Bad Faith Insurance – Claims Investigation

An inconsistent investigation and the insurance company relying on it is bad faith according to the 1988, Dallas Court of Appeals opinion, Harco Nat’l Ins. Co. v. Villanueva.  The owner of a truck reported the theft of the truck to his insurance company, Harco.  Harco’s investigator stated  that he saw the man he believed to be the truck owner sitting with others in a vehicle similar to the stolen truck.  Harco, based on the investigator’s report, denied the claim.  At trial, the jury found that Harco had breached its duty of good faith and fair dealing to the truck owner and further, found that Harco’s claim denial was gross negligence.  This appeals court agreed.  Harco’s denial was based solely on information discovered by the unlicensed investigator.  Harco did not ask it’s insured for any corroborating evidence.  The insured had no criminal record, had never submitted an insurance claim before, and appeared to be in god financial condition.  Thus, there was sufficient evidence for a jury to determine that Harco’s reliance upon the report of the investigator did not constitute a reasonable basis for denial of the claim; and there was sufficient evidence to support a finding of gross negligence.

In a different case an expert was deemed to not be biased only because he wanted to obtain business from the insurance company he was doing work for.  The case is a 2003, Fort Worth Court of Appeals opinion styled, Allstate Tex. Lloyds v. Mason.  While investigating a homeowner’s claim, Allstate retained Tolson, an engineer, to inspect the house and determine whether the damage to the house was caused by a plumbing leak.  During these inspections, Tolson learned about the history of the house, examined the failed pipe and plumbing diagnostics, and obtained soil data.  During his investigation, Tolson also reviewed a report discussing the house’s sub-structure drainage and foundation problems.

Based on his investigation, Tolson concluded that sub-surface drainage caused the clay soil under the house to swell, leading to the foundation upheaval, and that the sub-surface drainage combined with the soil expansion was alone sufficient to damage the house.  After Allstate denied the claim, the homeowners brought suit, alleging breach of contract, and the duty of good faith and fair dealing.  They also alleged that Tolson’s conclusions should be disregarded based on the fact that he has worked for insurance companies in the past in conducting investigations.

The evidence showed that Tolson conducted an adequate investigation of the house and surrounding property, that he took a history of the house, and that he examined reports regarding the house’s prior foundation problems.  Although Tolson testified that he received a significant amount of his income from insurers, he testified that he also works for homeowners and that he does not believe that plumbing leaks can never cause foundation damage.  Before the trial in this case, Tolson had concluded that a plumbing leak had caused foundation damage while working for another insurance company.  He also made a similar conclusion while working for Allstate on a different claim.  The that Tolson wants to obtain more business from Allstate, by itself and in conjunction with the above, however, does not show that Tolson was necessarily biased against the insureds.

A 1997, Texas Supreme Court opinion, State Farm Lloyds v. Nicolau, tells us an insurer’s reliance upon an expert’s report, standing alone, will not necessarily shield the carrier if there is evidence that the report was not objectively prepared or the insurer’s reliance on the report was unreasonable.