Time Insurance Agency, Inc. v. The Hanover Insurance Company
Filing
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REPORT AND RECOMMENDATIONS re Defendant's Amended 11 Motion to Dismiss. Signed by Judge Andrew W. Austin. (lt)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION
TIME INSURANCE AGENCY, INC.
v.
THE HANOVER INSURANCE CO.
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§
§
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§
A-17-CA-969 LY
REPORT AND RECOMMENDATION
OF THE UNITED STATES MAGISTRATE JUDGE
TO:
THE HONORABLE LEE YEAKEL
UNITED STATES DISTRICT JUDGE
Before the Court are Defendant’s Amended Motion to Dismiss (Dkt. No. 11); Plaintiff’s
Response (Dkt. No. 12); and Defendant’s Reply (Dkt. No. 14). The District Court referred the above
motion to the undersigned Magistrate Judge for a report and recommendation pursuant to 28 U.S.C.
§ 636(b) and Rule 1(c) of Appendix C of the Local Court Rules.
I. BACKGROUND1
This case is a breach of contract case between Time Ins. Agency, an independent insurance
agency with offices in Austin and San Antonio, and Hanover Insurance Co., a property and casualty
insurance company. The Agency and Hanover entered into a written “Agency Agreement” effective
December 9, 2010. Pursuant to the Agreement, Hanover appointed the Agency to become Hanover’s
agent with the authority to “solicit, bind, issue and deliver policies of insurance” for product lines
designated in a “Schedule of Authority” attached to the Agreement. The Agreement’s “Schedule of
Authority” provides that the Agency may act as Hanover’s representative in “negotiating, servicing
or effecting policies of insurance” issued by Hanover in Texas for lines of business including
“fidelity and surety bonds.”
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The facts in this section are taken from Plaintiff’s First Amended Complaint (Dkt. No. 8).
The Agency contends that the Agreement provided that all Hanover business written by the
Agency for the Agency’s customers was the Agency’s exclusive property. The Agency relies on
Section 6.1 of the Agreement which states: “the ownership, use and control of all expirations, and
all records applicable to business you have written with us, including your work product, shall be
your exclusive property. . . .” The Agreement additionally provided at Section 6.2 that Hanover “not
knowingly take any action that could be construed as moving a policy from [the Agency] to another
agency without the written direction of the policyholder.”
Between the Effective Date of the Agreement and May of 2017, the Agency wrote surety
bonds issued by Hanover for a number of its customers, including D.L. Bandy Constructors, Inc.,
and DNT Construction. On May 25, 2017, one of Hanover’s field directors—Michael Kremheller—
visited the Agency’s Austin office and removed the Agency’s powers of attorney and seals for the
Agency’s authorization to write surety bonds for Hanover. By doing so, Hanover moved DNT and
D.L. Bandy’s existing bonds from the Agency to another agency without these customer’s written
direction. Additionally, Hanover immediately terminated the Agency’s authorization to write surety
bonds for its customers, effectively terminating the Agreement without any advance notice.
Upon learning about this event, the Agency’s President, John Schuler, in an effort to mitigate
the loss of its Hanover customers, contacted representatives of D.L. Bandy and DNT. D.L. Bandy
elected to remain with the Agency and the Agency placed it with another company writing surety
products. DNT, however, designated another agent, Insurance and Bonds of Texas (IBTX), to write
its surety bonds with Hanover. The Agency lost DNT’s surety business, which the Agency alleges
is a direct result of Hanover’s actions in terminating the Agreement. The Agency alleges losses in
excess of $300,000 from the loss of this business.
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In this suit, the Agency claims that Hanover: (1) violated section 4051.353 of the Texas
Insurance Code by failing to provide at least six months written notice to the Agency before
terminating the Agreement; and (2) breached the Agreement by failing to comply with the notice
provision and by moving D.L. Bandy and DNT’s surety bonds to another insurance agency without
the written direction of those customers. The Agency requests damages in the form of lost profits
along with the loss of good will, attorney’s fees costs, and expenses.
