Insurance Company Must Conduct A Reasonable Investigation

Grand Prairie insurance lawyers must know what it takes for an insurance company to be found liable for bad-faith. A 5th Circuit Court of Appeals opinion is educational in this respect. It is a 2014 opinion styled, Santacruz v. Allstate Texas Lloyd’s, Inc.
The 5th Circuit reversed a summary judgment in favor of Allstate because the reviewing panel found that Allstate had failed to make a reasonable investigation before denying the claim. The result is unusual not only because Allstate’s bad-faith summary judgment was reversed, but also the reason for reversal was not that Allstate had no reasonable basis for the denial but rather, it failed to conduct a reasonable investigation before denial. Under Texas’ bad-faith standard, the insurer must demonstrate both.
In this case, a rainstorm blew several shingles off Santacruz’s roof, causing leaks and exgensive damage to personal property. The insured promptly reported the incident to Allstate who informed the insured that it could not send an adjuster for several days. However, because more storms were forecast, Santacruz, upon the advice of his contractor, informed Allstate that he had to repair the roof immediately to prevent further damage. Allstate repeated that it needed to inspect the roof before it could be repaired. Santacruz proceeded with repairs that day. A few days later, an Allstate adjuster came and took pictures of the roof and interior but did not further investigation. Allstate denied the Santacruz’s claim, who then sued Allstate for breach of the duty of good faith and fair dealing and intentional infliction of emotional distress.
On appeal, the panel noted that the lower court had focused only on the first prong of the bad-faith standard, whether Allstate had a reasonable basis for denial, by holding that Allstate reasonably believed that it could deny the claim because the policy provided that the insured must provide Allstate access to the damaged property. Allstate argued that Santacruz had failed to do this. Santacruz countered that he had to repair the roof immediately because the policy required him to “protect the property from further damage’ and “make reasonable and necessary repairs to protect the property.” The panel stated:
“We agree that Allstate’s reading of the policy places Santacruz in a lose-lose situation: on the one hand, he is required to take action to mitigate the damage, but on the other hand he is required not to repair the damage prior to the adjuster’s inspection.”
The panel noted it was not clear that Santacruz had refused access to the property because he did not prohibit the adjuster from visiting his home after repairs, and the policy did not contain an explicit provision allowing the insurer a reasonable time and opportunity to inspect before repairs are undertaken.
On the bad-faith claim itself, the panel understood Allstate’s defense to rest not so much on the “access” provision of the policy, but on Allstate’s view that repairing the roof before the adjuster’s inspection prevented Allstate from determining whether the damage was the result of wind, a covered peril, or some other non-covered peril such as normal deterioration or the weight of the rain on the roof. However, the panel found, even if Allstate was justified on that basis, Allstate failed to address the other prong, that it must reasonably investigate a claim. The panel held that Santacruz had produced enough evidence to allow a jury to determine that Allstate failed to conduct a sufficient investigation. Specifically:
“Allstate did not attempt to talk to the contractor, who submitted an affidavit in the case describing what he observed concerning the roof and attributing the cause to wind damage. Nor is there any evidence showing that Allstate obtained weather reports or inquired with neighbors to see if they suffered similar damage, which would tend to show the damage was caused by wind rather than normal wear and tear.”
Accordingly, the panel reversed and remanded the case for trial.

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