Someone in Weatherford, Fort Worth, Aledo, and other places in Tarrant and Parker County might have a hard time understanding what is “bad faith” in most insurance situations. Here is a case that gives some insight into how it works.
The case is State Farm Lloyd’s v. Johns and was decided by the Dallas Court of Appeals in 1998. Here are some of the background facts.
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 to 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 an upheaval of the foundation, thereby damaging the structure. State Farm concluded that Johns’ foundation problems were not caused by the plumbing leaks, but rather asserted that the damage was 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 and violations of the Texas Insurance Code among other violations. She won at trial and State Farm filed this appeal.
BAD FAITH In Universal Life Ins. Co. v Giles, the Texas Supreme Court held that a bad faith claimant had the burden of proving that the insurer knew or should have known it was reasonably clear that the claim was covered.
State Farm attorneys argued that it had a reasonable basis for denying the claim based on a report prepared by a professional engineer, Mr. Bitting. Mr. Bitting concluded Johns’ foundation problems were caused by ordinary, long term settlement rather than plumbing leaks. However, in State Farm Lloyds v. Nicolau, the Supreme Court held that the report in denying a claim does not automatically foreclose bad faith recovery as a matter of law, it there is evidence that the report was not objectively prepared or the insurer’s reliance on the report was unreasonable. In this case, the following evidence was presented:
* Mr. Bitting 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’s report doubted any leaks existed. Mr. Bitting did not attempt to confirm them in 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, this 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. Bitting’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.
This case is an example where a finding of “bad faith” was successful.