Hanover moves to dismiss the suit, asserting that: (1) section 4051.353 of the Texas
Insurance Code does not apply to surety bonds; (2) there is no breach of contract because the notice
provision of section 4051.353 of the Texas Insurance Code does not apply; (3) there is no breach of
contract because Hanover did not remove an insurance policy from the Agency; and (4) the Agency
cannot recover speculative damages.
II. LEGAL STANDARD
Federal Rule of Civil Procedure 12(b)(6) allows a party to move to dismiss an action for
failure to state a claim upon which relief can be granted. FED. R. CIV. P.12(b)(6). In deciding a Rule
12(b)(6) motion to dismiss for failure to state a claim, “[t]he court accepts all well-pleaded facts as
true, viewing them in the light most favorable to the [nonmovant].” In re Katrina Canal Breaches
Litig., 495 F.3d 191, 205 (5th Cir. 2007) (internal quotation marks omitted), cert. denied, 552 U.S.
1182 (2008).
While a complaint attacked by a Rule 12(b)(6) motion does not need detailed factual
allegations in order to avoid dismissal, the plaintiff's factual allegations “must be enough to raise a
right to relief above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555
(2007). The Supreme Court has explained that a court need not accept as true conclusory allegations
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or allegations stating a legal conclusion. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (“mere
conclusions[ ] are not entitled to the assumption of truth.”). A complaint must contain sufficient
factual matter “to state a claim to relief that is plausible on its face.” Id. (quoting Twombly, 550 U.S.
at 570). “A claim has facial plausibility when the [nonmovant] pleads factual content that allows
the court to draw the reasonable inference that the [movant] is liable for the misconduct alleged.”
Id.
III. ANALYSIS
A.
Section 4051.353 of the Texas Insurance Code
The Agency argues that by failing to provide proper notice of termination, Hanover violated
the Texas Insurance Code, which states in relevant part:
(a) An insurer may not terminate or suspend a contract with an appointed agent that
has been in effect for at least two years unless the insurer provides written notice of
the termination or suspension to the agent at least six months before the date the
termination or suspension takes effect.
(b) A contract that replaces or revises a contract that has been in effect for at least
two years is subject to this subchapter if there has not been a material change in the
ownership of the agency.
TEX. INS. CODE § 4051.353. Hanover argues that this provision, which refers specifically to “[a]n
insurer” does not apply to a “surety” like Hanover. In support, Hanover relies upon a different
section of the Texas Insurance Code which states:
(a) This subchapter and Subchapters B-E, G, and I apply to each agent of an insurer
authorized to engage in the business of property and casualty insurance in this state.
(b) This subchapter and Subchapters B-E, G, and I apply to each person who
performs the acts of an agent, as described by Section 4001.051, whether through an
oral, written, electronic, or other form of communication, by soliciting, negotiating,
procuring, or collecting a premium on an insurance contract offered by any kind of
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insurer authorized to engage in the business of property and casualty insurance in this
state, including:
(1) a fidelity or surety company . . . .
TEX. INS. CODE § 4051.001. Hanover contends that because § 4051.353 is part of “subchapter H,”
§ 4051.001 does not apply to that section and thus § 4051.353 only applies to “insurers” and not
“sureties.” Hanover argues that the Texas Supreme Court, in recognizing the difference between
insurers and sureties, has ruled that unless a section of the Insurance Code specifically includes
sureties, the section does not apply to sureties. See Dallas Fire Ins. Co. v. Tex. Contractors Sur. &
Cas. Agency, 159 S.W.3d 895, 897 (Tex. 2004); Great American Insurance Co. v. North Austin
Utility District No. 1, 908 S.W.2d 415, 424 (Tex. 1995). Hanover additionally argues that nothing
in the legislative history suggests that the Legislature intended § 4051.353 to apply to performance
bonds or sureties.
