Weiser-Brown Operating Co. v. St. Paul Surplus Lines Insurance , 801 F.3d 512 ( 2015 )

Case: 13-20442 Document: 00513195229 Page: 1 Date Filed: 09/16/2015
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 13-20442 United States Court of Appeals
Fifth Circuit
FILED
WEISER-BROWN OPERATING COMPANY, September 16, 2015
Lyle W. Cayce
Plaintiff - Appellee Cross-Appellant Clerk
v.
ST. PAUL SURPLUS LINES INSURANCE COMPANY,
Defendant - Appellant Cross-Appellee
Appeals from the United States District Court
for the Southern District of Texas
Before JOLLY, HIGGINSON, and COSTA, Circuit Judges.
STEPHEN A. HIGGINSON, Circuit Judge:
This case involves an insurance dispute between Plaintiff Weiser-Brown
Operating Company (“Weiser-Brown”) and Defendant St. Paul Surplus Lines
Insurance Company (“St. Paul”). On September 7, 2012, after a four-day trial,
a jury found that St. Paul breached its insurance contract with Weiser-Brown
by failing to pay Weiser-Brown’s insurance claim for costs associated with the
“loss of control” of an oil well that Weiser-Brown operated in Lavaca County,
Texas. St. Paul was ordered to pay Weiser-Brown $2,290,457.03 in damages
for its breach of contract. After trial, the district court awarded $1,232,328.14
in penalty interest to Weiser-Brown under the Texas Prompt Payment of
Claims Statute (the “Prompt-Payment Statute”), Texas Insurance Code
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§§ 542.051-.061. The court concluded that St. Paul violated § 542.056 of the
statute on November 21, 2009, when it failed to accept or reject Weiser-Brown’s
claim fifteen days after receiving certain requested information, and the court
calculated interest accruing from the date of that violation. St. Paul timely
appealed and contends that the district court erred in concluding that St. Paul
violated the Prompt-Payment Statute and, alternatively, that the district court
used the wrong accrual date in calculating interest under the statute. Weiser-
Brown cross-appealed, claiming that the district court erred by granting
judgment as a matter of law in favor of St. Paul on Weiser-Brown’s bad-faith
claim. For the reasons that follow, we AFFIRM.
I.
Weiser-Brown, a small company based in Arkansas, operates wells that
explore for oil in Arkansas, Texas, and Louisiana. Weiser-Brown had a control-
of-well insurance policy with St. Paul, by which St. Paul agreed to, among other
things, “reimburse [Weiser-Brown] for actual costs and/or expenses incurred
. . . in regaining or attempting to regain control of any and all Wells Insured
which get out of control.” The policy explained that “a Well shall be deemed
out of control . . . when there is an unintended subsurface flow of oil, gas, water,
and/or fluid from one subsurface zone to another subsurface zone via the bore
of the Well, which cannot be controlled by the blowout preventer . . . or other
equipment required.”
Weiser-Brown was the operator and a working-interest owner of the
Viking No. 1 well, located in Lavaca County, Texas. In August 2008, while
drilling the Viking No. 1, Weiser-Brown experienced a loss of control of the
Viking No. 1. 1 In March 2009, Weiser-Brown notified St. Paul that it was
1 Whether the Viking No. 1 was ever out of control, as defined by the insurance policy,
was a point of major contention at trial. The jury, and subsequently the district court, found
that the Viking No. 1 was out of control and, thus, the costs incurred in attempting to regain
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interested in making a claim under the insurance policy for the August 2008
event. St. Paul acknowledged the claim and appointed a loss adjuster, BC
Johnson Associates, to investigate. In a letter dated March 9, 2009, BC
Johnson requested seventeen categories of information from Weiser-Brown,
including daily drilling reports, the Joint Operating Agreement, and “invoice
cost documentation.” Within one month, Weiser-Brown sent some, but not all,
of the requested documentation to BC Johnson. On June 9, 2009, BC Johnson
sent a letter to Weiser-Brown indicating that it had received the daily drilling
reports, the Joint Operating Agreement, and some of the invoices, but still
needed several documents, including any additional invoices, mud logs, and
noise and temperature logs.
