Opinion ID: 2336779
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Heading: Recovery of Prejudgment Interest

Text: The Insurance Code requires insurers to offer Texas motorists UIM coverage and mandates that such coverage: provide for payment to the insured of all sums which he shall be legally entitled to recover as damages from owners or operators of underinsured motor vehicles because of bodily injury or property damage in an amount up to the limit specified in the policy, reduced by the amount recovered or recoverable from the insurer of the underinsured motor vehicle. TEX. INS.CODE art. 5.06-1(5). A motorist is underinsured if his or her liability insurance is insufficient to pay for the injured party's actual damages. Stracener v. United Servs. Auto. Ass'n, 777 S.W.2d 378, 380 (Tex.1989). Because the jury valued Brainard's damages at $1,010,000, and Premier's liability policy limit was $1,000,000, Premier was underinsured. The trial court correctly applied the sum of Premier's $1,000,000 liability limit and Brainard's $5,000 PIP recovery as an offset to actual damages. Mid-Century Ins. Co. of Tex. v. Kidd, 997 S.W.2d 265, 271 (Tex.1999); Stracener, 777 S.W.2d at 380. Thus, Trinity does not dispute that the $5,000 difference is covered under Brainard's UIM policy. The issue is whether, in addition to this amount, UIM insurance covers prejudgment interest that Premier would owe on the $1,010,000 in actual damages. We conclude that it does. Prejudgment interest is awarded to fully compensate the injured party, not to punish the defendant. Cavnar v. Quality Control Parking, Inc., 696 S.W.2d 549, 552 (Tex.1985), superseded in part by statute, Act of June 3, 1987, 70th Leg., 1st C.S., ch. 3, § 1, 1987 Tex. Gen. Laws 51, 51-52, as recognized in Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507 (Tex.1998) and C & H Nationwide, Inc. v. Thompson, 903 S.W.2d 315, 327 (Tex.1994). It is `compensation allowed by law as additional damages for lost use of the money due as damages during the lapse of time between the accrual of the claim and the date of judgment.' Johnson & Higgins, 962 S.W.2d at 528 (quoting Cavnar, 696 S.W.2d at 552). By statute, [a] judgment in a wrongful death, personal injury, or property damage case earns prejudgment interest. TEX. FIN.CODE § 304.102. Thus, if Brainard obtained a judgment against Premier for past damages resulting from the collision, Premier would be liable for prejudgment interest. Whether Brainard may recover this interest from Trinity is governed by their UIM insurance contract. In language closely tracking article 5.06-1(5), Brainard's policy states that Trinity will pay damages which [Brainard] is legally entitled to recover from Premier. We have consistently viewed prejudgment interest as falling within the common law meaning of damages, and Trinity does not argue that the Legislature or the parties intended the term to convey a narrower meaning. TEX. INS.CODE art. 5.06-1(5); see, e.g., Horizon/CMS Healthcare Corp. v. Auld, 34 S.W.3d 887, 898 (Tex.2000) (citing Cavnar, 696 S.W.2d at 552-54). Two courts of appeals have held that prejudgment interest constitutes damages that the insured is legally entitled to recover from the underinsured motorist. Norris v. State Farm Mut. Auto. Ins. Co., 217 S.W.3d 1, 7 (Tex.App.-Waco 2004, pet. granted); Menix v. Allstate Indem. Co., 83 S.W.3d 877, 880 (Tex.App.-Eastland 2002, pet. denied); Allstate Indem. Co. v. Collier, 983 S.W.2d 342, 343 (Tex.App.-Waco 1998, pet. dism'd by agr.). Trinity's primary argument to the contrary, upon which the court of appeals relied, emphasizes that the UIM policy, like article 5.06-1(5), requires Trinity to pay only those damages which the insured is legally entitled to recover because of bodily injury or property damage. 153 S.W.3d at 512; see also TEX. INS.CODE art. 5.06-1(5). Trinity contends that this qualification negates coverage for prejudgment interest because the essence of prejudgment interest is compensation for lost use of money, not damages from bodily injury. Further, Trinity suggests that Brainard's interpretation of the UIM endorsement would require the insurer to cover all damages assessed against the underinsured motorist, yet the courts of appeals have held that UIM insurance does not cover punitive damages. See, e.g., Milligan v. State Farm Mut. Auto. Ins. Co., 940 S.W.2d 228, 232 (Tex.App.