Is There Negligent Claim Handling?

Most Parker County attorneys who handle insurance claims know that there is not a claim for “negligent claim handling,” that the claim that probably exists has to fall under one of those listed in the Texas Insurance Code. A 1991, San Antonio Court of Appeals case styled, United Services Automobile Association v. Pennington, helps explain the difference between negligent claim handling and simple breach of contract.
Here is some of the relevant information.
Gary Lochte had a homeowner’s insurance policy from USAA . The policy excluded coverage for damages arising out of “business pursuits.” Lochte is a car salesman. He also ran a quarter horse breeding business with his father. Apart from the breeding business, he and Don Rowland, a co-worker at the car lot, purchased a quarter horse in order to experiment with a new training system to condition horses for racing competition. They placed an advertisement in the local newspaper to hire someone to ride the horse. Pennington answered the advertisement. During her interview with Lochte and Rowland she was asked to demonstrate her riding abilities by riding Viking Vanny. The horse reared while Pennington was mounted on her. Pennington slid off the back of the horse and the horse fell on top of her, crushing her pelvis.
Lochte notified USAA of Pennington’s injury. USAA investigated the claim, questioned Lochte regarding his horse breeding pursuits and the status of Viking Vanny as a hobby or business pursuit. It eventually notified him it would not defend him in any lawsuit instituted by Pennington against him because the occurrence was deemed by USAA to come under the business pursuit exclusion. Lochte obtained private counsel to represent him in the suit. The trial court entered a judgment against Lochte and awarded Pennington $277,576.07 actual damages for the injuries she sustained.
Lochte then assigned Pennington his claim against USAA for its failure to defend him in the Pennington v. Lochte suit in return for her agreement not to execute on the judgment against him. Pennington brought this suit against USAA for breach of the insurance contract by failing to defend its insured, violating the DTPA, violating Section 541.060 of the Insurance Code, and negligence in handling the claim.
USAA complains that Pennington’s tort cause of action for negligent handling of the claim is an inappropriate claim to bring because USAA’s wrongful refusal to defend Lochte is a breach of a contractual duty and thus must be brought as a contract claim. Pennington alleged DTPA violations, insurance code violations, breach of contract, and negligence in USAA’s handling of the claim. The jury found that USAA was negligent in the manner in which it handled Lochte’s claim, was grossly negligent, and that the negligence was a proximate cause of the damages against Lochte.
No Texas case has found or discussed a cause of action such as Pennington has alleged, i.e., the insurer’s negligent handling of the claim by wrongfully refusing to defend its insured.
In order for a tort duty to arise out of a contractual duty, i.e. a negligent failure to perform a contract, the liability must arise “independent of the fact that a contract exists between the parties”: the defendant must breach a duty imposed by law rather than by the contract. If the defendant’s conduct would impose liability on him only because it breaches the parties’ agreement, the claim is contractual. The Texas Supreme Court looks to the nature of the loss in determining whether the claim sounded in contract or tort. “When the only loss or damage is to the subject matter of the contract, the plaintiff’s action is ordinarily on the contract.” Economic loss to the subject matter of the contract does not give rise to tort liability. In this case, no liability arises in the absence of a contract (the insurance policy). Without the policy, USAA had no insured and no duty to defend. No legal duty of adhering to the contract terms has been imposed by law. Thus, there is no duty beyond the contract itself to defend the insured. The law, however, has imposed the duty that the insurer act in good faith and deal fairly with the insured. Thus, this court reversed the judgment of the trial court insofar as it awarded Pennington judgment on a tort basis, i.e. negligent claim handling.