repair his plumbing system. The district court also instructed the jury on which party had the burden of proof. 5 If there is doubt about the proof supporting any part of the damages, the different elements should be broken out with separate spaces for answers. See Pattern Jury Charge Comment (Elements of damages submitted separately), citing Harris County v. Smith, 96 S.W.3d 230, (Tex. 2002). 4 Our esteemed colleague, Chris Martin, argues that the any or all language was erroneous, because the insurer had introduced evidence of conditions other than plumbing leaks that caused damage to the dwelling. See Christopher W. Martin, Jury Charge Landmines in Insurance Cases: Beyond the PJC, in STATE BAR OF TEX. 4TH ANN. ADVANCED INSURANCE LAW COURSE 22-8 (2007). 5 The district court instructed the jury: In this case the Plaintiff claims that the damages to his home were caused in whole, or in part, by plumbing leaks; the Plaintiff has the burden to prove this claim by a preponderance of the evidence. You are hereby instructed that damages which result from plumbing leaks are covered by the insurance policy issued by State Farm Lloyds. The Defendant denies that the damages to Plaintiff s home were caused in whole, or in part, by plumbing leaks. Rather, the Defendant claims that the damages were caused in whole, or in part, by other factors which are excluded from coverage under the terms of the insurance policy. The Defendant has the burden to prove, by a preponderance of the evidence, that the Plaintiff s damages are excluded from coverage. 79 Fed. App x at

9 B. Instructions About Specific Terms Instructions about the specific terms of the insurance contract may not be necessary. State Farm Lloyds v. Nicolau, 951 S.W.2d 444, 451 (Tex. 1997). For example, in Nicolau, a suit over the insurer s failure to pay for foundation damage, the supreme court held that the trial court did not err by refusing to give instructions about the specific terms of the insurance policy. Id. Significantly, the policy itself was in evidence, and the relevant exclusions were presented to the jury in an exhibit and were discussed at length. Further, the meaning of the terms was not disputed. Id. at 542. The defense perspective is quite different. Agreeing to a generic breach of contract question without instructions as to specific terms, particularly exclusions relied upon. risks waiving the ability to assert policy defenses as to which the carrier has the burden of proof. In the hurricane related litigation. the first question most carriers seek to pose is whether there was a direct physical loss due to the event in question. Then the charge turns to whether particular exclusions are pertinent or not. The jury s answers to these questions establish whether the carrier was right or wrong in denying or delaying payment. It is also confusing to the jury to be asked a generic question about breach without any specification of the defenses. When instructions are given, they should follow the terms in the policy. See Mutual Life Ins. Co. of New York v. Steele, 570 S.W.2d 213, 217 (Tex. Civ. App. Houston [14th Dist.] 1978, writ ref d n.r.e.). It is error to submit an instruction that doesn t sufficiently follow the contract language. See Aetna Life Ins. Co. v. McLaughlin, 380 S.W.2d 101, 106 (Tex. 1964); New York Underwriters Ins. Co. v. Coffman, 540 S.W.2d 445, 450 (Tex. Civ. App. Fort Worth 1976, writ ref d n.r.e.); Hartford Fire Ins. Co. v. Christianson, 395 S.W.2d 53, 62 (Tex. Civ. App. Corpus Christi 1965, writ ref d n.r.e.). C. Ambiguity When an insurance contract is ambiguous, the court must construe the contract in favor of the insured, as a matter of law, so there is not a question for the jury. The standard Pattern Jury Charge instruction for breach of contract would not be suitable for an insurance case, because when a court determines that a non-insurance contract is ambiguous, that creates a fact question on the parties intent, which should be submitted to the jury with appropriate instructions. See PJC & Comment. 6 There are some insurance cases where courts have approved instructions telling the juries that ambiguities are construed against the drafter. These cases involved ambiguities in whether certain facts fit within policy language. For example, in Bellefonte Underwriters Ins. Co. v. Brown, 663 S.W.2d 562 (Tex. App. Houston [14th Dist.] 1983), aff d in part, rev d in part, 704 S.W.2d 742 (Tex. 1986), the issue was whether the insured could delegate his duty to maintain the building s sprinkler system, without thereby losing coverage under a clause in the fire policy. In this context, the court of appeals held that the trial court did not err by instructing the jury that the insured could delegate his duty to maintain the system without suffering the consequences 6 Because of the well-settled rule that ambiguities are construed in favor of coverage, it may even be proper for the court to instruct the jury that an insurer did not have a reasonable basis to deny a claim, if the insurer relied on language the court found ambiguous

