Dallas Fort Worth Insurance Lawyer Blog

Texas Insurance Code, Section 541.060(a)(7) requires an insurance carrier to conduct a reasonable investigation when refusing to pay a claim.

The Texas Supreme Court 2009, opinion styled, Tex. Mut. Ins. Co. v. Morris, found there was sufficient evidence to support finding the insurance carrier refused to pay a claim without conducting a reasonable investigation.

The jury had before it proof that medical and non-medical personnel for the carrier initially authorized a surgery; that the carrier’s adjuster disputed coverage the same day she first reviewed the file, ignored accepted methods of investigating a claim, may or may not have spoken briefly with the claimant’s former employer, never spoke with the two people who would know the most about the initial injury and/or the current state of the claimant’s spine, and did not speak with any other treating physician before deciding to dispute the claim – that the carrier complained that it had trouble getting claimant’s medical records, yet claimant’s attorneys faxed his records to the carrier on more than one occasion, claimant’s wife signed a release for claimant’s medical records, and claimant himself signed a release for his medical records – twice the carrier sent medical records to its medical expert claiming that those were all the records when, in fact, one key page detailing multiple visits to claimant’s chiropractor was left out of the file, that the page left out of the records sent to the carrier’s medical expert showed that the claimant saw his chiropractor between the injury in 2000 and the surgery in 2003 – the carrier’s medical expert informed the carrier that he would give claimant the benefit of the doubt if claimant’s records supported ongoing trouble with his back and if he had back trouble prior to 2000.  The carrier neither did not know its files well enough to know that it had a page of treatment notes from the claimant’s chiropractor showing the visits between 2001 and 2–3, or it chose not to give the sheet to its medical expert.

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 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: