File: 060156F - From documents transmitted: 12/03/2007
Affirmed in part, Reversed and Remanded in part; Opinion Filed December 3, 2007
Court of Appeals
Fifth District of Texas at Dallas
GAMMA GROUP, INC, Appellant
TRANSATLANTIC REINSURANCE COMPANY AND
HOME STATE COUNTY MUTUAL INSURANCE COMPANY, Appellees
On Appeal from the 191st District Court
Dallas County, Texas
Trial Court Cause No. 02-11063-J
Before Justices Richter, Francis, and Lang-Miers
Opinion By Justice Richter
This appeal involves a breach of contract claim asserted by Transatlantic
Reinsurance Company (“TRC”), a reinsurer on non-standard automobile insurance policies,
and intervenor Home State County Mutual Insurance Company (“Home State”), the ceding
and fronting carrier, against Gamma Group, Inc. (“Gamma”), the agent responsible for binding
and adjusting the policies. See Footnote 1 In two issues, Gamma
appeals the trial court's judgment awarding TRC and Home State damages and attorney's fees.
Gamma first argues the trial court erred in awarding damages under the contract because losses
and loss adjustment expenses on run-off claims should not have been included in the commission
adjustment after Home State transferred the claims adjusting responsibility to a third party.
See Footnote 2 In its second issue, Gamma asserts the trial court erred in awarding
statutory attorney's fees for breach of contract because the demand was unreasonable and the
evidence was insufficient to establish the statutory prerequisites for recovery. In a cross-issue,
TRC and Home State assert the contract provided for commission adjustments based on
“incurred” rather than “reasonable” losses. As a result, TRC and Home State contend the
trial court erred when it construed the contract to imply that only “reasonable” run-off
payments were to be included in the commission adjustment calculation. We affirm the trial
court's judgment on the right to recover damages for breach of contract and attorney's fees, but
conclude the trial court erred when it reduced the damage award based on an implied term in the
contract. Therefore, we reverse the trial court's judgment with regard to the amount of damages
awarded. Because the damages can not be calculated with mathematical certainty on this record,
we remand the case to the trial court for calculation of damages based on the incurred loss.
I. FACTUAL AND PROCEDURAL BACKGROUND
The Home State Program
In May 1995, Home State and Gamma entered into an agency agreement (the
“agency agreement”) under which non-standard automobile insurance policies were to be
underwritten by Home State as the fronting carrier and bound and adjusted by Gamma. See
Footnote 3 The agency agreement provided Gamma would produce the policies, collect
premiums, and adjust any resulting liability claims against Home State insureds. In addition to
payment of insured's claims, the collected premiums were to be used to make payments to the
ceding carrier and reinsurer and for Gamma to pay commissions to itself. Initially, the agency
agreement was subject to a reinsurance agreement between Home State and U.S. Capital
Insurance Company. In 1996, TRC and Hartford Reinsurance Company (“HartRe”) began
reinsuring the business produced under the Agency Agreement through a quota-share
reinsurance treaty with Home State (the “treaty”). See Footnote 4 The treaty was
renewed in 1997 and 1998. By the time of the 1998 renewal, TRC had assumed 90% of the
Home State liabilities in exchange for 90% of the premium.
The treaty provided for payment of a “provisional ceding commission”
consisting of 21.5% of the collected premium. This commission was to be subsequently adjusted
to an “actual ceding commission.” The adjustment was based on a ratio of incurred losses to
premiums. The adjustments were to continue during the effective period of the treaty and after
termination until all losses were settled, including those incurred during run-off periods.
The agency agreement fully incorporated the reinsurance treaty and
amendments, and required all business coming within the scope of the agreement to be reinsured
under the reinsurance treaty. The agency agreement further stated the reinsurer had the right to
act on all matters within the scope of the agreement as though the reinsurer were Home State.
