When Hurricane Harvey made landfall in late August 2017, it was the first major hurricane to hit Texas since Hurricane Ike, nine years before, which spawned a wealth of litigation against carriers.
Most of these cases have been resolved by 2017, leaving many policyholder and carrier attorneys with extra time on their hands. Harvey litigation undoubtedly means these lawyers will be back in business, but several other significant events mean they now operate on a much different playing field than before.
One event was arguably good for carriers. This was the passage of the so-called “Hailstorm Bill,” an act designed to curb the actions of “storm chaser” attorneys, and applicable to Hurricane claims. The statute took effect Sept. 1, 2017—shortly after Harvey had finished its destruction.
Another event was arguably good for the policyholder: the Texas Supreme Court’s April 2017 decision in USAA Texas Lloyds v. Menchaca ,which, seemingly meant that bad faith causes of action were revived in Texas. This article examines the Hailstorm Bill’s and Menchaca’s impact on Harvey litigation. Finally, It addresses a third issue—the flood exclusion, the “elephant in the room” for Harvey litigation.
“Hailstorm Bill”, Chapter 542A of the Texas Insurance Code, has already impacted Harvey litigation. It has several new requirements that policyholder’s attorneys find rigorous. An important requirement that the policyholder, in his demand letter, must state that he will allow a carrier the opportunity to inspect his property if request to do so is made within 30 days of the demand letter. This “sleeper” requirement is especially fruitful for Harvey claims. Harvey was a massive catastrophe. Many so-called “Stormtroopers” were called in from all over the country to quickly adjust an overwhelming amount of claims. Many times, some things were missed—by the carrier, or by the policyholder. The inspection allows any missed damages to be adjusted and paid if covered. Lawsuits can be avoided. Consumers and carriers both win. Only lawyers—from both sides—lose out on fees.
Another important provision allows for carriers to indemnify adjusters if they are sued. A typical tactic for policyholder’s attorneys was to sue an in-state adjuster in order to defeat removal to Federal Court. This provision puts a stop to improper joinder and should mean federal courts will see more Harvey suits. Realistically, though, it may mean that less suits are filed. Policyholder attorneys who cannot maintain a case in a state court unfavorable to carriers may settle cases rather than see them removed.
There are many changes regarding attorney fees in the new statute with sliding scales regarding their recovery, designed to prevent the award of huge amounts on small claims. There is another “sleeper” provision here: under the new statute, policyholder attorneys must supply a statement justifying their attorney fee with “contemporaneous time records.” Plaintiffs attorneys do not like to keep time sheets and are not used to doing so. When asked for statements, they cannot produce them. Additionally, the interest rate has gone from 18 to 10 percent as the Prompt Payment Act penalty.
Still, despite the Hailstorm Bill, policyholder’s attorneys are heartened by the Texas Supreme Court’s decision in USAA Texas Lloyds v. Menchaca (2018) on bad faith. The case was first decided in April 2017. Upon motion for rehearing, a deeply divided court issued a new opinion April 13 2018. In Menchaca, a Hurricane Ike case, a jury found that USAA did not breach its contract with Menchaca. However, the jury did award Menchaca $11, 500 (equal to her contract claim), for a bad faith failure to perform a reasonable investigation. The trial court upheld that finding. In the past, the absence of a breach of contract finding would mean no recovery. Now, while the Texas Supreme Court has remanded the case for a new trial, the language in its opinion indicates that it would support a recovery for bad faith in the absence of a breach of contract.
Much has been written and much will be written about Menchaca. This article is about its legal ramifications. Policyholder’s attorneys had been discouraged for years about Texas Appellate Courts limiting or eliminating bad faith awards. Now they argue Menchaca means that bad faith is back, and that bad faith should be a serious component of a first party lawsuit.
So, while there is something good for both the policyholder and for the carrier in recent statutes and rulings impacting Harvey litigation, it remains to be seen whether the volume of Harvey litigation will reach Hurricane Ike levels. However, there is one immutable factor that would argue against it: Harvey is noted as a “flood event” rather than a “wind event,” at least in the vast metropolis of Houston. Many policies—both homeowners and commercial—exclude flood loss. Innovative policyholder attorneys are scratching their heads to come up with ways around the flood exclusion; but many will admit that it cannot be done.
There will be claims that what is said to be flood damage is actually wind damage—but that will be a hard sell. Instead, there are now lawsuits being filed against agents and brokers for failing to inform policyholders that they needed flood insurance. Yet, without actual misrepresentations, the agents and brokers may have no liability. Probably, the real Harvey battles will be fought over covered losses where the issue of quantum will be the main one—in other words, how much is owed? These battles will be fought under the Hailstorm Bill’s rules, and with Menchaca looming in the background.
Stephen Pate is a partner in the Insurance Coverage Practice at Cozen O’Connor in Houston. Over a 30-year career in coverage work, Stephen has tried more than 45 first-party extracontractual cases to verdict.