Severance makes the appellate court’s heart grow fonder.

March 27th, 2022 By Sheila Tan

A recent Thirteenth Court of Appeals opinion reminds us of when it is appropriate to seek a severance and abatement of extracontractual claims from a contract claim for policy benefits, while also clarifying the scope of permissible discovery in such cases. In re Old Republic Ins. Co., 13-21-00264-CV involved a suit filed by Uhr Real Estate, Inc. against Old Republic. The petition alleged that homeowners David and Valerie Fallas had contracted with Uhr to repair damage done by Hurricane Harvey to their home and to make improvements on the property. Uhr subcontracted with Williams Insulation Company, Inc. (Williams) to install insulation and the contract between the companies required Williams to designate Uhr as an additional insured on Williams’ CGL policy with Old Republic. According to Uhr, Williams did so.

The homeowners experienced problems with the repairs, which Uhr suspected was due to improperly installed insulation. Uhr notified Williams, which made repairs but did not accept responsibility. The homeowners ultimately filed a claim against Uhr, which Uhr then presented to Old Republic. Old Republic denied that Uhr was an additional insured and denied coverage under its policy.

Uhr sued Old Republic for breach of contract and violations of Chapter 541 and 542 of the Insurance Code. During the litigation, Uhr noticed the deposition of Old Republic’s corporate representative. Shortly thereafter, Old Republic filed a motion to sever and abate Uhr’s extra contractual claims from its breach of contract claims, arguing that the contract and extracontractual claims were independent and that Uhr could not prevail on its extracontractual claims without first showing that Old Republic had breached the contract. Old Republic further asserted abatement was necessary because the scope of permissible discovery was different between contract and extra contractual claims. Included in the evidence attached to the motion was Old Republic’s offer to settle the breach of contract claim. Uhr objected to Old Republic’s evidence on multiple grounds, arguing that there had been no discovery done and “no one knows the facts.” Thus, Uhr claimed there was no evidence that its claims for breach of contract were essentially different from its statutory bad faith claims.

Old Republic also filed a motion to quash the corporate representative depo due to the fact that the notice included topics related to the extracontractual claims and unrelated third-party claims. The trial court denied both of Old Republic’s motions, believing it would be more expensive and prejudicial to all parties if discovery was not combined. Old Republic filed a petition for writ of mandamus on both issues.

The Thirteenth Court of Appeals looked back on the Texas Supreme Court’s discussion in Liberty National Fire Insurance Co. v. Akin 927 S.W.2d 627 628-32 (Tex. 1996) of when a severance may be necessary in similar bad faith cases, such as when the insurer has made a settlement offer on the contract claim. In this case, Old Republic had made a settlement offer. Uhr’s argument, that the settlement offer was ”less than 2.7% of the value” of its breach of contract claim and was made in bad faith after Uhr objected to the severance and abatement, did not affect the determination that a settlement offer had been made. The Thirteenth Court of Appeals also found that Uhr’s extracontractual claims against Old Republic were dependent on its right to receive policy benefits. The court ultimately held that the extracontractual claims should have been severed.

Finally, the appellate court agreed with Old Republic that the trial court had abused its discretion by allowing discovery on extracontractual issues, and particularly in allowing the corporate representative deposition to take place as the scope of the proposed deposition exceeded the bounds of the contract claim at issue. As a result, the Thirteenth Court of Appeals conditionally granted the petition for writ of mandamus and directed the trial court to vacate its orders and to issue an order severing and abating Uhr’s extracontractual claims against Old Republic.