Articles Posted in Bad Faith Insurance

An insurance company may breach its duty of good faith and fair dealing by failing to reasonably investigate a claim.  As an example, in the 1997, Texas Supreme Court opinion, Universe Life Ins. Co. v. Giles, the insurer could not escape liability merely by failing to investigate the claim so that it could contend that liability was never reasonably clear.

Here is what happen in the 1998, Texas Supreme Court opinion, State Farm Fire & Cas. Co. v. Simmons.  After leaving for a day trip, Simmons home burned down.  Previously, Simmons had reported a theft loss.  State Farm immediately tagged the claim as “suspicious,” denied the claim and asserted an arson defense in the subsequent lawsuit.  By the time State Farm denied the claim, legitimacy of the burglary had been proven.  State Farm failed to investigate potential arson suspects (other than the policyholder) and erroneously compiled information concerning the policyholder’s financial obligations.  The Court held a jury could infer that a reasonable insurer would have approached its insured to resolve apparently conflicting information and would have eventually concluded that the insured lacked a sufficient motive to commit arson.  Accordingly, the Court concluded that the evidence was legally sufficient that State Farm denied the claim based on a biased investigation intended to construct a pretextual basis for denial.

In another case the Court concluded that once the insurance company and the public adjuster hired by the building owner reached an agreement on the estimate method, it was no longer reasonable for the insurance company to rely on contrary opinions of other experts.  This was the 2014, 14th District Court of Appeals opinion, United Nat’l Ins. Co. v. AMJ Invs., LLC.

As was stated in the 1997, Texas Supreme Court opinion, Universe Life Ins. Co. v. Giles, an insurer violates its duty of good faith and fair dealing by denying or delaying payment of a claim if the insurer knew or should have known that its liability was reasonably clear.  However, an insurance company may withhold UIM benefits until the insured’s legal entitlement is established.

Statutory liability may also be imposed on an insurer that delays payment of a claim under Texas Insurance Code, Section 542.051 and those sections following, if the insurer delays payment for more than 60 days from the date it received all the information reasonably requested and required, the insurer must pay the claim along with the statutory penalty.  An insurer’s failure to comply with the requirements of this Prompt Payment of Claims section will result in imposition of statutory penalties, even if the delay in payment is in “good faith.”  If an insurer promptly interpleads policy proceeds, it cannot be subjected to statutory penalties for delayed payment.  However, in the 2007, Texas Supreme Court opinion, State Farm Life Ins. Co. v. Martinez, the court held an insurer may be liable for statutory penalties for interpleader filing after the prompt payment deadlines.

To recover the statutory penalties available under the Prompt Payment of Claims Act, an insured must first prove that the insurer is liable for the underlying claim.  The insured must establish three elements: (1) a claim under an insurance policy; (2) that the insurer is liable for the claim; and (3) that the insurer has failed to follow one or more sections of the Prompt Payment of Claims Act with respect to the claim.

The standard of bad faith was originally phrased in the negative under the 1988, Texas Supreme Court case, Aranda v. Insurance Co. of N. Am.  Under that case, the first element of bad faith required an objective determination of whether a reasonable insurer under similar circumstances would have denied plaintiff’s  claim.  The second element balanced the right of the insurance company to investigate and pay compensable claims.  This element was met by establishing that the insurance company actually knew there was no reasonable basis to deny the claim or that, based on its duty to investigate, the insurance company should have known that there was no reasonable basis for denial.  Under the test, insurers maintained the right to deny invalid or questionable claims and would not be subject to liability for an erroneous denial of a claim.

The Texas Supreme Court, in the 1997 opinion, Universal Life Ins. Co. v. Giles, rephrased the standard in an attempt to ease the incompatibility between the no-evidence standard of review and the bad faith standard of liability.  Pursuant to this decision, the insured must prove the insurer: (a) either denied or delayed payment of the claim; and (b) with respect to which the insurer’s liability has become reasonably clear.

An insurer’s liability is not reasonably clear, and liability must not be imposed under Texas Insurance Code, Section 541.001, unless the insured shows that: (1) the policy covers the claim; (2) the insured’s liability is reasonably clear; (3) the claimant has made a proper settlement demand within policy limits; and (4) the demand’s terms are such that an ordinarily prudent insurer would accept it.  A proper settlement demand generally must clearly state a sum certain and propose to fully release the insured.  These elements comprise the statutory liability standard against which to measure legal sufficiency.  An insurer’s denial of a claim it was not obligated to pay might nevertheless be in bad faith if it’s conduct was extreme and produced damages unrelated to and independent of the policy claim.  However, an insurer does not breach its duty merely by erroneously denying a claim.  Evidence that only shows a bona fide dispute about the insurer’s liability on the contract does not rise to the level of bad faith.

