An inconsistent investigation and the insurance company relying on it is bad faith according to the 1988, Dallas Court of Appeals opinion, Harco Nat’l Ins. Co. v. Villanueva.  The owner of a truck reported the theft of the truck to his insurance company, Harco.  Harco’s investigator stated  that he saw the man he believed to be the truck owner sitting with others in a vehicle similar to the stolen truck.  Harco, based on the investigator’s report, denied the claim.  At trial, the jury found that Harco had breached its duty of good faith and fair dealing to the truck owner and further, found that Harco’s claim denial was gross negligence.  This appeals court agreed.  Harco’s denial was based solely on information discovered by the unlicensed investigator.  Harco did not ask it’s insured for any corroborating evidence.  The insured had no criminal record, had never submitted an insurance claim before, and appeared to be in god financial condition.  Thus, there was sufficient evidence for a jury to determine that Harco’s reliance upon the report of the investigator did not constitute a reasonable basis for denial of the claim; and there was sufficient evidence to support a finding of gross negligence.

In a different case an expert was deemed to not be biased only because he wanted to obtain business from the insurance company he was doing work for.  The case is a 2003, Fort Worth Court of Appeals opinion styled, Allstate Tex. Lloyds v. Mason.  While investigating a homeowner’s claim, Allstate retained Tolson, an engineer, to inspect the house and determine whether the damage to the house was caused by a plumbing leak.  During these inspections, Tolson learned about the history of the house, examined the failed pipe and plumbing diagnostics, and obtained soil data.  During his investigation, Tolson also reviewed a report discussing the house’s sub-structure drainage and foundation problems.

Based on his investigation, Tolson concluded that sub-surface drainage caused the clay soil under the house to swell, leading to the foundation upheaval, and that the sub-surface drainage combined with the soil expansion was alone sufficient to damage the house.  After Allstate denied the claim, the homeowners brought suit, alleging breach of contract, and the duty of good faith and fair dealing.  They also alleged that Tolson’s conclusions should be disregarded based on the fact that he has worked for insurance companies in the past in conducting investigations.

An insurance company may breach its duty of good faith and fair dealing by failing to reasonably investigate a claim.  As an example, in the 1997, Texas Supreme Court opinion, Universe Life Ins. Co. v. Giles, the insurer could not escape liability merely by failing to investigate the claim so that it could contend that liability was never reasonably clear.

Here is what happen in the 1998, Texas Supreme Court opinion, State Farm Fire & Cas. Co. v. Simmons.  After leaving for a day trip, Simmons home burned down.  Previously, Simmons had reported a theft loss.  State Farm immediately tagged the claim as “suspicious,” denied the claim and asserted an arson defense in the subsequent lawsuit.  By the time State Farm denied the claim, legitimacy of the burglary had been proven.  State Farm failed to investigate potential arson suspects (other than the policyholder) and erroneously compiled information concerning the policyholder’s financial obligations.  The Court held a jury could infer that a reasonable insurer would have approached its insured to resolve apparently conflicting information and would have eventually concluded that the insured lacked a sufficient motive to commit arson.  Accordingly, the Court concluded that the evidence was legally sufficient that State Farm denied the claim based on a biased investigation intended to construct a pretextual basis for denial.

In another case the Court concluded that once the insurance company and the public adjuster hired by the building owner reached an agreement on the estimate method, it was no longer reasonable for the insurance company to rely on contrary opinions of other experts.  This was the 2014, 14th District Court of Appeals opinion, United Nat’l Ins. Co. v. AMJ Invs., LLC.

The Law Office of Mark Humphreys announces the settlement of another case dealing with a “Credit Life & Disability” insurance policy.

This case involved a client who’s husband had purchased the policy as part of the deal when buying an expensive new truck. The client’s husband had numerous health issues that were not disclosed during the application process. About a year later the client’s husband died and the insurance company did a background check of the husbands medical history and discovered the numerous health issues. The insurance company denied the claim and a lawsuit resulted.

This case ultimately went to trial and a verdict was rendered in favor of Mark’s client, the wife of the deceased. Of significance to the trier of facts in this case was that the husband had died as the result of a broken neck when he fell off a trailer he was tying down for a trip. In other words, he death had nothing to do with the health conditions the insurance company alleged were misrepresented in the insurance application.