Any violation of the terms and conditions of the reinsurance treaty resulting in a diminution of the
reinsurer's liability to Home State was the sole responsibility of Gamma. The agency agreement
also provided that the commission set forth in the reinsurance agreement was to be Gamma's
sole and full compensation for business placed with Home State.
Two years after the inception of the Home State program, Home State had
disagreements with Gamma about its management of the program. During the same time frame,
the Texas Department of Insurance alerted Home State to an “extraordinary” number of
complaints made by insureds about Gamma. As a result, Home State decided to withdraw from
the arrangement and terminated the Agency Agreement effective January 1, 1999. Although
Gamma was not authorized to write new business on Home State policies after the termination
date, Gamma was still responsible for adjusting run-off claims on policies placed during the
effective period of the agreements.
The S&C Program
TRC subsequently joined in a new contractual relationship with State and
County Mutual Insurance Company (S&C) as the ceding and fronting carrier and Gamma as the
agent responsible for binding coverage and adjusting claims. To this end, in 1999, Gamma,
S&C, and TRC executed an agency agreement (the “S&C Agency Agreement”) and a
reinsurance agreement (the “S&C Treaty”). See Footnote 5 The S&C Treaty was a
100% quota-share agreement under which TRC assumed 100% of the risks in exchange for
100% of the premiums, less commissions, fees, and taxes. Like the Home State treaty,
commissions were subject to adjustment based on the ratio of losses to earned premium.
In 2000, outside sources advised TRC of two lawsuits alleging Gamma
engaged in improper claims handling practices. Although contractually obligated to do so,
Gamma failed to notify TRC and Home State about these claims. One of the claims resulted in a
default judgment and a claim for bad faith against Gamma and Home State. Home State also
contacted TRC to express concern about Gamma's handling of the run-off business. As a result,
in June 2000, TRC conducted an extensive audit of Gamma. Previous audits of Gamma, a
company in its infancy, had been conducted by the underwriting department. But the 2000 audit
was conducted by the claims department. The claims department was critical of Gamma's
aggressive claims handling and was concerned such practices could result in extra-contractual
liability. The audit also revealed problems with Gamma's staffing and record-keeping. After the
audit, TRC made several efforts to rehabilitate Gamma's claims handling practices but ultimately
concluded the efforts were futile. TRC terminated the S&C Treaty by endorsement with respect
to all new and renewal business effective January 1, 2002. Following termination, Gamma
remained obligated to handle run-off claims made on S&C policies.
Despite the termination of the agreements with Gamma, the parties remained
concerned about Gamma's ability to handle run-off claims. In November 2002, TRC, Home
State, and S&C exercised their contractual authority to terminate Gamma's servicing of run-off
claims and transferred the responsibility to an independent third-party administrator, Marshall
Contract Adjusters (“MCA”). Prior to the transfer, claim payments were funded by Gamma
out of retained premiums. After the transfer, payments for run-off claims adjusted by MCA
were paid by TRC and Home State. MCA was paid a flat fee of $250 to open a claim file and
$250 when the file closed. Approximately 350 run-off files were transferred to MCA. The
claims resulted in payments totaling $4,109,847, all of which was paid by TRC and Home
State. TRC and Home State also incurred additional charges of $761,417.32, which included
the MCA fees and loss adjustment expenses for run-off claims.
TRC initiated a lawsuit against Gamma and asserted, inter alia, claims for
breach of contract, breach of fiduciary duty, and negligence. Home State intervened, mirroring
the claims asserted by TRC. See Footnote 6 Gamma counterclaimed for breach of
contract. Prior to trial, the court granted a partial summary judgment for defendants, narrowing
the issues to be tried to: (1) whether there was a breach of fiduciary duty; (2) whether there was
a breach of contract; and (3) whether the run-off claims and expenses should be run through the
treaties. See Footnote 7
Following a bench trial, the trial court ruled in favor of TRC on the breach of
contract claim and made findings of fact and conclusions of law. The court found Gamma
breached the contract because the run-off claims and expenses should have been run through the
treaties and the excess commissions refunded. The court interpreted the contract, however, to
require that such claims and expenses be “reasonable”, and held that “reasonableness” was a
component of plaintiff's claim rather than a mitigation defense. As a result, the court determined
what constituted a “reasonable” loss, and used this figure to calculate damages instead of the
figure for actual incurred loss. The court further found there was no breach of fiduciary duty. In
accordance with the findings of fact and conclusions of law, the court signed a final judgment
awarding TRC actual damages in the amount of $514,854.77 for breach of the S&C Treaty,
plus attorney's fees, and $786,144.68 to TRC and Home State for breach of the Home State
treaty. This appeal followed.
