Travelers Indemnity Company v. Gustine Independent School District

Opinion filed May 25, 2023
In The
Eleventh Court of Appeals
__________
No. 11-21-00229-CV
__________
TRAVELERS INDEMNITY COMPANY, Appellant
V.
GUSTINE INDEPENDENT SCHOOL DISTRICT, Appellee
On Appeal from the 220th District Court
Comanche County, Texas
Trial Court Cause No. CV03220
MEMORANDUM OPINION
This appeal arises from the denial of a motion to dismiss or stay a lawsuit
pending arbitration. Gustine Independent School District (“Gustine”) is a member
of the Texas Rural Education Association Risk Management Cooperative (“the
TREA”). Travelers Indemnity Company (“Travelers”) is a reinsurer of the TREA.
The reinsurance certificate between the TREA and Travelers includes a clause
requiring arbitration of disputes that arise under the reinsurance certificate.
After several of Gustine’s buildings were damaged by wind and hail in May
2019, Gustine filed suit against the TREA and Travelers. This interlocutory appeal
was filed by Travelers after the trial court denied its request to dismiss or stay
Gustine’s claims in lieu of arbitration.
Travelers has also filed a motion to compel arbitration against Gustine and
two other school districts in the United States District Court for the District of
Connecticut (“the federal court”). After Travelers filed its appeal of this matter, the
federal court denied Travelers’ motion to compel arbitration. We hold that the
judgment of the federal court now precludes any determination on the issue of
arbitrability in this court or in the court below. We also hold that, in any event,
Gustine is not required to arbitrate its claims against Travelers under the terms of the
reinsurance agreement. As such, we affirm the order of the trial court.
Background Facts
The TREA is a self-funded intergovernmental risk pool. It provides property
coverage to Gustine pursuant to the terms of a coverage agreement form that is
similar to an insurance policy. The TREA, in turn, is insured under a Property
Facultative Reinsurance Certificate issued by Travelers. Under the terms of the
reinsurance certificate, Travelers is liable for any property loss that is outside of a
$500,000 retention. Travelers is not a party to the coverage agreement, and Gustine
is not a party to the reinsurance certificate.
The reinsurance certificate states that the TREA has an obligation to
investigate any claims or suits relating to coverage provided by Travelers. However,
once the claim exceeds the retained limit, Travelers assumes the duty to investigate.
The certificate provides that, notwithstanding Travelers’ duty to investigate, the
TREA is ultimately obligated to make “all payments due” under the coverage
agreement. The reinsurance certificate also contains an arbitration clause, which
includes the following language:
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As a condition precedent to any right of action hereunder, any dispute
between [the TREA] and [Travelers] arising out of, or relating to the
formation, interpretation, performance or breach of this
CERTIFICATE, whether such dispute arises before or after termination
of this CERTIFICATE, shall be submitted to arbitration.
In May 2019, a storm caused hail and wind damage to multiple buildings
owned by Gustine that are included within the coverage agreement. Gustine asserted
a claim against the TREA for the loss. Travelers then adjusted the claim, arriving at
a final replacement cost estimate in the amount of $1,438,564.70. Gustine, on the
other hand, maintains that its replacement costs are $4,149,540.80.
Gustine filed this suit against both the TREA and Travelers. In its live
pleadings, Gustine alleges that Travelers mishandled the investigation and
adjustment of the claim, and that Travelers made multiple misrepresentations to
Gustine. Gustine also asserts claims against the TREA for failure to pay benefits
under the coverage agreement.
After suit was filed, Travelers sent a demand for arbitration to counsel for
Gustine. It then filed a motion to dismiss or stay the litigation pending arbitration
pursuant to the Federal Arbitration Act (hereinafter the FAA). See 9 U.S.C. § 3.
The trial court denied the motion on August 6, 2021, and Travelers filed an
interlocutory appeal from the order shortly thereafter.1
The Collateral Litigation
This is one of three lawsuits that Travelers is seeking to arbitrate under the
same TREA reinsurance certificate. The other two lawsuits involve claims by Alto
Independent School District (“Alto”) and Grapeland Independent School District
1
Under the FAA, an aggrieved party is permitted to take a direct appeal from an order refusing to
stay an action. 9 U.S.C. § 16(a)(1)(A); see TEX. CIV. PRAC. & REM. CODE ANN. § 51.016 (West 2015)
(permitting interlocutory appeal in matters that are appealable under 9 U.S.C. § 16).