The Agency responds that the preamble to Subchapter H of Chapter 4051 (§ 4051.351),
entitled, “Applicability of Subchapter” establishes that section 4051.353 applies here. Section
4051.351 states:
(a) Except as provided by Subsection (b), this subchapter applies to each contract
between an agent and an insurer engaged in the business of property and casualty
insurance in this state.
TEX. INS. CODE § 4051.351(a) (emphasis added). The Agency argues that regardless of the product
at issue, the Agreement is subject to the notice provision because Hanover is an “insurer engaged
in the business of property and casualty insurance in this state.” The Agency further argues that
Hanover’s own form agreement, and specifically the Agreement at issue here, defines surety bonds
as a type of insurance product. Specifically, the Agreement’s “Schedule of Authority” provides that
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the Agency may act as Hanover’s representative in “negotiating, servicing or effecting policies of
insurance” issued by Hanover in Texas for “lines of business” including “fidelity and surety bonds.”
(Dkt. No 1-1). The Agency asserts that Hanover’s primary argument and related authorities rest upon
a distinction between insurers and surety companies that is immaterial for purposes of § 4051.353,
and therefore are not determinative of this case. The Agency argues that the statute’s reach plainly
covers any “insurer engaged in the business of property and casualty insurance” in Texas, including
Hanover.
When construing a statute, the court’s primary objective is to determine the Legislature’s
intent which, when possible, the court should discern from the plain meaning of the words chosen.
State v. Shumake, 199 S.W.3d 279, 284 (Tex. 2006). If a statute is clear and unambiguous, the court
applies the common meaning of the words of the statute, without resort to rules of construction or
extrinsic aids. Fitzgerald v. Advanced Spine Fixation Sys., Inc., 996 S.W.2d 864, 865–66 (Tex.
1999). “It is a rule of statutory construction that every word of a statute must be presumed to have
been used for a purpose. Likewise, we believe every word excluded from a statute must also be
presumed to have been excluded for a purpose.” Cameron v. Terrell & Garrett, Inc., 618 S.W.2d
535, 540 (Tex. 1981) (citation omitted). This means that “[w]hen the Legislature employs a term
in one section of a statute and excludes it in another section, the term should not be implied where
excluded.” Laidlaw Waste Sys. (Dallas), Inc. v. City of Wilmer, 904 S.W.2d 656, 659 (Tex. 1995).
Thus, the Court must decide whether Hanover qualifies as an“insurer engaged in the business
of property and casualty insurance” for the purpose of applying § 4051.353. First the Court looks at
the statutory language. Section 4051.001(b)(1) of the Texas Insurance Code states that, for purposes
of the listed subchapters of that portion of the Insurance Code, an “insurer authorized to engage in
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the business of property and casualty insurance in this state” includes “a fidelity or surety company.”
However, § 4051.001 does not apply to Subchapter H, which is the subchapter that includes
§ 4051.353, the termination provision on which the Agency brings suit. Complicating matters, the
first section of Subchapter H, entitled “Applicability of Subchapter” indicates that “this subchapter
applies to each contract between an agent and an insurer engaged in the business of property and
casualty insurance in this state.” TEX. INS. CODE § 4051.351(a). This section does not otherwise
limit this phrase. By its plain language, therefore, Subchapter H applies to “each contract between
an insurer engaged in the business of property and casualty insurance in this state.” This would
suggest that it applies to the contract between the Agency and Hanover, as there is no dispute that
Hanover is “an insurer” and is engaged in the business of property and casualty insurance in Texas.
Hanover argues that this is not the end of the analysis. It points to Great American Insurance
Co. v. North Austin Util. Dist. No. 1, 908 S.W.2d 415, 424 (Tex. 1995), and specifically to the
statement that “according to the Texas Supreme Court, when as here, an Insurance Code provision
omits sureties, the statute does not apply to sureties.” (Dkt. No. 11 at 4). In Great American, the
Texas Supreme Court held that article 21.21 of the Insurance Code, providing a private cause of
action for unfair or deceptive acts or practices in the business of insurance, did not apply to sureties.
