Bad Faith And Claim Denial

Bad faith attorneys need to know when bad faith in insurance occurs and when it does not.  A 1995, Texas Supreme Court case is worth reading.  It is styled, Republic Insurance Co. v. Stoker.

The Stokers were involved in a chain reaction car wreck caused by an unidentified pickup truck which dropped a load of furniture causing a chain reaction.  The truck was not struck by any of the vehicles.  The Stokers had no collision insurance and therefore submitted a claim under their uninsured/underinsured coverage.  Republic originally denied the claim because it concluded that Mrs. Stoker, the driver, was more than fifty percent at fault in causing the accident.

The Stokers sued for breach of insurance contract, breach of good faith and fair dealing, of violations of the Deceptive Trade Practices Act, and violations of the Texas Insurance Code.  The Stokers alleged that Republic gave an invalid reason for denial of their claim.

Republic and Southwest (the investigator) filed a Motion for Summary Judgment asserting a different reason for denial — because there was no physical contact, there was no coverage under the policy and therefore the Stokers had no contractual and extra-contractual claims as a matter of law.  The trial court granted summary judgment in favor of Republic and Southwest on the contract issue.  However, the trial court submitted the case to the jury on breach of duty of good faith, DTPA and Insurance Code violation theories.  The jury found that Republic and Southwest breached the duty of good faith and fair dealing and violated the DTPA and Insurance Code.  The trial court rendered judgment for the Stokers.  The Court of Appeals affirmed the summary judgment in favor of Republic and Southwest on the policy claim and the judgment for extra-contractual damages.

The issue is whether the defendants are liable to the Stokers for denying their claim for an incorrect reason — the accident was mostly Mrs. Stoker’s fault — when there was a correct reason for denial which the defendants did not give the Stokers — the incident was not covered by the policy.

A breach of the duty of good faith and fair dealing is stablished by: (1) there is a absence of a reasonable basis for denying or delaying payment of benefits under the policy, and (2) the carrier knew or should have known that there was not a reasonable basis for denying the claim or delaying payment of the claim.  In this case, the Stoker’s accident was never covered by their policy because there was no collision with the pickup truck.  The facts compelling denial were in existence at the time of the denial.  In this case, Republic did not fail to determine whether there was a reasonable basis for denying the Stokers’ claim; its decision was timely, it simply made the right decision for the wrong reason.

As a general rule, there can be no claim for bad faith when an insurer has promptly denied a claim that is, in fact, not covered.  The judgment of the Court of Appeals is reversed and rendered against the Stokers.