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May 25, 1989


On Appeal from the 122nd District Court Galveston County, Texas, Trial Court Cause No. 123,522.


Grant Gealy, Galveston, for appellant.

Alton C. Todd, Alvin, for appellee.

Justices Paul Pressler, Cannon and George T. Ellis. Ellis, Justice, concurs in part and dissents in part.

Author: Pressler

Appellee sued after the denial of two claims and the cancellation of her medical insurance policy. The jury found all issues in her favor, and the trial court entered judgment for actual damages of $48,281.94, exemplary damages of $500,000 and attorney's fees. We modify the judgment to award a twelve percent penalty pursuant to TEX. INS. CODE ANN. art. 3.62 (Vernon 1981). We further order a remittitur of $250,000 in exemplary damages. Otherwise, we affirm the judgment of the trial court.

On March 5, 1981, insurance agent Cliff Cox met with Frankie Williams and her husband Willie and took an application for a hospital insurance policy to be issued by Paramount. Mrs. Williams was sixty-four and had a long history of medical problems which the couple described to Cox. Cox told the Williams he needed to know only about the preceding five years. He filled out the application and had them read and sign it. Paramount approved the application and issued the policy on March 20, 1981. Mrs. Williams was hospitalized in July 1981 and again in December 1981. She filed two claims totaling over $40,000 in connection with these hospitalizations. Paramount denied the claims and cancelled the policy on the grounds that Mrs. Williams had failed to disclose her full medical history on the insurance application and that the conditions for which she was being treated were pre-existing conditions. The company refunded her premiums. Mrs. Williams then sued Paramount for breach of contract, breach of the duty of good faith and fair dealing, fraud and violations of both the Texas Insurance Code and the Texas Deceptive Trade Practices Act. Based on the jury's answers to thirty-one special issues, the trial court entered judgment on the theory that afforded the greatest recovery. Paramount appeals that judgment with twenty-five points of error.

In its first point of error, Paramount argues that the trial court violated several evidentiary rules in admitting petitions, pleadings and discovery from lawsuits filed against Paramount, as well as complaints to the State Board of Insurance regarding the company's actions on claims of other insureds. The court admitted the evidence "not for the truth of the matter stated therein, but for the purpose of aiding you, if they do, in determining whether the Defendant has a custom of denying things because of prior existing medical conditions."

Paramount contends the extraneous litigation and complaints had no probative value because Mrs. Williams tendered no evidence that in those instances Paramount asserted the defense of prior existing medical conditions without reasonable investigation or without just cause. Paramount maintains such evidence is necessary, citing us to language in Aztec Life Ins. Co. of Texas v. Dellana, a mandamus proceeding. 667 S.W.2d 911, 915 (Tex. App. - Austin 1984, no writ). In Aztec the court ordered the discovery of denied claims of other insureds and made this comment about the relevancy of the denied claims:

On the other hand, this Court knows of no bar to the admission of evidence, if such exists, that Aztec had consistently denied claims upon the basis of the exclusion without reasonable investigation. (emphasis added)

Mrs. Williams, on the other hand, contends the evidence was admissible to prove several of her causes of action. Her argument closely parallels that made by the court in Underwriters Life Ins. Co. v. Cobb, 746 S.W.2d 810, 815 (Tex. App. - Corpus Christi 1988, no writ). That court approved the admission of letters from Underwriters denying other claims about the same time and on the same basis as its denial of the subject claim as well as the company's log of complaints filed against its agents. Although Underwriters contended the evidence was immaterial, irrelevant and highly prejudicial, the court found the following:

Underwriters' denial of other claims around the same time as its denial of the Cobbs' claim, and on the same basis, was admissible to show that Underwriters' refusal to pay the Cobbs' claim was "'commit[ted] or perform[ed] with such frequency as to indicate a general business practice.'" Chitsey, 738 S.W.2d at 643. Such a showing was necessary to recover under the Cobbs' pleaded cause of action for breach of Underwriters' duty to reasonably investigate. Id. It is also relevant and material under Arnold to prove the Cobbs' cause of action for Underwriters' breach of duty of good faith and fair dealing; these routine denials on the same grounds were sufficiently similar to indicate a failure by Underwriters to determine whether there was any basis to deny the Cobbs' claim. See Arnold, 725 S.W.2d at 167. (additional citations omitted)

