State Farm Fire & Cas. Co. v. Simmons

• Decision Date: 13 February 1998
• Docket Number: No. D-4095,D-4095
• Citation: 41 Tex.Sup.Ct.J. 371,963 S.W.2d 42
• Parties: 41 Tex. Sup. Ct. J. 371 STATE FARM FIRE & CASUALTY COMPANY, Petitioner, v. James and Cynthia SIMMONS, Respondents.
• Court: Texas Supreme Court

Page 42

963 S.W.2d 42

41 Tex. Sup. Ct. J. 371

STATE FARM FIRE & CASUALTY COMPANY, Petitioner, v. James and Cynthia SIMMONS, Respondents.

No. D-4095.

Supreme Court of Texas.

Argued Oct. 8, 1997.

Decided Feb. 13, 1998.

Katherine D. Mackillop, Joy M. Soloway, William J. Boyce, Houston, for Petitioner.

James C. Plummer, Houston, Larry Zinn, San Antonio, for Respondents.

SPECTOR, Justice, delivered the opinion of the Court, in which PHILLIPS, Chief Justice, GONZALEZ, BAKER, ABBOTT and HANKINSON, Justices, join.

The two principal issues in this cause are whether legally sufficient evidence supports a jury's finding that an insurer breached its duty of good faith and fair dealing and whether there is some evidence to support a punitive damages award. The court of appeals answered each question affirmatively. 857 S.W.2d 126, 137. We reverse the punitive damages award, but render judgment awarding the Simmonses enhanced damages under the DTPA. We affirm the court of appeals' judgment in all other respects.

I. Background

James and Cynthia Simmons purchased their first home in 1983, financed by a Veterans Administration loan. The house was located on a large lot in a semi-rural part of Montgomery County. After buying the house, the Simmonses bought a homeowners insurance policy from State Farm Fire & Casualty Insurance.

In the year and a half after the Simmonses and their two young children moved into the house, they substantially improved the property. They installed a driveway and sidewalk, remodeled the bathroom, improved the home's water well, and, for safety's sake, moved a butane fuel tank farther from the house. To indulge his "love for hogs," James constructed a hog pen with the hope of eventually purchasing some stock. He also built a dining room table for his wife and beds for each of his children, as well as a mantel and a number of picture frames.

In the first year after the Simmonses bought the house, James, a construction supervisor, experienced some down-time from work. Consequently, the Simmonses missed several monthly mortgage payments. As a result, in January 1985, to make up for the missed payments, the Simmonses worked out a repayment schedule with the VA that allowed them to make weekly payments of $185 in lieu of their monthly mortgage obligation of $603. Thereafter, most of the weekly payments the Simmonses made were for $190 or $200. They made their last weekly payment in late April 1985.

In the same month the Simmonses worked out their repayment schedule, someone burglarized their home. Several items, including a television, silverware, a shotgun, and the children's piggy banks, were stolen. Although the burglary occurred during the day, none of the Simmonses' neighbors saw anything amiss. The burglars apparently entered the house through one of two doors at the back of the house. After the burglary, James followed the tracks of a wheelbarrow through the woods abutting the Simmonses' house to the nearby home of eighteen- or nineteen-year-old Tim Mattix. There, James confronted Mattix and another youth, James Wooddell, about the burglary. James Simmons called the police, but the police made no arrest at that time. Mattix later confessed to the police that he had committed the burglary in company with James and Charles Wooddell. State Farm paid the Simmonses $7,069 for their claim within a few weeks of the burglary.

After James's confrontation with Mattix and Wooddell, the Simmonses experienced a spate of vandalism: their telephone line was tapped into, eggs were smashed in their mailbox, and their dog died under circumstances that caused James, who had studied animal husbandry at Prairie View A & M University, to suspect that someone had poisoned the dog. Within a couple of weeks of the burglary, Cynthia returned home one day to find that someone had again entered the house, although nothing appeared to have been stolen at that time.

On Sunday, June 2, 1985, some time between 1:30 and 2:00 a.m., the Simmonses, along with James's mother, left the house to take the children to Cynthia's aunt's home in rural Louisiana for the summer. They planned to return that evening so that James could be at work the next day. The Simmonses locked all of the doors and windows before they departed. A short time after the family left, Irene Lawrence, who was delivering newspapers, noticed smoke emanating from the Simmonses' house. Within a few minutes, Lawrence reported the fire. Firefighters responded to the fire, but to no avail. When the Simmonses returned late Sunday afternoon, they found their home totally destroyed.

The Simmonses reported the loss to their State Farm agent the next day. The claim was immediately tagged as "suspicious" because of the relatively recent theft claim. State Farm soon referred the claim to an adjuster in what later came to be known as State Farm's Special Investigation Unit. Four months later, in October, State Farm denied the claim.

Thirteen months later, the Simmonses sued State Farm. State Farm asserted arson as an affirmative defense. The jury found that the Simmonses had not burned their home, thus establishing coverage under the policy. State Farm does not contest that finding in this Court. The jury also found that State Farm had breached its duty of good faith and fair dealing in handling the Simmonses' claim and knowingly violated the Deceptive Trade Practice--Consumer Protection Act. Finally, the jury found that State Farm acted with conscious indifference in determining whether there was a reasonable basis to deny the Simmonses' claim. Based upon those findings, the district court rendered judgment for the Simmonses for $275,000 in actual damages and $2 million in punitive damages. The court of appeals affirmed that judgment. 857 S.W.2d at 142.

II. Bad faith

State Farm contends that the finding that State Farm breached its duty of good faith and fair dealing is not supported by legally sufficient evidence. We disagree.

This Court recently clarified the standard for recovery in bad faith cases. In Universe Life Insurance Company v. Giles, we held that an insurer breaches its duty of good faith and fair dealing by denying a claim when the insurer's liability has become reasonably clear. 950 S.W.2d 48, 56 (Tex.1997). Evidence establishing only a bona fide coverage dispute does not demonstrate bad faith. State Farm Lloyds v. Nicolau, 951 S.W.2d 444, 448 (Tex.1997); Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 17 (Tex.1994). But an insurer cannot insulate itself from bad faith liability by investigating a claim in a manner calculated to construct a pretextual basis for denial. See Nicolau, 951 S.W.2d at 448; National Union Fire Ins. Co. v. Dominguez, 873 S.W.2d 373, 376 (Tex.1994); Lyons v. Millers Cas. Ins. Co., 866 S.W.2d 597, 601 (Tex.1993).

As State Farm conceded at oral argument, whether an insurer has breached its duty of good faith and fair dealing is a fact issue. See Giles, 950 S.W.2d at 56, and id. at 81 (Enoch, J., concurring). In determining whether the evidence is legally sufficient to support a bad faith judgment, we resolve all conflicts in the evidence and draw all inferences in favor of the jury's findings. Id. at 51. Viewing the evidence in this case in the light most favorable to the judgment, the evidence is legally sufficient that State Farm breached its duty of good faith and fair dealing by denying the Simmonses' claim based upon a biased investigation intended to construct a pretextual basis for denial. An insurance company's obligation to investigate is obviously not unlimited. The scope of the appropriate investigation will vary with the claim's nature and value and the complexity of the factual issues involved. Here, however, the testimony of State Farm's own experts, as well as its own internal documents, established the deficiencies in the company's review of the Simmonses' claim.

A.

The Simmonses produced evidence from which the jury could logically infer that State Farm did not make a good-faith effort to objectively investigate the Simmonses' claim, but instead engaged in an outcome-oriented investigation designed to place the Simmonses at the center of an "arson triangle." ¹ The Simmonses' fire loss claim was immediately deemed "suspicious" because of the earlier theft claim. In fact, by the time State Farm denied the fire claim, the legitimacy of the earlier burglary claim was unquestionable. The police had returned a shotgun taken in the burglary to the Simmonses, which James turned over to State Farm because the company had paid for it in settling the burglary claim.

Further, there was evidence that State Farm's investigation was not reasonable because State Farm failed to investigate the possibility that other potential suspects might have started the fire. At trial, Mike Hvasta, State Farm's adjuster, testified that revenge and spite are some of the more common motivations for arson. The Montgomery County fire marshal also testified that spite and revenge were the leading motivations for arson fires in the county in 1985. In their statements to State Farm, the Simmonses had identified five people who may have had grudges against them, including Mattix and the Wooddells. Yet, there is evidence that State Farm never attempted to locate or contact any of these potential suspects, even though Hvasta's preliminary combined fire report listed locating them as an unfinished item of investigation.

State Farm's explanation for its failure to attempt to contact Mattix and the Wooddells was contradictory. At trial, Hvasta first testified that he did not contact them because he could not locate them. When confronted with his deposition testimony, however, he conceded that his explanation at that time was that he felt that it was "not important" to do so. He also acknowledged that he never learned during his investigation that Mattix, who lived just down the road from the Simmonses, had confessed to burglarizing the...