in Re Allstate Texas Lloyd's ( 2005 )

Petition for Writ of Mandamus Conditionally Granted and Memorandum Opinion filed September 2, 2005

Petition for Writ of Mandamus Conditionally Granted and Memorandum Opinion filed September 2, 2005.

In The

Fourteenth Court of Appeals

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NO. 14-05-00762-CV

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IN RE ALLSTATE TEXAS LLOYD=S, Relator

ORIGINAL PROCEEDING

WRIT OF MANDAMUS

M E M O R A N D U M   O P I N I O N

On July 29, 2005, relator filed a petition for writ of mandamus in this court.  See Tex. Gov=t. Code Ann. ' 22.221 (Vernon 2004); see also Tex. R. App. P. 52.  Relator complains of the trial court=s denial of a motion to sever.  Real parties have filed a response.  We conditionally grant relief.

This proceeding arises from a suit for damages filed by real parties in interest, James and Song Suk Roberts, based on an alleged breach of a homeowner=s insurance policy.  Real parties allege breach of contract as well as extra-contractual claims of bad faith. After pretrial mediation, relator made a settlement offer to real parties on all disputed breach of contract claims, but the offer was rejected.  Thereafter, relator filed a motion to sever the extra-contractual claims from the breach of contract claims.  The trial judge signed an order on July 1, 2005, denying the motion for severance.^[1]  Relator contends the trial judge abused her discretion by failing to sever the extra-contractual claims from the breach of contract claims. 

Mandamus is an extraordinary remedy, available only in limited circumstances to correct a clear abuse of discretion or the violation of a legal duty when no other adequate remedy at law is available.  In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex. 2001).   Rules 41 and 174(b) of the Texas Rules of Civil Procedure vest the trial court with broad discretion to sever and order separate trials of causes of action.  The trial court's discretion is not unlimited, however.  Womack v. Berry, 291 S.W.2d 677, 683 (Tex.1956).  The supreme court has stated:

When all the facts and circumstances of the case unquestionably require a separate trial to prevent manifest injustice, and there is no fact or circumstance supporting or tending to support a contrary conclusion, and the legal rights of the parties will not be prejudiced thereby, there is no room for the exercise of discretion. The rule then is peremptory in operation and imposes upon the court a duty to order a separate trial. While the refusal to grant a separate trial under such circumstances is usually termed a clear abuse of discretion, it is nevertheless a violation of a plain legal duty.

Id.

A trial court properly exercises its  discretion in severing claims when: A(1) the controversy involves more than one cause of action; (2) the severed claim is one that could be asserted independently in a separate lawsuit; and (3) the severed actions are not so interwoven with the other claims that they involve the same facts and issues.@ Liberty Nat=l Fire Ins. Co. v. Akin, 927 S.W.2d 627, 629 (Tex. 1996).  Insurance coverage claims and bad faith claims are, by their nature, independent claims.  In re Republic Lloyds, 104 S.W.3d 354, 358 (Tex. App.BHouston [14th Dist.] 2003, orig. proceeding).  Furthermore, an insured usually may not prevail on an extra-contractual claim without first proving the insurer breached the contract.  Id. 

No one disputes that there are multiple claims at issue in this case.  Furthermore, case law indicates that the contract and extra-contractual claims can be asserted independently.  Thus, the first two requirements for severance are met. Although the claims in this case could be asserted independently, the claims are largely interwoven as most of the evidence introduced will be admissible on both claims.  See Akin, 927 S.W.2d at 630.  Nonetheless, severance may be necessary in some bad faith cases, such as when the insurer has made a settlement offer on the disputed contract claim.  Id. at 630.  The supreme court has approved case law from courts of appeals holding that severance is required when an insurer has made a settlement offer.  Id. (citing Mid-Century Ins. Co. v. Lerner, 901 S.W.2d 749 (Tex. App.BHouston [14th Dist.] 1995, orig. proceeding); Northwestern Nat=l Lloyds Ins. Co. v. Caldwell, 862 S.W.2d 44 (Tex. App.BHouston [14th Dist.] 1993, orig. proceeding); F.A. Richard & Assocs. v. Millard, 856 S.W.2d 765 (Tex. App.BHouston [1st Dist.] 1993, orig. proceeding); United States Fire Ins. Co. v. Millard, 847 S.W.2d 668 (Tex. App.BHouston [1st Dist.] 1993, orig. proceeding); and State Farm Mut. Ins. Co. v. Wilborn, 835 S.W.2d 260 (Tex. App.BHouston [14th Dist.] 1992, orig. proceeding)).

The supreme court did not find severance necessary in Akin because there was no settlement offer made in that case.  Id. at 629-30.  Instead, the insurer in Akin had tendered payment for the uncontested portion of the real party=s claim.  Id. at 630.  Thus, the supreme court found that, A[i]n the absence of a settlement offer on the entire contract claim, or other compelling circumstances, severance is not required.@  Id.    