II. DISCUSSION AND ANALYSIS
Breach of Contract
The contract provided Gamma would receive a set percentage of the premiums
it produced and a sliding scale commission based on the loss ratio. The loss ratio is defined as
the “Incurred Loss” divided by the Gross Net Earned Premium Income. An “Incurred Loss”
is defined as:
The sum of the losses and loss adjustment expenses paid plus reserves for outstanding
losses and outstanding loss adjustment expenses. See Footnote 8
Thus, an incurred loss has three components: (1) losses; (2) loss adjustment
expenses; and (3) reserves. At trial, TRC and Home State maintained incurred losses included
losses during run- off. Consequently, Gamma was contractually required to factor the run-off
into the commission adjustment, and breached the contract when it retained the premiums from
which the adjusted commission payments were to be made. The trial court agreed. In its first
issue, Gamma insists it is not liable for payment of run-off claims under the treaty because the
agency agreement bars recovery when the claims are administered by a third party. See
Footnote 9 Therefore, Gamma claims it was not required to run the MCA loss payments
through the treaty to calculate the excess commission refund owed to TRC and Home State.
Gamma's argument is directed only to the loss component of the commission adjustment
calculation and is premised on paragraph 6.2(E) of the agency agreement. The agency
[Home State] is responsible for and shall promptly pay all expenses attributable to the
actions of [Home State] as a result of business produced under this Agreement. This
responsibility shall not be altered whether the expense is billed to [Home State] or the
Agent. These expenses include, but are not limited to:
losses and loss adjustment expenses incurred at the direction of [Home
(Emphasis added). According to Gamma, Home State retained the right to
settle any loss or claim, but could not require Gamma to pay for such a settlement because the
payment constituted an expense incurred at Home State's direction. TRC and Home State
contend Gamma's construction is unreasonable because it would allow Gamma to retain
premiums without utilizing the funds to cover losses, resulting in an ill-deserved windfall for
Gamma. TRC and Home State further assert the construction fails to give meaning to each term
of the provision and the agreements as a whole. Home State and TRC point out that the
commission adjustment provisions are in the reinsurance treaties, not the agency agreements.
Further, Article 6.2(E) does not reference commissions or commission adjustments. Instead, it is
The trial court found Gamma's construction of 6.2(E) reads the predicate
sentence out of the contract. The key part of the predicate to subpart E is the phrase “expenses
attributable to the actions of [Home State].” The court further found that settlements paid for
ordinary claims are not expenses that can be attributed to Home State's actions; they are losses
caused by insureds under the policies. Therefore, Gamma was required to run the MCA loss
payments through the treaty, and breached the contract when it failed to do so. We agree.
The agency agreement expressly incorporates the reinsurance treaty and
amendments. Instruments pertaining to the same transaction may be read together to ascertain the
parties' intent. See Fort Worth Indep. School Dist. v. City of Fort Worth, 22 S.W.3d 831,
840 (Tex. 2000). Therefore, we review and refer to the agency agreement and the Home State
treaty as one contract.
Neither party asserts the contract is ambiguous. The interpretation of an
unambiguous contract is a question of law that we review de novo. MCI Tel. Corp. v. Tex.