Based on the rationale of Cobb and the trial court's limiting instruction, the evidence was properly admitted. In the Aztec case, the court noted that the evidence in dispute "is generally admissible when the other acts are so closely connected with the act charged so as to disclose a plan or scheme." 667 S.W.2d at 915. The court also stated that a showing that Aztec consistently followed such a claims practice could be relevant as tending to show that the company had purposely denied the subject claim without reasonable investigation. Id. Furthermore, Paramount had the opportunity to refute or mitigate the evidence of the lawsuits and complaints and show if there been some favorable resolution. The relevancy of the evidence outweighed any prejudicial effect. Point of error one is overruled.

In point of error two, Paramount challenges the legal and factual sufficiency of the evidence to support the jury's answers to Special Issues Nos. 2 and 4. In addition, it asserts that the trial court erred in submitting Special Issue No. 4 because, as a matter of law, Cliff Cox was Mrs. Williams' agent, his acts could not bind Paramount and there could be no issue of apparent authority. In reviewing a "no evidence" point, this court must consider only the evidence and the inferences tending to support the finding and disregard all evidence and inferences to the contrary. Garza v. Alviar, 395 S.W.2d 821, 823 (Tex. 1965). In deciding an "insufficient evidence" point, we must consider and weigh all the evidence. In re King's Estate, 150 Tex. 662, 244 S.W.2d 660, 661 (1951).

Paramount denies there was a breach of contract. It alleged that it rejected Mrs. Williams' two hospital claims on the basis that the conditions for which she was being treated (primarily colon-related) did not comply with the definition of sickness under the policy as well as her failure to disclose pre-existing medical conditions. Paramount claims that certain language in the documents relating to the policy puts the applicant on notice that accurate and complete information is required. On her application Mrs. Williams stated she was in good health and free from any physical or mental defects and her only prior medical problems were a kidney stone in 1952 and a cancerous uterus in 1975, both with full recovery. However, the evidence showed Mrs. Williams had experienced numerous physical and mental problems, including the removal of a kidney stone, colitis, possible diverticulitis, recurring pneumonia and schizophrenia. Paramount's president testified that had the company been aware of Mrs. Williams' complete medical history, the policy would not have been issued.

Paramount also contends that there was no breach with regard to Mrs. Williams' first claim because the claim involved a hernia. The policy specifically excluded a sickness or disorder involving a hernia occurring within six months of the date of the policy. Paramount, however, asserts this argument somewhat late. The hernia exclusion was not mentioned as a reason for denying the claim in any correspondence from the company to either Mrs. Williams or her attorney.

Although Paramount feels it had legitimate reasons to deny Mrs. Williams' claims and, therefore, did not breach the insurance contract, the primary issue is what occurred when agent Cox took the application for the policy. Mrs. Williams does not contest Paramount's description of her medical history. She contends she disclosed it all to Cox but that he told her he needed to know only about the preceding five years. He then filled out the application with the information he deemed pertinent, and Mrs. Williams initialed the answers and signed it.

Paramount notes that Mrs. Williams signed a document, the Confirmation of Presentation, which was a representation by her to Paramount acknowledging the terms of the contract and the limitations on Cox's authority. Paramount also maintains that while the insurance agent acts for the carrier in delivering the policy and collecting the premiums, he acts for the insured in making the application for the insurance and in processing the policy. Thus in taking Mrs. Williams' application, Cox was acting on her behalf, and if any misrepresentation was made, it is not attributable to Paramount but to Mrs. Williams. Paramount classifies Cox as a soliciting agent and states that as a matter of law, the acts of a soliciting agent cannot bind the insurance carrier. The company also argues that Mrs. Williams cannot bind Paramount to Cox's alleged misrepresentations on an apparent authority theory.

