Last Friday, a federal district court in San Antonio dismissed via Rule 12(b)(6) motion all extra-contractual claims asserted under a third-party liability insurance policy, enforcing established Texas law holding that a liability insurer's extra-contractual duties to its insured (and, by extension, a judgment creditor) are limited to the duty to reasonably respond to a settlement proposal within policy limits. In Travelers Lloyds Ins. Co. v. Cruz Contracting, No. 5:16-CV-759-DAE (W. D. Tex. March 17, 2017), a liability carrier filed a declaratory judgment action to determine coverage for a judgment against its insured. Both the insured and the judgment creditor responded by filing a litany of counterclaims for causes of action only legally recognized under first-party policies, including common-law bad faith, violations of Insurance Code Chapter 541 and 542, and associated DTPA violations. The carrier filed a 12(b)(6) motion seeking dismissal of all the extra-contractual claims.
On dual motions for dispositive relief, the district court rejected several unusual arguments, including the judgment holder's assertion that it was an intended third-party beneficiary of the policy and therefore had automatic legal access to all rights of the insured. The court noted that opinions of the Supreme Court of Texas highlight the concern that allowing third-parties to sue insurance carriers for causes of action that arise out of the first-party relationship between insured and insurer would create serious conflicts of interest, and concluded that merely holding a judgment did not negate existing supreme court precedent limiting the causes of action at issue to the first-party context. The court also concluded that controlling Texas law limits the insured's own extra-contractual remedy under a liability policy to Stowers, so even if the judgment holder had an assignment of rights, it would be still be limited to Stowers, and no party had asserted a facially plausible Stowers claim.
[Editor’s note: Amber Dunten and Chris Martin of MDJW’s Houston office had the privilege to represent Travelers in the district court. We want to congratulations to Travelers on their win and express our firm’s appreciation for the opportunity to protect its interests in this important litigation.]