U.S. Fifth Circuit - The FindLaw 5th Circuit Court of Appeals Opinion Summaries Blog

Court: Treble Damages for Defense Costs in Insurance Breach Case

It takes a lot to change a court's mind, especially when the court has three judges.

In Lyda Swinterton Builders v. Oklahoma Surety Company, however, it wasn't that hard. That's because the Texas Supreme Court changed it for them.

It doesn't happen all the time, but one decision can change everything. In this case, it's about an insurer's duty to defend and treble damages for failing to do so.

Treble Damages

The U.S. Fifth Circuit Court of Appeals affirmed a summary judgment, finding Oklahoma Surety had a duty to defend and breached that duty.

The appeals court reached its conclusion based on USAA Texas Lloyds Co. v. Menchaca, which came down while the Fifth Circuit appeal was pending. The Texas Supreme Court said the federal court was wrong about another state case.

It came down to the "independent-injury rule," which limits recovery of damages other than those that "flow" or "stem" from a denial of benefits. In Menchaca, the state supreme court confirmed that treble policy benefits do not run afoul of the independent-injury rule.

For the insured in the Fifth Circuit case, that means the possibility of recovering treble the defense costs from the insurer's breach. After taking another look at Vail v. Texas Farm Bureau Mut. Ins. Co., the appeals court withdrew its prior opinion, reversed and remanded.

$665,600 Question

The insurer appealed the trial judge's award of $665,600 in damages, arguing that $500,000 was for a deductible. The company also complained about $132,992 for unreimbursed defense fees for independent counsel and other costs.

The Fifth Circuit affirmed. "Since OSC breached its duty to defend, it is in no position to object to defense-related expenditures that are supported by the record and that are not patently unreasonable," the judges said.

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