Loss-of-Use Damages in the Event of a Total Loss
On September 22, 2015, the Texas Supreme Court will hear oral argument in the case J&D Towing, LLC v. American Alternative Insurance Corporation, and the ruling could potentially have drastic effects upon how insurers handle and value property damage claims that involve a total loss. For years, the rule in Texas has been that when a person's property is damaged but repairable, he can recover damages for both the cost of repairs and the loss-of-use of the property. If that property is totally destroyed, however, loss-of-use damages may not be recovered. Instead, the only recoverable damage is the fair market value of the property destroyed. The petitioner in this case, armed with a recent decision from the Fort Worth Court of Appeals in support of its position, is challenging this long-standing rule in an effort to recover loss-of-use damages after its tow truck was deemed a total loss following an accident.
Factual and Procedural Background
J&D Towing, LLC is a vehicle towing company in Huntsville, Texas. In 2011, J&D owned only one wrecker. On December 29, 2011, the company's sole wrecker was involved in an accident with a third party, and it was undisputed that the third party was at fault. The wrecker was deemed to be an unrepairable total loss.
With its only source of income incapacitated, J&D was forced to shut down operations until it could obtain a new wrecker. J&D could not afford to replace the wrecker until it received compensation from the third party's insurance company. The insurance company did not pay the claim for over two months due to a dispute over the value of the wrecker. On February 29, 2012, the insurance company finally paid its $25,000 policy limits to J&D. The payment was greater than the wrecker's fair market value of $19,500, but according to J&D, the additional $5,500 payment only compensated it for a small portion of its loss-of-use damages.
J&D then filed a claim pursuant to its underinsured motorist policy with American Alternative Insurance Corporation ("AAIC") to recover the remainder of its loss-of-use damages. AAIC denied the claim, prompting J&D to file suit. Based on evidence presented at trial, a jury awarded $28,000 to J&D for its loss-of-use of the wrecker. This amount was later reduced to $22,500 to account for the $5,500 that J&D received from the third party's insurance company.
On appeal, the Waco Court of Appeals determined that the trial court abused its discretion in submitting a jury question on loss-of-use damages. It therefore reversed the trial court and rendered a take-nothing judgment.
Traditionally, Texas law distinguishes between property that has been totally destroyed and property that has been damaged but can be repaired. The overarching principles behind calculating damages are to make the plaintiff whole and to avoid double-recovery. Texas courts have consistently held that when property is completely destroyed, damages are calculated based upon the property's fair market value (the difference in the market value immediately before and immediately after the injury). See Riddell v. Mays, 533 S.W.2d 910, 911 (Tex.Civ.App.—Waco 1976, no pet.). When property is damaged but repairable, however, the owner may recover the cost of repairs and damages for loss-of use of the property. Id. Many Texas courts have indicated that repairable property and destroyed property should be treated differently because in a case of total destruction, the owner can and usually will immediately replace the property, thus resulting in no "loss-of-use" damages.
Last year, the Fort Worth Court of Appeals decided to re-examine the general rule regarding the ability to recover loss-of-use damages in the event of a total loss. Morrison v. Campbell, 431 S.W.3d 611 (Tex.App.—Fort Worth 2014, no pet.). After examining cases from several different states, the Court determined that "there is no compelling or logical reason to treat loss of use claims differently in destroyed property cases than we do in repairable property cases." However, the Court expressly did not hold that loss-of-use damages are available in every case involving destroyed property. Rather, the Court limited its decision to the facts before it, holding that when an insurer unreasonably delays payment on a total loss, the claimant may recover both the fair market value and reasonable loss-of-use damages.
J&D relies heavily on the Morrison case to support its position that loss-of-use damages should be recoverable. While some companies may be able to replace a vehicle immediately, therefore precluding any loss-of-use damages, J&D was unable to do so. Its business was solely based upon the capabilities of its one wrecker and it was unable to purchase another wrecker without the insurance proceeds. Without the wrecker, J&D was unable to conduct any business operations for two months. J&D could not rent a wrecker to mitigate its damages because tow trucks are not allowed to be rented in Texas. J&D therefore argues that it cannot be made whole by merely recovering the fair market value of the wrecker.
On the other hand, AAIC relies on over 60 years of case law to support its argument that Texas law simply does not allow for recovery of loss-of-use damages in this situation. Along those lines, AAIC argues that the parties entered into an insurance contract based upon the existing case law which has never permitted the recovery of loss of use damages in cases where property is a total loss. AAIC also argues that allowing loss-of-use damages in a total loss situation would incentivize future claimants to abuse the system by drawing out settlement negotiations with their insurer in order to increase their loss-of-use claims.
The Texas Supreme Court essentially has at least three possible options in deciding this case. First, it could uphold existing law and solidify that loss-of-use damages are not recoverable when the property is a total loss. The second option is to re-examine and re-write the law, overruling decades of Texas jurisprudence in the process, to hold that loss-of-use damages are recoverable in this situation. A third option for the Court is to create a limited exception to the existing rule based upon the unique facts of the case. That is, the Court could uphold the general rule that loss-of-use damages are not recoverable for a total loss, unless certain criteria are met such as (1) the property owner was unable to replace the property without the recovery of damages, (2) the property owner made reasonable efforts to mitigate but was unable to do so, and (3) the property owner did not cause the delay in payment of the claim.
Insurers will be keeping a close eye on this case. If the law is re-written, this case can have a significant impact on how property claims are handled. Especially in situations where commercial property is involved, insurers may need to begin including loss-of-use damages in evaluating claims. At the outset, insurers will need to seek information from the claimant regarding their ability to conduct business without the property, whether property can be rented in the interim, and the company's profits that may be lost without use the property. The cost of a rental may be estimated in many situations and would be relatively easy to budget in evaluating a claim. However, in a situation such as this where a rental vehicle cannot be used, insurers will have a more difficult task of estimating loss-of-use damages in valuing a claim. This, in turn, could force insurers to settle claims more quickly in order to minimize potential damages for loss of use.