Bad Faith – How To Get There?

It’s easy to say “bad faith.”  It’s not always easy to prove.  Insurance lawyers have to look hard and rarely will be successful.  A 1992, San Antonio Court of Appeals opinion helps explain why.  The case is styled, State Farm Lloyds v. Polasek.

A fire destroyed the Polasek’s video rental business.  State Farm denied insurance claim on ground of arson.  The Polasek’s filed suit for breach of contract and bad faith.  At trial, the jury found that the Polaseks had not committed arson and that State Farm had acted in bad faith because it did not have a reasonable basis for denying the claim.  The jury awarded $40,000.00 property damages, $200,000.00 mental anguish, and $500,000.00 exemplary damages.  State Farm appealed.  On appeal, the San Antonio Court of Appeals reversed the bad faith judgment.

A bad faith cause of action is not satisfied by proof that State Farm should have paid the claim or that State Farm acted unreasonably in denying the claim.  Instead, a bad faith cause of action requires proof of a negative: that no reasonable basis existed for denying or delaying payment of the insurance claim.  Under a bad faith cause of action, carriers still maintain the right to deny invalid or questionable claims and will not be subject to liability for an erroneous denial of a claim.  A bad faith cause of action requires a much different and more demanding proof than a suit for breach of the insurance policy.

In a bad faith suit, where there is undisputed evidence that a reasonable basis existed for denying an insurance claim, the bad faith cause of action is defeated as a matter of law.  In deciding whether a reasonable basis existed for denying an insurance claim, the jury does not weigh conflicting evidence: it decides whether the evidence existed and whether, standing alone, it constituted a reasonable ground for denying the claim.  In a bad faith claim, the issue is whether there was evidence in existence before State Farm; the issue is not whether State Farm correctly evaluated the evidence before it.  Courts and juries do not weigh conflicting evidence that was before the insurer; they decide whether the evidence existed to justify denial of the claim.  Courts should be careful to insure that the bad faith action is reserved for cases of fragrant denial or delay of payment where no reasonable basis existed, and not for mere unreasonable denial or delay.  If the circumstantial evidence before the insurer reasonably suggests that the insured may have committed arson, there is no bad faith cause of action, even though the jury would easily have resolved the issue in the insured’s favor.

In this case, State Farm investigated the circumstances surrounding the fire.  Burn patterns showed accelerants had been present; laboratory tests confirmed that kerosene had been poured on the carpeting; no accidental cause such as electrical shorting was apparent; no forced entry into the store was shown; and the fire was concentrated under a counter in the tape storage area.