The First Court of Appeals in Houston agreed, so Texas Mutual appealed to the Supreme Court, which decided that workers’ compensation insurers are not subject to “bad faith” claims for unfair claims settlement practice under the Texas Insurance Code. The ground-breaking decision overturned 20 years of established law which allowed claimants’ attorneys to file bad faith claims at the drop of a hat–including when the carrier became aggressive in protecting its statutory subrogation rights and/or didn’t reduce or eliminate a workers’ compensation subrogation lien when demanded.

Topic: Made-Whole Doctrine
Case: Steffens v. BlueCross and BlueShield of Illinois

The case involved an Employee Retirement Income Security Act benefits plan that included a “reimbursement, subrogation and/or right of reduction” clause. According to the clause, BlueCross was entitled to reimbursement for expenses arising out of an accident when a third party “may be liable” for those expenses and the beneficiary obtains a settlement. The insurance contract also stated that any “so-called ‘make-whole’ or ‘full compensation’ rule or doctrine is hereby explicitly rejected and disavowed.”

Upon review, a Wisconsin Supreme Court concluded that in matters where the made-whole doctrine is expressly disclaimed in a policy, an insurer is entitled to fully recover disbursed funds under a subrogation claim. This occurs against those funds recovered by the insured and applies even when the remaining recovered funds do not ultimately make the injured party “whole” through the settlement.

Topic: Business Interruption
Case: Dickie Brennan & Company Inc. v. Lexington Insurance Co.

Lexington Insurance Co. denied coverage for the Brennan’s losses during the mandatory evacuation of New Orleans due to Hurricane Gustav in 2008. New Orleans suffered only minimal damage, however, and none the Brennan’s three restaurant properties nor their neighbors’ properties sustained damages.

Brennan’s business interruption (BI) policy covered losses of business income related to “action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.”

Brennan argued that the damage from Hurricane Gustav in the Caribbean qualified as “damage to property, other than at the described premises,” and should trigger coverage. Lexington denied the claim, saying there had to be an actual link between the prior damage and the evacuation order, and that the damage must have occurred closer to the insured property.

The U.S. Court of Appeals for the Fifth Circuit agreed, stating that Brennan: “failed to demonstrate a nexus between any prior property damage and the evacuation order.” Further, the evacuation order did not mention the Caribbean property damage, but was based on potential dangers due to the approaching hurricane.

Sources: Texas Mutual, www.mwl-law.com, wislawjournal.com, www.mblb.com