Utils. Elec. Co., 995 S.W.2d 647, 650-651 (Tex. 1999). The primary objective of contract
interpretation is to ascertain the intent of the parties as expressed in the written agreement. See
Nat'l Union Fire Ins. Co. v. CBI Indus. Inc., 907 S.W.2d 517, 520 (Tex. 1995). The court
examines the entire agreement in an effort to harmonize and give effect to all provisions of the
contract so no provision will be rendered meaningless. See City of Midland v. Waller, 430
S.W.2d 473, 478 (Tex. 1968). The interpretation of insurance contracts is governed by the same
rules that apply to contracts in general. Balandran v. Safeco Ins. Co., 972 S.W.2d 738, 740
Gamma's reliance on the expense provision in the agency agreement is
misplaced. The commission adjustment provision appears in the reinsurance treaty and provides
for the inclusion of “all losses” in the commission adjustment calculation. Specifically, the treaty
states the first adjustment to the provisional ceding commission is to occur 12 months following
the inception of each agreement year, with subsequent adjustments thereafter “until all losses
and premiums are paid and settled.” The unambiguous phrase “all losses” evidences the
parties' clear intent that no losses be excluded. The intent to include losses occurring during
run-off in the calculation of “all losses” is evidenced by the paragraph appearing immediately
after the commission calculation formula. The provision states:
After termination, applicable run-off premiums and losses occurring during run-off, if any,
will be assigned to the Agreement Year immediately preceding the termination date.
responsibility for the run-off following termination of the agreement
is also reflected in the provision of the agency agreement which states:
Notwithstanding the termination of this Agreement, the provisions of this Agreement shall
continue to apply to all unfinished business to the end that all obligations and liabilities
incurred by each party as a result of this Agreement shall be fully performed and discharged.
Once Gamma collected the premiums, it became obligated to pay claims out of
the proceeds. The fact that a claim continued to exist after the agreement terminated did not
obviate Gamma's obligation to “fully perform and discharge” the “obligations and liabilities” it
incurred once it accepted premiums for the policies. The transfer of the claims administration to
a third party was not mentioned, and is therefore presumed immaterial to this obligation.
All parties agree the treaty gives TRC and Home State the absolute right to
assume the handling of the run-off claims. In addition, the agency agreement provides Gamma
may appoint claims adjustment firms to handle certain settlements and investigations relating to
claims. But neither the treaty nor the agency agreement distinguish between run-off claims
administered by Gamma and those administered by TRC, Home State, or a third party. We
view the absence of distinction as instructive, and indicative of the parties' intent to run all losses
through the treaty, regardless of who administers the claims.
Contracts are construed to avoid a construction that is “unreasonable,
inequitable, and oppressive.” See Frost Nat'l Bank v. L&F Distrib., Ltd., 165 S.W.3d 310,
312 (Tex. 2005). Article 6.2 (E) of the agency agreement can not reasonably be interpreted as a
limitation on or exception to the unambiguous language of the treaty. The article is entitled
“expenses,” and provides Home State is responsible for expenses “attributable to” and
“incurred at the direction of” Home State. As the trial court found, the losses in question were
caused by the insured drivers. Transferring the claims handling for these losses did not change
the nature of the loss itself. Therefore, the losses can not reasonably be characterized as
expenses, attributed to Home State, or deemed incurred at its direction simply because the
claims handling responsibility was transferred to MCA. To construe the contract otherwise
would be unreasonable.
The construction Gamma advances would also result in a windfall to Gamma. If
the losses MCA paid to insureds are not run through the treaty, Home State and TRC are left to
fund the claims while Gamma retains the premiums. The treaty, however, clearly contemplates
that all losses, including run-off, are to be funded from the premiums. Thus, the trial court did not
err in finding that Gamma's failure to run the losses through the treaty and resulting retention of
the premiums was a breach of the contract. Gamma's first issue is resolved against it.