As was stated in the 1997, Texas Supreme Court opinion, Universe Life Ins. Co. v. Giles, an insurer violates its duty of good faith and fair dealing by denying or delaying payment of a claim if the insurer knew or should have known that its liability was reasonably clear.  However, an insurance company may withhold UIM benefits until the insured’s legal entitlement is established.

Statutory liability may also be imposed on an insurer that delays payment of a claim under Texas Insurance Code, Section 542.051 and those sections following, if the insurer delays payment for more than 60 days from the date it received all the information reasonably requested and required, the insurer must pay the claim along with the statutory penalty.  An insurer’s failure to comply with the requirements of this Prompt Payment of Claims section will result in imposition of statutory penalties, even if the delay in payment is in “good faith.”  If an insurer promptly interpleads policy proceeds, it cannot be subjected to statutory penalties for delayed payment.  However, in the 2007, Texas Supreme Court opinion, State Farm Life Ins. Co. v. Martinez, the court held an insurer may be liable for statutory penalties for interpleader filing after the prompt payment deadlines.

To recover the statutory penalties available under the Prompt Payment of Claims Act, an insured must first prove that the insurer is liable for the underlying claim.  The insured must establish three elements: (1) a claim under an insurance policy; (2) that the insurer is liable for the claim; and (3) that the insurer has failed to follow one or more sections of the Prompt Payment of Claims Act with respect to the claim.

The standard of bad faith was originally phrased in the negative under the 1988, Texas Supreme Court case, Aranda v. Insurance Co. of N. Am.  Under that case, the first element of bad faith required an objective determination of whether a reasonable insurer under similar circumstances would have denied plaintiff’s  claim.  The second element balanced the right of the insurance company to investigate and pay compensable claims.  This element was met by establishing that the insurance company actually knew there was no reasonable basis to deny the claim or that, based on its duty to investigate, the insurance company should have known that there was no reasonable basis for denial.  Under the test, insurers maintained the right to deny invalid or questionable claims and would not be subject to liability for an erroneous denial of a claim.

The Texas Supreme Court, in the 1997 opinion, Universal Life Ins. Co. v. Giles, rephrased the standard in an attempt to ease the incompatibility between the no-evidence standard of review and the bad faith standard of liability.  Pursuant to this decision, the insured must prove the insurer: (a) either denied or delayed payment of the claim; and (b) with respect to which the insurer’s liability has become reasonably clear.

An insurer’s liability is not reasonably clear, and liability must not be imposed under Texas Insurance Code, Section 541.001, unless the insured shows that: (1) the policy covers the claim; (2) the insured’s liability is reasonably clear; (3) the claimant has made a proper settlement demand within policy limits; and (4) the demand’s terms are such that an ordinarily prudent insurer would accept it.  A proper settlement demand generally must clearly state a sum certain and propose to fully release the insured.  These elements comprise the statutory liability standard against which to measure legal sufficiency.  An insurer’s denial of a claim it was not obligated to pay might nevertheless be in bad faith if it’s conduct was extreme and produced damages unrelated to and independent of the policy claim.  However, an insurer does not breach its duty merely by erroneously denying a claim.  Evidence that only shows a bona fide dispute about the insurer’s liability on the contract does not rise to the level of bad faith.

The Insurance Code sections and the Deceptive Trade Practices Act were adopted together in 1973, as part of a package to reform legislation, are interrelated, and incorporate each other.

Texas Insurance Code, Section 541.008 says the Insurance Code provisions are to be liberally construed and applied to promote its underlying purposes to define and prohibit unfair and deceptive insurance practices.  This is affirmed in the 1988, Texas Supreme Court opinion, Vail v. Texas Farm Bur. Mut. Ins. Co.

The same court in the 1981 case, Cameron v. Terrell & Garrett, Inc., stated that the similar construction mandate in the DTPA requires that the statute be given “its most comprehensive application possible without doing any violence to its terms.”  In the 1985, the Texas Supreme Court in Kennedy v. Sale, applied the same reasoning in insurance cases.