10 of a failure to do so by the delegatee and that any ambiguities in the policy were to be strictly construed against the drafter of the policy. 663 S.W.2d at 578. In International Insurance Co. v. RSR Corp., 426 F.3d 281, (5th Cir. 2005), discussed below, the question was whether notice by the EPA was a claim sufficient to trigger coverage. The Fifth Circuit found the word claim ambiguous and thus approved the trial court s instruction that, in construing the meaning of the term, the jury could consider evidence of the meaning the parties had given it, and evidence of the surrounding circumstances. It seems in both Bellefonte and RSR, the courts should have simply concluded as a matter of law that the facts fit within the interpretation of the insurance policies that would provide coverage. Carriers will object to submissions of purely legal questions, such as the proper interpretation of the policy. The rule of strict construction is one to be applied by the court. The risk of such submissions is that they involve (a) a potential comment on the weight of the evidence, (b) confusion of the jury, and (c) submission of a legal as opposed to a fact issue. D. Court s Construction of Terms If the court has construed the meaning of a contract term, the jury should be given an instruction with that interpretation. See PJC An example of this approach was approved in International Insurance Co. v. RSR Corp., 426 F.3d 281 (5th Cir. 2005). An insured lead smelter sought coverage for environmental cleanup costs. The insurer denied coverage, arguing there was no claim. The policy provided coverage for damages imposed on the insured in respect to which a claim has been made against or other due notice has been received by the insured during the Policy Period. The dispute was whether the EPA had asserted a claim sufficient to invoke coverage when it issued a press release and then later added the insured to a list of priority cleanup sites and gave notice that it might initiate actions against the responsible parties. The Fifth Circuit concluded that the district court properly defined claim, instructed the jury on that definition, and submitted to the jury whether the EPA notice was a claim. The term was not adequately defined in the policy, so the court applied the meaning that favored the insured. The district court instructed the jury: [T]he term claim means an assertion by a third party, that in the opinion of the third party, the insured is liable to it for damages within the risks covered by the policy, whether or not there is reason to believe that there actually is liability. An insured s mere awareness of a potential claim is not a claim. A claim does not require the institution of formal proceedings. 426 F.3d. at 290. The Fifth Circuit held this was an ordinary meaning of the term that was most favorable to the insured. Id. at

11 It is critical to use motions for summary judgment to insure a pre-trial determination of the meaning of the policy. At the very least, such issues need to be resolved prior to void dire and the presentation of evidence. E. Concurrent Causation Most policyholders try to short-circuit the submission of concurrent causation questions by asking what damages were solely caused by the event in question. This is insufficient in light of the fact that the policy has contrasting provisions regarding situations where causes combine. Some provisions act as a form of typhoid exclusion, negating all coverage if the excluded cause is in any way a cause of damage. Other provisions allow coverage for the covered portion, if shown by the insured. Thus, many carriers are taking the approach noted below to dealing with these issues: QUESTION 1: Do you find that Plaintiffs residence suffered an accidental direct physical loss to any of the listed items below? Answer Yes or No as to each. 1. Exterior brick façade 2. Windows 3. Interior sheetrock If you have answered Yes to any subpart of Question No. 1, then answer the corresponding subpart of Question No. 2. Do not answer as to any subpart as to which you have answered No in answering Question No. 1. QUESTION 2: What caused the accidental direct physical loss, if any, you have found in answer to Question 1? Answer Yes or No as to each item as to which you have answered Yes to Question 1. Answer Yes or No in each and every column for such item(s). You are instructed that Excluded Cause(s) I consists of any one or more of the following: a. wear, tear, marring, scratching, inherent vice, latent defect or mechanical breakdown; or b. settling, cracking, shrinking, bulging, or expansion of pavements, patios, walls, floors, roofs or ceilings; or

12 c. defect, weakness, inadequacy, fault or unsoundness in any property due to: (1) Design, specifications, workmanship, construction, grating, compaction; or (2) Materials used in construction or repair; or (3) Maintenance. You are further instructed that Excluded Cause(s) II consists of any one or more of the following: a. Earth movement, meaning the sinking, rising, shifting, expanding or contracting of earth, all whether combined with water or not; or b. Neglect, meaning neglect of the insured to use all reasonable means to save and preserve property at and after the time of the loss, or when property is endangered. You are further instructed that [the insurer] has the burden of proof as to whether a loss was caused by either Excluded Cause(s) I (Column 2), or Excluded Cause(s) II (Column 3). Column 1 Column 2 Column 3 Hurricane Excluded Excluded Rita Cause(s) I Cause(s) II 1. Exterior brick façade 2. Windows 3. Interior sheetrock

13 IV. Unfair Insurance Practices Submitting questions for unfair insurance practice under Tex. Ins. Code section is much more straightforward. The Pattern Jury Charges provides forms that track the statute on the more common causes of action. See PJC As the Pattern Jury Charges notes: The supreme court has held that jury submission in this type of case should follow the statutory language as closely as possible but may be altered somewhat to conform to the evidence of the case. Spencer v. Eagle Star Insurance Co. of America, 876 S.W.2d 154, 157 (Tex. 1994); Brown v. American Transfer & Storage Co., 601 S.W.2d 931, 937 (Tex. 1980). Material terms, however, should not be omitted or substituted. See Transport Insurance Co. v. Faircloth, 898 S.W.2d 269, 273 (Tex. 1995).... PJC Comment (Use of statutory language). Basic questions in a case involving a misrepresentation and unfair settlement practices would be submitted as follows: QUESTION: Did Insurer Inc. engage in any unfair or deceptive act or practice that caused damages to Paul Payne? Unfair or deceptive act or practice means any of the following: Making or causing to be made any statement misrepresenting the terms, benefits, or advantages of an insurance policy; Misrepresenting to Paul Payne a material fact or policy provision relating to the coverage at issue; Failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim when Insurer Inc. s liability had become reasonably clear; or Making any misrepresentation relating to an insurance policy by: (a) making any untrue statement of a material fact; or (b) failing to state a material fact that is necessary to make other statements not misleading, considering the circumstances under which the statements are made; or (c) making any statement in such a manner as to mislead a reasonably prudent person to a false conclusion of a material fact. PJC These subparts submit violations listed in Tex. Ins. Code sections and Other prohibitions exist, and the instruction can be tailored to fit them, in an appropriate case. The statute has many different prohibitions that overlap. To avoid confusing

14 the jury, it makes sense to select only a few definitions or even a single one that best fit(s) the case. There are some questions that may require a preliminary finding by the court. Subsection (4) prohibits making a misstatement of law, and subsection (5) prohibits failing to disclose legally required information. The PJC Committee is of the view that the trial court would need to first determine what the legal requirements were. See PJC Comment (Use of statutory language). The use of multiple subparts with a single answer raises the potential for error if one of the theories is legally invalid or not supported by the evidence, as noted above in the discussion of Crown Life Insurance Co. v. Casteel, 22 S.W.3d 378, 388 (Tex. 2000). Policyholders are prone to submit as many laundry list items as possible, which compounds the danger of reversal under Casteel. If any single theory is unsupported by legally sufficient evidence or is legally inapplicable, then the entire case must be remanded for a new trial. One of the most fruitful attacks of this kind that can be made is for the carrier to urge that proof involves nothing more than a mere breach of contract. In other words, a submission of misrepresentation based claims where the misrepresentation deals with whether the insurer did what it promised to do in the contract is not actionable under either the DTPA or the Insurance Code. The carrier must of course object to the submission of broad form in the setting where legal sufficiency or legal inapplicability is presented as to one or more theories. To avoid this problem, submit separate lines for answers to each subpart, as follows: QUESTION: Did Insurer Inc. engage in any unfair or deceptive act or practice that caused damages to Paul Payne? Answer yes or no Unfair or deceptive act or practice means any of the following: (a) Making or causing to be made any statement misrepresenting the terms, benefits, or advantages of an insurance policy; (b) Misrepresenting to Paul Payne a material fact or policy provision relating to the coverage at issue; (c) Failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim when Insurer Inc. s liability had become reasonably clear; or (d) Making any misrepresentation relating to an insurance policy by: (1) making any untrue statement of a material fact; or

15 (2) failing to state a material fact that is necessary to make other statements not misleading, considering the circumstances under which the statements are made; or (3) making any statement in such a manner as to mislead a reasonably prudent person to a false conclusion of a material fact. This same checklist format can be used to submit multiple defendants, by including answer blanks for each defendant. Additional instructions may be needed if there is a legal issue that the jury otherwise might not be aware of. For example, it is well-established that any ambiguity in an insurance policy will be construed in favor of coverage. A policy is ambiguous if it is subject to more than one reasonable construction. The construction that favors coverage will be adopted, even if the insurer s interpretation denying coverage is reasonable or even more reasonable. Because of these rules, an insurer would not be reasonable in denying a claim based on ambiguous policy language. However, unaware of these legal principles, a jury might be misled and think that the insurer s reasonable interpretation meant the claim denial was reasonable. In such a case, it would be essential for the court to give the jury an instruction to the effect that an insurer s liability is reasonably clear if there is a reasonable interpretation that allows coverage. Most likely, the court will have already found coverage, because the question is a legal one, so the jury would need to be instructed that the court found the claim was covered. Obviously, an insurer is not reasonable in failing to pay a claim the court has found is covered, but the jury would not know this without an instruction. From the defense perspective, debate regarding the meaning of the policy should result in instructions noting that liability is not reasonably clear if there is a good faith legal or factual dispute. For example, if the coverage question is one first impression, then the jury should be told that this conduct does not involve liability that is reasonably clear. A similar problem arises when an insurance suit is severed and the contract claim is decided first, while the bad faith claim is tried second. If the insured has won on the coverage claim, then the jury should be made aware of that fact, to the extent that the insurer was not reasonable, or is no longer reasonable, in denying the claim. The defense perspective is that merely losing on the contract is insufficient by itself to justify a finding of common law or statutory bad faith. Thus, even if the carrier loses on the coverage debate, the jury will decide, primarily based on expert testimony, as to whether the conduct of the carrier in testing the coverage issue was in good faith or not. Conversely, if the insured has lost on coverage but survives summary judgment on any bad faith claims the jury may need to be instructed that the insurer was right, to the extent that affects the insurer s liability on the extracontractual claims

16 These kinds of instructions may be essential to obey the mandate of Rule 277 to submit such instructions and definitions as shall be proper to enable the jury to render a verdict. However, this may be difficult to accomplish without violation the prohibition in Rule 277 against commenting on the weight of the evidence. This was the problem in Redwine v. AAA Life Insurance Co., 852 S.W.2d 10 (Tex. App. Dallas 1993, no writ). The plaintiff sued her insurer for misrepresenting a travel accident insurance policy. She contended that the advertisements led her to believe the policy covered serious injuries, while the actual policy language only covered death, loss of limb, or loss of sight. The insurer denied the plaintiff s claim when her daughter suffered a spinal cord injury and paralysis of her lower limbs caused by an automobile accident. The plaintiff sued for breach of contract, DTPA and article violations, fraud, and breach of the duty of good faith and fair dealing. The trial court held as a matter of law that the policy did not cover the claim and thus granted the insurer a directed verdict on Redwine s breach of contract and duty of good faith and fair dealing causes of action. The trial court instructed the jury as follows: You are hereby instructed that AAA Life Insurance Company did not breach its fiduciary duty of good faith and fair dealing, or otherwise act in bad faith, by denying Deanne Redwine s claim under the 365 Travel Accident Policy. You are hereby instructed that Deanne Redwine s claim pursuant to the injuries received were not covered by the 365 Travel Accident Policy. Id. at 13. The jury found against the plaintiff on the remainder of her theories. The court of appeals held that the trial court committed reversible error by commenting on the weight of the evidence with these instructions. The court held that these instructions were unnecessary and improperly suggested to the jury the trial judge s opinion about the remaining causes of action. Id. at 16. V. Deceptive Trade Practices The only useful cause of action given by the Deceptive Trade Practices Act that is not also available when suing under the Insurance Code is a claim for unconscionable conduct. See Tex. Bus. & Com. Code 17.45(5) and 17.50(a)(3). Here is the PJC question for unconscionable conduct: QUESTION: Did Insurer Inc. engage in any unconscionable action or course of action that was a producing cause of damages to Paul Payne? Producing cause means an efficient, exciting, or contributing cause that, in a natural sequence, produced the damages, if any. There may be more than one producing cause. An unconscionable action or course of action is an act or practice that, to a consumer s detriment, takes advantage of the lack of knowledge, ability, experience, or capacity of the consumer to a grossly unfair degree

17 PJC VI. Prompt Payment Violation There are no pattern jury charges, yet, for the prompt payment of claims statute, Tex. Ins. Code sections The statute imposes about a dozen deadlines for insurers to acknowledge, investigate, accept or reject, and ultimately pay, claims. See generally Mark L. Kincaid & Christopher W. Martin, Texas Practice Guide: Insurance Litigation 17:1 to 17:47 (West 2006) (available on Westlaw at TXPG-INS). Often these issues are determined as a matter of law, because the evidence conclusively establishes whether or not the insurer complied. A few of the requirements, however, could give rise to fact questions. For example, section (b) allows an insurer to request additional necessary information while investigating the claim. A proper request by the insurer will defer other deadlines for the insurer to accept, reject, or pay the claim, until the claimant provides the information. See (a), Thus, the claimant may contend that the insurer made an unnecessary request that should not postpone the other deadlines. The following suggested question might be suitable. QUESTION: When did Insurer, Inc. receive all the necessary information that it reasonably requested and required from Paul Payne to pay the claim? This question should be effective to submit disputes over the timing of the receipt, the necessity and reasonableness of the request, and whether the information really was required for the insurer to pay the claim. This proposed question paraphrases the statutory language, with some modifications. Section (a) relating to the deadline to accept or reject the claim, speaks of receiving items required by the insurer to secure final proof of loss. In contrast, section (a) requires payment within sixty days after receiving all items, statements, and forms reasonably requested and required under Section [.] The proposed language attempts to submit the legal concepts without using confusing or redundant terms. The proposed question focuses on when the insurer received the information from the claimant, because awaiting information from other parties does not extend the deadlines in the statute. See Kincaid & Martin, Texas Practice Guide: Insurance Litigation 17:45. VII. Breach of the Duty of Good Faith and Fair Dealing An insurer owes a common law duty of good faith and fair dealing, which is breached if the insurer denies or delays payment of a claim with no reasonable basis or fails to determine whether there is a reasonable basis. Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987). The supreme court expanded the duty to include liability for canceling a

18 policy without a reasonable basis. Union Bankers Ins. Co. v. Shelton, 889 S.W.2d 278, 283 (Tex. 1994). In Universe Life Ins. Co. v. Giles, 950 S.W.2d 48 (Tex. 1997), the supreme court modified the common law liability standard for unreasonably denying a claim. The court adopted the statutory language that now appears in Tex. Ins. Code section (a)(2)(A). Under that standard, an insurer breaches its duty of good faith and fair dealing by failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim with respect to which the insurer s liability has become reasonably clear. Thus, a breach of the duty of good faith and fair dealing for an unreasonable denial would be submitted in essentially the same language as the statutory cause of action. The court s reasoning in Giles also supports adopting the statutory standard for failing to conduct a reasonable investigation, as the proper way to submit a common law claim for breach of the duty of good faith and fair dealing. That standard is found in Tex. Ins. Code section (a)(7), which prohibits refusing to pay a claim without conducting a reasonable investigation with respect to the claim. However, there is no statutory equivalent for the Shelton common-law liability for unreasonably canceling a policy, so the common-law standard still applies. See Union Bankers Ins. Co. v. Shelton, 889 S.W.2d 278 (Tex. 1994). PJC The Pattern Jury Charges follow this reasoning to suggest the following question: QUESTION: Did Insurer Inc. fail to comply with its duty of good faith and fair dealing to Paul Payne? An insurer fails to comply with its duty of good faith and fair dealing by failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim when the insurer s liability has become reasonably clear; refusing to pay a claim without conducting a reasonable investigation of the claim; or canceling an insurance policy without a reasonable basis. The defense approach to this issue is quite different: QUESTION: Did [the insurer] breach the duty of good faith? An insurer fails to comply with its duty of good faith and fair dealing by failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim when the insurer knew or should have known that its liability had become reasonably clear