On September 29, 2009, BC Johnson’s Bob Kachnik informed Weiser-
Brown, via e-mail, that an independent expert, David Watson, had reached a
preliminary conclusion that “there was not a subsurface loss of control” of the
Viking No. 1. Kachnik noted that Watson requested some additional
information from Weiser-Brown, including “[a] mud log across the sidetrack
wellbore”; “[a]ll daily reports prepared by the mud logger”; and “[a]ll daily mud
reports prepared by Spirit’s mud engineer.” Kachnik asked Weiser-Brown to
provide the additional information and to “advise” if it believed Watson’s
conclusion was incorrect. Weiser-Brown continued to send documents to BC
Johnson in October and November 2009. On November 6, 2009, Weiser-Brown
sent BC Johnson “the [s]idetrack log.”
On February 8, 2010, Kachnik informed Weiser-Brown that after
reviewing the additional information, Watson had not changed his conclusion
that the Viking No. 1 was never out of control. The e-mail from Kachnik
control were covered by the insurance policy. Because St. Paul is not appealing this
determination, we find it unnecessary to detail the events that took place at the well in 2008.
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concluded: “Again, please review this report and if you believe that the
conclusions reached in the report are incorrect, please advise accordingly and
provide any information or documentation in support.” In March and April
2010, St. Paul sent two letters to Weiser-Brown explaining that it had not
received a response from Weiser-Brown to Watson’s report and that it would
close the claim in thirty days if no response was received. On April 26, 2010,
Weiser-Brown responded that it was “studying the matter” and would “respond
to that report shortly.” On June 7, 2010, Weiser-Brown sent a one-page
response to Watson’s report, challenging his neutrality and conclusion. On
June 23, 2010, St. Paul acknowledged receipt of Weiser-Brown’s response and
indicated that it would forward the response to Watson “for further review and
comment.” On July 16, 2010, Weiser-Brown filed the present lawsuit.
Weiser-Brown alleged that St. Paul breached the insurance agreement
and brought claims for breach of contract and for bad faith, in violation of Texas
Insurance Code § 541. 2 As part of its breach-of-contract claim, Weiser-Brown
asserted that St. Paul was liable under the Prompt-Payment Statute for 18%
interest on any damages awarded. During trial, the parties agreed to submit
the Prompt-Payment Statute issue to the court if the jury returned a verdict
in favor of Weiser-Brown. At the close of Weiser-Brown’s case, St. Paul moved
for judgment as a matter of law on Weiser-Brown’s § 541 bad-faith claim. The
district court granted St. Paul’s motion, stating “I do not believe there’s been a
showing of bad faith, and I’m not going to have that go to the jury.” The breach-
of-contract claim went to the jury in the form of four questions, which
essentially asked: (1a) Did Weiser-Brown comply with the insurance policy’s
submission requirements relating to loss, damage, occurrence and a “sworn
2 Initially, Weiser-Brown asserted only a breach of contract claim. However, on
January 19, 2012, Weiser-Brown filed a third amended complaint in which it added a bad-
faith claim against St. Paul.
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proof of loss”? (1b) If not, did St. Paul waive compliance with these conditions?
(2) Did St. Paul breach the insurance policy by not paying Weiser-Brown’s
claim? (3) What are Weiser-Brown’s damages? While the jury found that
Weiser-Brown had not complied with the contract’s conditions, the jury also
found that St. Paul had waived compliance with those conditions. It further
found that St. Paul breached the insurance agreement and awarded Weiser-
Brown $2,290,457.03 in damages.
The parties then submitted the prompt-payment issue to the court. After
extensive briefing and oral argument, the district court issued Findings of Fact
and Conclusions of Law. The district court concluded that St. Paul violated
the Prompt-Payment Statute, specifically § 542.056(a), when it failed to accept
or reject Weiser-Brown’s claim within fifteen days of receiving “all items,
statements, and forms required by the insurer to secure final proof of loss.”