Insurance attorneys know that Section 541.051 broadly prohibits making any statement misrepresenting the terms of a policy, or the benefits, advantages, or dividends of a policy, making misrepresentations about the financial condition of an insurer, misrepresenting the true nature of any policy or class of policies, or making any misrepresentation to a policy holder for the purpose of inducing or intending to induce the policyholder to allow an existing policy holder to lapse, forfeit, or surrender his insurance.  This provision is sometimes referred to  as the “anti-twisting” provision, because the latter portion is aimed at preventing one insurer stealing away the insureds of another insurer by making misrepresentations.

Section 541.052 prohibits making any advertisement or statement containing any assertion, representation, or statement with respect to the business of insurance or with respect to any person in the conduct of his insurance business that is untrue, deceptive, or misleading.

Section 541.061 prohibits misrepresenting an insurance policy by:

Here is a list of responsibilities that insurance agents can be held responsible for failing to perform or performing incorrectly.

A.  From a 1948, El Paso Court of Appeals opinion styled, Burroughs v. Bunch, an insurance agent has a duty to procure the coverage entrusted to his care, or failing to do so, to immediately notify the insured of this fact.  A more recent opinion from the Tyler Court of Appeals, Critchfield v. Smith, which was issued in 2004, says this duty to procure is two distinct duties: (1) the duty to use reasonable diligence in attempting to place the requested insurance, and (2) the duty to inform the client promptly if unable to do so.

B.  From the 1992, Texas Supreme Court opinion styled, May v. United Services Association of American, requires that agents keep their insureds fully informed about the current status of a policy’s in force status.

In order to hold a person liable for his/her acts or omissions, the thing complained of must violate a duty which the law recognizes.  This is easily understandable in the case of a collision resulting from running a stop sign.  The law imposes a duty of drivers to stop at stop signs.  So, when a driver violates that duty by running a stop sign, he or she is liable for the damages caused.  So, too, with insurance agents.

Nationally there is a concept known as the “professional judgment rule” which holds that an agent in the business of selling insurance must act in a manner befitting a reasonable and prudent agent.  Accordingly, agents who do not utilize their skills in this way are subject to claims for damages.  Unfortunately, our Texas Supreme Court has rejected the “professional judgment rule” for use Texas.  Instead, in Texas, agents have a general duty to use reasonable care, skill and diligence in procuring insurance.  It even includes the duty of an agent to “keep his clients fully informed so that they can remain safely insured.”  This is according to the 1977, Beaumont Court of Appeals opinion, Trinity Universal Ins. Co. V. Burnette.  In the Burnette case the court upheld a jury finding that an insurance agent was negligent in failing to “thoroughly acquaint himself” with his client’s needs and in failing to produce the coverage for risks or perils the client faced.

On 1992, the Texas Supreme Court was faced with deciding if an insurance agent was negligent for failing to explore other health insurance coverage options beyond one with a tricky termination and deferral clause.  This was the opinion styled, May v. United Services Association of America.  In this case, the May wound up without coverage after buying the policy that the agent recommended.  The lawsuit claimed that the agent failed to investigate alternative policies which were easily obtainable.  This was factually true – the agent did not investigate any of the several other possible policies and instead settled on the first one he found.  Nevertheless, the Texas Supreme Court found that the agent did not “mislead” the May about the limits of the policy selected.  The May case dramatically changed the fact of insurance law in Texas.  In essence, it appears the the Court now requires there to be an actual misrepresentation in order for the Plaintiff to succeed.  However, the court did leave open the possibility that the Mays might have succeeded if they had an explicit agreement with the agent regarding what terms they required in the policy that the agent obtained.  Had the agent violated such an agreement, he might have been found liable.

Texas insurance lawyers will find this interesting.

A person finds early on when dealing with an insurance company that simply making complaints and contacting the Texas Department of Insurance is a waste of time and effort.

If you are an attorney representing someone injured in an automobile accident and the person who cause the wreck is uninsured and the person injured has uninsured motorist (UM) coverage with their auto insurance company and the company is refusing to compensate their customer, here is a sample opening statement when trying this case to a jury: