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Insurance Law No. 14-02-01208-CV, 5/8/2003 Click here for the full text of this decision FACTS: In July of 2002, the real party in interest, James Fuller, along with Amanda Gonzales, brought suit against the relators. In their petition, Fuller and Gonzales alleged they submitted a claim to Republic Lloyds under their homeowners policy for damages to their residence caused by water leaks. Republic Lloyds assigned the claim to Thomas Beno & Associates, who, in turn, assigned the claim to Thomas Beno and Doug Wallace for adjustment. According to the petition, Republic Lloyds wrongfully denied the claim. Fuller and Gonzales specifically alleged claims against Republic Lloyds for breach of contract, violations of the Texas Insurance Code, violations of the DTPA and breach of the duty of good faith and fair dealing. The allegations against Beno & Associates, Thomas Beno and Doug Wallace were limited to violations of the Texas Insurance Code. After filing an answer asserting a general denial, relators filed a motion for severance, or, alternatively motion for separate trials and motion for abatement. In that motion, the relators argued that severance of the breach of contract claim from the extra-contractual claims is necessary and proper because: first, more than one cause of action was asserted, the breach of contract claim is the proper subject of an independent suit and the breach of contract claim is not so intertwined with the extra-contractual claims as to involve the same identical facts and issue; second, severance is necessary to promote judicial economy and avoid unnecessary costs and delays; and third, severance is necessary to avoid the possibility of irreconcilable conflicts between the interests of the parties. Fuller and Gonzales filed a response to the motion in which they argued that severance is not proper or necessary because: 1. the breach of contract claim and the extra-contractual claims are not severable and should be tried together; 2. severance is properly denied when an insurance company has not offered to settle the entire claim; 3. most of the evidence produced in this litigation will be admissible on the breach of contract and extra-contractual claims; 4. claims made under article 21.55 of the Texas Insurance Code cannot be severed; and 5. Republic Lloyds, Beno & Associates, Beno and Wallace failed to carry the burden of proof to establish their entitlement to severance. An oral hearing was held on Nov. 8, 2002. At the hearing, the relators argued that a settlement offer had been made on the entire breach of contract claim. In support of this argument, relators offered into evidence a sworn statement in proof of loss executed by Fuller and Gonzales and a check issued by relators for the full amount referenced on the sworn statement. In response, Fuller and Gonzales argued that the check covered only the undisputed plumbing leak claim, not the foundation damage claim, and thus, relators had not made an offer to settle the entire claim. On Nov. 11, 2002, the trial court signed an order denying the motion for severance. The relators sought relief by filing this petition for writ of mandamus. HOLDING: The trial court did not clearly abuse its discretion in refusing to grant relators’ motion for severance, or, alternatively motion for separate trials and motion for abatement. The court orders the stay imposed by this court’s order of Dec. 16, 2002, lifted, and denies the petition for writ of mandamus. Insurance coverage claims and bad-faith claims, by their nature, are independent. Liberty Nat’l Fire Ins. Co. v. Akin, 927 S.W.2d 627 (Tex. 1996). In most circumstances, however, an insured may not prevail on a bad faith or other extra-contractual claim without first proving the insurer breached the contract. Several courts of appeals, including this court, have held that when the insurer has made an offer to settle the contract claim, a severance of the tort and contract claims is required to avoid undue prejudice to the insurer in its defense of the coverage dispute. The rationale of these cases is that, ordinarily, offers of settlement of a coverage dispute are inadmissible on the contract claim, but may nevertheless be admissible on the tort claims to rebut evidence of bad faith. In Akin, the Supreme Court specifically concurred with these decisions. Severance of claims under the Texas Rules of Civil Procedure rests within the sound discretion of the trial court. The Texas Supreme Court has concluded that a trial court properly severs a claim when: 1. the controversy involves more than one cause of action; 2. the severed claim is one that could be asserted independently in a separate suit; and 3. the severed actions are not so interwoven with the other claims that they involve the same facts and issues. Guaranty Fed. Sav. Bank v. Horseshoe Operating Co., 793 S.W.2d 652 (Tex. 1990). In Akin, the Supreme Court held that severance may be necessary in some bad faith cases. The court specifically noted that an insurer would be unfairly prejudiced if the breach of contract and extra-contractual claims were tried together when the insurer has made a settlement offer on the disputed contract claim. Thus, pursuant to Akin, a severance is required when the insurer has made a settlement offer on the entire breach of contract claim. Given that a proof of loss is not conclusive as to the insured, and may be corrected or explained, as Fuller did here, and given the inconclusive nature of the proof regarding relators’ offer to settle, the court cannot say that relators conclusively proved they offered to settle the entireclaim as required by Akin. Furthermore, the relators failed to establish any other compelling circumstances that would entitle them to a severance and abatement. OPINION: Anderson, J.; before Yates, Anderson and Frost, JJ. DISSENTING: Yates, J. “I respectfully disagree with the majority’s conclusion that severance was not required under the facts of this case. This court has held on numerous occasions that it is an abuse of discretion for a trial court to refuse to sever and abate extra-contractual claims from a breach of contract claim when the extra-contractual or bad faith claims are based on an inadequate settlement offer. Mid-Century Ins. Co. of Texas v. Lerner, 901 S.W.2d 749, 752 (Tex. App.-Houston [14th Dist.] 1995, orig. proceeding); Northwestern Nat’l Lloyds Ins. Co. v. Caldwell, 862 S.W.2d 44, 46-47 (Tex. App.-Houston [14th Dist.] 1993, orig. proceeding); State Farm Mut. Automobile Ins. Co. v. Wilborn, 835 S.W.2d 260, 262 (Tex. App.-Houston [14th Dist.] 1992, orig. proceeding). That is precisely the situation here. The majority’s conclusion that Akinrequires severance only when an offer to settle the entirebreach of contract claim has been made misses the mark. Liberty Nat’l Fire Ins. Co. v. Akin, 927 S.W.2d 627 (Tex. 1996).”

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