-Houston [14th Dist.] 1997, writ denied); State Farm Mut. Auto. Ins. Co. v. Shaffer, 888 S.W.2d 146, 148 (Tex.App.-Houston [1st Dist.] 1994, writ denied); Vanderlinden v. United Servs. Auto. Ass'n Prop. & Cas. Ins. Co., 885 S.W.2d 239, 242 (Tex.App.-Texarkana 1994, writ denied). Trinity's argument fails for several reasons. First, although several courts of appeals have held that UIM insurance does not cover punitive damages assessed against the underinsured motorist, none reached this result by adopting Trinity's narrow interpretation of damages because of bodily injury. In fact, their reasoning effectively supports UIM coverage for prejudgment interest. In Shaffer, the court concluded that the phrase because of bodily injury was ambiguous because it could mean that the damages must (a) literally derive from a bodily injury or (b) arise as a result of bodily injury. Shaffer, 888 S.W.2d at 148-49. If this language were ambiguous and had been drafted by the insurance company, precedent would require that it be interpreted to favor the insured. Nat'l Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex.1991). Most UIM provisions, however, recite nearly the exact text of article 5.06-1(5). For that reason, the Shaffer court inquired into the statute's legislative intent, which it found addressed in one of this Court's opinions. In Stracener, we concluded that the Legislature sought to protect conscientious motorists from `financial loss caused by negligent financially irresponsible motorists.' Stracener, 777 S.W.2d at 382 (quoting Act of Oct. 1, 1967, 60th Leg., R.S., ch. 202, § 3, 1967 Tex. Gen. Laws 448, 449). Accordingly, the court of appeals observed that a primary purpose of UIM insurance is compensatory; it protects against financial loss. Shaffer, 888 S.W.2d at 149. Other courts of appeals have added that neither deterring wrongful conduct nor punishing the defendant is accomplished when the UIM insurer pays punitive damages assessed against the underinsured motorist. Milligan, 940 S.W.2d at 231; Vanderlinden, 885 S.W.2d at 240-42. Thus, they have held that neither the language of article 5.06-1(5) nor public policy supports coverage of punitive damages. We have already noted that prejudgment interest serves to compensate the injured party, not to punish the defendant. Johnson & Higgins, 962 S.W.2d at 528; Cavnar, 696 S.W.2d at 552. This distinction is apparent in the rule that [p]rejudgment interest may not be assessed or recovered on an award of exemplary damages. TEX. CIV. PRAC. & REM.CODE § 41.007. Article 5.06-1(5)'s compensatory purpose is well served when the insured obtains, in addition to actual damages, any prejudgment interest that the underinsured motorist would owe the insured. Trinity's attempt to give the phrase because of bodily injury an artificially literal meaningso as to establish a nexus requirement that eliminates coverage for prejudgment interesthas no basis in the statute's history or our precedent, under which article 5.06-1 is liberally construed to protect persons who are legally entitled to recover damages from underinsured motorists. Stracener, 777 S.W.2d at 382. Moreover, Trinity's rigid reading proves too much, for it would entail splitting hairs even among purely compensatory damages, such as those for mental anguish and loss of society. Article 5.06-1(5) states that the insurer will pay the insured all sums which he shall be legally entitled to recover as damages from owners or operators of underinsured motor vehicles because of bodily injury or property damage. TEX. INS.CODE. art. 5.06-1(5). The qualification because of bodily injury or property damage merely underscores that UIM insurance is compensatory. In addition, it clarifies what should be obvious that only injuries and damages caused by the motor vehicle accident are covered because if the qualification is omitted, the policy would not exclude damages arising from unrelated incidents and transactions between the parties. In sum, while it is true that prejudgment interest accrues over time because of lost use of money, it is equally accurate to say that it constitutes additional compensatory damages for the insured's bodily