“Knowing” Conduct By Insurance Company

A 1998, Dallas Court of Appeals case is a good read for lawyers handling bad faith insurance cases. The case is styled, State Farm Lloyds v Johns.
Johns house was built in 1964. Johns moved in to her house in 1972. In the summer of 1990, Johns noticed evidence of extensive foundation problems including door misalignment, significant cracks in the interior walls and a slope on the floor. Repairmen later discovered two plumbing leaks under the house. Johns made a claim for foundation damage alleging that the plumbing leaks caused the soil underneath the house to expand resulting in upheaval of the foundation, thereby damaging the structure. State Farm concluded that John’s foundation problems were not cause by the plumbing leaks, but rather asserted that the damage occurred from natural soil movement common to north Texas. State Farm’s homeowners policy excludes damage caused by ordinary settlement. Based on the exclusion, State Farm denied the claim.
Johns filed suit against State Farm alleging wrongful denial of her claim, violations of the Texas Insurance Code, and violations of the Texas Deceptive Trade Practices Act. The trial court rendered judgment on the verdict in favor of Johns based on the DTPA and Insurance Code claim. State Farm appealed.
The trial court judgment in favor or Johns and against State Farm was affirmed by this court.
In this case, the following evidence was presented:
*Mr. Biting, a professional engineer, believed that foundation problems rarely occurred because of plumbing leaks.
*Mr. Bitting’s work came from State Farm and other insurance companies.
*Mr. Bitting’s firm had received increasing amounts of business from State Farm over the previous years.
*Johns was present during Mr. Bitting’s inspection and she felt that she was not getting a “fair shake” from State Farm.
*Johns had the plumbing system inspected again and a second leak was found.
*The location of the second leak was in the bath in the master bedroom where the most severe distress was found.
*Johns hired her own expert who concluded that the foundation stress was caused by plumbing leaks, swelling the soil under the slab foundation causing the foundation to “heave” upward creating a dome shape.
*Johns forwarded her expert’s report to State Farm. Mr. Bitting did not attempt to confirm his inspection.
*State Farm’s adjuster testified that State Farm had no procedure for resolving opposing or conflicting expert opinions on the cause of foundation damage.
Based on the evidence, the appellate court concluded that State Farm’s reliance on Mr. Bitting’s report was unreasonable and State Farm denied the claim after it knew or should have known that it was reasonably clear that the claim was covered. The evidence showed that when confronted with the report from a geo-technical engineer contradicting Mr. Biting’s opinion, State Farm continued to insist that Mr. Bitting’s opinion was correct, did not seek a third opinion, did not require Mr. Bitting to re-inspect the house, did not require soil testing, and did not interview the engineer which Johns had retained. Furthermore, State Farm assigned the claim to an adjuster who did not understand that the policy unambiguously covered foundation damage resulting from a plumbing leak and thought the claim should be denied.
The evidence is legally and factually sufficient to support a finding of a “knowing” violation. “Knowingly” means “actual awareness of the falsity, unfairness or deception of the act or practice made the basis of the claim for damages.” The Texas Supreme Court has stated that “actual awareness” does not mean merely that a person knows what he is doing; rather, it means that a person knows what he is doing is false, deceptive or unfair. In other words, a person must thing to himself at some point, “Yes, I know this is false, deceptive or unfair to him but I am going to do it anyway.” In this case, the adjuster testified that he knew State Farm had no procedures for resolving disputes between experts, that he had no expertise to evaluate engineering reports, but yet he chose to believe Mr. Bitting’s reports. In addition, the adjuster erroneously testified that the policy did not provide any coverage for foundation damage, that he knew that he did not investigate Mr. Bitting’s qualifications, that he was also aware that Mr. Bitting usually concluded foundation damage occurred from settlement rather than from plumbing leaks, and that he was aware that Johns claimed to have discovered a second plumbing leak but did not request that Mr. Bitting or any other engineer re-inspect the house. The could have concluded State Farm knew it had no reasonable basis for denying the claim and knowingly conducted an outcome-oriented investigation designed to “paper” the file to justify denying the claim.
Based on this “knowing” violation the appeals court upheld the jury award of exemplary damages.