Texas Jury Award of Bad Faith Penalties Upheld by Appellate Court

Case: United National Insurance Company v. AMJ Investments, LLC
Texas Court of Appeals
2014 Tex. App. LEXIS 6969

This Texas bad faith case arose out of a Hurricane Ike loss to a seven-story office building. The cause and extent of the property damage, which was insured at $4 million replacement cost value, was at issue.

The insurer engaged a well known building consultant who met with the insured’s public adjuster. Together, they prepared an estimate of repairs that was eventually agreed by both the insurer and the insured. However, the insurer’s independent adjuster had prepared his own estimate that was $300,000 lower than the agreed estimate prepared by the consultant and public adjuster. The insurer’s adjuster then submitted a proof of loss to the insured that contained the lower estimate. The insured executed the proof of loss, and the insurer paid the lower estimate.

The insured ultimately filed suit after the insurer refused to pay the additional damage included in the higher estimate. After trial, a jury awarded $300,000 for additional property damages (the difference between the consultant’s and the independent adjuster’s estimates) and $1 million in damages for violation of the Insurance Code and attorney’s fees. The trial court rendered judgment of $300,000 for violations of the Code, $178,734 in prompt-payment penalties and another $600,000 for knowing conduct (reduced to statutory maximum), together with attorney fees, costs, and interest.

The insurer challenged the verdict on several grounds, including that the insured presented no evidence that the estimated cost of repairs were “reasonable and necessary” as set forth in the Texas Supreme Court’s decision of McGinty v. Hennen, 372 S.W.3d 625 (Tex. 2012). As to the bad faith damages, the appellate court found that evidence establishing the insurer’s failure to pay in accordance with the agreed estimate was sufficient for the jury to conclude the insurer had knowingly violated the good faith requirements of the Texas Insurance Code. The court rejected the insurer’s argument that an independent injury other than for amounts owed under the policy was necessary to support an award against the insurer for violation of the Insurance Code.

Perhaps more importantly, the court upheld the $300,000 compensatory award even though there was no evidence that the amount was reasonable and necessary for repairs. Distinguishing the Texas Supreme Court’s McGinty ruling which held that estimated expenses do not establish that the cost of repair is reasonable, the appellate court reasoned the insurer failed to submit a jury question as to whether the repairs were reasonable or necessary, and in any event, both parties relied on the same Xactimate (software used to provide property damage estimates) evidence. Notably, a spirited dissent would have had the insured take nothing, principally based on the failure to submit evidence that the amounts sought were reasonable and necessary for repairs.