See TEX. INS. CODE ART. 21.21, § 16(A). The court found that the Texas Legislature did not intend
to include suretyship as the “business of insurance” for all purposes under the version of the
Insurance Code then in force, and stated:
we cannot conclude that the Legislature intended to include suretyship in the
definition of the business of insurance under article 21.21. Absent a clear legislative
directive, we conclude that suretyship, as historically understood in the insurance and
suretyship fields, does not constitute the business of insurance under article 21.21.
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Id. at 424. Several years later, the Texas Supreme Court held that a contract dispute between an
agent and a surety did not qualify as the “business of insurance” under article 21.21 and that “the
business of insurance” means different things for different sections of the Insurance Code. Dallas
Fire Ins. Co.,159 S.W.3d at 896. The court stated, “[f]or example, at all times applicable here,
suretyship was expressly included in the ‘doing an insurance business’ in former article 1.14-1, but
expressly excluded in article 21.55, section 5(a)(4).” Id. Relying on these cases, Hanover argues that
contracts between agents and surety companies have been excluded from the reach of § 4051.353,
and therefore it may not be sued under that section.
The Court disagrees that the applicable statute “omits” sureties from its reach, as the sections
at issue in the two cases just discussed did. In this case the Legislature stated that the applicable
subchapter, Subchapter H, applies to “each contract between an agent and an insurer engaged in the
business of property and casualty insurance in this state.” Though the language of the first
subchapter (§ 4051.001) makes certain sections specifically applicable to surety companies, it does
not purport to exclude surety companies from the reach of the remaining unlisted subchapters. To
have done this, the section would had to have included language to the effect that “Subchapters D,
F, and H do not apply to a fidelity or surety company.” The absence of such language means that
the Court must look to the language of those subchapters—in this case, Subchapter H—to determine
the types of insurance entities to which it applies. Here, that question is answered unequivocally by
the first section of Subchapter H, titled “Applicability of Subchapter,” which as noted, states that it
applies to “each contract between an agent and an insurer engaged in the business of property and
casualty insurance in this state.” TEX. INS. CODE § 4051.351(a). Because there is no dispute that
Hanover also provides commercial insurance products in Texas, Hanover is undeniably “an insurer
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engaged in the business of property and casualty insurance in this state.” No one disputes that the
Agency is an “agent.” Accordingly, this cause of action states a valid claim.
B.
Breach of Contract Claim
The Agency asserts that Hanover breached the Agreement by:
(1) failing to comply with the notice provision under applicable law (as stated herein)
and (2) knowingly taking actions that could be construed as moving the existing
bonds of D.L. Bandy and DNT from the Agency to another agency without the
written direction of these customers.
(Dkt. No. 8 at 6). Hanover argues that the Agency cannot bring a breach of contract claim for its
decision to remove the Agency’s authority to issue surety bonds because: (1) the breach of contract
claim is duplicative of its Insurance Code claim; and (2) as a surety company it did not remove an
insurance policy, but a surety bond. The Agency responds it has brought independently viable claims
for breach of the Agreement.
With regard to the argument that the breach of contract claim is duplicative of the breach of
Insurance Code claim, this argument fails. Section 10 of the Agreement outlines the methods of
terminating the Agreement to be: (a) by mutual agreement; (b) after a period of at least 90 days
advance written notice; or (c) immediately for certain identified reasons. (Dkt. No. 8 at 14). The
Agency asserts that none of those conditions were met, and thus the termination violated the
Agreement. The Agency separately asserts that in terminating its agency, Hanover also violated the
termination notice provision of the Texas Insurance Code, which contains separate requirements.
The Court agrees that these are two independent claims.
As to Hanover’s second argument, that it did not violate the Agreement because it only
prohibits the removal of insurance policies and Hanover removed the Agency’s authority to issue
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surety bonds, the Court finds it is without merit. Section 6.2 of the Agreement, upon which Hanover
relies, states that, “Except as provided in this subsection, we shall not knowingly take any action that
could be construed as moving a policy from your agency to another agency without the written
direction of the policyholder.” (Dkt No. 8 at 13). The Agreement only covers the sale of surety
products. The Agreement also states in its Schedule of Authority: “As an Agent for the Company,
you may act as a representative of the Company in negotiating, servicing or effecting policies of
insurance issued in the name of the Company for the following lines of business: Fidelity and Surety
Bonds.” (Dkt No. 8 at 17).