The trial court found TRC was the prevailing party and awarded it attorney's
fees on the breach of contract claim. The court does not state whether the award was based on
the contract or a statutory right to recovery. In its second issue, Gamma contends the trial court
erred in awarding statutory attorney's fees for breach of contract because the demand was
unreasonable. Gamma also argues there was no evidence, or alternatively, factually insufficient
evidence to establish the statutory prerequisites for recovery.
prevailing party cannot recover attorney's fees unless permitted by
statute or by contract between the parties. See Travlers Indem. Co. v. Mayfield, 923 S.W.2d 590, 593
(Tex. 1996); Dallas Cent. Appraisal Dist. v. Seven Inv. Co., 835 S.W.2d 75, 77 (Tex.
1992); Holland v. Wal-Mart Stores, Inc., 1 S.W.3d 91, 95 (Tex. 1999). Gamma claims
Home State and TRC failed to assert a contractual basis for recovery, and focuses its attack on
the statutory award. We will sustain the trial court's judgment if it is correct on any theory of the
law applicable to the case. See Carrollton Farmers Branch Ind. School Dist. v. JPD, Inc.,
168 S.W.3d 184, 188 (Tex. App.-Dallas 2005, no pet.).
In the breach of contract section of its Second Amended Petition, TRC seeks
attorney's fees pursuant to Tex. Civ. Prac. & Rem. Code Ann. § 38.001. There is no specific
request for attorney's fees under the contract. But even when a party pleads an incorrect or
inapplicable theory or statute, it does not necessarily preclude an award. See Mitchell v. La
Flamme, 60 S.W.3d 123, 130 (Tex. App.-Houston [14th Dist.] 2000, no pet.). The question is
whether a litigant pleads facts, which if true, would entitle him to the relief sought. Cf. O'Connell
v. Hitt, 730 S.W.2d 16, 18 (Tex. App.-Corpus Christi 1987, no writ) (applicable statute need
not be specifically pled to recover attorney's fees; one must plead facts, which if true, establish
entitlement to relief sought). Both the agency agreement and the reinsurance agreement were
attached to the petition and introduced as evidence at trial. The prayer for relief, couched in
more general terms, seeks an award of “attorney's fees.” The breach of contract section under
which the request for statutory attorney's fees is made asserts Gamma failed to perform under the
contract and caused TRC to suffer damages. Thus, Gamma was on notice TRC was seeking
attorney's fees because of its breach of contract. We conclude the pleading suffices to support
the recovery of contractual attorney's fees. We turn now to whether such fees were recoverable.
The agency agreement provides:
In the event [Home State] or the Agent shall have to institute any lawsuit to enforce the
obligations assumed by the other party under this Agreement, the prevailing party shall be
entitled to recover from the other party all costs, expenses, judgments and attorney's fees
incurred by the prevailing party in connection with the lawsuit.
As demonstrated by the foregoing, the contract provides for the award of attorney's fees to the
prevailing party. Gamma does not dispute TRC and Home State were the prevailing parties.
See Footnote 10 As a prevailing party, TRC was entitled to recover attorney's fees under
the contract. Because we conclude TRC was entitled to recover attorney's fees under the
contract, we need not reach appellant's remaining arguments. See Tex. R. App. P. 47.1.
Gamma's second issue is resolved against it.
Construction of the Contract
We review the trial court's legal conclusions de novo. See Barber v.
Colorado Indep. School Dist., 901 S.W.2d 447,450 (Tex. 1995). The trial court relied on the
expense provision in the agency agreement to construe the commission adjustment provision in
the reinsurance treaty. In so doing, the court concluded “run-off payments must be 'reasonable'
in order to be 'run through the treaty.'” The court explained:
[T]he logical construction of 6.2E is that if Home State . . . overpays a claim through
negligence or spite, that would be an expense “attributable to the action of the company”
rather than an ordinary loss caused by the action of the insured . . . To avoid applying 6.2E
to the settlement payments, the payments must be losses caused by the insured (i.e.