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(“Grapeland”). All three lawsuits arise out of storm-related property damage that
occurred during the spring of 2019.
In Alto, the trial court denied Travelers’ motion to dismiss or stay, and
Travelers filed an interlocutory appeal. Travelers Indem. Co. v. Alto ISD, No. 12-
21-00143-CV, 2022 WL 1668859 (Tex. App.—Tyler May 25, 2022, pet. denied)
(mem. op.). On May 25, 2022, the Tyler Court of Appeals affirmed the trial court’s
order denying the motion. Id.The trial court also denied Travelers’ motion to dismiss or stay in the
Grapeland litigation. Travelers Indem. Co. v. Grapeland Indep. Sch. Dist., No. 12-
22-00311-CV, 2023 WL 3371072, at *1 (Tex. App.—Tyler May 10, 2023, no pet.
hist.) (mem. op.). On May 10, 2023, the Tyler Court of Appeals likewise affirmed
the trial court’s order denying the motion in Grapeland. Id. at *3.
Travelers also filed a lawsuit against Gustine, Alto, and Grapeland in the
United States District Court for the District of Connecticut (“the federal action”).
The federal action sought an order compelling the school districts to arbitrate their
claims against Travelers. See Travelers Indem. Co. v. Alto Indep. Sch. Dist.,
No. 3:21CV00909(SALM), 2022 WL 2981594 (D. Conn. July 28, 2022). Following
the lead of the Tyler Court of Appeals in Alto, the federal court denied Travelers’
motion to compel arbitration on July 28, 2022. Id. at *7. Travelers’ appeal from the
judgment of the federal district court is currently pending in the United States Court
of Appeals for the Second Circuit. See Travelers Indem. Co. v. Alto Indep. Sch.
Dist., No. 22-1760 (D. Conn. filed Aug. 12, 2022).
Travelers’ Issue
In its sole issue in this appeal, Travelers complains that the trial court erred in
denying its motion to dismiss or stay Gustine’s lawsuit pending arbitration.
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Res Judicata
We first address the question of whether the federal court’s denial of
Travelers’ motion to compel arbitration now precludes consideration of a stay by the
trial court. In so doing, we apply Texas law, since the loss at issue occurred in Texas
and the relationship between the parties is centered in Texas. See Torrington Co. v.
Stutzman, 46 S.W.3d 829, 848 (Tex. 2000) (the “most significant relationship” test
under Restatement (Second) of Conflict of Laws applies to conflicts of laws in
Texas).
Travelers argues that Gustine has waived the issue of res judicata by failing
to raise it in the trial court. Travelers is correct that the failure to raise a defense
based on res judicata must generally be pleaded at the trial court or waived. See
Green v. Parrack, 974 S.W.2d 200, 202 (Tex. App.—San Antonio 1998, no pet.)
(res judicata must generally be pleaded or it is waived); Fitz v. Days Inns Worldwide,
Inc., 147 S.W.3d 467, 470 (Tex. App.—San Antonio 2004, pet. denied) (collateral
estoppel must be pleaded at the trial court level or it is waived). However, Gustine
has not waived the issue under these particular facts.
Waiver is the intentional relinquishment of a known right, or intentional
conduct inconsistent with claiming that right. In re RSR Corp., 568 S.W.3d 663,
666 (Tex. 2019) (orig. proceeding); Legacy Bank v. Fab Tech Drilling Equip., Inc.,
566 S.W.3d 922, 931 (Tex. App.—Eastland 2018, pet. denied). It is normally
applicable in cases of res judicata and collateral estoppel because the nature of the
previous judgment is known before the issue is appealed. See Garner v. Long, 106
S.W.3d 260, 264 (Tex. App.—Fort Worth 2003, no pet.) (December 14, 2000
judgment in estate administration had become final and had been affirmed on appeal
before the issues were raised again on November 16, 2001). In this case, however,
the federal court’s judgment had not been rendered before Travelers filed its
5
interlocutory appeal, and Gustine therefore could not have waived any issues relating
to the federal court’s judgment prior to the appeal.
