XL Insurance Company of New York, Inc. v. Juan Lucio

Citation: 551 S.W.3d 894Docket: 13-16-00652-CV

Court: Court of Appeals of Texas; May 24, 2018; Texas; State Appellate Court

Original Court Document: View Document

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

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XL Insurance Company of New York, Inc. (XL New York) appeals a no-answer default judgment awarding Juan Lucio approximately $144,500. XL New York raises two issues: (1) the trial court's denial of its motion to set aside the default judgment and request for a new trial constitutes an abuse of discretion; and (2) the awarded amount exceeds Lucio's stipulation, necessitating either a judgment reform, remittitur, or remand for a new trial on damages. 

The background indicates that Lucio filed a claim under his homeowner's insurance policy with XL New York following damage from a hail storm. After allegedly underpaying the claim, Lucio sued XL New York within two years, asserting violations of the Texas Insurance Code, breach of contract, breach of good faith, and fraud, seeking damages between $10,000 and $70,000. Alongside his petition, Lucio submitted a stipulation limiting damages to $74,000, including penalties and fees.

XL New York's registered agent received Lucio's petition and citation on April 27, 2015, forwarding the documents to paralegal Barbara Brown. In her affidavit, Brown described her role in processing legal notices and emphasized that XL Group Ltd. companies often face numerous lawsuits. She detailed her standard practice of reviewing claims related to new lawsuits and noted that no attorney is engaged until there is a clear intent from the claimant to pursue the matter against XL Group Ltd. companies. The appellate court affirmed part of the judgment while reversing and remanding in part with instructions.

After receiving Lucio's Original Petition, an unsuccessful attempt was made to find an insurance policy from XL New York related to Lucio or the property in question. No records of any pre-litigation claims from Lucio to XL New York were found. It was noted that the Original Petition included claims against entities not affiliated with XL Group Ltd. Consequently, an email was sent to Lucio's legal counsel on April 28, 2015, stating that XL New York had no relevant records and suggesting contact with Folksamerica Insurance for potential coverage. 

Brown, the sender of the email, claimed not to have received any response from Lucio or his counsel. On January 28, 2016, the trial court issued a notice of intent to dismiss the case for lack of prosecution, scheduling a hearing for March 30, 2016, at which no one appeared, leading to a dismissal order. Lucio filed a motion to reinstate within thirty days, arguing that his counsel had not received the dismissal notice, thus the hearing was not properly calendared. The trial court granted this motion on April 15, 2016, and scheduled a jury trial for August 29, 2016.

A week before the trial, Lucio filed for a default judgment. On the trial date, a default judgment was granted against XL New York, citing violations of the Texas Insurance Code, including unfair practices and breach of good faith. Lucio was awarded $70,000 in actual damages, $24,500 in prejudgment interest starting from July 3, 2014, and was entitled to additional statutory interest at 18% per year.

Defendant is ordered to pay Plaintiff $25,000 for reasonable fees and expenses incurred if Defendant unsuccessfully appeals the judgment to either an intermediate court of appeals or the Texas Supreme Court. Plaintiff is also entitled to recover all court costs. On September 26, 2016, XL New York filed a motion to set aside the judgment and for a new trial, with Brown's affidavit indicating she received key documents related to Lucio’s lawsuit, including notices of dismissal, reinstatement, and default judgment. Brown believed the lawsuit was dismissed due to abandonment and was unaware of subsequent litigation activities, failing to inform others at XL Group Ltd. After the trial court denied XL New York's post-judgment motion, the appeal ensued. XL New York argues the trial court abused its discretion by denying the motion, claiming Brown's testimony negated conscious indifference, a key factor in the Craddock test for setting aside a default judgment. The Craddock case outlines three requirements for a defendant to set aside a default judgment: lack of intentional failure to respond, existence of a meritorious defense, and no resulting delay or prejudice to the plaintiff. The standard of review for denying a new trial is based on whether the trial court acted without proper legal guidance.

Conscious indifference in the context of failing to file an answer implies that a defendant knew about the lawsuit but chose not to act. Courts evaluate a defendant's knowledge and behavior when determining the nature of this indifference. A lack of understanding regarding a citation, followed by inaction, does not qualify as a legal mistake that satisfies the requirements set forth in Craddock. However, some form of excuse, even if inadequate, can indicate that the defendant's failure to respond was not due to apathy. 