Tex. Ins. Code § 542.056(a). The court found that “[b]y November 6, 2009,
Weiser-Brown had complied with ‘most,’ but not all, of the requests for
information in Watson’s report.” The court also held that, despite any
omission, “St. Paul and its adjusters did not indicate in the February 8, 2010;
March 30, 2010; or April 21, 2010 correspondence that any request for
information remained unfulfilled or that determination of coverage was
contingent upon receiving such information.” Because St. Paul did not accept
or reject Weiser-Brown’s claim fifteen days later, on November 21, 2009, the
district court held that St. Paul was liable to Weiser-Brown for “interest on the
amount of the claim at a rate of 18 percent a year” from that date. Tex. Ins.
Code § 542.060(a). The court subsequently entered a final judgment ordering
St. Paul to pay $1,232,328.14 in interest under the Prompt-Payment Statute.
St. Paul timely appealed and argues that the district court erred in
concluding that St. Paul violated the Prompt-Payment Statute or,
alternatively, the district court miscalculated the statutory interest. Weiser-
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Brown cross-appealed, arguing that its bad-faith claim should have gone to the
jury and that the district court improperly excluded evidence of bad faith.
II.
In this diversity case, this court applies state substantive law, but
federal procedural law. Symetra Life Ins. Co. v. Rapid Settlements, Ltd., 775
F.3d 242, 248 (5th Cir. 2014). “We review the district court’s conclusions of law
de novo and its findings of fact for clear error.” RecoverEdge L.P. v. Pentecost,
44 F.3d 1284, 1290 (5th Cir. 1995); see also Flowers Transp., Inc. v. M/V
Peanut Hollinger, 664 F.2d 112, 113 (5th Cir. 1981) (“[T]he trial judge’s
findings of fact are not to be overturned unless they are clearly erroneous.”
(citing Fed. R. Civ. P. 52(a))); In re Matter of Complaint of Settoon Towing,
L.L.C., 720 F.3d 268, 276 (5th Cir. 2013) (“[W]e review interpretations of state
law de novo.”). We must interpret Texas’s statutes the way we believe the
Texas Supreme Court would. See F.D.I.C. v. Shaid, 142 F.3d 260, 261 (5th Cir.
1998). “When the highest state court is silent on an issue we must make an
Erie guess, using the sources of law that the state’s highest court would look
to.” Symetra, 775 F.3d at 248.
III.
St. Paul contends that the district court misinterpreted and misapplied
§ 542.056 of the Prompt-Payment Statute when it determined that St. Paul
violated that section of the statute.
A.
The Prompt-Payment Statute, 3 “provides for additional damages when
an insurer wrongfully refuses or delays payment of a claim.” Lamar Homes,
3 The Prompt-Payment Statute was formerly codified as article 21.55 of the Texas
Insurance Code. The statute was re-codified without substantial change. See Lamar Homes,
Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 16 (Tex. 2007).
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Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 16 (Tex. 2007). As the Texas
Supreme Court has summarized,
[t]he prompt-payment statute provides that an
insurer, who is “liable for a claim under an insurance
policy” and who does not promptly respond to, or pay,
the claim as the statute requires, is liable to the policy
holder or beneficiary not only for the amount of the
claim, but also for “interest on the amount of the claim
at a rate of eighteen percent a year as damages,
together with reasonable attorney’s fees.”
Id. (quoting Tex. Ins. Code. § 542.060(a)). In order to recover interest under
the Prompt-Payment Statute, an insured must establish: “(1) a claim under an
insurance policy; (2) that the insurer is liable for the claim; and (3) that the
insurer has failed to follow one or more sections of [the Prompt-Payment
Statute] with respect to the claim.” GuideOne Lloyds Ins. Co. v. First Baptist
Church of Bedford, 268 S.W.3d 822, 830-31 (Tex. App.—Fort Worth 2008, no
pet. 2008) (citing Allstate Ins. Co. v. Bonner, 51 S.W.3d 289, 291 (Tex. 2001),
modified on other grounds, No. 00-0282, 2001 WL 1412951, at *1 (Tex. 2001)).
The statute is to be “liberally construed to promote the prompt payment of
insurance claims.” Tex. Ins. Code § 542.054.