Travelers also maintains that we cannot consider the issue of res judicata
because Gustine did not raise it in connection with its briefing on appeal, citing
Maples v. Maples, 601 S.W.3d 23, 31 n.1 (Tex. App.—Tyler 2020, no pet.) (“An
issue may not be raised for the first time at oral argument unless the issue has been
first presented in the party’s written brief.”). Such a failure likewise cannot be
construed as a waiver of the argument since Gustine’s brief was filed on February 7,
2022, more than five months before the federal court rendered its judgment.
Furthermore, shortly after the federal court rendered judgment, Gustine filed
a document entitled “Notice of New Authority.” The notice included language
stating that the federal action “and the court’s disposition thereof are relevant here
in that they involve the same parties, i.e., Travelers and Gustine ISD, and the same
legal and factual issues.” While it would have been preferable for Gustine to have
raised the issue more explicitly, such language was “sufficient to put us on notice”
of a claim preclusion issue. See St. John Missionary Baptist Church v. Flakes, 595
S.W.3d 211, 215 (Tex. 2020) (“St. John’s briefing was ‘sufficient to put the court of
appeals on notice’ of the ecclesiastical-abstention issues in the case and ‘invite[d]
the court of appeals to correct any error of law’ as to that issue.” (quoting Rohrmoos
Venture v. UTSW DVA Healthcare, LLP, 578 S.W.3d 469, 481 (Tex. 2019))).
We also note that the issue of res judicata was addressed on its merits in post-
submission letter briefs that were filed by each of the parties. Given these
circumstances, we are not inclined to elevate “form-over-substance” in a “rigid
application of our preservation rules.” See Rohrmoos, 578 S.W.3d at 481. Instead,
we will consider the issue, which has been repeatedly addressed by the parties during
this appeal.
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“Broadly speaking, res judicata is the generic term for a group of related
concepts concerning the conclusive effects given final judgments.” Barr v.
Resolution Tr. Corp. ex rel. Sunbelt Fed. Sav., 837 S.W.2d 627, 628 (Tex. 1992).
Within this general doctrine are two principal categories: (1) claim preclusion (also
known as res judicata); and (2) issue preclusion (also known as collateral estoppel).
Id. “The doctrine of res judicata, or claim preclusion, bars causes of action that have
already been fully adjudicated or that, with the use of diligence, could have been
brought in the prior suit.” Rosetta Res. Operating, LP v. Martin, 645 S.W.3d 212,
225 (Tex. 2022). Collateral estoppel bars relitigation of an issue if (1) the facts
sought to be litigated in the second action were fully and fairly litigated in the first
action; (2) those facts were essential to the judgment in the first action; and (3) the
parties were cast as adversaries in the first action. In re USAA Gen. Indem. Co., 629
S.W.3d 878, 883 (Tex. 2021) (orig. proceeding); Caprock Inv. Corp. v. Montgomery,
321 S.W.3d 91, 97 (Tex. App.—Eastland 2010, pet. denied).
Travelers does not argue that the federal action did not involve the same
parties and issues that are involved in this matter. In this regard, any determination
as to whether Gustine’s claim is “referable to arbitration” necessarily involves the
same issues that were in dispute in connection with Travelers’ motion to compel
arbitration in the federal action. See 9 U.S.C. §§ 3–4. Instead, Travelers makes two
interrelated arguments.
First, Travelers argues that, because our review of the trial court’s order is
limited to the record as it existed when the trial court ruled, we cannot consider the
federal court judgment. While an appellate court is generally limited to the record
that is before it on appeal, the court may take judicial notice of facts that could have
been properly judicially noticed by the trial judge. Tafel v. State, 536 S.W.3d 517,
523 (Tex. 2017); Dutton v. Dutton, 18 S.W.3d 849, 856 (Tex. App.—Eastland 2000,
pet. denied) (“This court may take judicial notice, even if no one requested the trial
7
court to do so and even if the trial court did not announce that it would do so.”).
There is no dispute between the parties regarding the nature or contents of the federal
court’s order, nor is there a dispute as to the finality of the judgment. In this regard,
the federal court order is available for review through various opinion reporting
services. Given these circumstances, we believe it is appropriate for us to take
judicial notice of the judgment that was rendered by the federal court during the
pendency of this appeal.
Travelers also argues that the federal court’s judgment cannot have a
preclusive effect because it was not rendered prior to the trial court’s rendition of the
order denying the motion to stay. Travelers cites Travelers Ins. Co. v. Joachim in
support of this proposition. 315 S.W.3d 860, 862 (Tex. 2010) (“The party relying
on the affirmative defense of res judicata must prove . . . a prior final determination
on the merits by a court of competent jurisdiction . . . .”). Travelers asserts that,
because there was no prior determination on the merits at the time the Court ruled
on the motion to stay, the federal court’s judgment cannot have a preclusive effect.