The Texas Insurance Code divides insurance agents into two categories, local recording agents and soliciting agents. TEX. INS. CODE ANN. art. 21.14 ยง 2 (Vernon 1981). While both types of agents may solicit insurance a soliciting agent's authority is more limited than that of a local recording agent. Royal Globe Ins. Co. v. Bar Consultants, Inc., 577 S.W.2d 688, 693 (Tex. 1979). However, that limitation on authority does not completely shield the insurer.

It has been held that a soliciting agent has no authority to make a contract on behalf of an insurer or to waive the terms of a policy. Similarly, a soliciting agent whose authority is limited to receiving and forwarding applications of insurance cannot bind an insurer by his misrepresentations. Even if a soliciting agent cannot alter a policy as a matter of law, under certain circumstances his acts will make an insurer liable under section 17.50 of the DTPA and article 21.21 of the Texas Insurance Code.

von Kreisler, A Survey of Insurance Litigation under the Texas Deceptive Trade Practices Act, 18 TEX. TECH. L. REV. 177, 185 (1987).

Absent actual authority, liability may still arise if the agent had apparent authority to act for the carrier. Guthrie v. Republic Nat'l Life Ins. Co., 682 S.W.2d 634, 637 (Tex. App. - Houston [1st Dist.] 1984, writ ref'd n.r.e.); see also Lucadou v. Time Ins. Co., 758 S.W.2d 886, 888 (Tex. App. - Houston [14th Dist.] 1988, no writ); Tidelands Life Ins. Co. v. Franco, 711 S.W.2d 728 (Tex. App. - Corpus Christi 1986, writ ref'd n.r.e.); Tidelands Life Ins. Co. v. Harris, 675 S.W.2d 224 (Tex. App. - Corpus Christi 1984, writ ref'd n.r.e.). Apparent authority arises when the principal clothes the agent with the appearance of authority or fails to exercise diligence to prevent the agent from appearing to have authority. Underwriters v. Cobb, 746 S.W.2d at 819-20; see also Guthrie, 682 S.W.2d at 637 (for expanded discussion of apparent authority).

Here Paramount sells its policies through general agents who function as independent contractors. Those agents hire sub agents, who in turn may hire other people to work under them. Keith Wood is a general agent for Paramount. At the time he took the Williams' application, Cliff Cox was employed by the Stan Firebaugh Agency, a sub agent for Wood located in the same two-story building as Paramount. Paramount sponsored Cox for his license and filed a form certifying that he would complete a forty-hour course conducted by Paramount by February 13, 1981.

Cox used Paramount forms when he took the application from Mrs. Williams. He signed the Confirmation of Presentation document as "Agent." The document itself, which purports to ensure that there is a "complete and clear understanding between the parties," was signed following the application visit, and refers throughout to Cox's relationship to Paramount as "your agent." For example, one paragraph reads, "Upon my request, your agent, whose signature appears below, visited with me to determine my interest in applying for insurance with your company." The receipt for the initial premium was signed for Paramount by Cox as "Duly Licensed Representative."

Mrs. Williams was sixty-four when she applied for the policy. Two of her physicians testified that the Williams were not well-educated people. Neither doctor thought the couple understood much when the doctors tried to explain her treatment. It is therefore unreasonable to expect Mrs. Williams to comprehend the limit of the authority of the agent who takes her application for a policy with a specific insurance company, particularly when that company refers to him in its documents as its agent. A statement in the Confirmation of Presentation that the company "is not bound by any knowledge of or statements made by or to the agent" does little to negate the apparent authority with which the company had clothed the agent.

There was sufficient evidence to support the jury's answer to Special Issue No. 4 that Cox had apparent authority to bind Paramount; his misrepresentations are attributable to Paramount; and Paramount breached the insurance contract by its failure to pay Mrs. Williams' claims. Had the Williams not believed she was insured, they could have made different arrangements for her treatment. Point of error two is overruled.

Paramount's next two points of error also concern Special Issues Nos. 2 and 4. In point of error three, the company contends that the trial court erred in submitting Special Issue No. 4 as drafted and that the jury's finding on that issue is legally insufficient to establish liability. Paramount objects to the language "acting by and through its agents" and argues that only the acts of the principal can create apparent authority. Paramount also argues that it was error ...

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