Insurance Claim Denial

Grand Prairie insurance lawyers and those in Dallas and other areas will run across situations where an insurance company is denying a claim based on the defense of arson. This happened in the case, Southland Lloyd’s Insurance Company v. Tomberlain. The case is a Texas Supreme Court case decided in 1996.
Here is some relevant information:
Charles W. Tomberlain is an independent insurance agent who owns the Charles Tomberlain Insurance Agency in Longview. His son, Chuck Tomberlain, is an agent with the agency. In addition, Chuck Tomberlain owns and manages numerous real properties in and around Longview. In 1988, Chuck Tomberlain purchased a small house, for $13,200.00. Chuck Tomberlain then spent approximately $500.00-$1,000.00 improving the house. On September 9, 1988, Chuck Tomberlain executed a contract for sale of the house to Trennis Willis for $20,000.00, to be paid in monthly installments over ten years at twelve percent interest. Willis immediately began occupying the house. Chuck Tomberlain, acting as agent for the Charles Tomberlain Insurance Agency, issued a policy on the house with Republic Insurance Company in August 1988. On August 15, 1991, the Republic insurance policy on the house expired. Chuck Tomberlain did not renew the policy at that time because his father’s agency had stopped writing policies with Republic.
On October 11, 1991, again acting as his own agent, Chuck Tomberlain completed, signed, and submitted an application for a $25,000.00 fire insurance policy on the house with Southland. Southland thereafter approved the policy, but reduced the coverage amount to $20,000.00. Sometime before October 16, Willis vacated the house without notifying Chuck Tomberlain. Chuck Tomberlain immediately began cleaning and repairing the house, and arranged for a new tenant to move in December 1.
In the early morning hours of November 20, 1991, a fire started and burned substantial portions of the house’s interior before being extinguished. Damage was estimated by the fire department at $20,000.00. A fire department investigation concluded that the fire was of suspicious origin and was started with the aid of accelerants.
Chuck Tomberlain telephoned Southland on November 20, the day of the fire, to notify them of the loss. The next day, November 21, he faxed them a completed claim form, along with a copy of the fire marshal’s report. Over the next two months, Chuck Tomberlain called Southland periodically to check on the status of the claim. He was told that an investigation was being conducted. The first written response that he received in regard to his claim was a letter from Webb dated January 24, 1992. The letter stated that Southland had determined that the fire was the result of arson and that the company had requested further investigation. Chuck Tomberlain’s attorney sent a demand letter to Southland on February 4, requesting that it pay the claim in full.
Southland responded to the demand letter by way of two letters dated February 7, 1992. One letter, addressed to Charles W. Tomberlain, announced that Southland was immediately cancelling its agency agreement with the Tomberlain Agency and notified the agency that Southland intended to seek damages against it for its misrepresentations on the property application. The other letter was written to Chuck Tomberlain’s attorney by J. Duncan Webb, IV, James Webb’s son and a licensed attorney who performs work for Southland. In the letter, the younger Webb stated that Southland was investigating Chuck Tomberlain’s claim as a potential arson incident and that Southland felt it had been “duped” by misrepresentations on the insurance application. The letter demanded that Chuck Tomberlain produce all records and documents of any kind pertaining to the property and to his employment history with the Tomberlain Insurance Agency.
On February 7, 1992, the same date as the two Southland letters, Chuck Tomberlain sued Southland and James Webb. The petition charged Southland with statutory violations in its handling of the claim, breach of the common-law duty of good faith and fair dealing, and negligence. Southland responded by denying all of the allegations of the petition and by filing a counterclaim against Chuck Tomberlain for breach of his fiduciary duties as an agent, breach of his contractual responsibilities as specified in the agency agreement, and negligence in preparing the application. Southland also filed a third-party action against the agency and Charles W. Tomberlain on the same grounds alleged against Chuck Tomberlain in the counterclaim, seeking indemnification from the agency should Chuck Tomberlain be awarded any damages from Southland. On September 9, 1992, in the midst of the lawsuit, Southland paid Chuck Tomberlain $20,900.00 in settlement of his claim, with the intention of pursuing its third-party action against the agency for indemnification. Chuck Tomberlain, however, refused to drop his suit, opting instead to seek additional damages against Southland.
At the close of the evidence, the court granted Chuck Tomberlain’s motions for directed verdict on the prompt-payment-of-claims statute, and both Chuck Tomberlain’s and the agency’s motions for directed verdicts as to all counter- and third-party claims raised by Southland. The case was submitted to the jury on the issues of common-law good faith and fair dealing and statutory unfair insurance practices. The jury found Southland and Webb liable on both counts and found that their conduct was knowing and intentional. It awarded Chuck Tomberlain damages of $107,514.61.
Throughout the trial, Southland’s primary defense for its failure to promptly investigate and pay the claim was that misrepresentations on the policy application had rendered the policy void and the claim invalid.
Southland maintained that the court erred in excluding from evidence various memoranda prepared by the company during its investigation of the case and in excluding an engineering report prepared by an expert based on his inspection of the house after the fire. The court excluded each of these documents based on the Tomberlains’ objections that they constituted inadmissible hearsay. Any error in the exclusion of the evidence was harmless. While the trial court excluded the documents themselves, it did allow both sides to testify freely regarding their contents, and all of the documents’ authors were extensively questioned about them during trial.
In order to prevail on a cause of action for breach of the duty of good faith and fair dealing based on an insurer’s delay or denial of a claim payment, an insured must prove two independent facts: (1) that the insurer had no reasonable basis for denying or delaying payment of the claim, and (2) that the insurer knew, or should have known, that it had no such reasonable basis. Because it used the word “or” rather than “and,” the instruction given by the trial court allowed the jury to find that Southland failed to comply with its duty of good faith and fair dealing based on proof of only one of the two required elements. Therefore, under the applicable law, the instruction was clearly improper.
The Court then had to determine whether the trial court’s submission of the erroneous jury instruction amounted to such a denial of Southland’s rights as was reasonably calculated to cause, and probably did cause, the rendition of an improper judgment. Southland’s primary defense in the case was its contention that it was unable to make an informed decision about the reasonableness of Chuck Tomberlain’s claim until it investigated all of the relevant facts concerning the claim, including the possibilities of arson and material misrepresentation on the policy application. The instruction given by the court effectively allowed the jury to find that Southland breached its duty to Chuck Tomberlain if, in light of all of the evidence presented at trial, there was no reasonable basis for delaying payment of the claim, regardless of whether Southland was, or should have been, aware of this fact while it was conducting its investigation. In light of the evidence and arguments in this case, the erroneous instruction given by the court created a significant probability that the jury found that Southland breached its duty of good faith and fair dealing without considering whether the company legitimately believed it had a reasonable basis for delaying payment of the claim. Because such an incomplete verdict probably resulted in the rendition of an improper judgment, the court held that submission of the erroneous instruction constituted reversible error.
Reading of the above should be proof enough that an experienced Insurance Law Attorney needs to be involved in these cases.