Lyons v. Millers Cas. Ins. Co. of Texas

Decision Date08 December 1993
Docket NumberNo. D-0664,D-0664
Citation866 S.W.2d 597
PartiesGolda A. LYONS, Petitioner, v. The MILLERS CASUALTY INSURANCE COMPANY OF TEXAS, Respondents.
CourtTexas Supreme Court

Brian D. Bethune, Dallas, Christine Karol Roberts, Newport, CA, Steve Sumner, Webb F. Joiner, Jr., Dallas, for petitioner.

Scott Patrick Stolley, Dallas, for respondents.

CORNYN, Justice, delivered the opinion of the Court, in which PHILLIPS, Chief Justice, and GONZALEZ, HECHT, ENOCH and SPECTOR, Justices, join.

This case presents us with the opportunity to clarify the method by which Texas courts should conduct legal sufficiency review of factfindings of bad faith against an insurer. After a windstorm, Golda Lyons submitted a claim to Millers Casualty Company, her homeowner's insurance carrier, for damage to the brick veneer and outside back staircase of her house. Following an investigation, Millers denied Lyons' claim. Lyons sued for breach of contract and of the duty of good faith and fair dealing. The essence of this controversy is that while Lyons claims the damage to her house was caused by the windstorm, a covered peril, Millers claims that it was caused by settling of the foundation, an excluded peril. Because we hold that there is no evidence to support the bad faith judgment for Lyons under the substantive test we adopted in Aranda v. Insurance Co. of North America, 748 S.W.2d 210, 213 (Tex.1988), we affirm the judgment of the court of appeals. 798 S.W.2d 339.

Lyons testified at trial that during a storm on April 29, 1984, she heard something banging on the outside of the house. She later discovered that bricks within the external veneer were cracked and loose and that the back staircase was standing "out of kilter." According to Lyons and two of her neighbors, this damage did not exist before the storm. The storm also knocked over a hackberry tree in Lyons' yard, which had fallen perpendicular to and away from the residence. Another hackberry tree, located inches from the damaged staircase, remained standing.

After Lyons submitted her claim to Millers, Hal Benoy, an adjustor for Millers, and Charlie Herman, a reconstruction expert hired by Benoy, inspected the house. Herman concluded that the damage was not caused by the storm, but rather by settling and shifting of the foundation. He based this conclusion on several cracks he found in the foundation and the absence of any indication of impact between a tree and the house. Herman also noted that the wood in the staircase was rotted. Millers denied the claim five days after receiving Herman's written report, less than one month after the storm.

When Lyons protested the denial of her claim, Millers dispatched Clyde Hardy, a registered professional engineer specializing in damage and failure analysis, to reinspect the property. Hardy's conclusions were identical to Herman's. He likewise noted the existence of numerous cracks in the foundation, indicating settling and shifting, and the absence of any evidence of contact between a tree and the house. On October 5, 1984, based on Hardy's report, Millers again denied Lyons' claim.

In August 1985 Lyons hired Marcus Avila, an architect and resident engineer with Trinity Construction Materials, to inspect the property. By the time of Avila's inspection, the staircase had collapsed following a second storm on March 28, 1985. Avila concluded that the original damage to the staircase and the brick veneer had been caused by the April 1984 storm. He theorized that the surviving hackberry tree located near the staircase, rather than the one found laying on the ground, struck the house during the first storm, causing the damage.

In February 1986 Lyons sued Millers for breach of contract, violation of the Texas Deceptive Trade Practices Act (DTPA) and the Texas Insurance Code, and breach of the duty of good faith and fair dealing. A jury found that one-quarter of the structural damage to the house was attributable to the windstorm, three-quarters was attributable to settlement of the structure, and that $25,000 was the reasonable cost to repair the residence. The jury further found that Millers violated the DTPA, and breached its duty of good faith and fair dealing in failing to pay Lyons' claim, awarding an additional $75,000 in damages for those claims, plus exemplary damages of $8,700. The trial court rendered judgment on the verdict for $89,950, plus pre-judgment interest and attorneys' fees.

On appeal, the court of appeals determined that there was no evidence of a breach of the duty of good faith and fair dealing or a violation of the DTPA; it therefore rendered a take-nothing judgment on those claims. 1 Lyons complains here of the court of appeals' conclusion that no evidence supports the jury's finding of bad faith.

We first recognized an insurer's tort duty of good faith and fair dealing to its insured in Arnold v. National County Mutual Fire Ins. Co., 725 S.W.2d 165 (Tex.1987), in which we stated:

A cause of action for breach of the duty of good faith and fair dealing is stated when it is alleged that there is no reasonable basis for denial of a claim or delay in payment or a failure on the part of the insurer to determine whether there is any reasonable basis for the denial or delay.

Id. at 167 (emphasis added). That duty arises from the special relationship between the insurer and the insured resulting from the insurer's disproportionately favorable bargaining posture in the claims handling process.

A year later, in Aranda v. Insurance Co. of North America, we said that to establish an insurer's liability for the tort of bad faith the insured must prove:

(1) the absence of a reasonable basis for denying or delaying payment of the benefits of the policy and (2) that the carrier knew or should have known that there was not a reasonable basis for denying the claim or delaying payment of the claim.

748 S.W.2d 210, 213 (Tex.1988) (emphasis in original). 2 We also distinguished the insurer's liability under the contract of insurance from the insurer's liability for the tort of bad faith. "[C]arriers," we stated, "will maintain the right to deny invalid or questionable claims and will not be subject to [bad faith] liability for an erroneous denial of a claim." Id. In other words, if the insurer has denied what is later determined to be a valid claim under the contract of insurance, the insurer must respond in actual damages up to the policy limits. But as long as the insurer has a reasonable basis to deny or delay payment of the claim, even if that basis is eventually determined by the factfinder to be erroneous, the insurer is not liable for the tort of bad faith.

Appellate review of the legal sufficiency of the evidence supporting a judgment for the insured in a bad faith case, however, presents unusual problems. Primary among these is the conundrum of a reviewing court scouring the record to evaluate an insurer's claim that there is "no evidence" of a negative fact, that is, that the insurer had no reasonable basis to deny or delay payment of a claim.

The traditional statement of the standard of review for legal sufficiency requires a court to consider only the evidence favoring the judgment for the insured and to disregard all evidence to the contrary. See, e.g., Havner v. E-Z Mart Stores, Inc., 825 S.W.2d 456, 458 (Tex.1992); W. Wendell Hall, Revisiting Standards of Review in Civil Appeals, 24 ST.MARY'S L.J. 1045, 1133 (1993); William Powers, Jr. & Jack Ratliff, Another Look at "No Evidence" and "Insufficient Evidence," 69 TEXAS L.REV. 515, 522 (1991); Robert W. Calvert, "No Evidence" and "Insufficient Evidence" Points of Error, 38 TEXAS L.REV. 361, 362-63 (1960). Our courts of appeals have struggled to reconcile the insurer's substantive rights under the Aranda test and the traditional statement of the no evidence standard of review. See State Farm Lloyds, Inc. v. Polasek, 847 S.W.2d 279, 283 (Tex.App.--San Antonio 1992, writ denied) (surveying cases and noting "confusion about the proper approach for assessing the legal sufficiency of a bad faith finding").

As this case demonstrates, we believe that when a court is reviewing the legal sufficiency of the evidence supporting a bad faith finding, its focus should be on the relationship of the evidence arguably supporting the bad faith finding to the elements of bad faith. The evidence presented, viewed in the light most favorable to the prevailing party, must be such as to permit the logical inference that the insurer had no reasonable basis to delay or deny payment of the claim, and that it knew or should have known it had no reasonable basis for its actions. See Pittman v. Baladez, 158 Tex. 372, 312 S.W.2d 210, 216 (1958). The evidence must relate to the tort issue of no reasonable basis for denial or delay in payment of a claim, not just to the contract issue of coverage. This is nothing more than a particularized application of our traditional no evidence review. This focus on the evidence and its relation to the elements of bad faith is necessary to maintain the distinction between a contract claim on the policy, and a claim of bad faith delay or denial of that claim, which arises from the tort duty we imposed on insurers in Arnold and Aranda.

The evidence offered by Lyons in support of the bad faith finding consisted of Avila's opinion that the windstorm caused the damage, and the testimony of Lyons and her neighbors that the brick veneer and staircase were visibly damaged after the storm. This evidence supports the jury's finding that Lyons' damage was caused in part by the wind, and therefore her claim was covered by the Millers policy. In other words, Millers was mistaken as to its contract liability. The jury was entitled to resolve the conflict between Lyons' evidence that the windstorm caused the damage and Millers' evidence that the settling of the foundation caused the damage. If the jury concluded that the former is more credible, and some evidence...

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