The statute establishes a series of claim-handling and claim-payment
deadlines for insurers. See Tex. Ins. Code §§ 542.055-.058. First, § 542.055,
entitled “Receipt of Notice of Claim,” provides that within fifteen days of
receiving notice of a claim, the insurer must acknowledge receipt of the claim,
commence an investigation, and request “all items, statements, and forms that
the insurer reasonably believes, at that time, will be required from the
claimant.” Tex. Ins. Code § 542.055(a). Next, § 542.056, entitled “Notice of
Acceptance or Rejection of Claim,” requires the insurer to “notify a claimant in
writing of the acceptance or rejection of a claim not later than the 15th business
day after the date the insurer receives all items, statements, and forms
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required by the insurer to secure final proof of loss.” Tex. Ins. Code
§ 542.056(a). The statute allows insurers to extend this deadline for an
additional forty-five days if “the insurer is unable to accept or reject the claim”
and “notif[ies] the claimant of the reasons that the insurer needs additional
time.” Tex. Ins. Code § 542.056(d). If the insurer accepts the claim and
“notifies a claimant under [§] 542.056 that the insurer will pay a claim or part
of a claim,” it has five days to do so. Tex. Ins. Code § 542.057(a). Finally,
§ 542.058, entitled “Delay in Payment of Claim,” provides that “if an insurer,
after receiving all items, statements, and forms reasonably requested and
required under [§] 542.055, delays payment of the claim . . . for more than 60
days, the insurer shall pay damages and other items as provided by [§]
542.060.” Tex. Ins. Code § 542.058(a).
Section 542.060 provides the “enforcement mechanism” for the statute’s
deadlines. Cox Operating, L.L.C. v. St. Paul Surplus Lines Ins. Co., 795 F.3d
496, 505 (5th Cir. 2015). That section provides that “[i]f an insurer that is
liable for a claim under an insurance policy is not in compliance with this
subchapter, the insurer is liable to pay the holder of the policy . . . interest on
the amount of the claim at a rate of 18 percent a year as damages, together
with reasonable attorney’s fees.” Tex. Ins. Code § 542.060(a). This court
recently held that although § 542.058 is the only section that explicitly refers
to the penalties in § 542.060, “a violation of any of the Act’s deadlines . . . begins
the accrual of statutory interest under § 542.060.” 4 Cox Operating, 795 F.3d
at 509. Accordingly, if St. Paul violated § 542.056, as the district court found,
4 St. Paul’s secondary argument before us is that a violation of § 542.056 does not
trigger the penalty provision in § 542.060. St. Paul asks us to reform the judgment so that
interest does not begin to accrue until 60 days after the district court’s chosen accrual date,
when St. Paul would have been in violation of § 542.058, rather than § 542.056. Our recent
holding in Cox Operating forecloses this argument. See Cox Operating, 795 F.3d at 509.
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then the correct accrual date for statutory interest was the date of that
violation, consistent with the district court’s calculation. See id. at 509 n.4.
B.
The parties do not dispute that St. Paul never accepted or rejected
Weiser-Brown’s claim until after the present lawsuit was filed. The question
presented on appeal is whether St. Paul received “all items, statements, and
forms required by the insurer to secure final proof of loss” such that § 542.056’s
fifteen-day deadline was triggered, and subsequently violated. See Tex. Ins.
Code § 542.056(a). St. Paul argues that the district court “improperly changed
the wording in 542.056” and urges us to look at “the plain meaning of the
statute’s language.” St. Paul concedes, however, that “[t]he statute does not
define what items are necessary to constitute a ‘final proof of loss.’”
In addition to a lack of statutory guidance, there has been little guidance
from Texas courts about information covered by § 542.056. See Colonial Cnty.