injury and property damage. Trinity's alternative argument against coverage for prejudgment interest is based on the contractual aspect of a UIM claim. Franco v. Allstate Ins. Co., 505 S.W.2d 789, 791-92 (Tex.1974) (noting that, although ultimate recovery in this type of action depends upon proof of damages due to the tort of an uninsured third party, the cause of action against the insurer arises by reason of the written contract). If the claim is purely contractual, as Trinity contends, then Finance Code section 304.102, which authorizes prejudgment interest in wrongful death, personal injury, and property damage cases, would have no application in this case. TEX. FIN.CODE § 304.102. The court of appeals adopted this approach, citing our decision in Henson v. Southern Farm Bureau Casualty Insurance Company, 17 S.W.3d 652, 653 (Tex. 2000), as additional support for the view that the relationship between the Brainards and Trinity is that of contracting parties. 153 S.W.3d at 513. The reference to Henson deserves further discussion because our reasoning in that case clarifies the issues presented here. Henson was a passenger in a truck driven by Millican, which collided with a vehicle driven by Contreras. Henson, 17 S.W.3d at 652. Henson sued Millican and Contreras for negligence and, before establishing liability, settled with Contreras for $20,000her liability insurance limit. Id. at 652-53. A jury attributed one hundred percent of the negligence to Contreras and assessed Henson's damages at $133,842. Id. at 653. Within thirty days of the judgment, Henson and Millican's UIM insurers tendered $45,000their combined UIM policy limits. Id. Henson, however, refused the payment and demanded prejudgment interest on top of the policy limits, alleging the interest began to accrue against the insurers from the earlier of 180 days after he gave notice of his claim or the day he filed suit against them. Id. at 653-54. The issue in Henson was whether prejudgment interest accrued on the insured's contractual claim for UIM benefits. The prejudgment interest which Henson could recover from Contreras in tort liability was not at issue, as the damages assessed by the jury already exceeded the UIM policy limit. We examined the insurer's obligation to pay damages which the insured is legally entitled to recover from the underinsured motorist and concluded that there is no contractual duty to pay benefits until the liability of the other motorist and the amount of damages suffered by the insured are determined. Id. at 653-64. Thus, we held that a UIM claim does not earn prejudgment interest until the insurer breaches the contract by withholding benefits after the insured has obtained a judgment establishing the liability and underinsured status of the other motorist. Id. at 654. The jury could have found that Contreras was not negligent or that Henson's damages did not exceed Contreras's liability insurance limit, precluding any recovery of UIM benefits. Id. Because the insurers tendered the benefits promptly after the jury made its findings, no contractual duty was breached, and Henson was not entitled to receive the benefits earlier than he did. Id. The question we answer todaywhether UIM insurance covers the prejudgment interest an underinsured motorist would owe the insured was not before us in Henson. Under section 304.102, Premier would be liable for prejudgment interest on $1,010,000. TEX. FIN.CODE § 304.102. The fact that Brainard's suit against Trinity is based on contract in no way renders the statute inapplicable. On the contrary, the UIM policy effectively incorporates the statute by requiring Trinity to pay damages which Brainard is legally entitled to recover from Premier. Section 304.102, like the law of negligence, is necessary to determine the liability of the underinsured motorist. The UIM policy, however, controls Trinity's obligations. Because Brainard obtained a judgment establishing the negligence and underinsured status of Premier, the contract requires Trinity to pay benefits. Henson, 17 S.W.3d at 654. Accordingly, we hold that UIM insurance covers prejudgment interest that the underinsured motorist would owe the insured. The court of appeals erred in affirming the trial court's judgment denying Brainard this recovery.