4:19-cv-04211
S.D. Tex.Dec 2, 2020Background
- Urban Oaks Builders and affiliated entities (Plaintiffs) were insureds under a controlled insurance program (CIP) for a Florida apartment construction project; multiple insurers (Gemini, Ironshore, Navigators, Great American) issued layered liability/excess policies with specified limits.
- Southstar (purchaser) sued UOB for construction defects; Gemini initially defended and paid $2M, then treated the suit as a single occurrence and refused further payment; Ironshore, Navigators, and Great American dispute whether underlying limits have been exhausted because of a single-vs.-multiple-occurrence dispute.
- UOB filed Chapter 11 in Houston; Southstar’s claim was adjudicated in the bankruptcy proceeding, resulting in a final judgment against UOB for $26,103,717.38.
- Plaintiffs filed this adversary action asserting turnover (11 U.S.C. §542), breach of contract, declaratory relief, Texas Insurance Code violations (including the TPPCA), Florida statutory bad faith, and Florida common-law bad faith against the insurers.
- Great American moved to dismiss Claims 2 (breach), 4 (Texas Insurance Code), 5 (Florida statutory bad faith), and 6 (Florida common-law bad faith); Navigators joined as to the bad-faith/Texas-code claims.
- The magistrate judge recommended denying dismissal of breach claims against Great American (and cross-claim) but granted dismissal of Texas Insurance Code §§541.060/.061 (with no leave to amend) and dismissed the TPPCA (§542) and Florida bad-faith claims without prejudice as premature.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Breach of contract (Claim 2; Great American excess) | Plaintiffs allege Great American breached its excess indemnity obligation and can plead alternative theories (single or multiple occurrences) so breach claim is plausible. | Great American contends its excess obligation attaches only after underlying limits are exhausted (argues Plaintiffs’ own allegations show underlying limits not exhausted, so breach implausible). | Denied as to breach: plaintiffs may plead inconsistent theories; given the $26.1M judgment and defense costs, exhaustion of the $27M single-occurrence layer is plausible so dismissal is premature. |
| Texas Insurance Code §§541.060 & 541.061 (extracontractual bad faith) | Plaintiffs allege insurers’ refusal to defend/indemnify caused bankruptcy and other damages constituting statutory violations and extracontractual injury. | Insurers argue Plaintiffs plead only loss of policy benefits (not an independent injury), fail to plead the ‘‘who/what/when/where/how’’ under Rule 9(b), and cannot recover extracontractual damages absent a statutory-cause causal showing per Menchaca. | Granted: claims dismissed for failure to plead with particularity and failure to allege an independent injury causally tied to a statutory violation; dismissal recommended without leave to amend (subject to narrow exception if good-faith facts are offered). |
| Texas Prompt Payment of Claims Act (§542) | Plaintiffs assert statutory prompt-payment violations based on unpaid defense costs and the bankruptcy judgment. | Insurers assert TPPCA liability requires adjudication or acceptance of liability under the policy; action is premature until coverage/liability is resolved. | Granted without prejudice: TPPCA claims are premature/ripe only after insurer liability is adjudicated; dismiss and allow renewal after coverage resolution. |
| Florida statutory and common-law bad faith (Claims 5 & 6) | Plaintiffs rely on the bankruptcy judgment as determining damages and argue Fridman supports proceeding on bad-faith once damages determined. | Insurers contend Florida law bars bad-faith claims until coverage/liability is finally resolved; Fridman is distinguishable and does not allow pre-resolution bad-faith suits. | Granted without prejudice: Florida bad-faith claims are premature pending final resolution of coverage/liability; dismissal without prejudice recommended. |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (pleading must be plausible)
- Ashcroft v. Iqbal, 556 U.S. 662 (conclusory allegations insufficient)
- USAA Tex. Lloyds Co. v. Menchaca, 545 S.W.3d 479 (Texas Insurance Code extracontractual damages require causation or independent injury)
- Barbara Techs. Corp. v. State Farm Lloyds, 589 S.W.3d 806 (TPPCA duties and elements explained)
- Weiser-Brown Operating Co. v. St. Paul Surplus Lines Ins. Co., 801 F.3d 512 (bona fide coverage dispute does not establish bad faith)
- Lyda Swinerton Builders, Inc. v. Oklahoma Sur. Co., 903 F.3d 435 (application of Menchaca principles)
- State Farm Fire & Cas. Co. v. Simmons, 963 S.W.2d 42 (coverage dispute vs. bad faith standard)
- OneBeacon Ins. Co. v. Delta Fire Sprinklers, Inc., 898 So. 2d 113 (Florida requires coverage/liability resolution before bad-faith claim)
- Maryland Cas. Co. v. Alicia Diagnostic, Inc., 961 So. 2d 1091 (Florida principle that bad-faith is premature before coverage determined)
- Douglass v. United Servs. Auto. Ass’n, 79 F.3d 1415 (objection period consequences under 28 U.S.C. §636(b)(1))