19 The existence of a coverage dispute between the Plaintiffs and [the insurer] does not mean that liability under the insurance policy had become reasonably clear. Moreover, a determination that the carrier actually owed coverage, by itself, does not amount to a breach of the duty of good faith. You are instructed that liability was not become reasonably clear if [the insurer] had a reasonable basis for not paying money in addition to that they each already paid. You are further instructed that liability is not reasonably clear if, at the time [the insurer] denied the claim, a bona fide controversy about the extent of the damage or whether there was coverage for the damage. Both policyholders and carriers have some difficulty with the issue of whether the use of an instruction regarding the defined points in time for determining whether there was a good faith basis for denial or delay. In Viles v. Security Nat l Ins. Co., 788 S.W.2d 566, (Tex. 1990), the Court held that [w]hether there is a reasonable basis for denial... must be judged by the facts before the insurer at the time the claims was denied. Certainly, failure to object to a submission that does not limit the time period for the jury s consideration of the issue opens up the possibility for even litigation conduct to be used to support the verdict. In State Farm Lloyd s Insurance Co. v. Ashby AAA Automotive Supply Co., 1995 WL (Tex. App. Dallas 1995, writ denied), the carrier actually discovered information postlitigation that supported denial based on arson when prior to suit it had decided that there was insufficient evidence to support denial. The carrier basically completed most of its investigation in late August of The adjuster was put on emergency storm duty and then went on vacation. When he returned, in October (about a month later), he determined that there was insufficient evidence of a motive to commit arson and decided to settle the case. A serious controversy over the amount to be paid for lost profits and repair costs continued to exist. Attempts were made to contact the insured by phone to discuss settlement, but he was unavailable. The insured then filed suit. The carrier later learned after suit was filed that the insured was impecunious, and thus had a motive for arson, because the carrier had mistakenly believed that he and his wife jointly owned $6 million. It turned out this was the separate property of the wife. The insured had no other substantial assets other than his business, which was profit challenged. The trial in Ashby was not bifurcated. In other words, the contract and the bad faith claims were tried together. As a result, substantial post-litigation information was submitted to the jury, particularly through the insured s attorney s testimony regarding attorney s fees. The carrier did not object to the admission of post-litigation conduct or information. Id. at *10. Moreover, no limiting instruction was sought and no objections were made to the jury charge. Id. The court of appeals held that any error regarding the admission of testimony of postlitigation conduct was waived for the lack of objection and requests for limiting instructions. Nevertheless, the court, in reviewing the sufficiency of the evidence of breach of the duty of good faith, looked exclusively to pre-litigation conduct. The court stated that it was speculation to suggest that the jury verdict was based on post-litigation activity. Id. The clear

20 message from the court s opinion is that post-litigation activity and information is simply not relevant in determining whether an improper delay or stringing along by the carrier amounts to bad faith. Id. Had the court determined post-litigation activity could be used, then the court would have had to have considered the substantial additional evidence of arson discovered in the course of litigation, particularly evidence of motive. VIII. Fraud The Pattern Jury Charges suggests the following form to submit fraud based on a misrepresentation: QUESTION: Did Insurer Inc. commit fraud against Paul Payne? Fraud occurs when (a) (b) (c) (d) a party makes a material misrepresentation, the misrepresentation is made with knowledge of its falsity or made recklessly without any knowledge of the truth and as a positive assertion, the misrepresentation is made with the intention that it should be acted on by the other party, and the other party relies on the misrepresentation and thereby suffers injury. Misrepresentation means: a false statement of fact, a promise of future performance made with an intent, at the time the promise was made, not to perform as promised, a statement of opinion based on a false statement of fact, a statement of opinion that the maker knows to be false, or an expression of opinion that is false, made by one claiming or implying to have special knowledge of the subject matter of the opinion. Special knowledge means knowledge or information superior to that possessed by the other party and to which the other party did not have equal access

21 PJC E. The Pattern Jury Charges suggests omitting definition subparts that are not applicable to the particular case. For a claim based on a fraudulent nondisclosure, if the court has found a duty to disclose, Pattern Jury Charges suggests that the definition of fraud be changed to the following: Fraud occurs when (a) (b) (c) (d) a party fails to disclose a material fact within the knowledge of that party, the party knows that the other party is ignorant of the fact and does not have an equal opportunity to discover the truth, the party intends to induce the other party to take some action by failing to disclose the fact, and the other party suffers injury as a result of acting without knowledge of the undisclosed fact. PJC IX. Negligent Misrepresentation The Pattern Jury Charges offers this form to submit a claim for negligent misrepresentation: QUESTION: Did Insurer Inc. make a negligent misrepresentation on which Paul Payne justifiably relied? Negligent misrepresentation occurs when (a) (b) (c) a party makes a representation in the course of his business or in a transaction in which he has a pecuniary interest, the representation supplies false information for the guidance of others in their business, and the party making the representation did not exercise reasonable care or competence in obtaining or communicating the information. PJC