Lee v. Catlin Specialty Ins. Co., No. H-09-2792 (S.D. Tex. Feb. 27, 2011), see Decision
Insurance bad faith law has had its ups and downs in Texas. When I started practicing law in the late 1980's, skewering insurance companies under the recently adopted tort of bad faith was a popular blood sport. With a shift in the political winds, however, it appeared by the mid-1990's to be impossible to win a bad faith case, at least on appeal, until a Texas Supreme court case opened the door a crack. In State Farm Lloyds v. Nicolau, 951 S.W.2d 444 (Tex. 1997), the court upheld a verdict that the insurer breached its duty of good faith and fair dealing by relying exclusively on a disputed engineering report of foundation water damage from the insurer's "hired-gun" expert, an engineering firm that the insurer used routinely because it almost never opined that foundation damage could be the result of plumbing leaks (which was covered). The policyholder in Nicolau had introduced abundant evidence to support the covered claim and to show the expert's bias. The jury found that the insurer unreasonably failed to consider the policyholder's evidence, relied only on its expert, and so committed bad faith.
So it is no longer impossible to win a bad faith case in Texas, but, as the present decision illustrates, the policyholder must build a careful and substantial record to do so. Lee's commercial property in Houston was hit by Hurricane Ike in 2008, sustaining roof damage. Lee submitted the claim, and Catlin put the investigation in the hands of Engle Martin (EM), a company that Catlin had hired to adjust all Ike damage claims in the region. Lee hired his own representative, Mike Bass, to investigate the damage. EM reported evidence of previous damage and hired another company to perform an infrared scan to identify which damages were attributable to Ike winds, and which to faulty prior repairs or natural deterioration. More reports. More inspections. At the end of the day, EM submitted its final report that none of the damage was caused by wind, and the roof could be repaired for $22,864.77. Mike Bass put the cost at $871,187.50 for the roof and $3.1 million for the entire building. Litigation ensued.
On just a cursory look, the policyholder's case looks pretty good: a "hired gun" expert with an exclusive contract with the insurer to do all the Ike work, disputed engineering evidence, only EM's part of which Catlin relied on, even a piece of correspondence seeming to show that EM was working to build a one-sided case against coverage. The plaintiff's attorney had good reason to expect at least high settlement value. The judge, however, gave more than a cursory look at the evidence and granted summary judgment for the insurer.
The criterion for bad faith is whether Catlin knew or should have known that the damage was covered when it denied the claim. The judge considered this standard in light of Nicolau and found that the policyholder had failed to introduce anything near the kind of evidence presented in Nicolau, which included detailed reports from a foundation-repair contractor, a structural engineer, and a licensed civil engineer, all of whom concluded that the foundation damage was attributable to a significant leak in the plumbing system.
Lee's evidence, by contrast, was limited to an estimate of the cost of repairing the roof and the building. The judge observed, "the record does not contain a report with conclusions that contradict those formulated by [EM]. . . . [or] any statements or conclusions relating to the cause of the damage." The judge also found nothing in the record indicating that Catlin's adjusters were unqualified, anything showing what percentage of EM's business comes from insurance companies (or even that EM in fact investigated other Ike claims), or any evidence showing that EM's conclusions were biased. The one piece of correspondence, showing that EM was working to support arguments against coverage, was written after EM had completed its reports, and so did not prove bias. "The evidence shows no more than a bona fide dispute between Catlin and Lee as to whether the damages to the roof were covered by Lee's policy."
With a little more sweat work, time and attention, the policyholder should have been able to build the kind of record that could have survived summary judgment. The huge discrepancy in the two estimates screams that one side or the other was really off base. A Houston jury would probably have found it hard to believe that a storm like Ike did not cause some damage to Lee's roof and that a large shopping center roof could be repaired for just over $22K. But before you get to a jury, you have show that there are genuine issues of material fact. That wasn't done here.
David S. White, Thompson & Knight, LLP
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