But this argument fails to account for the ongoing potential for the interlocutory
order in the state trial court to be affected by a final judgment in another court.
When addressing issues relating to the preclusive effects of judgments, the
Texas Supreme Court has consistently looked to the Restatement (Second) of
Judgments for guidance. See Mitchell v. MAP Res., Inc., 649 S.W.3d 180, 191 n.9
(Tex. 2022); Dubai Petroleum Co. v. Kazi, 12 S.W.3d 71, 74–75 (Tex. 2000);
Jeanes v. Henderson, 688 S.W.2d 100, 106 (Tex. 1985) (citing the Restatement in
support of its description of collateral estoppel). As such, in addressing the question
of whether the federal court’s judgment can operate as res judicata on the trial court’s
order, we turn to the Restatement.
The Restatement provides that where “two actions which involve the same
issue are pending between the same parties, it is the first final judgment rendered in
8
one of the actions which becomes conclusive in the other action, regardless of which
action was brought first.” RESTATEMENT (SECOND) OF JUDGMENTS § 27 cmt. l
(1982) (emphasis added). Travelers is correct that, at the time the trial court’s
judgment was originally rendered, it was not precluded by the federal court’s
decision. However, the trial court’s judgment is not yet final because it is subject
to future modification by the trial court, even while it is on review. See TEX. R.
APP. P. 29.5 (“While an appeal from an interlocutory order is pending, the trial court
retains jurisdiction of the case and unless prohibited by statute may make further
orders, including one dissolving the order complained of on appeal.”); Bonsmara
Nat. Beef Co., LLC v. Hart of Tex. Cattle Feeders, LLC, 603 S.W.3d 385, 390 (Tex.
2020) (discussing relationship between interlocutory orders and final judgments).
For purposes of res judicata, the judgment of the federal court, on the other hand,
has become final. Travelers, 2022 WL 2981594, at *7 (resolving motion to compel
arbitration and terminating other pending issues); see Tex. Beef Cattle Co. v. Green,
921 S.W.2d 203, 207 (Tex. 1996) (a judgment is generally final for purposes of issue
and claim preclusion regardless of the taking of an appeal). Once the federal court
determined that Gustine was not required to arbitrate by way of its final judgment in
July 2022, it precluded any contrary determination in the trial court, where a final
determination of the issue was pending between the same parties. Furthermore, even
if the trial court had initially ordered a stay, it would serve no purpose for such stay
to remain in effect after Travelers’ request to compel arbitration had been rejected
by way of a final judgment in the federal court. Accordingly, we conclude that
collateral estoppel now operates to prohibit Travelers’ request for a stay pending
arbitration.
The Motion to Stay
Our determination as to the effect of the federal court’s judgment is sufficient
to dispose of this appeal. However, even if the federal court’s judgment did not
9
preclude the issue of arbitrability, the trial court did not err in rejecting Travelers’
motion on the merits.
In Texas, a trial court’s order denying a motion to compel arbitration is
reviewed for an abuse of discretion. Henry v. Cash Biz, LP, 551 S.W.3d 111, 115
(Tex. 2018); Alto, 2022 WL 1668859, at *2. The same standard applies where, as
here, the trial court has denied a request to stay a lawsuit pending arbitration. Vets
Securing Am., Inc. v. Smith, 632 S.W.3d 272, 279 (Tex. App.—Corpus Christi–
Edinburg 2021, pet. denied). In so doing, we will defer to the trial court’s factual
determinations if they are supported by the evidence. Henry, 551 S.W.3d at 115;
Alto, 2022 WL 1668859, at *2. However, we review its legal determinations
de novo. Henry, 551 S.W.3d at 115; Alto, 2022 WL 1668859, at *2. As such, any
questions relating to the arbitrability of an agreement, including the question of
whether nonsignatories are bound to such agreements, are reviewed de novo. Jody
James Farms, JV v. Altman Group, Inc., 547 S.W.3d 624, 633 (Tex. 2018); Alto,
2022 WL 1668859, at *2.
Under section 3 of the FAA, “the courts of the United States” are required to
stay any case that is “referable to arbitration” under an “agreement in writing.”
9 U.S.C. § 3. Ordinary principles of state contract law determine whether there is a
valid agreement to arbitrate. G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458
S.W.3d 502, 524 (Tex. 2015). “Because arbitration is contractual in nature, the FAA
generally ‘does not require parties to arbitrate when they have not agreed to do so.’”
In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 738 (Tex. 2005) (orig.
proceeding) (quoting Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior
Univ., 489 U.S. 468, 478–79 (1989)). However, under appropriate circumstances,
principles of contract law and agency will bind a nonsignatory to an arbitration
agreement. See Jody James, 547 S.W.3d at 629.
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Travelers maintains that, even though Gustine is a nonsignatory to the
reinsurance certificate, it is required to arbitrate its claims under the principle of
direct-benefits estoppel. Under direct-benefits estoppel, a nonsignatory seeking the
benefits of a contract is estopped from simultaneously attempting to avoid the
contract’s burdens, such as the obligation to arbitrate disputes. Kellogg, 166 S.W.3d
at 739. Thus, if a nonsignatory’s breach-of-warranty and breach-of-contract claims
are based on the terms of a written contract, then the nonsignatory cannot avoid an
arbitration provision within the contract. Id. On the other hand, if a nonsignatory’s
claims can stand independently of the underlying contract, then arbitration generally
should not be compelled. Id. at 739–40.
The central question is whether the nonsignatory “seeks, through the claim, to
derive a direct benefit from the contract containing the arbitration provisions.” In
re Weekley Homes, L.P., 180 S.W.3d 127, 131–32 (Tex. 2005) (orig. proceeding)
(emphasis added) (quoting Kellogg, 166 S.W.3d at 741). The mere existence of a
relationship between the claims and the contract containing an arbitration provision
is insufficient. Jody James, 547 S.W.3d at 637. Instead, when the substance of the
claim arises from general obligations imposed by state law, including statutes, torts,
and other common law duties, direct-benefits estoppel is inapplicable. Id.
In the archetypal direct-benefits case, the party opposing arbitration seeks to
enforce the terms of an agreement that contains an arbitration clause. Id. Thus,
where a trust beneficiary alleges violation of a trust agreement that contains an
arbitration clause, such a dispute is subject to arbitration, even though the beneficiary
is not a party to the trust agreement. Id. (citing Rachal v. Reitz, 403 S.W.3d 840(Tex. 2013)).
In its briefing, Travelers references the contents of a demand letter that
Gustine sent to Travelers in December 2019, as well as the pleadings that were
amended by Gustine prior to the hearing on its motion to stay the action. It is not
11
clear whether Travelers is claiming that Gustine’s allegations in these documents are
relevant to the determination of whether Gustine is estopped from participating in
arbitration. However, we conclude that they are not relevant.
A nonsignatory can seek the benefits of a contract by either (1) filing a lawsuit
based on the contract or (2) engaging in conduct that “deliberately seeks and obtains
substantial benefits from the contract itself.” Taylor Morrison of Tex., Inc. v. Ha,
660 S.W.3d 529, 533 (Tex. 2023) (quoting Weekley Homes, 180 S.W.3d at 132).
Where, as here, it is alleged that a nonsignatory’s lawsuit seeks the benefits of a
contract, the nonparty can choose whether to frame its claims in tort or “on the
contract.” See Weekley Homes, 180 S.W.3d at 132.
The FAA’s stay requirements are also based on an assessment of whether the
lawsuit in which the stay is sought contains “any issue referable to arbitration.”
9 U.S.C. § 3. An order referring the matter to arbitration is only appropriate if the
court is “satisfied that the issue involved in such suit . . . is referable to arbitration.”
Id. (emphasis added). As such, where direct-benefits estoppel is based on the
contents of the lawsuit, and where a party seeks a stay pursuant to the FAA, the
critical focus is on the “issues involved in [the] suit,” which are reflected in the live
pleadings of the party resisting arbitration. This process is similar to the manner in
which we would assess a plea to the jurisdiction or a determination of an insurer’s
duty to defend a liability insurance policy. See Abbott v. G.G.E., 463 S.W.3d 633,
642 (Tex. App.—Austin 2015, pet. denied) (to determine whether the court had
jurisdiction to hear a case based on a challenge to the pleadings, “we look to the
contents of the claimant’s live pleadings”); Richards v. State Farm Lloyds, 597
S.W.3d 492, 495 (Tex. 2020) (an insurer’s duty to defend is determined by
examining the third-party claimant’s pleadings in light of the policy provisions);
Archon Invests., Inc. v. Great Am. Lloyds Ins. Co., 174 S.W.3d 334, 339 (Tex.
