Bad Faith Insurance ?

An old Insurance Lawyer once stated about “bad faith” that if you have to have an expert to tell you whether the insurance company acted in bad faith, or not, then there probably not bad faith in whatever the insurance company did.

In 2021, a court in the Western District of Texas, San Antonio Division issued an opinion discussing bad faith.  It is styled, Richard Riley v. Safeco Insurance Company of Indiana.

The claim arises out of a claim being asserted by the insured, Riley, against his insurance company, Safeco.  The claim is for hail damage to Riley’s metal roof.  After a hail storm Riley made a claim for damages and Safeco assigned adjuster Doug Lehr to inspect the claim.  Lehr, after his initial inspection retained an engineering firm, Rimkus Consulting, to determine whether the damage to the roof was cosmetic or structural.  Rimkus determined the damage was structural.

Riley then hired a Aftermath Consulting Group to investigate the extent of damage and Aftermath concluded the damage was beyond cosmetic.

Riley filed a lawsuit in State Court alleging Insurance Code violations and breach of contract damages.  The Insurance Code bad faith allegations fall under Sections 541.060(a)(2)(A) and 541.060(a)(7).  Safeco removed the case to Federal Court and filed a motion for summary judgement on the Insurance Code bad faith claims.

The court said that Riley’s bad faith claims fail as a matter of law because there is no evidence that Safeco acted unreasonably in the investigation of the claim.  The Court stated, “An insurer does not act in bad faith where a reasonable investigation reveals the claim is questionable.”  An insurer fails to reasonably investigate a claim if the investigation is conducted as a pretext for denying the claim.  An insurer’s reliance on an expert’s report will not support a finding of bad faith unless there is evidence that the report was not objectively prepared or the insurer’s reliance on the report was unreasonable.  This was discussed further in the opinion and is a good read for an Insurance Attorney facing a similar situation.

Riley’s bad-faith claims based on denial of coverage fail as a matter of law because Riley has only pointed to evidence of a bona fide coverage dispute.  Riley contends that Safeco failed to pay his claim when its liability under the insurance policy was reasonably clear.  To prevail on such a bad faith claim, the insured must establish the absence of a reasonable basis for denying or delaying payment of the claim and that the insurer knew, or should have known, that there was no reasonable basis for denying or delaying payment of the claim.  In other words, the insured
bears the burden to prove that there were no facts before the insurer which, if believed, would justify denial of the claim.  The issue of bad faith does not focus on whether the claim was valid, but on the reasonableness of the insurer’s conduct in rejecting the claim.  Texas courts have repeatedly held that evidence showing only a bona fide coverage dispute does not, standing alone, demonstrate bad faith.

The Court concluded that Safeco conducted a reasonable investigation and there is no evidence that Valle’s report was not objectively prepared or unreliable.  Thus, Safeco was permitted to rely on its expert report in denying Riley’s claim.  The undisputed evidence in the record demonstrates that Safeco had a reasonable basis for denying Riley’s claim—Valle’s report.  Therefore, Riley’s extra-contractual claims fail as a matter of law.

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