Insurers that provide coverage to protect against uninsured and underinsured motorists (hereinafter,“UM/UIM”) should take heed of a decision announced on September 19 by the Fourth Court of Appeals in San Antonio, Texas. In State Farm Mutual Automobile Association v. Cook, the Court held that an insurer’s duty to reasonably investigate a case involving an UM/UIM is triggered prior to the entry of final judgment against the UM/UIM. Moreover, the Court determined that once an insurer conducts a reasonable investigation and there is ample evidence to support that the UM/UIM is liable to the insured for damages sustained from a vehicular collision, the insurer may not delay payment.
Appellee Veatrice Cook was injured in an automobile accident when a vehicle driven by Roger Cervantes, an uninsured motorist, collided with her vehicle. Cook filed a claim with State Farm seeking uninsured motorist benefits under her policy’s coverage. Cook demanded the full policy limit of $100,000, while State Farm offered to pay $15,255.00. Unsatisfied with State Farm’s offer, Cook sued Roger Cervantes for negligence and State Farm for breach of contract, bad faith and prompt payment claims. Roger Cervantes was found liable for Cook’s injuries, and the trial court entered judgment against him. Nine days after the entry of judgment, State Farm rendered prompt payment of the policy limits to Cook.
State Farm then filed a motion for summary judgment in the severed cause, asserting it was entitled to a take-nothing judgment on Cook’s extra-contractual claims because it was not liable for those claims as a matter of law. As previously noted, the trial court denied State Farm’s motion but found that an immediate appeal of two controlling questions of law would materially advance the ultimate termination of the litigation. The Court of Appeals then granted State Farm’s petition for permission to appeal.
The central question at issue before the appellate court was whether a UM/UIM insurer’s duty to conduct a reasonable investigation and make prompt payment on a UM/UIM claim is triggered prior to the entry of judgment against a UM/UIM. The San Antonio Court of Appeals answered in the affirmative. The Court explained that a UM/UIM insurer has a contractual duty of good faith and fair dealing towards the insured. A breach of this duty occurs when the UM/UIM insurer fails to conduct a reasonable investigation into a UM/UIM claim and when it fails to promptly make payment to the insured after the investigation results in liability against the UM/UIM. Contrary to the UM/UIM insurer’s argument, the breach of this duty can occur prior to the entry of final judgment against the UM/UIM.
The Court reasoned that a UM/UIM insurer’s liability can become reasonably clear before final judgment is obtained because:
(1) State Farm could have conducted an investigation that revealed evidence establishing obvious fault against Roger Cervantes;
(2) Cook’s bad faith claims could not have existed against State Farm if its liability did not become reasonably clear before final judgment because once final judgment was entered, State Farm’s relationship with Cook became that of debtor/creditor, and any pre-existing contractual duty was extinguished;
(3) the Brainard case relied on by State Farm only addressed a UM/UIM insurer’s contractual duty and did not address a UM/UIM insurer’s duty; and
(4) the United States Court of Appeals for the Fifth Circuit rejected State Farm’s argument that its duty to reasonably investigate a UM/UIM claim and make prompt payment accordingly was triggered once final judgment was obtained.
Key practice points to take away from this ruling are that UM/UIM insurers should begin a reasonable investigation into a UM/UIM claim to determine fault and liability once the insured initially files the claim. Upon finding obvious fault and liability as shown by the reasonable investigation, the UM/UIM insurer must promptly render payment pursuant to the insured’s policy and coverage. Failure to take these steps can result in the UM/UIM insurer’s liability for breach of contract, breach of the duty of good faith and fair dealing, and prompt payment claims.