Mut. Ins. Co. v. Valdez, 30 S.W.3d 514, 523 (Tex. App.—Corpus Christi 2000,
no pet.) (“We are unaware of any Texas case examining what documents are
‘required by the insurer to secure final proof of loss’ for purposes of triggering
the deadlines in [§ 542.056].”). The clearest statement was made by the Texas
Court of Appeals in GuideOne Lloyds Insurance Company v. First Baptist
Church of Bedford, 5 which, interpreting the “plain language of” § 542.056,
concluded that “final proof of loss” did not require information regarding the
extent of the loss, only information proving that a loss occurred. 268 S.W.3d at
834-35. 6 In GuideOne, which involved an insurance claim for roof damage, the
5 “In making an Erie guess in the absence of a ruling from the state’s highest court,
this Court may look to the decisions of intermediate appellate state courts for guidance.”
Howe ex rel. Howe v. Scottsdale Ins. Co., 204 F.3d 624, 627 (5th Cir. 2000).
6 The GuideOne court cited the previous version of the Prompt-Payment Statute,
article 21.55 of the Texas Insurance Code. See GuideOne, 268 S.W.3d at 834-35. The current
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trial court determined that the insurer violated § 542.055 when it failed to
request any items, statements, or forms from the insured within fifteen days
of receiving notice of the claim. Id. at 834; § 542.055(a)(3). The trial court used
the date of this § 542.055 violation to calculate statutory interest under the
Prompt-Payment Statute. Id. at 834 n.7. On appeal, the insurer shifted focus
to § 542.056 of the Prompt-Payment Statute and argued that because it had
an outstanding request for information required to determine final proof of
loss, penalty interest should not have begun to accrue according to the district
court’s calculation. Id. at 833-35. Specifically, the insurer contended that
nearly six months after receiving notice of the claim it sent a written request
for “core samples to determine the extent of the damage.” Id. at 834. Rejecting
the insurer’s argument, the GuideOne court reasoned:
Taking core samples of [the insured’s] roof may have
been required to determine the extent of [the
insured’s] loss, but it would not have been required to
prove that [the insured] in fact suffered a loss, which,
according to the plain language of [§ 542.056], is
required for an insurer to make its decision to accept
or reject the claim.
Id. at 835. By this logic, § 542.056’s reference to information “required by the
insurer to secure final proof of loss” refers to information demonstrating that
the insured in fact suffered a loss. According to the GuideOne court, the extent
of the loss is not determinative of § 542.056 and the fifteen-day
acceptance/rejection deadline. Id. at 834-35 (explaining that “GuideOne’s
reason for sending the letter was for a purpose other than what is relevant to
this issue”).
version of the statute, re-codified as § 542 of the Texas Insurance Code, remains largely the
same. See supra note 3.
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The GuideOne court relied on Colonial County Mutual Insurance Co. v.
Valdez, as support for its statutory interpretation. See GuideOne, 268 S.W.3d
at 835. Colonial County involved an insurance claim for car theft and an
alleged violation of the Unfair Settlement Practices Act, rather than the
Prompt-Payment Statute. 30 S.W.3d at 516, 522. However, because the
parties urged the court to interpret the terms of the Unfair Settlement
Practices Act in light of the deadlines established by the Prompt-Payment
Statute, the court interpreted and discussed § 542.056. Id. at 522. The insurer
had requested eight pieces of information from the insured and argued that
because it did not receive all of the requested information, it never received all
“items, statements, and forms required by the insurer to secure final proof of
loss” and, therefore, did not fail to promptly accept or reject the claim. Id. at
522-23 (quoting Tex. Ins. Code § 542.056). Noting that it was “unaware of any
Texas case examining what documents are ‘required by the insurer to secure
final proof of loss,’” the court relied on “[c]ommon sense,” to find that “materials
such as service records, sets of keys, and photographs of the vehicle are
irrelevant to proving the loss of the vehicle.” Id. at 523. Because these missing
materials were irrelevant to proving that the claimed loss occurred, the court
reasoned, they did not excuse the insurer’s failure to affirm or deny coverage
within the deadline provided by § 542.056. Id.