In a cross-issue, TRC and Home State argue the trial court erred because the
express language of the contract does not include the term “reasonable” and there is no basis
for the court's addition of this implied term. We agree.
do not rewrite contracts to insert provisions parties could have
included or imply restraints for which they did not bargain. See Tenneco Inc. v. Enterprise Prods. Co.,
925 S.W.2d 640, 646 (Tex. 1996). A court may not add to a contract under the guise of
interpretation. See Helmerich & Payne Int'l Drilling Co. v. Swift Energy Co., 180 S.W.3d
635, 640 (Tex. App.-Houston [14th Dist.] 2005, no pet.). Although the trial court refers to its
determination as contract construction, it has, in effect, inserted an implied covenant requiring
that loss payments be reasonable.
Implied covenants are not favored in Texas law. Bank One, Texas, N.A. v.
Stewart, 967 S.W.2d 419, 434 (Tex.App.-Houston 1998, pet. denied). Thus, it is only in rare
circumstances that a court will imply a covenant in a contract. See Universal Health Serv., Inc.
v. Renaissance Women's Group, P.A., 121 S.W.3d 742,747 (Tex. 2003). A term will not be
implied simply to make a contract “fair, wise, or just.” Id. at 748; see also, Clovis Corp. v.
Lubbock Nat'l Bank, 194 S.W.3d 716, 719
(Tex.App.-Amarillo 2006, no pet.). A court will only look beyond the written agreement to
imply a covenant if necessary to effectuate the parties' intent as disclosed by the contract as a
whole. See Case Corp. v. Hi-Class Business Systems of America, Inc., 184 S.W.3d 760,
770 (Tex. App.-Dallas 2005, pet. denied). An implied covenant is necessary to effect the
parties' intentions only if the obligation is “so clearly within the contemplation of the parties that
they deemed it unnecessary to express it.” Id. Here, the entire agreement, taken as a whole,
does not evidence an intent to measure losses for the commission adjustment calculation by any
other standard than that which is expressly provided in the contract. The inclusion of the implied
term was not necessary to effectuate the parties' intent.
first blush, it might seem logical to exclude extraordinary loss
payments from the calculation because a reasonableness requirement must be so inherently obvious the parties
deemed it unnecessary to express it. But close examination of the precision with which the
parties crafted the complex formulae for all calculations in the contract, including those at issue,
demonstrates the opposite.
The contractual definition of an incurred loss makes no reference to whether
losses and loss adjustment expenses are reasonable. Instead, the agreement specifies an
incurred loss is comprised of losses that are actually paid. To adopt the trial court's
interpretation of the contract would require us to inject meaning not expressed in words chosen
by the parties and placed within the four corners of the agreement. Had these sophisticated
businesses intended any analysis of the loss amount before its inclusion in the adjustment
calculation, the agreement could easily have included the word “reasonable” and delineated the
criteria for its determination. Had the expense provision in the agency agreement been intended
as a limitation on the commission adjustment provision in the reinsurance treaty, the provisions
could have been cross-referenced, or the expense provision could have at least mentioned
commissions. Other sections of the contract reflect the parties intended
payments and settlements be accepted at face-value. The contract contained a loss settlement
clause, known in the industry as a “follow the settlements” provision. A follow the settlements
provision obligates a reinsurer to pay claims on policies issued under the treaty as long as the
settlements are not “fraudulent, collusive or otherwise made in bad faith, or an ex gratia
payment.” See North River Ins. Co. v. Employer's Reinsurance Corp., 197 F.Supp.2d 972,
977-78 (S.D. Ohio 2002). The purpose of the doctrine is to prevent the reinsurer from
second-guessing settlement decisions. Id. Prior to trial, TRC challenged a number of claims
settled by Gamma, and Gamma moved for summary judgment. The “follow the settlements”
clause was one of the grounds upon which Gamma requested and was granted partial summary
judgment. Specifically, the trial court held the “follow the settlements provision applies to
Gamma's settling of claims, and . . . TRC cannot recover from Gamma for any claim settled by
Gamma if TRC could not successfully assert a claim against Home State for that settlement.”