12
App.—Houston [1st Dist.] 2005, pet. denied) (the duty to defend is based on the
allegations in the live pleadings).
This approach is also consistent with the manner in which Texas courts have
historically assessed the question of whether direct-benefits estoppel applies. See
Weekly Homes, 180 S.W.3d at 132 (discussion of the relationship between a
nonsignatory’s pleadings and direct-benefits estoppel); G.T. Leach Builders, LLC v.
Sapphire V.P., LP, 458 S.W.3d 502, 528 (Tex. 2015) (assessing the direct-benefits
estoppel issue by addressing the claims asserted by the nonmovant “in its petition”);
Taylor Morrison of Tex., Inc. v. Kohlmeyer, 634 S.W.3d 297, 306 (Tex. App.—
Houston [1st Dist.] 2021, pet. filed) (assessing causes of action and factual assertions
made by nonsignatory “[i]n their live pleading”); Sam Houston Elec. Coop., Inc. v.
Berry, 582 S.W.3d 282, 289 n.5 (Tex. App.—Beaumont 2017, no pet.) (basing its
analysis on nonmovant’s “live pleading at the time the trial court denied [the] motion
to compel arbitration”); Loya v. Loya, 507 S.W.3d 871, 878 (Tex. App.—Houston
[1st Dist.] 2016, no pet.) (addressing manner in which party resisting arbitration
characterized herself as a shareholder “throughout her pleadings”); ENGlobal U.S.,
Inc. v. Gatlin, 449 S.W.3d 269, 277 (Tex. App.—Beaumont 2014, no pet.) (assessing
direct-benefits estoppel based on nonsignatory’s “live pleading”); Tex.
Petrochemicals LP v. ISP Water Mgmt. Servs. LLC, 301 S.W.3d 879, 886 (Tex.
App.—Beaumont 2009, no pet.) (compelling arbitration because “[nonmovant’s]
pleadings reveal that its case for partition is premised on a dispute” over whether the
opposing party complied with an agreement containing an arbitration clause); In re
Ford Motor Co., 220 S.W.3d 21, 24 (Tex. App.—San Antonio 2006, no pet.)
(analyzing direct-benefits estoppel issue based on “plaintiffs’ joint petition”). It is
also notable that, in assessing the issue of whether Alto was subject to direct-benefits
estoppel, the Tyler Court of Appeals based its analysis on the school district’s “live
petition.” 2022 WL 1668859, at *1.
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With these principles in mind, we now turn to Gustine’s Fourth Amended
Petition, which was its live pleading at the time the trial court ruled on the motion to
stay. In reviewing the petition, we look to the substance of the claim, not artful
pleading. Weekley Homes, 180 S.W.3d at 131–32.
Gustine’s petition alleges that the TREA “sold the policy, insuring the
Property that is the subject of this lawsuit.” It further alleges that “Defendant
Travelers adjusted the claim and determined the replacement cost of the covered
damage.” Gustine maintains that, even though Travelers paid $723,252 to the TREA
in connection with the claim, there was a long delay in which the TREA did not, in
turn, convey those funds to Gustine. Gustine further maintains that Travelers’
investigation was “outcome oriented” and that the TREA has “refused to fully
compensate [Gustine], under the terms of the policy.” There are also a number of
allegations regarding Travelers’ alleged misrepresentations, including
misrepresentations about the claims payment process, the TREA’s financial capacity
to pay the claim, and the amount of the loss itself. Based on these allegations,
Gustine asserts causes of action against Travelers for violation of the Texas
Insurance Code, fraud, conspiracy to commit fraud, violation of the Texas Deceptive
Trade Practices–Consumer Protection Act (DTPA), misrepresentation, and
negligence. All of these causes of action are tort claims that are commonly asserted
against adjusters in the context of insurance litigation.