In construing a contract, the court examines the entire document and considers each part with
every other part so that the effect and meaning of one part on any other part may be determined.
Steeger v. Beard Drilling, Inc., 371 S.W.2d 684, 688 (Tex. 1963). The Court presumes that the
parties to a contract intend every clause to have some effect. Ogden v. Dickinson State Bank, 662
S.W.2d 330, 332 (Tex. 1983). The Schedule of Authority explicitly describes surety bonds as
“policies of insurance.” Therefore, any reference to “policy” and “policyholder” in Section 6.2 also
refers to surety bonds. Moreover, as the Agreement only applies to fidelity and surety bonds, Section
6.2 would have no meaning if it did not also apply to those instruments. The Agency has stated a
breach of contract claim under Section 6.2 of the Agreement.
C.
Damages
Lastly, Hanover asserts that the Agency’s claims must be dismissed because the damages it
asserts are purely speculative. The Agency claims that it was damaged in the loss of goodwill and
by lost profits. It identifies its damages as “the current and future commissions expected to be
generated from the lost DNT account.” (Dkt. No. 8 at 6). At the pleadings stage, if damages are a
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required element to a plaintiff's claim, the plaintiff must plead only that he has incurred damages.
FED. R. CIV. P. 8(A)(3). Lost profits may be recovered as damages under Texas law. See White v. Sw.
Bell Tel. Co., 651 S.W.2d 260, 262 (Tex. 1983). Additionally, damages may be recovered for the
loss of good will under Texas law. Tex. & P. Ry. Co. v. Mercer, 127 Tex. 220, 90 S.W.2d 557, 560
(1936); see Marsh USA, Inc. v. Cook, 354 S.W.3d 764, 777 (Tex. 2011).
In its pleading, the Agency asserted that in 2016 it generated over $300,000 in commissions
from bonds written by Hanover for DNT. (Dkt. No. 8 at 4). “Contrasting revenue from a time period
immediately before the period at issue is an established method of proving revenue for a lost profit
damages calculation.” See Tex. Instruments, Inc. v. Teletron Energy Mgmt., Inc., 877 S.W.2d 276,
279 (Tex.1994) (“It is permissible to show the amount of business done by the plaintiff in a
corresponding period of time not too remote, and the business during the time for which recovery
is sought.” ). The Agency’s pleading regarding its damages is more than adequate to state a claim
and survive a Rule 12(b)(6) motion.
III. RECOMMENDATION
For the reasons set forth above, the Court RECOMMENDS that the district judge DENY
Defendant’s Amended Motion to Dismiss (Dkt. No. 11). The Clerk is directed to REMOVE this
case from the undersigned’s docket.
IV. WARNINGS
The parties may file objections to this Report and Recommendation. A party filing objections
must specifically identify those findings or recommendations to which objections are being made.
The District Court need not consider frivolous, conclusive, or general objections. See Battle v.
United States Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987).
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A party's failure to file written objections to the proposed findings and recommendations
contained in this Report within fourteen (14) days after the party is served with a copy of the Report
shall bar that party from de novo review by the District Court of the proposed findings and
recommendations in the Report and, except upon grounds of plain error, shall bar the party from
appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the
District Court. See 28 U.S.C. § 636(b)(1)(C); Thomas v. Arn, 474 U.S. 140, 150-53, 106 S. Ct. 466,
472-74 (1985); Douglass v. United Servs. Auto. Ass’n, 79 F.3d 1415, 1428-29 (5th Cir. 1996) (en
banc).
SIGNED this 15th day of August, 2018.
_____________________________________
ANDREW W. AUSTIN
UNITED STATES MAGISTRATE JUDGE
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