Universe Life Ins. Co. v. Giles, 94-0992

• Decision Date: 09 July 1997
• Docket Number: No. 94-0992,94-0992
• Parties: 40 Tex. Sup. Ct. J. 810 The UNIVERSE LIFE INSURANCE COMPANY, AIA Services Corporation, and AIA Insurance, Inc., Petitioners, v. Ida M. GILES, Respondent.
• Court: Texas Supreme Court

Page 48

950 S.W.2d 48

40 Tex. Sup. Ct. J. 810

The UNIVERSE LIFE INSURANCE COMPANY, AIA Services Corporation, and AIA Insurance, Inc., Petitioners, v. Ida M. GILES, Respondent.

No. 94-0992.

Supreme Court of Texas.

Argued Sept. 21, 1995.

Decided July 9, 1997.

J. D. McLaughlin, Paris, Robert H. Renneker, Dallas, for Petitioners.

John R. Mercy, Texarkana, Jesse L. Nickerson, III, Paris, for Respondent.

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

The two issues in this case are whether any evidence supports an insured's judgment against her health insurer for breach of the duty of good faith and fair dealing, and whether any evidence supports a punitive damages award. In deciding the first issue, we attempt to ease the incompatibility between the no-evidence standard of review and the bad-faith standard of liability by clarifying the latter. The court of appeals reduced the amount of punitive damages awarded the insured and otherwise affirmed the judgment. 881 S.W.2d 44. We reverse the punitive damages award but affirm the court of appeals' judgment in other respects.

A majority of the Court--eight Justices--agrees that an insurer violates its duty of good faith and fair dealing by denying or delaying payment of a claim if the insurer knew or should have known that it was reasonably clear that the claim was covered. Our fundamental disagreement concerns who should decide that issue. Those joining Justice Hecht's concurrence would take the resolution of bad-faith disputes away from the juries that have been deciding bad faith cases for more than a decade. However, a majority of the Court--the four Justices joining this opinion and Justice Enoch--continues to believe that whether an insurer breached its duty of good faith and fair dealing remains a fact question. Nothing we have seen persuades us that juries are unsuited to decide whether an insurer breached its duty of good faith and fair dealing.

I.

Ida Mae Giles, age 61, underwent heart bypass surgery about three months after she obtained health insurance from The Universe Life Insurance Company. Universe denied Giles's claim for payment of her medical bills on the ground that the policy did not cover her heart condition because she had received treatment for it before Universe issued the policy. Universe based its denial on four alleged facts. First, Giles's hospital records stated that she had had a two- or three-year history of recurrent chest pain. Second, the same records stated that she had a positive history of heart disease. Third, other medical records reflected that for years before the policy issued Giles had been treated with Mevacor and Lorelco, two drugs used to lower blood cholesterol. Fourth, Giles's medical records indicated that she suffered from atherosclerosis, a condition that must have developed over several years.

When Giles learned why Universe had denied coverage, she asked two of her physicians to write to Universe to clarify her medical records. The physician whose notes stated that Giles had suffered chest pain for some years explained that the statement resulted from a transcription error, and that in fact, Giles had suffered chest pain for only two or three weeks before her surgery--the entire time being after her insurance policy issued. The physician who had prescribed Mevacor and Lorelco explained that he had given them to Giles for hypercholesteremia, not for hypertension or heart problems. The medical record indicating that Giles had a positive history of heart disease actually stated that Giles "has never had any history of heart problems.... She has a positive history of heart disease with a mother who recently had coronary artery bypass grafting.... She does not smoke, has no history of hypertension or diabetes, but has had an elevated cholesterol in the past...." Taken in context, the "positive history" appears to refer to family history. It thus became quite clear that Giles was not treated for heart problems until a few weeks before surgery, after the policy issued, and that the policy covered her claim.

Universe never questioned Giles's physicians' credibility in clarifying her medical history and never insinuated that they misstated her history to help her with her insurance claim. Nevertheless, Universe persisted in denying Giles's claim until it received a letter from her attorney, about ten months after the surgery, demanding payment of Giles's medical bills of $51,086.10 (less her $1,000 deductible) and $1,500 attorney fees. Several weeks later Universe paid medical bills totaling $48,074.51, but it refused to pay about $2,000 of charges it considered unreasonable, and it refused to pay any attorney fees.

Giles then sued Universe and two related companies, AIA Insurance, Inc., which sold polices underwritten by Universe, and AIA Services Corporation, which owned the other two (hereafter collectively referred to as "Universe"). After a jury trial, the district court rendered judgment for Giles on a verdict that Universe had breached its duty of good faith and fair dealing and assessed $75,000 damages for mental anguish and $500,000 punitive damages. The court of appeals held that section 41.007 of the Civil Practice and Remedies Code limited punitive damages to the greater of $200,000 or four times actual damages, and reduced that award to $300,000. In all other respects the court of appeals affirmed the district court's judgment. 881 S.W.2d 44.

In this Court, Universe contends that no evidence supports either the bad-faith finding or the punitive damages award. We address each of these contentions in turn. Universe also contends that its payment of Giles's medical bills was a settlement of her claim precluding this bad-faith action, and that the trial court erred in its jury charge on this subject. We reject these contentions, as the court of appeals did, for the reasons that court stated. 881 S.W.2d at 52-53.

The parties make two other arguments we do not consider. Universe contends that no evidence supports a mental anguish damages award. However, Universe did not include this complaint in its motion for rehearing in the court of appeals and therefore did not preserve it here. TEX.R.APP. P. 131; Doctors Hosp. Facilities v. Fifth Court of Appeals, 750 S.W.2d 177, 178 (Tex.1988). Giles complains that the punitive damages award is not subject to the statutory limits on such damages, but because we conclude that Giles cannot recover punitive damages, we do not reach her statutory argument.

II.

An insurer breaches its duty of good faith and fair dealing when "the insurer had no reasonable basis for denying or delaying payment of [a] claim, and [the insurer] knew or should have known that fact." Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 18 (Tex.1994); see Aranda v. Insurance Co. of N. Am., 748 S.W.2d 210, 213 (Tex.1988). Although this standard seems straightforward, reviewing courts have found it difficult to assess the legal sufficiency of evidence to support bad faith findings. See Lyons v. Millers Casualty Ins. Co., 866 S.W.2d 597, 600 (Tex.1993) ("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."); National Union Fire Ins. Co. v. Dominguez, 873 S.W.2d 373, 376 (Tex.1994) ("As we observed in [Lyons ], courts have had difficulty applying a traditional 'no evidence' review of [the elements of proof of bad faith]."); Columbia Universal Life Ins. Co. v. Miles, 923 S.W.2d 803, 808-10 (Tex.App.--El Paso 1996, writ denied) (describing the efforts of the courts of appeals to apply the no-evidence standard of review to bad-faith findings).

The problem is this: A plaintiff in a bad-faith case must prove the absence of a reasonable basis to deny the claim, a negative proposition. Yet, under our no-evidence standard of review, an appellate court must resolve all conflicts in the evidence and draw all inferences in favor of a bad-faith finding. ¹ See Havner v. E-Z Mart Stores, Inc., 825 S.W.2d 456, 458 (Tex.1992); Garza v. Alviar, 395 S.W.2d 821, 823 (Tex.1965). It has been argued, then, that if the reviewing court must give no weight to the insurer's evidence of a reasonable basis for the denial or delay in payment of a claim, no judgment can be reversed for want of evidence because there will never be any evidence of a reasonable basis. A review of the cases applying the traditional no-evidence standard to bad-faith findings suggests that this argument has some merit. See Stewart Title Guaranty Co. v. Aiello, 911 S.W.2d 463, 471 (Tex.App.--El Paso 1995), rev'd on other grounds, 941 S.W.2d 68 (Tex.1997); Maryland Ins. Co. v. Head Indus. Coatings & Servs., Inc., 906 S.W.2d 218, 227 (Tex.App.--Texarkana 1995), rev'd on other grounds, 938 S.W.2d 27 (Tex.1996) (per curiam); St. Paul Surplus Lines Ins. Co. v. Dal-Worth Tank Co., 917 S.W.2d 29, 55-56 (Tex.App.--Amarillo 1995, writ pending); Liberty Mut. Fire Ins. Co. v. Crane, 898 S.W.2d 944, 952 (Tex.App.--Beaumont 1995, no writ); Southern Life & Health Ins. Co. v. Alfaro, 875 S.W.2d 740, 746 (Tex.App.--San Antonio 1994, no writ); Nationwide Mut. Ins. Co. v. Crowe, 857 S.W.2d 644, 652 (Tex.App.--Houston [14th Dist.] ), judgment vacated pursuant to settlement, 863 S.W.2d 462 (Tex.1993); Shelton Ins. Agency v. St. Paul Mercury Ins. Co., 848 S.W.2d 739, 746 (Tex.App.--Corpus Christi 1993, writ denied); State Farm Fire & Cas. Co. v. Price, 845 S.W.2d 427, 438 (Tex.App.--Amarillo 1992, writ dism'd by agr.); St. Paul Ins. Co. v. Rakkar, 838 S.W.2d 622, 627 (Tex.App.--Dallas 1992, writ denied); Commonwealth Lloyd's Ins. Co. v. Thomas, 825 S.W.2d 135, 144 (Tex.App.--Dallas 1992), judgment vacated pursuant to settlement, 843 S.W.2d 486 (Tex.1993); Texas Employers Ins. Ass'n v. Puckett, 822 S.W.2d 133, 138 (Tex.App.--Houston [1st Dist.] 1991, writ denied); ...