Travelers points to a number of allegations in Gustine’s pleadings in support
of its claim that Gustine is seeking a direct benefit under the terms of the reinsurance
certificate. For example, Travelers points to language indicating that Travelers
misrepresented “a material fact or policy provision relating to coverage” and that
Travelers “made false representations.” However, these allegations relate to
misrepresentations about the terms of the TREA coverage agreement, and they
cannot reasonably be construed as a claim to benefits under the reinsurance
14
certificate. Likewise, Travelers points to multiple allegations which it believes state
or imply that Gustine has an expectation that Travelers is required to make direct
payments to it under the reinsurance certificate. For example, the petition alleges
that Gustine “made claims to Defendants for insurance proceeds,” that Travelers
failed “to effectuate a prompt, fair, and equitable settlement,” that Travelers “was
not going to fully pay the claim,” and that Travelers failed “to promptly provide
Plaintiff a reasonably [sic] explanation . . . for . . . denial of a claim.” When read in
context with Gustine’s petition as a whole, however, these excerpts do not
demonstrate an intent to recover benefits directly under the reinsurance certificate.
The allegations in the petition are clear that the TREA, and not Travelers, is
ultimately responsible for payment under the coverage agreement, and we do not
believe that a claim for direct payment under the terms of the reinsurance agreement
can be fairly inferred from these isolated allegations.
Travelers also points to allegations that relate to the TREA’s failure to tender
funds that had been paid to it under the reinsurance certificate, as described above.
These allegations likewise do not seek direct benefits under the reinsurance
certificate. To the contrary, they reflect an understanding that any payment of funds
to Gustine must ultimately be tendered by the TREA pursuant to the coverage
agreement.
Travelers further points to allegations in the petition that relate to its duty to
adjust the claim, including a claim that Travelers was “tasked with . . . fully
quantifying covered damages” and a claim that Travelers “failed to discover covered
damages and/or fully quantify covered damages.” These allegations support
Gustine’s tort causes of action arising out of Travelers’ duty to adjust the claim,
which comes “from general obligations imposed by state law, including statutes,
torts and other common law duties” as opposed to a contractual obligation that is
15
owed to Gustine. See Jody James, 547 S.W.3d at 637. As such, they do not support
direct-benefits estoppel.
Finally, Travelers points to allegations in the petition that state a measure of
damages against Travelers that is similar to the measure of damages that is due under
the coverage agreement. For example, Gustine asks for damages under the DTPA
that are “in an amount equal to the costs of repairs” as well as the “loss of benefits
that should have been paid.” These claims are also insufficient to establish a direct-
benefits estoppel. Even where a claimant seeks “a measure of loss that equates to
the amount of a contract loss,” it does not follow that direct-benefits estoppel applies,
since such a claim merely refers to the contract. See id. at 638.
Based on the substance of Gustine’s live pleadings at the time the motion to
stay was determined by the trial court, Gustine’s claims against Travelers arise out
of “general obligations imposed by state law, including statutes, torts and other
common law duties.” See id. at 637. Thus, Gustine is not stating a claim that seeks
the direct benefit of the reinsurance certificate. We further conclude that, in so
doing, Gustine is not attempting to artfully plead a case that, in actuality, constitutes
a suit “on the contract.” See Weekley Homes, 180 S.W.3d at 131–32.
These findings are consistent with the findings of the Tyler Court of Appeals
in Alto and Grapeland. In both cases, the court found that the complaints against
Travelers were based on tort, DTPA, and insurance code duties—none of which
arose under the terms of the reinsurance certificate. Alto, 2022 WL 1668859, at *4.
Grapeland, 2023 WL 3371072, at 3*. As such, Travelers’ liability was not based
on expectations created by the contracts, but was necessarily extracontractual. Alto,
2022 WL 1668859, at *4; Grapeland, 2023 WL 3371072, at *3.
Our conclusions are also consistent with the United States District Court in
Connecticut, which held that none of the claims asserted against Travelers, including
Gustine’s claims, give rise to direct-benefits estoppel. 2022 WL 2981594, at *5.
16
The federal court determined that such claims instead arise “from general obligations
imposed by state law, including statutes, torts and other common law duties.” Id.(quoting Jody James, 547 S.W.3d at 637).
This Court’s Ruling
Having held that the issue of arbitrability is precluded by the judgment in the
federal action, and having determined that, in any event, Gustine’s claims are not
subject to direct-benefits estoppel, we overrule Appellant’s sole issue. Accordingly,
we affirm the order of the trial court.
JOHN M. BAILEY
CHIEF JUSTICE
May 25, 2023
Panel consists of: Bailey, C.J.,
Trotter, J., and Williams, J.
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