St. Paul relies heavily on the Texas Supreme Court’s decision in Lamar
Homes, Inc. v. Mid-Continental Casualty Co., 242 S.W.3d 1 (Tex. 2007). In
Lamar Homes, the Texas Supreme Court, answering a question certified by
this court, held that the Prompt-Payment Statute applies to an insurer’s
breach of the duty to defend. Id. at 16, 20. The court acknowledged that some
Texas courts found application of the Prompt-Payment Statute to defense
claims “unworkable,” as it was difficult to calculate and apply interest to a
claim that “has no finite value at the time the insurer denies it.” Id. at 19. The
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court responded that in the context of a claim for defense, where the insured
has not yet suffered a quantifiable loss when it makes the claim, the insured
“would have to submit his legal bills to the insurance company, as received, to
mature its rights under the prompt-payment statute.” Id. The court
explained:
[W]hen the insurer wrongfully rejects its defense
obligation, the insured has suffered an actual loss that
is quantified after the insured retains counsel and
begins receiving statements for legal services. These
statements or invoices are the last piece of information
needed to put a value on the insured’s loss. See Tex.
Ins. Code. § 542.056(a). And when the insurer, who
owes a defense to its insured, fails to pay within the
statutory deadline, the insured matures its right to
reasonable attorney’s fees and the eighteen percent
interest rate specified by the statute. Id. § 542.060.
Id. at 19.
St. Paul indicates that the reference in Lamar Homes to the “last piece
of information needed to put a value on the insured’s loss” means that, under
§ 542.056, Weiser-Brown needed to provide “evidence of the dates and amounts
of its costs demonstrating loss” and “proof that it incurred the out-of-pocket
costs for the loss.” When read in context, however, Lamar Homes does little to
guide our analysis of § 542.056 in this case. In describing how the Prompt-
Payment Statute would apply to an insurer’s wrongful denial of a claim for
defense, and subsequent failure to pay within the statutory deadlines, the
Lamar Homes court was analyzing a violation of § 542.058 rather than
§ 542.056. 7 See Lamar Homes, 242 S.W.3d at 19. Further, the court was
7 As previously explained, § 542.056 requires the insurer to accept or reject a claim
within fifteen days of receiving certain information. The rejection of a claim, even if wrongful,
does not violate § 542.056, if done timely. See Tex. Ins. Code § 542.056(a). If an insurer
wrongfully rejects a claim, the insurer will violate § 542.058 of the statute when it
subsequently fails to pay the claim within the statutory deadline. See Higginbotham v. State
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explaining how statutory interest would accrue with respect to a unique type
of claim, “which typically has no finite value at the time the insurer denies it.”
Id. The court recognized that even though the insured is injured when his
claim for defense is wrongfully denied, his injury is not quantifiable until “after
the insured retains counsel and begins receiving statements for legal services.”
Id. It follows logically then that the insured would need to submit those
invoices, and thus quantify a loss, before the insurer could be penalized for
failing to timely pay the claim.
Finally, the district court relied on Lee v. Caitlin Specialty Insurance Co.,
766 F. Supp. 2d 812 (S.D. Tex. 2011), a case involving roof damage under a
wind-storm insurance policy. After hiring a roofing consultant to inspect the
roof, the insurer’s adjuster concluded in a report, dated March 20, 2009, that
the roof damage was not caused by wind. Id. at 816. In a motion for summary
judgment, the insurer argued that it did not have to notify the insured of its
rejection of the claim because it never received certain pieces of information
that it requested, including an invoice for roof repair and leases between the
building owner and tenants. Id. at 826. The district court rejected this
argument. Emphasizing that the insurer’s adjuster had already finished his
investigation and had done so without the missing documentation, the court
found that the insurer had “not demonstrated that such documentation was
required for it to make its determination.” Id. Accordingly, the court denied
summary judgment, finding that there was a genuine issue of fact as to
whether all documentation “required for the insurer to secure final proof of
loss,” under § 542.056, had been submitted, even in the absence of the invoice
and leases. Id.
Farm Mut. Auto. Ins. Co., 103 F.3d 456, 461 (5th Cir. 1997) (“A wrongful rejection of a claim
may be considered a delay in payment for purposes of the 60-day rule and statutory
damages.”).
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While these decisions are helpful in analyzing the contours of the proof-
of-loss documentation described in § 542.056, we do not today endorse as
determinative the approach taken in any one decision. Instead, we find that
common to all of these decisions is the understanding that the information and
documentation “required by the insurer to secure final proof of loss” under
§ 542.056 will depend on the facts and circumstances involved in a given case.