Thus, the court construed the contract to preclude a challenge to Gamma's settlements because
they were not reasonable, and refused to distinguish the application of the follow the settlements
doctrine based on Gamma's status as Home State's agent. Based on our review of the contract,
it is logically inconsistent to require that loss payments made by MCA be “reasonable”and
exempt Gammas's loss payments from the same standard.
Gamma argues the follow the settlements provision is not pertinent to our
determination because the prohibition applies only to prevent the reinsurer from second-guessing
settlements made by the ceding carrier. But we are not inclined to dismiss the provision as
inconsequential simply because it is addressed to the reinsurer. Contracts should be construed as
a whole. See Kelley Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, 464 (Tex.
1998). Coupled with the precise definition of incurred loss and the absence of an express
requirement that losses be “reasonable,” we view the follow the settlements provision as
illustrative of the parties overall intent to insulate all claim payments from post-payment scrutiny.
The parties to reinsurance contracts are sophisticated, commercial enterprises.
When construing a contract, courts must be mindful of the business activity sought to be served.
See Clear Lake City Water Authority v. Kirby Lake Devel. Ltd., 123 S.W.3d 735, 743
(Tex.App.-Houston [14th Dist.] 2003, pet. denied). Insurance treaties are contracts of
indemnity, not of liability. See Unigard at 1054. An implied contractual term subjecting certain
claim payments to an amorphous standard of “reason” while exempting others is not consistent
with the overall purpose of this contract.
The trial court's construction of the agreement for purposes of determining
liability does not harmonize with its construction for determining damages. The court found to
avoid the application of the agency agreement expense provision, the payments must be losses
caused by the insureds. The court further found losses caused by insureds are not expenses. But
even if we assume MCA paid more to settle an insured's loss than Gamma might have paid, a
higher payment does not transform the insured's loss into an expense or loss attributable to
Home State. The loss remains a loss caused by the insured, albeit one for which a higher
settlement was paid.
Gamma characterizes all of the damages sought by TRC and Home State as
“cost of completion” damages, and insists such damages must be reasonable before they are
compensable. In support of its argument, Gamma relies on Mustang Pipeline Co. v. Driver
Pipeline Co., 134 S.W.3d 195 (Tex. 2004). Mustang Pipeline was a construction case in
which the court ruled that a party seeking to recover the cost of completion in a contract case
has the burden to prove that the damages sought are reasonable. Id. at 200. The damages at
issue in Mustang Pipeline were those incurred to complete the construction of a pipeline the
breaching party failed to timely build. The damages Gamma has challenged in this case,
however, are not cost of completion damages. Gamma has challenged the loss component of
the calculation, not loss adjustment expenses. The losses incurred are payments made on
automobile policies. Neither the incurred losses nor the adjusted commissions are a cost
attendant to completion of the contract; both were anticipated under the original contract and
occur regardless of who administers the claims. Although the fees paid to MCA for claims
handling might be considered cost of completion damages, Gamma did not challenge these fees.
The parties devote considerable argument to which party had the burden of
proof as to “reasonable” and whether the inquiry was one of failure to mitigate damages or a
component of plaintiff's claim. Gamma also argues the issue was tried by consent. Because we
conclude in our de novo review that the trial court erred by construing the contract to require
commission adjustment calculations based on reasonable rather than incurred losses, we need not
reach these remaining issues. See Tex. R. App. P. 47.1. The cross-issue is sustained.
Calculation of Damages for Breach of Contract
The trial court awarded damages to TRC and Home State for Gamma's breach
of contract. In support of the award, the court found:
[t]he proper measure of damages is the amounts that should have been paid under the
treaty by [Gamma] but which were not less the difference between the sums retained by
Plaintiffs and (7% of the premium plus 1996 and 1997 loss sharing) . . . .
