State Farm Lloyds v. Nicolau

• Citation: 951 S.W.2d 444
• Decision Date: 02 October 1997
• Docket Number: No. 94-0287,94-0287
• Parties: 40 Tex. Sup. Ct. J. 794 STATE FARM LLOYDS, Petitioner, v. Ioan and Liana NICOLAU, Respondents.
• Court: Supreme Court of Texas

Page 444

951 S.W.2d 444

40 Tex. Sup. Ct. J. 794

STATE FARM LLOYDS, Petitioner, v. Ioan and Liana NICOLAU, Respondents.

No. 94-0287.

Supreme Court of Texas.

Argued Nov. 16, 1994.

Decided July 9, 1997.

Rehearing Overruled Oct. 2, 1997.

Paul Dodson, Corpus Christi, for petitioner.

Savannah Robinson, Russell H. McMains, Corpus Christi, Stacy L. Keaton, Houston, for respondents.

SPECTOR, Justice, delivered the opinion of the Court, in which CORNYN, ENOCH, BAKER and ABBOTT, Justices, join.

This cause presents several questions about an insurer's liability for extracontractual damages. The court of appeals upheld jury findings of bad faith and malice, allowing the insureds to recover both mental anguish and exemplary damages. 869 S.W.2d 543. We agree that some evidence supports the jury's finding that the insurer violated its duty of good faith and fair dealing. In addition, we hold that there is no evidence that the insurer acted unconscionably or with malice. Because the latter holding eliminates the Nicolaus' recovery of common-law exemplary damages, we remand this cause to the court of appeals to consider the Nicolaus' entitlement to additional damages on statutory grounds.

In the insurance claim giving rise to this dispute, Ioan and Liana Nicolau sought coverage for extensive foundation damage at their Corpus Christi home. The Nicolaus' homeowners policy, issued by State Farm Lloyds, generally excludes losses caused by "inherent vice," or by "settling, cracking, bulging, shrinkage, or expansion of foundations." Under an express exception, however, these exclusions do not apply to losses caused by an "[a]ccidental discharge, leakage or overflow of water" from within a plumbing system.

The Nicolaus first experienced foundation problems in 1984, when cracks appeared in their walls. Unaware that the problems might be attributable to a plumbing leak and thus covered under their policy, the Nicolaus did not, at that time, file a claim. Instead, they hired Michael Krismer, a foundation repair contractor, to inspect the house. On his recommendation, they also engaged Dexter Bacon, a structural engineer with Maverick Engineering. After examining the house, Krismer and Bacon concluded that the ongoing drought that year--combined with four mesquite trees in the Nicolaus' front yard--was drying the soil under the front part of the house, causing the front of the house to sink. To prevent further downward movement, Krismer installed a series of concrete piers beneath the front of the house and part of the sides.

In 1986, the Nicolaus again noticed cracks in the interior and exterior of the house. Krismer again inspected the house but concluded that the cracks were insignificant. Krismer and Bacon both inspected the house again in 1988. Bacon determined that the piers installed in 1984 were providing adequate support. Krismer inspected the house once again in June 1989, and likewise concluded that the piers were continuing to function. Not yet realizing that they had a problem that might be covered under their insurance policy, the Nicolaus still did not file a claim.

In late 1989, however, Krismer became alarmed by additional foundation movement at the Nicolau home. One set of elevations indicated that the back of the house was five inches higher than the front. In Krismer's words, the rear end of the house appeared to be "digging up out of the ground." There was significant cracking in the sheetrock and exterior brick, and doors and cabinets were not closing properly.

At Krismer's request, Bacon reexamined the house. Bacon realized there was a problem and referred the matter to Fred Hayden a licensed civil engineer with Maverick Engineering. Krismer, Bacon, and Hayden together determined that the problem was with swelling of the soil at the back of the house rather than contraction of the soil at the front of the house. For that reason, they decided to test for leaks in the drainline system under the foundation. Such leaks, they reasoned, could be causing expansion of the clay soil under the rear of the house. Initial testing indicated that there was a significant leak in the plumbing system.

Realizing for the first time that their homeowners' policy might cover their foundation problems, the Nicolaus filed a claim with State Farm in February 1990. State Farm referred the claim to Monty R. Murray, an adjuster with ABJ Adjusters, Inc. Murray provided an initial report to State Farm in late February 1990 and a second report in March. Both reports expressed doubts that the leak was responsible for the foundation damages, because the leak was located toward the front rather than the back of the house.

In late March, at Krismer's request, Maverick Engineering provided the Nicolaus with a report based on its investigation and testing. The Nicolaus gave the report to Ralph Cooper, State Farm's claims superintendent. The report stated that the water from the plumbing leak may have flowed along the plumbing lines and trenches and may have caused the rear of the house to heave.

After receiving the Maverick report, Cooper, on behalf of State Farm, notified the Nicolaus that he wanted to obtain a second opinion on the origin and extent of their damages. For that purpose, Cooper authorized ABJ Adjusters to obtain a report from Haag Engineering Company.

Two Haag engineers examined the Nicolaus' house. They provided Cooper with a report concluding that the reported sewer line leak did not significantly affect the foundation. Cooper forwarded the report to the Nicolaus, together with a letter reserving State Farm's rights to deny coverage.

A month later, after receiving an estimate from Michael Krismer, State Farm notified the Nicolaus that State Farm was denying most of the coverage sought. State Farm did reimburse the Nicolaus $1,820.50 for expenses incurred in locating and repairing the leak, but rejected the Nicolaus' claim for $102,200 for further piering or leveling of the foundation. Cooper explained in a letter that State Farm felt the Haag Engineering report was correct: that the foundation damage was not related to the water leak but was instead caused by inherent vice or by settling problems, both of which were not covered.

The Nicolaus then obtained a report from Trinity Engineering Testing Corporation (Tetco) prepared by Chien Fu, a licensed professional engineer with a master's degree in geotechnical engineering specializing in soils analysis and foundation reports. Based on soil samples taken at the house, Fu concluded that the plumbing leak had allowed water to travel great distances through the cushion sand layer, causing a widespread wet condition in the soils. The Nicolaus forwarded the Tetco report to Cooper.

Cooper then notified the Nicolaus that he and Haag Engineering had reviewed the Tetco materials. The Haag engineers had reported that Tetco's conclusions were unfounded, and that the opinions stated in Haag's initial report remained unchanged. Cooper agreed with Haag and stated that State Farm was adhering to its denial of the Nicolaus' claim.

The Nicolaus then sued State Farm, asserting breach of contract and several extracontractual claims based on State Farm's conduct. At trial, the jury found that State Farm had breached its insurance contract, engaged in an unfair or deceptive act or practice, maliciously breached its duty to deal fairly and in good faith, and knowingly engaged in an unconscionable action. The jury awarded the Nicolaus $102,200 in policy benefits owed for necessary repairs to their home; $50,000 for mental anguish suffered in the past; $300,000 in punitive damages; and attorney's fees of either forty percent or $150,000.

The trial court chose to disregard all of the jury's findings except those relating to breach of contract, amount of loss, and attorney's fees. After subtracting the amount State Farm had already paid for plumbing repairs, the trial court rendered judgment for the Nicolaus for $100,380, plus attorney's fees and interest.

The court of appeals affirmed the trial court's judgment on the breach of contract finding. 869 S.W.2d at 555. However, in all other respects, the court of appeals reversed the trial court's judgment and rendered judgment for the Nicolaus in accordance with the jury's findings. Id.

I. Bad faith

In an opinion also issued today, we clarified the standard for imposing liability for a breach of the duty of good faith and fair dealing. See Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 54 (Tex.1997). We held in Giles that an insurer breaches its duty when the insurer fails to settle a claim if the insurer knew or should have known that it was reasonably clear that the claim was covered. Giles, 950 S.W.2d at 56. This case was submitted in accordance with the bad-faith standard established in Arnold v. National County Mutual Fire Insurance Co., 725 S.W.2d 165 (Tex.1987). Under Arnold, an insurer breaches its duty of good faith and fair dealing if the insurer denies a claim with no reasonable basis. Id. at 167. There is some evidence in the record in this case to sustain a bad-faith finding under either formulation of the standard.

Here, State Farm argues that the Haag Engineering reports conclusively establish that it did not act in bad faith in denying the Nicolaus' claim. Those reports, prepared by licensed engineers, conclude that a water leak did not cause the damage to the Nicolaus' foundation. Because State Farm based its denial on these reports in the dispute over coverage of the Nicolaus' claim, State Farm argues that any liability for bad faith is foreclosed as a matter of law.

We have recognized that evidence showing only a bona fide coverage dispute does not, standing alone, demonstrate bad faith. Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 17 (Tex.1994) citing National Union Fire Ins. Co. v. Dominguez, 873 S.W.2d 373, 376-77 (Tex.1994). But we have never held that the mere fact that an insurer relies upon an...