How does this stuff work?! That is a question someone in Dallas, Fort Worth, Grand Prairie, Weatherford, Arlington, Mansfield, Irving, or anywhere else in Texas might ask when it comes to insurance contracts and bad faith insurance.
“Insurance coverage claims and bad faith claims are by their nature independent. But, in most circumstances, an insured may not prevail on a bad faith claim without first showing that the insurer breached the contract.” This was stated in the Texas Supreme Court case styled, Liberty National Fire Insurance Company v. The Honorable Ted Akin, decided in 1996.
The case is called a mandamus proceeding.
The original proceeding arose out of claims by Jennifer Broderick against her homeowner’s insurance carrier, Liberty National Fire Insurance Company. On Septmeber 1, 1993, Brodrick discovered that a shifting foundation had damaged her house. She retained an engineer to identify the source of the problem. The engineer eventially concluded that a water leak under the slab had caused settling and the resulting damage.
Broderick made a claim against Liberty. Liberty sent out an adjuster who concluded that the claim was not covered. Liberty had a second engineer investigate and still denied the claim.
Broderick sued for breach of the insurance contract and for breach of the duty of good faith and fair dealing. Liberty requested that the court sever the breach of contract claim from the bad faith claim and when the court refused to do so, this mandamus action was brought.
Earlier court decisions have made clear that insurance coverage claims and bad faith claims are by their nature independent. In most circumstances, an insured may not prevail on a bad faith claim without first showing that the insurance company breached the contract.
This court spent considerable time discussing the standards that are suppose to be applied in determining whether the trial court has abused its discretion in determining whether the breach of contract claim and the bad faith claim should be severed.
With the standards in mind that the court had discussed, they held that the trial court did not abuse its discretion in denying Liberty’s motion for severance. The court stated that the contract claims and bad faith claims are largely interwoven. Most of the evidence on one of the claims would be part of the evidence on the other claim. For example, evidence regarding Liberty’s investigation and reasons for denial of the claim will no doubt be admissable in the contract case because the linchpin of any coverage case is the insurance company’s denial of the claim. The court would assume that Liberty would introduce all evidence tending to support its contention that the claim was not covered by the policy. The court also assumed that Brodrick would offer evidence of any bias against the claim on the part of Liberty’s agents, which would likely be admissable on cross-examination to test the agents’ credibility and to allow the jury to determine the weight to be given to the agents’ testimony.
This case stands for a couple of legal principles for an experienced Insurance Law Attorney to be aware of and one of them is that there is a difference between breach of contract and bad faith.
Another Texas Supreme Court has stated that contractual liability is not essential to establish extracontractual liability, but it helps. For example, an insurance company that owes policy benefits under the contract may also be found to have acted unfairly in refusing to pay those benefits.
On the other hand, the absence of contractual liability may disprove liability under other theories. For example, if the insurance company successfully defends a contract claim by proving the insured committed arson, the insurance company would not be liable for failing to act in good faith to settle, because the contract defense also gives the insurer a good faith basis for denying the claim.