XL New York argues against the notion of conscious indifference by presenting five factual scenarios, supported by case law, illustrating instances where defendants acted without conscious indifference. One case cited is Shelly v. Eubanks, where a layperson's failure to respond to a second lawsuit—following the dismissal of the first for want of prosecution—was deemed not to reflect conscious indifference. The appellate court reversed the denial of a new trial, stating the defendant's mistaken belief about representation was reasonable under the circumstances. 

Another case referenced is Gotcher v. Barnett, where the Gotchers’ failure to answer was attributed to confusion arising from a dismissal order during settlement negotiations. The appellate court concluded that their inaction stemmed from a mistaken reliance on the opposing party's conduct, warranting a reversal of the trial court's denial of their request for trial. These examples illustrate the nuanced application of the Craddock standard, demonstrating that the assessment of conscious indifference is case-specific.

XL New York argues that conscious indifference is negated by instances where employees followed established company procedures for handling lawsuits. Referencing specific cases, XL New York highlights that forwarding citations to an insurance agent, as required by company protocol, demonstrates a lack of conscious indifference. Examples include a case where an employee’s forwarding of a citation and a company owner’s mistaken belief about informing the insurance agent both aligned with company procedures, thereby satisfying the Craddock standard. Additionally, XL New York claims that Brown's belief that no insurance policy was issued to Lucio and her communication of this to Lucio’s counsel reflect a lack of indifference, supported by case law where paralegal mistakes were deemed insufficient to establish conscious indifference. XL New York further contends that Lucio’s counsel contributed to the default judgment through confusing petition drafting and lack of communication after citation service. Citing the Texas Lawyer’s Creed, XL New York emphasizes that a lawyer should not exploit a default when they know the opposing counsel. However, the analysis of the conscious indifference factor ultimately finds XL New York's arguments unconvincing, noting an institutionalized indifference revealed by Brown’s admission of company policy to delay retaining counsel until a claim is actively pursued.

Brown's decision not to retain counsel at the time of receiving her citation distinguishes her actions and those of XL New York from the defaulting defendants in similar cases. Unlike the defendant in Shelly, who believed he had arranged for counsel to file an answer, and the situation in Gotcher, where XL New York does not claim to have been in settlement negotiations with Lucio, Brown independently concluded that XL New York was not a relevant party in Lucio's lawsuit. Company protocols in Crawford and Culinaire required employees to forward legal citations to an insurance agent responsible for hiring legal representation, a process that was mismanaged in prior cases due to errors by paralegals or legal staff following similar procedures. XL New York's fifth argument is not supported by Cervantes and Levine, which emphasize that a plaintiff's lack of evidence to dispute a defendant's claims can lead to a presumption of truth regarding the defendant's lack of conscious indifference. In Cervantes, the court noted the absence of evidence showing that the defaulting defendants' attorney was aware of the filing deadlines. In Levine, the court affirmed the denial of a motion to set aside a default judgment due to the attorney's failure to confirm the filing of an answer despite being warned of the consequences. XL New York's interpretation of the lawyer's creed suggests that Lucio's counsel should have considered Brown as opposing counsel, while Brown’s actions arguably constituted unauthorized practice of law. However, the lawyer's creed is aspirational and does not impose enforceable duties or obligations beyond existing legal frameworks.

XL New York was found by the trial court to have intentionally failed to file an answer to Lucio’s original petition, demonstrating conscious indifference. The court acted within its discretion in denying XL New York's motion to set aside the default judgment, which was not deemed arbitrary or lacking legal principles according to the Craddock standard. XL New York's first issue was overruled.

In its second issue, XL New York challenged the monetary award, arguing it exceeded Lucio's stipulation of $74,000, which included all damages. Citing *Capitol Brick, Inc. v. Fleming Manufacturing Co.*, the court noted that a default judgment cannot award more than what is specifically pleaded. The trial court erred in awarding damages beyond this limit. Although XL New York sought to reform the judgment or suggest a remittitur, the court found that modifying the judgment was impractical given the circumstances and the types of damages awarded. Therefore, XL New York's second issue was sustained, leading to a reversal of the monetary relief award while affirming the liability findings.

The trial court's judgment was affirmed concerning liability but reversed regarding monetary relief, which was remanded with instructions to comply with the $74,000 limit outlined in Lucio's stipulation.