J&D Towing, LLC v. Am. Alternative Ins. Company Corp. – No. 14-057
Shortly after the New Year, the Texas Supreme Court issued a significant opinion for the Texas insurance community in J&D Towing, LLC v. American Alternative Insurance Corporation, 2016 WL 91201 (Tex. Jan. 8, 2016). The Court’s opinion overrules over 60 years of contrary, although inconsistent, Texas case law. Specifically, Texas’ high court now authorizes an “owner of personal property that has been totally destroyed [to] recover loss-of-use damages in addition to the fair market value of the property immediately before the injury.” Before this decision, Texas law fell in the minority of jurisdictions that precluded recovery for loss-of-use damages in cases of property considered a “total loss.” Practically, this ruling will impact how insurers conduct claims handling and the evaluation of claims, especially in cases of commercial property.
In 2011, the only tow truck of J&D Towing was struck by a negligent motorist in a motor vehicle accident. The truck was considered a “total loss” following the accident. As a result, J&D Towing was forced to suspend its business operations until it could buy a new tow truck. To obtain funds to buy the new tow truck, J&D Towing filed an insurance claim with the negligent motorist’s insurance company, who eventually paid $25,000, policy limits, for J&D Towing’s claim. The towing company maintained that this amount did not wholly compensate the company for its loss-of-use damages. As a result, filed an insurance claim under its underinsured motorist policy with American Alternative Insurance Corporation (“AAIC”) to recover the rest of the damages. Insurer AAIC ultimately denied the claim, leading to J&D Towing filing suit against the insurer in state trial court.
After a trial, the jury awarded $28,000 to the towing company for damages incurred for its loss-of-use of the destroyed tow truck. The Waco Court of Appeals reversed the trial court decision, holding that the trial court abused its discretion by submitting a question on loss-of-use damages to the jury.
On appeal to the Texas Supreme Court, J&D Towing argued that, in equity, Texas law should permit loss-of-use damages in cases with totally-destroyed property. In opposition, Insurer AAIC represented to the Court that the fair-market value of the company’s tow truck inherently includes “the value of the raw materials of the asset” and “the value of its use as a functioning asset.”
PRIOR CASE LAW IN TEXAS:
Loss-of-use damages, by design, provide compensation to a property owner for damages resulting from a reasonable period of “lost use” of the property. The majority of Texas courts have allowed recovery for such damages in cases of partial, or repairable, destruction of property, but not for a case of total loss. Commentators believe the courts treat the degrees of loss differently for the practical reason that property owners frequently replace destroyed property quickly after a loss, circumventing the need to award “loss-of-use” damages.
Notably, the Fort Worth Court of Appeals examined the issue in 2014 and found “no compelling or logical reason to [exist to] treat loss of use claims differently in destroyed property cases than we do in repairable property cases." Morrison v. Campbell, 431 S.W.3d 611, 617 (Tex. App.—Fort Worth 2014, no pet.). However, the appellate court limited its holding authorizing loss-of-use damages to the factual scenario where an insurance company unreasonably delays payment to an insured on a total loss claim.
THE COURT OPINION:
In the opinion by Justice Don R. Willet, the high court ultimately endorsed an award of loss-of-use damages, pointing to the law of other jurisdictions. Acknowledging the inconsistent Texas precedent on the subject, the Texas Supreme Court sustained the trial court’s decision and held that loss-of-use damages are recoverable in total-destruction cases. However, the Court cautioned that “[p]ermitting loss-of-use damages in total-destruction cases, however, is not a license for unrestrained raids on defendants’ coffers.”
THE IMPACT ON INSURERS:
Practically, insurers now may need to begin considering damages for loss-of-use at the outset of the claims-evaluation process, specifically asking commercial property claimants (1) about business interruption they may potentially suffer following a total loss, and (2) the feasibility of mitigating such interruption with the use of rental property. Moreover, this opinion may encourage insurers to settle claims more expeditiously as to avoid and/or minimize potential loss-of-use damages in property claims.
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Attorney Emily G. Cottingham specializes in insurance coverage and works for Parker Straus, LLP in the Fort Worth, Texas main office.