Insurance Bad Faith Explained

Here is a 2022 opinion from the Northern District of Texas, Dallas Division, that articulates how courts look at insurance bad faith claims.  The opinion is styled, Art Dallas, Inc. v. Federal Insurance Company and Derek Franks.

This is an insurance dispute involving Federal Insurance Company (FIC) and Art Dallas, Inc’s (ADI) extracontractual claims or “bad faith” claims against FIC.  The opinion, in part, comes from FIC’s Rule 12(c) motion.

The standard for deciding a motion under Rule 12(c) is the same as the one for deciding a motion to dismiss under Rule 12(b)(6).

In deciding a Rule 12(b)(6) motion to dismiss, the court evaluates the sufficiency of a plaintiff’s complaint by accepting all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff.  To survive a motions to dismiss, ADI must plead “enough facts to state a claim to relief that is plausible on its face.  A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.  The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully.  Where the well-pleaded facts do not permit the court to infer more than the mere
possibility of misconduct, the complaint has alleged—but it has not ‘shown’—‘that the pleader is entitled to relief.

Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.

FIC contends that ADI’s petition fails to plausibly allege that FIC violated its duty of good faith and fair dealing because ADI does not allege that FIC lacked a reasonable basis for denying ADI’s claim.  At best, FIC argues, ADI asserts that there was a “battle of the experts” or bona fide dispute between the parties, which itself is insufficient to constitute bad faith under Texas law.  FIC maintains that ADI has also failed to plausibly allege that the reports FIC relied on in making its decision were biased, unreliable, or not objectively prepared, and it posits that ADI only makes conclusory allegations of bias. 

ADI contends that it has plausibly pleaded that FIC violated its duty of good faith and fair dealing.  ADI posits that Nicolau involved both HAAG and Teasdale—FIC’s two experts in this case—and that the court in Nicolau concluded that the evidence showed that they were biased.  ADI also points out that it has pleaded that FIC knew its experts were biased and that FIC had contrary evidence from ADI’s experts disputing its own expert’s conclusions.

Under Texas law, there is a duty on the part of the insurer to deal fairly and in good faith with an insured in the processing of claims.

The focus of a bad faith inquiry is on the reasonableness of the insurer’s conduct in rejecting or delaying payment of the claim, which is determined by viewing the facts available to the insurer at the time of denial.  An insurer breaches its duty of good faith if it denies a claim and its liability has become reasonably clear.  Moreover, an insurer cannot escape liability by failing to investigate a claim so that it can contend that liability was never reasonably clear; it breaches the duty of good faith and fair dealing by failing reasonably to investigate a claim.  But an insurer’s duty to investigate is limited.  The scope of the appropriate investigation will vary with the claim’s nature and value and the complexity of the factual issues involved.  If, after reasonable investigation, the insurer has evidence showing that the insured’s claim may be invalid, a bad faith action is not viable.

It is axiomatic that a bona fide dispute regarding insurance coverage precludes liability for breach of the duty of good faith and fair dealing.  And, at first blush, ADI’s allegations appear to suggest a bona fide controversy: they establish that FIC relied on two expert reports to reach its conclusions.

But while an insurer’s reliance on an expert report may create a bona fide controversy, the mere fact that an insurer relies upon an expert’s report to deny a claim does not automatically foreclose bad faith recovery as a matter of law.  A plaintiff may allege that the insurer could not rely on an expert report by arguing that the report was not objectively prepared or the insurer’s reliance on the report was unreasonable.

Accordingly, the question in this case is whether ADI has plausibly adequately alleged that the two reports that FIC relied on were not “objectively prepared” or FIC’s “reliance on the report was unreasonable.”  ADI must have alleged sufficient facts for the court to reasonably conclude that the reports were not objectively prepared or that reliance was unreasonable.

The opinion then discusses other cases on this case and makes it’s ruling.  This is a must read for insurance lawyers who believe they have a case that arises to the level of bad faith.


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