Update: TDI holds hearing on request for mandatory mediation-arbitration endorsement

Yesterday, TDI held a hearing on Farm Bureau’s request to offer optional mandatory mediation-arbitration endorsements in certain homeowner’s policies. You can read about it here. I discussed some of the issues here.

Here’s Farm Bureau’s explanation on why it wants to write the endorsement:

Stephens said many unique factors prompted the Farm Bureau — which only serves Texas and is not publicly traded — to ask permission to “try something different” to help its bottom line.

That included a dramatic rise in lawsuits in South Texas and along the Gulf beginning in 2012. The rate of disputed claims in those regions, he said, outpaced the rest of the state by nearly 30-fold.

That last sentence tells the tale. Farm Bureau has been pounded with lawsuits in the Valley in the last few years. It wants to stem the tide.

Apparently, insurance commissioner David Mattax didn’t tip his hand on whether TDI would allow Farm Bureau to write the endorsement. Stay tuned.

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TDI mulls mandatory mediation-arbitration endorsements

On July 6, the Texas Department of Insurance will consider whether to allow Texas Farm Bureau to offer a mandatory mediation-arbitration endorsement with its homeowner’s policies. The insured would give up their right to sue Farm Bureau in court in exchange for an unknown reduction in premium.

Under the endorsement, the insured and Farm Bureau must attempt mediation first ( I always appreciate the opportunity for more mediation business!) and go to arbitration if they do not settle at mediation.The arbitration clause limits discovery to the sharing of certain documents related to the claim. No depositions unless the arbitrator permits them. Farm Bureau pays the fees for mediators and arbitrators. An arbitrator’s award would be confidential unless both sides agree to disclose. I don’t read the endorsement as limiting the types of damages an arbitrator can award. The endorsement does not provide for an award of attorney’s fees.

I don’t like arbitration for most consumer transactions, particularly those involving adhesion contracts. Experience shows arbitration isn’t an effective or practical mechanism for most consumers to enforce their rights. (I have no qualms about two parties in relatively comparable bargaining positions agreeing to arbitrate their disputes). Heck, I typically work on the defense side of the bar, and I don’t typically prefer arbitration as lawyer. I suppose I prefer the structure provided by court rules and procedures instead of the unpredictable flexible rules of arbitration. At least Farm Bureau offers to mitigate certain barriers associated with arbitration in other fields, such as paying administrative fees.

I think TDI will bless then endorsement. I fear most policyholders won’t understand what rights they will relinquish in exchange for a lower premium. Most insureds will agree to the endorsement because their agent will tell the insured he or she will save some dough in the short-term and it’s rare whenever a dispute arises out of a claim. Notwithstanding my doubts, I don’t think TDI should prohibit Farm Bureau from offering the endorsement. It’s not my place to mandate whether certain people voluntarily give up certain rights in exchange for money, especially when other safeguards exist.

I suspect TDI will allow Farm Bureau to offer the endorsement, as long as the insured receives a tangible break on policy premiums. If the consumer gets no real benefit, forget it. Having to front arbitration and mediation fees can make it difficult for an insured to pursue a remedy against a carrier. It helps that Farm Bureau will bear most of the administrative fees and costs for mediators and arbitrators. Also, for it to work for me, policyholders have to be able to obtain policies from admitted carriers which do not require the endorsement. Otherwise, arbitration will become the norm.

Will we see mandatory mediation-arbitration endorsement as a matter of course?  That’s the big question. I anticipate most other HO carriers will follow suit if TDI allows Farm Bureau to offer this endorsement. I imagine most carriers see this as an opportunity for carriers to lower claim costs and potential exposure. Carriers may have to offer the endorsement to compete with Farm Bureau on premium price. The problem arises if and when each carrier offers the endorsement and policyholders have to pay significantly more to remove it. What if carriers may refuse to write policies without the endorsement. That result would be terrible for Texas consumers.

FTR, I wouldn’t personally agree to the endorsement if I was a Farm Bureau insured.

 

In re Nationwide: Forum-selection clauses, waiver, and actual prejudice

In In re Nationwide Ins. Co. of America, No. 15-0328 (Tex. Jun. 24, 2016), the Supreme Court of Texas held that a party who claims another party waived enforcement of a contractual forum-selection clause must establish actual prejudice resulted from the alleged waiver.

Facts and Procedural History

 

This case involves a dispute between Nationwide and an independent insurance agent. The contract between Nationwide and the agent had a forum-selection clause. The clause provided for venue in Franklin County, Ohio.

The agent filed suit against Nationwide in Travis County, Texas, in December 2012. Nationwide’s lawyer told the agent’s lawyer Nationwide intended to enforce the forum-selection clause; however, Nationwide waited over two years to seek to enforce it, and only after changing lawyers. Nationwide sought to enforce the forum-selection clause by filing a motion to dismiss.

During the two years, the parties conducted written discovery. Nationwide filed special exceptions and two partial motions to dismiss. The trial court sustained the special exceptions. The trial court never heard the motions to dismiss because the agent amended his pleadings. The parties submitted an agreed confidentiality and protective order and the trial court signed it.

The limitations period on the agent’s contract claim expired during the pendency of the Texas lawsuit. Nationwide agreed to waive the limitations argument to move the case to Ohio. The limitations period on the agent’s fraud claim expired months after Nationwide moved to dismiss the Texas lawsuit. The trial court denied Nationwide’s motion to dismiss; consequently, the agent never filed suit in Ohio. The court of appeals denied Nationwide’s mandamus petition.

The Supreme Court of Texas held the agent did not establish any prejudice resulted from the delay. Consequently, the Court granted mandamus relief.

Analysis

 

As a general rule, Texas enforces contractual forum-selection clauses. A party waives enforcement “by substantially invoking the judicial process to the other party’s detriment or prejudice.” In determining whether a party waived enforcement, a court looks at the totality of the circumstances on a case-by-case basis.

The Court punted somewhat on the substantial invocation question. The Court noted Nationwide was active in the Texas lawsuit but the parties’ interaction with the trial was “minimal.” While the trial court sustained special exceptions and entered an agreed order, the Court did not make any dispositive rulings. Ultimately, the Court deferred to the trial court’s ruling that Nationwide had substantially invoked the judicial process.

The Court concluded the agent had suffered no prejudice as a result of Nationwide’s substantial invocation of the judicial process . The mere fact that the agent had already spent time and money in working up the Texas lawsuit did not help the agent. The agent could have avoided that by filing in the correct forum in the first place. The Court held no actual prejudice resulted from the delay. The agent’s prejudice was theoretical because Nationwide agreed to waive its limitations argument on the contract claim. Meanwhile, Nationwide did not prejudice the agent’s fraud claim. The agent could have dismissed and refiled after Nationwide filed the motion to dismiss based on the forum-selection clause. (Why the agent would have done so after winning at the trial court level beats me). Nationwide maintained it had informed the agent’s lawyer regarding the Ohio statute of limitations for fraud claims months before the limitations period expired, so it wasn’t “laying behind the log.” Because the agent did not suffer any actual prejudice, Nation

My Two Cents

 

This case and result strikes me as an odd one. Generally, I have no problem with enforcing forum-selection clauses. I don’t have a ton of sympathy for a party who tries to avoid forum selection clauses by filing suit in the “wrong” forum. The agent’s lawyer could have prevented this mess by filing in Ohio.

I can’t see why a party who waited two years to enforce a forum-selection clause deserves any relief. If you have the forum-selection clause in the contract, move to enforce it early. Instead, as a result of the delay, the parties likely spent a good chunk of change in the discovery process during the two years.

Now the parties are a lot closer to the beginning of the lawsuit than the end. The parties probably should have resolved this case within two years, but that’s a different issue.

Some unanswered questions re: strategy: why was Nationwide so adamant about moving the case to Ohio after so much time passed? Why didn’t Nationwide’s first lawyer pull the trigger early on in the case? Did Nationwide think the agent would fold as soon as the case moved there? Have Ohio courts construed similar agency agreements such that Nationwide had a sure win? Texas courts can apply Ohio contract law, too.

I think the dissent gets it right.

Seger v. Yorkshire Ins. Co., Ltd.: Stowers requires coverage

Some observations on the Supreme Court of Texas’ recent decision in Seger v. Yorkshire Ins. Co., Ltd., No. 13-0673 (Tex. Jun. 17, 2016):

  1. The plaintiff/insured must establish coverage as an essential element of its Stowers claim. The plaintiff/insured bears the initial burden of establishing coverage. If the plaintiff/insured proves coverage, the burden shifts to the insurer to establish the policy excludes coverage.
  2. Under certain circumstances, an insured may reject or void, at its option, a policy issued by an unauthorized insurer. If the insured elects to enforce a policy subject to avoidance, it must enforce the entire contract, including any policy exclusions. An insured cannot select provisions which favor coverage and reject exclusions. In other words, the plaintiff/insured must accept all of the policy terms or none.
  3. As an aside to #2 above, I wonder whether a plaintiff/insured must accept provisions in a voidable policy that are otherwise unenforceable on public policy grounds. I don’t think the “all or nothing” logic mandates such a result. The Seger Court didn’t discuss that issue.
  4. This case gives Jarndyce vs. Jarndyce a run for its money. The underlying accident and death occurred in 1992. That’s unacceptable.

The bottom line: No coverage? No Stowers claim.

Texas now kowtows to conspiracy nuts

Texas Governor Greg Abbott has decided to placate the conspiracy nuts. From the Houston Chronicle:

Texas Governor Greg Abbott has ordered members of the Texas Military to monitor federal troops in an upcoming two-month training exercise planned for the Lone Star State.

Operation Jade Helm will bring the U.S. military’s most elite soldiers, including the Green Berets and Navy SEALS, to Texas for simulated special operations in a hostile territory. But plans for the exercise have roused fears in many Texans of a federal occupation.