See 13 Couch on Ins. § 189:1 (“[I]n most cases, there is no objective measure of
exactly what information the insurer does and does not need, and the universe
of information available in any given case varies considerably.”). The
documents required to prove a loss with respect to a defense claim might differ
from the documents required to prove a loss with respect to a roof-damage
claim that the insurer has already determined is only partially covered.
Compare Lamar Homes, 242 S.W.3d at 19, with GuideOne, 268 S.W.3d at 834-
35, and Lee, 766 F. Supp. 2d at 826; see also 13 Couch on Ins. § 189:4 (“More
so than the notice of loss, the contents of proofs of loss tend to vary by type of
insurance. The common thread to proofs, of course, is that the information
supplied must establish that the loss falls within the coverage terms of the
policy.”). Rather than embark on the challenging, perhaps impossible, task of
listing each piece of information for purposes of § 542.056(a), we think it
appropriate to turn to the specific facts and contract in this case, as examined
and found by the district court.
C.
On March 9, 2009, BC Johnson, St. Paul’s appointed loss adjuster, sent
a letter to Weiser-Brown requesting seventeen categories of information. By
June 9, 2009, BC Johnson had received a significant amount of information,
though not all of the information it requested. BC Johnson’s Bob Kachnik
wrote a letter to Weiser-Brown indicating that it had received: 1) “IADC or
contractor daily drilling reports from date of spud through the end of the claim
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period”; 2) “Joint Operating Agreement or other Participating Agreement
including division of interests and insurance provisions, if any”; 3) “[w]ritten
explanation outlining what Weiser-Brown believes caused the underground
well out of control event”; 4) “[o]riginal well plan” and “AFE and well permit”;
5) “[w]ell bore schematic”; 6) “Drilling Contract including any modifications or
amendments”; 7) confirmation that Weiser-Brown did not plan to re-drill the
well; and 8) some “[c]opies of invoice cost documentation.” The letter indicated
that BC Johnson still needed several documents, including additional invoices,
mud logs, and noise and temperature logs. An e-mail and spreadsheet, dated
June 10, 2009, showed that BC Johnson had received dated invoices from
Weiser-Brown, with vendor, service, and cost descriptions, totaling $4.5
million. In addition to the $4.5 million worth of invoices, BC Johnson also
received “a lot of field tickets/delivery tickets not attached to invoices,” which
Kachnik informed Weiser-Brown were incomplete without the “[a]ctual
invoices” attached.
On September 29, 2009, BC Johnson informed Weiser-Brown that an
independent expert decided, based on the information provided, that there had
not been a covered “subsurface loss of control” of the Viking No. 1 well. At that
time, Kachnik noted that the expert requested three pieces of additional
information, and Weiser-Brown responded by sending additional information.
On October 29, 2009, Kachnik explained that “the information is incomplete.”
Kachnik stated that “[t]he mud log across the sidetrack hole stops at
approximately 7,970 feet. We would like to see the rest of this log through the
total depth of 10,757 feet.” Kachnik also asked for “the mud check sheets filled
out every day by the mud engineer.” On November 6, 2009, Weiser-Brown sent
“the Sidetrack log” to BC Johnson. 8 On February 8, 2010, BC Johnson
8 BC Johnson later referred to this as the “mud log.”
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informed Weiser-Brown that Watson’s conclusions had not changed based on
the additional information received from Weiser-Brown. After November 6,
BC Johnson did not indicate that any specific information was missing until
after the lawsuit was filed. BC Johnson did instruct Weiser-Brown that if it
disagreed with the expert’s conclusions, it could submit a response and provide
“any information or documentation in support,” but BC Johnson did not
indicate that any specific additional information was necessary or missing.
The district court found very precisely that as of November 6, 2009,
“Weiser-Brown had complied with ‘most,’ but not all, of the requests for
information in Watson’s report.” As the district court emphasized, neither St.
