Standard For Punitive Damages In An Insurance Claim

Arlington insurance lawyers need to know what to look for in a case to determine how likely it is to achieve punitive damages. A 1998, Texas Supreme Court opinion sheds some light on how the court looks at punitive damages evidence. The style of the case is, State Farm Fire & Casualty Company v. Simmons. Here is some of the relevant evidence in the case.
The plaintiff in this case, Simmons, had purchased his first home by financing through a VA loan. Simmons was a construction supervisor who fell on hard times when his work slowed down. Simmons arranged a repayment program with the VA that substantially lowered his monthly payments. The same month he worked out this refinance program, his home was burglarized. The burglary occurred in the day and none of Simmons neighbors saw any wrong acts around Simmons home. Simmons began his own investigation and followed some wheel barrow tracks through the woods around his house to the home of Mattix, who later confessed to the police that he had committed the burglary of Simmons home. State Farm paid Simmons for this loss. Simmons then experienced a rash of vandalism to his property. Simmons then left to take his children to Louisiana for the summer. He planned to return right away because he had to work the next day. Soon after he left, someone noticed smoke from Simmons home. His home was completely destroyed by fire. State Farm denied the fire loss claim.
At trial, the jury made a finding that Simmons did not burn his own home, then found that State Farm had breached its duty of good faith and fair dealing in handling the claim and for knowingly violating the DTPA. The jury also determined State Farm acted with conscious indifference in determining whether there was a reasonable basis to deny Simmons claim. Based on these findings, Simmons was awarded $275,000 for actual damages and $2 million in punitive damages.
This Texas Supreme Court upheld all but the punitive damages part of the claim. This court stated the standard for recovery in bad faith cases, saying – an insurance company breaches its duty of good faith and fair dealing by denying a claim when their liability has become reasonably clear. An insurance company cannot insulate itself from bad faith liability by investigating a claim in a manner calculated to construct a pretextual basis for denial. Whether an insurance company does this is a fact issue for a trier of fact to determine based on the evidence presented at trial.
The evidence in this case was determined to be legally sufficient to support a finding that State Farm breached its duty of good faith and fair dealing by denying Simmons claim based upon a biased investigation intended to construct a pretextual basis for denial. State Farm immediately deemed the fire loss to be “suspicious” because of the earlier theft claim. By the time State Farm had denied the claim however, the legitimacy of the earlier burglary claim was unquestionable. State Farm failed to investigate the possibility that other potential suspects might have started the fire. There was undisputed evidence that the most common motivations for arson are spite and revenge. Simmons told State Farm of at least five people who may have grudges against them, including Mattix, yet there was no evidence that State Farm ever attempted to locate or contact any of these potential suspects. State Farm’s adjuster listed locating these potential suspects as an unfinished item of the investigation. At trial, the adjuster testified that he was unable to locate them, but then admitted he felt it was “not important” to do so. He also admitted that he did not know that Mattix had confessed to the burglary or that he had been released from jail only two weeks before the fire. From these facts, the jury could logically conclude that State Farm’s investigation was biased and unreasonable.
An insured may recover punitive damages only when the insurance company’s breach of the duty of good faith and fair dealing is accompanied by malicious, intentional, fraudulent, or grossly negligent conduct. Thus, Simmons had to show that State Farm “was actually aware that its action would probably result in extraordinary harm not ordinarily associated with breach of contract or bad faith denial of a claim. Examples of this would be death, grievous injury, or financial ruin. State Farm contacted the VA and agreed to pay its policy limits of $47,000 in exchange for an assignment of the VA’s lien. In light of State Farm’s undisputed efforts to settle with the VA, this court could not conclude that State Farm was actually aware that its actions were likely to result in financial ruin to Simmons. Thus, there was legally insufficient evidence to support the punitive damages in this case.

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