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.
The 1988, Dallas Court of Appeals opinion, Harco Nat’l Ins. Co. v. Villanueva, found that an inconsistent investigation and reliance thereon by the insurer is bad faith. The owner of the truck in this case reported its theft to his insurer, Harco. Harco’s investigator stated that he saw a man he believed to be the truck owner sitting with others in a vehicle similar to the stolen truck. Harco subsequently denied the claim. At trial, a jury found that Harco had breached its duty of good faith and fair dealing to its insured and, further, that Harco’s denial of the claim was gross negligence. On appeal the court agreed. Harco denied the claim solely on the basis of information uncovered by an unlicensed investigator. Harco did not ask the insured for any corroborating evidence. The insured had no criminal record, had never submitted an insurance claim before, and appeared to be in good 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 by Harco.