In a letter to Major General Gerald Betty of the Texas State Guard, Abbott said his order was “to address concerns of Texas citizens.”

“During the training operation, it is important that Texans know their safety, constitutional rights, private property right and civil liberties will not be infringed,” the governor wrote. “I am directing the Texas State Guard to monitor Operation Jade Helm 15.”

Lovely. Just the leadership we need in the Lone Star State. Did Alex Jones put Gov. Abbott up to this move?

I don’t dismiss the need for Texas state officials and other States to know when the armed forces conduct exercises within its borders. To that end, military officials briefed local law enforcement officials months ago regarding the operation. Gov. Abbott is grandstanding here to protect his right flank.

http://gov.texas.gov/files/press-office/20150428125759.pdf

Fat chancery

Will Texas soon create separate chancery courts? With HB 1603, State Rep. Jason Villalba proposes to create a new state system of courts of chancery. The special chancery courts would have concurrent jurisdiction to hear business-oriented lawsuits, such as shareholder disputes, fiduciary duty cases and the like. The bill would also create a special intermediate chancery appellate court. The governor would appoint judges and justices to the respective courts. The courts would sit in Austin/Travis County. On balance, I don’t particularly think the proposed system is a good idea.

To me, the biggest issue with the proposed system is the potential for regulatory capture. I can see the desire to have a court well-versed in the nuance of business disputes hearing those disputes. Corporate governance disputes can be complex.  I suspect that most of the appointed judges and justices—particularly those appointed by a Republican governor–will have a big business background. That isn’t a problem per se, but, I suspect the deck will be somewhat stacked against individual shareholders, directors, or officers, particularly if the same businesses or types of businesses frequently appear before the chancery courts.

Rep. Villalba proposed the chancery courts scheme as a means to promote Texas as a State for businesses to incorporate. I’m not sure there’s much more that Texas can do to promote a more favorable business climate. Texas law already favors businesses vis-à-vis minority shareholders. The Supreme Court of Texas made this abundantly clear with Ritchie v. Rupe. In my experience, the vast majority of trial courts attempt to apply the laws enacted by the Legislature and interpreted by the Supreme Court of Texas. As long as Texas trial courts do this, there shouldn’t be much practical difference in justice dispensed by a chancery court versus that dispensed by a district court. So why do we need these new chancery courts?

The proposed chancery court scheme dovetails with this year’s Legislature other efforts to reduce the power of Texas cities and counties, particularly as more cities attempt to regulate certain businesses. Many Texas cities—particularly those more liberal than the Lege—have promulgated laws when the State has not acted on a particular subject. Denton voted to ban fracking. Houston promulgated its HERO ordinance. Other cities are considering a hike in the minimum wage. This chancery court scheme fits with the goals of many legislators of reigning in the power of urban Texas cities and counties, particularly those cities that lean left. By creating a separate and independent court system—one that is apparently unaccountable at the ballot box—the bill takes a whack out of the power of those more liberal jurisdictions.

I don’t think this additional chancery court system is a good idea. I prefer having local judges and juries decide disputes. The nature of the dispute should not make a difference on who decides it. This system does not attack an issue that’s proven to be a real problem. I haven’t heard too many judges or parties complaining about these cases clogging their dockets. I haven’t encountered many folks clamoring for a special court to decide business disputes.

At the end of the day, I think the odds of this bill passing are fair. Texas is a State where big business usually gets what it wants. If big business decides it wants a court of chancery, it will get it.

UPDATE: The House Business and Industry Committee held a hearing regarding HB 1603 on March 24. The bill hasn’t made it out of committee. Stay tuned!

Police on film

The bill filed by Rep. Jason Villalba strikes me as a bad, bad idea:

The House Bill 2918 introduced by Texas Representative Jason Villalba (R-Dallas) would make private citizens photographing or recording the police within 25 feet of them a class B misdemeanor, and those who are armed would not be able to stand recording within 100 feet of an officer.

Rep. Villalba’s stated intent–“wanting people to stand back a little bit so as not to interfere with law enforcement”–is facile at best and deceptive at worst. Chapter 38 of the Texas Penal Code already prohibits people from interfering with police officers who are performing their job. The proposed bill doesn’t require the State to show any actual interference with a police officer; instead, it would prohibit the act of filming/photographing/documenting within 25 feet, regardless of any intent to interfere or actual interference.

The bill isn’t about wanting people to stand back a little bit. Instead, this bill helps the police avoid accountability. We need the police to be accountable to secure our personal liberty, and filming promotes police accountability. This bill reduces accountability and would have a chilling effect on citizens who see police going too far. Despite Rep. Villalba’s protestations, this bill would reduce filming on a de facto basis.

Supporters of more intrusive searches contend upstanding citizens shouldn’t have to worry about the government intruding into our lives as long as the citizens aren’t doing anything illicit. Shouldn’t the flip side be true for the police? If police officers aren’t doing anything wrong while walking the beat, and if filming in and of itself doesn’t interfere with the police, why should the presence of a camera make any sort of difference?

I hope this ill-conceived bill dies a quick death.