Using the “reasonable loss” figure $1,110,330 in the calculation, the trial court found
$786,144.68 net due to TRC and Home State under the Home State treaty. See
Footnote 11 Using the “reasonable loss” figure $1,025,976, the trial court found the net due
to TRC under the S&C treaty was $514,854.77. The court concluded the total principal
amount of damages for breach of contract was $1,300,999.45.
We have already concluded the trial court erred when it used the amount of
“reasonable losses” rather than “ incurred losses” in the damages calculation. TRC and Home
State maintain we need only substitute the amount of incurred losses to recalculate the damages
and render judgment. Although we agree the only remaining calculation required involves the
insertion of actual incurred losses in the formula used by the trial court, the amount of actual
incurred losses is not apparent on this record. TRC and Home State refer to contradictory
amounts in their briefs and at oral argument. These amounts do not directly reconcile with the
damages testimony and exhibits to provide a definite, conclusive, final number for incurred loss
under each of the treaties. Therefore, rendition is not appropriate. See Tex. R. App. P. 43.3.
The trial court's judgment on the merits of the breach of contract claim and
award of attorney's fees is affirmed. The judgment is reversed as to the amount of damages
awarded, and remanded to the trial court for the sole purpose of recalculating the amount of
damages due to TRC and Home State. The damages are to be calculated using the methodology
previously employed by the court, but with the amount of the incurred loss substituted in the
calculation in place of the amount of reasonable loss.
Footnote 1 “Fronting” is where a primary insurer issues a policy on its forms but all or
substantially all of the risk is transferred to the reinsurer. “Reinsurance” is a means whereby a
company that issues an insurance policy can allocate or “cede” a portion of the risk it bears on
that policy to another insurance company in return for a portion of the premium. See Great Atl.
Life Ins. Co. v. Harris, 723 S.W.2d 329, 330 (Tex.App.-Austin 1987, writ dism'd); see also,
Tex. Ins. Code Ann. Art. 4152.001(8) (Vernon 2006).
Footnote 2 In the context of this case, “run-off” refers to claims under a policy that
continued to exist after the insurance treaty or agency relationship terminated.
Footnote 3 An insurance binder is a contract that provides insurance coverage pending the
issuance of an original insurance policy. Tex. Ins. Code Ann. art. 549.001 (Vernon 2006).
Footnote 4 A witness at trial described a quota-share reinsurance agreement as a portfolio of
risks, reinsuring an entire book of business, as contrasted with a facultative reinsurance
agreement, which reinsures a single policy. See also,
Unigard Sec. Ins. Co., Inc. v. North River Ins. Co., Inc., 4 F.3d 1049, 1053 (3rd Cir.
1993) (discussing facultative and treaty reinsurance).
Footnote 5 Unlike the Home State agency agreement, TRC was a party to the S&C Agency
Footnote 6 Home State also asserted claims against two individual guarantors of the agency
agreement. These claims were ultimately resolved by summary judgement in favor of the
individuals, and are not at issue here.
Footnote 7 We understand the parties use of the phrase “running the claims and expenses
through the treaty” to mean the inclusion of these amounts in the tally of losses for purposes of
the commission adjustment calculated by the losses to earned premium ratio.
Footnote 8 Although there were various amendments to the reinsurance treaty during the
relevant time frame, but for minor modifications, this definition remained essentially the same.
Footnote 9 Gamma conceded at trial that all “reasonable” loss payments paid on run-off
claims must be run through the S&C Treaty. We therefore consider only the assigned error with
regard to the Home State Treaty.
Footnote 10 The judgment awards attorney's fees through trial only to “Plaintiff” (TRC).
Conditional appellate attorney's fees are awarded to both TRC and Home State.
Footnote 11 The court does not specify the amount found as Incurred Loss or the calculation
used to reduce this amount to reach the amount of “reasonable loss.”