In this case, unlike in the facts in Akin, a settlement offer was made.^[2]  Real parties attempt to distinguish the cases finding severance mandatory by noting many of the cases involve under-insured and uninsured motorist (AUIM@) policies.  Real parties note that an insurer in a UIM case is not obligated to pay benefits until the insured becomes legally entitled to those benefits.  Thus, real parties claim the insurer=s liability is different from the liability of an insurer under a homeowner=s policy.  In approving the courts of appeals= opinions finding severance mandatory, the supreme court in Akin did not distinguish the case law on the basis real parties assert, and because the claim in Akin, like the instant case, was on a homeowner=s insurance policy, the court certainly had the opportunity to do so.  927 S.W.2d at 628.  Instead, the court approved the case law, but  noted that this case law was inapplicable in Akin because there was no settlement offer involved.  Id. at 630.  Furthermore, this court has previously applied the UIM case law to a case involving a homeowner=s policy.  In re Republic Lloyds,104 S.W.3d 354 (Tex. App.BHouston [14th Dist.] 2003, orig. proceeding). Consequently, we are unpersuaded by the distinction real parties raise and we find the UIM case law applicable.^[3]

Real parties next assert the trial court properly denied the severance motion because relator=s settlement offer is irrelevant to the bad faith claims.  Real parties cite to Universe Life Ins. Co. v. Giles, 950 S.W.2d 48 (Tex. 1997), for the standard for recovery in a bad faith case. The Giles court held that, to prove bad faith on the part of the insurer, the plaintiff must prove the insurer failed to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim after the insurer=s liability has become reasonably clear.  Id. at 55.  The supreme court added that the issue whether an insurer acted in bad faith is a question of fact for the jury, not a question of law for the court.  Id. at 56. 

Although real parties acknowledge that the issue of whether relator acted in bad faith is an issue for the fact-finder, they nonetheless assert that evidence of relator=s settlement offer would be irrelevant because the offer was not made promptly.  Applying Rule of Evidence 408,^[4] a settlement offer would be irrelevant and prejudicial regarding the insurance company's liability under the policy itself. Wilborn, 835 S.W.2d at 261. However, the settlement offer could be an essential element of the insured's cause of action for bad faith or of the insurance company's defense to the bad faith claim.  Id.  AWhile evidence of an offer of settlement >would be prejudicial to the insurer because of its implication that the insurer has admitted liability= on the contract claim, >the very same evidence of settlement offers may be of great benefit to the insurance company in its defense against the bad faith claims, to show that it made a reasonable attempt to pay the amount it believed it owed on its insured's claim=.@ Avary v. Bank of America, N.A., 72 S.W.3d 779, 798 (Tex. App.BDallas 2002, pet. denied)(quoting Allstate Ins. Co. v. Evins, 894 S.W.2d 847, 849 (Tex. App.BCorpus Christi 1995, orig. proceeding).  Given that the fact-finder must consider the promptness of relator=s attempt to settle the claim in deciding the bad faith issue, we are unpersuaded by real parties= assertion that the settlement offer is irrelevant to the bad faith claim.

Real parties also distinguish cases finding severance mandatory by asserting that, in those cases, the settlement offers were made before trial.  Although most of the cases do involve pre-lawsuit settlement offers, a case from this court involved an offer made after suit was filed.  Caldwell, 862 S.W.2d at 45.  In Caldwell, the plaintiffs filed suit and subsequently added bad faith claims against the insurers.  Id.  A motion to sever was denied.  Id. Because the hearing on the motion was not recorded, the insurer sought and was granted rehearing.  Id.  Before the hearing was held, the insurer made a settlement offer, which was rejected.  Id.  The trial court held a hearing on the motion to sever and again, denied it.  Id.  On mandamus, our court found an abuse of discretion by the trial judge, and granted the writ.  Id. at 47.  Accordingly, the timing of the settlement offer does not support the trial court=s denial of the motion to sever.

Real parties further contend relator has not established that it will be prejudiced by a lack of severance. As a panel of this court observed in Wilborn, an irreconcilable conflict arises if severance is denied in a case involving contractual and extra-contractual claims.  835 S.W.2d at 262.  The trial court could refuse to admit evidence of the settlement offer, acknowledging relator=s right to exclude it under Rule of Evidence 408, but excluding it would deny real parties= right to use it to establish the elements of the bad faith claim.  Id.  Alternatively, the court could admit evidence of the settlement offer, satisfying real parties= proof of their bad faith claim, but abrogating relator=s right to exclude such evidence.  Id. AThe resolution of this conflict leaves but one decision to protect all interests involved and that is to order severance of the two causes of action and to abate the proceedings on the bad faith claim until final disposition of the uninsured motorist claim.@ Id. 

Accordingly, we find the trial court abused its discretion in denying relator=s motion for severance. The trial of the contractual claims, along with the bad faith claims would not afford relator an adequate remedy by appeal.  See Caldwell, 862 S.W.2d at 47.

We conditionally grant relator the relief requested in its petition for writ of mandamus.  The trial court is directed to vacate its order of July 1, 2005, denying the motion for severance, and to grant the motion for severance.  The writ will issue only if the trial judge fails to do so.

PER CURIAM

Petition Granted and Memorandum Opinion filed September 2, 2005.

Panel consists of Justices Yates, Anderson, and Hudson.

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^[1]  The parties do not state that a hearing was held on this motion and no record has been filed. The July 1, 2005, order does not reference a hearing. 

^[2]  Relator=s assert that their settlement offer was for the entire contract claim.  Real parties do not dispute this.  Thus, we need not address whether the offer was for the entire claim as we did in In re Republic Lloyds, 104 S.W.3d 354, 358-60 (Tex. App.BHouston [14th Dist.] 2003, orig. proceeding).

^[3]  In Republic Lloyds, a panel of this court noted that case law requiring severance of contract from extra-contractual claims was applicable, but denied relief because relators failed to prove that the settlement offer was made on the entire contract claim.  Id. at 358-60.

^[4]  Rule 408 provides in part: AEvidence of (1) furnishing or offering or promising to furnish or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount is not admissible to prove liability for or invalidity of the claim or its amount.@  Tex. R. Evid. 408.