The Insurance Code sections and the Deceptive Trade Practices Act were adopted together in 1973, as part of a package to reform legislation, are interrelated, and incorporate each other.

Texas Insurance Code, Section 541.008 says the Insurance Code provisions are to be liberally construed and applied to promote its underlying purposes to define and prohibit unfair and deceptive insurance practices.  This is affirmed in the 1988, Texas Supreme Court opinion, Vail v. Texas Farm Bur. Mut. Ins. Co.

The same court in the 1981 case, Cameron v. Terrell & Garrett, Inc., stated that the similar construction mandate in the DTPA requires that the statute be given “its most comprehensive application possible without doing any violence to its terms.”  In the 1985, the Texas Supreme Court in Kennedy v. Sale, applied the same reasoning in insurance cases.

Insurance attorneys know that Section 541.051 broadly prohibits making any statement misrepresenting the terms of a policy, or the benefits, advantages, or dividends of a policy, making misrepresentations about the financial condition of an insurer, misrepresenting the true nature of any policy or class of policies, or making any misrepresentation to a policy holder for the purpose of inducing or intending to induce the policyholder to allow an existing policy holder to lapse, forfeit, or surrender his insurance.  This provision is sometimes referred to  as the “anti-twisting” provision, because the latter portion is aimed at preventing one insurer stealing away the insureds of another insurer by making misrepresentations.

Section 541.052 prohibits making any advertisement or statement containing any assertion, representation, or statement with respect to the business of insurance or with respect to any person in the conduct of his insurance business that is untrue, deceptive, or misleading.

Section 541.061 prohibits misrepresenting an insurance policy by:

Here is a 2018, case with circumstances this insurance lawyer has not seen before.  The case is out of the San Antonio Court of Appeals and is styled, Virginia Bretado v. Nationwide Mutual Insurance Company.

This case is an appeal from a motion for summary judgment granted in favor of Nationwide.  Bretado was struck from behind by Paul Moryl.  On the same day, Bretado filed a claim against Nationwide for underinsured motorist (UIM) benefits.  Later, Bretado sued Moryl.

Nationwide denied the claim, stating the Moryl’s insurance was sufficient to satisfy Bretado’s damages.

Suing Adjusters in federal court is often times difficult.  The reason is that an adjuster is usually sued in state court in an effort to defeat diversity jurisdiction thus, keeping the case in state court.  When an insurance company believes the adjuster has been sued solely to defeat diversity jurisdiction, the insurance company will remove the case to federal court and ask the Judge to dismiss the adjuster.

This is what happened in this 2018, 5th Circuit opinion styled, William Mauldin v. Allstate Insurance Company; Mayella Gonzales; Theresa Hernandez.

Pursuant to 28 U.S.C., Section 1441 and 1446, Allstate removed this case to federal court where the Judge allowed the removal.  Mauldin appealed this issue to this Court.

Insurance company unfair settlement practices is dealt with in a specific section of the Texas Insurance Code.  Look at Texas Insurance Code, Section 541.060.

The statute prohibits engaging in any of the following settlement practices with respect to a claim by an insured or beneficiary:

(1)  misrepresenting to a claimant a material fact or policy provision relating to coverage at issue;

Any Insurance Law Attorney knows the heart of the law regarding bad faith insurance is found in the Texas Insurance Code.  Other sources include the Texas Department of Insurance and the Texas Administrative Code, among other sources.

The Texas Insurance Code, Chapter 541, defines and prohibits unfair and deceptive insurance practices.

The statutes allow a private cause of action by any person who has sustained actual damages caused by another’s engaging in any act or practice that is defined as an unfair method of competition or unfair or deceptive act or practice in the business of insurance, or defined as an unlawful deceptive trade practice.  This is found in Section 541.151.  The definitions of unfair and deceptive practices are found in two places: (1) Texas Insurance Code, Sections 541.051 to 541.061; and (2) Section 17.46(b) of the Business & Commerce Code, the Texas Deceptive Trade Practices — Consumer Protection Act (DTPA).

Insurance lawyers know there are time limits upon which lawsuits for bad faith insurance claims must be filed.

These limitations are illustrated in the 2018, U.S. Fifth circuit Court of Appeals opinion styled, Susan Sideman; Mark Sideman v. Farmers Group, Incorporated.

The Sidemans sued Farmers for breach of the Texas Insurance Code, Section 541.  In June 2013, Farmers mailed the Sidemans an offer package including (1) notice that Farmers was  not renewing the policy; (2) an offer for a new policy; (3) a summary comparison of the old policy and the new policy; and (4) a new endorsement, prominently titled “Exclusion of Marring of Metal Roof Materials” that limited coverage to situations where a covered peril such as hail punctures a roof or renders it functionless, and explicitly excluded coverage for mere marring like denting or scratching.