Breach Of The Insurance Contract By Itself Is Not Enough To Support A Bad Faith Claim

Dallas insurance lawyers need to know that when an insurance company breaks the contract it has with it’s insured, that is not enough by itself to support a claim for bad faith insurance. The 1988, Beaumont Court of Appeals case, Gulf States Underwriters v. Wilson, states this very clearly. Here is some of the relevant information from that case.
Wilson entered into an insurance contract with Gulf States effective June 29, 1979, and initially paid $85. This case has as its basis a dispute between Wilson and the insurance company over how this $85 should be classified: as a “deposit” against future premium shortfalls (according to Gulf States) or as a premium paid in advance (according to Wilson). The regular monthly premium was to be based on a percentage of cords of pulpwood Wilson’s employer produced each month. In late April 1982, Wilson paid $419 premium. Gulf States applied this payment to Wilson’s coverage from March 28, 1982, through April 29, 1982. Wilson was subsequently injured on May 1, 1982. On May 10, 1982, Gulf States mailed Wilson a notice of intention not to renew his policy. Wilson did not pay a premium on the next due date at the end of May. According to Gulf States, the letter did not actually cancel the policy, but rather, the policy lapsed for non-payment of the premium due at the end of May.
Gulf States theory at trial was that Wilson’s first payment of $85 was not the first month’s premium, but merely a “deposit” which was consideration for issuing the policy but did not effect coverage for any period of time. Following this logic, the first premium was not paid until the end of July 1979. That premium would apply retrospectively for coverage during July 1979. Gulf States thus maintains that the payment at the end of April 1982 was for insurance coverage during the month of April 1982. And, since Wilson paid no premium at the end of May, the policy lapsed as of the end of April 1982, so the injury on May 1, 1982, was not covered.
The contract itself provides: “This Policy is issued in consideration of the statements in the application, copy of which is attached hereto and made a part hereof, and of the payment in advance of the premium specified in the Insurance Schedule.” The insurance schedule sets out the effective date of the policy as June 29, 1979, and the “initial premium” as $85. This initial payment was calculated in the policy application by multiplying an estimated production of 100 cords of wood per month by a premium rate of $.85 per cord, for a total monthly premium of $85.
James Thomas testified he and Wilson were told at the time application was made that the initial $85 payment was an estimated premium for coverage from June 29, 1979, through July 29, 1979. Wilson testified the premiums were to be paid in advance and that the initial $85 was to apply to the first month’s coverage. Gulf States admits the deposit “effected the coverage for the initiation of the policy and was consideration given for the issuance of the contract.” Gulf States current president and sole stockholder agreed on direct examination that had the deposit not been collected, the company would have been forced to bear some risk free of charge. There was, thus, some evidence that the premiums were to be paid in advance and that the policy had not lapsed at the time of Wilson’s injury.
Gulf States raised the argument that asserting an alternative interpretation of an insurance policy, even if it rises to the level of breach of contract, should not support an action for treble damages. The Texas Supreme Court has adopted the position that a simple breach of contract cannot be a violation of the DTPA, where a “false, misleading or deceptive act” is alleged. This principle has also been extended to cover allegations of unconscionable acts as well. The entire basis for the court’s findings was that Gulf States sold a policy which clearly said one thing, then acted as though it said another; i.e., it breached its agreement. The rule seems to be equally applicable in the context of insurance policies.
Being aware of how courts interpret these situations helps an experienced Insurance Law Attorney to properly advise a client.