Paul nor its adjuster requested additional information in its later
correspondence or ever indicated that the determination of coverage was
dependent on missing documentation. Based on all of the provided documents,
St. Paul’s retained expert concluded in September 2009 that there had been no
covered event at all. St. Paul maintained this position through the entire
claims-handling process and through the trial. The district court concluded
that St. Paul’s request that Weiser-Brown respond to Watson’s report if it
disagreed, “was not a reasonable request for information necessary or required
to determine whether the Viking No. 1 was a well ‘out of control.’” St. Paul
contends, however, that three pieces of information were missing, such that
the fifteen-day deadline provided by § 542.056 never began to run. First, St.
Paul claims that although Weiser-Brown submitted invoices, it did not submit
evidence, such as checks, showing that it actually paid those invoices, and thus
did not establish that it experienced an out-of-pocket, compensable loss, until
after the lawsuit was filed. Second, St. Paul claims that it requested, but never
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received, “proof of the claimed insurable interest.” 9 Finally, St. Paul contends
that Weiser-Brown failed to provide “the engineering data that it relied upon
to prove its loss.” Specifically, St. Paul claims that the “mud reports and check
sheets” were missing.
We affirm the district court’s factual finding that these few additional
items did not operate to nullify application of § 542.056. By November 6, 2009,
Weiser-Brown had repeatedly answered St. Paul’s numerous requests,
providing information that established that an actual loss occurred, when,
where, and how it occurred, as well as $4.5 million dollars of supporting
invoices. St. Paul’s expert assessed this information to conclude that the loss
was not covered by the insurance policy, a position that St. Paul never
communicated as notification of rejection of Weiser-Brown’s claim yet pursued
into the lawsuit as its reason for denying the claim, which the jury rejected.
Not only was information alleged to have been missing not requested in
communications from St. Paul—notably, “checks evidencing an out-of-pocket
loss” and “documentary evidence of owners opting in or out of the insurance”—
this information also was not determinative of St. Paul’s position refusing
9 It is unclear what additional documentation Weiser-Brown would have been
expected to submit to prove the “claimed insurable interest.” BC Johnson requested Weiser-
Brown to provide the “Joint Operating Agreement or other Participation Agreement
including division interests and insurance provisions.” The Joint Operating Agreement
governed the relationship among the operator, Weiser-Brown, and the non-operating interest
owners. As St. Paul admits, the Joint Operating Agreement required Weiser-Brown to carry
well-control insurance for the other owners, and owners who did not want to be covered by
Weiser-Brown’s insurance had to opt-out. Weiser-Brown complied with BC Johnson’s
request, provided a copy of the Joint Operating Agreement. Further, a comprehensive report
by BC Johnson, dated March 2010, indicates Weiser-Brown “advised in writing that no non-
operating interest owners opted out of the coverage.” On appeal, St. Paul argues that Weiser-
Brown did not provide “documentary evidence of owners opting in or out of the insurance.”
But because no owners opted out of coverage, there was no documentary evidence to provide.
St. Paul claims that Weiser-Brown did not establish the insurable working interest until
January 2012, when lawyers for Weiser-Brown sent an e-mail stating “we confirm that there
were no opt outs.” This overlooks the previously-received written advisement that there were
no opt-outs.
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Weiser-Brown’s claim. Accordingly, based on the facts in this case, we hold
that the district court correctly found that the fifteen-day deadline under
§ 542.056 began to run on November 6, 2009.
St. Paul’s reliance on Kachnik’s trial testimony does not change our
conclusion. At trial, Kachnik claimed that St. Paul did not have enough
information from Weiser-Brown until after the lawsuit was filed. Kachnik
stated: “[A]gain, it takes that back and forth between the adjuster and the oil
company to sort out any questions. That hadn’t taken place. So, we weren’t in
a position to come to any kind of final numbers on it at that point.” Kachnik’s
testimony underscores why St. Paul’s argument is flawed. There had been no
“back and forth between the adjuster and the oil company” to sort out a final
loss amount because St. Paul concluded, and maintained, based on items of
information requested and received, that the event was not covered. Such
negotiations and finalization would have been futile in the face of Watson’s
position that there was no coverage, which is a chronology that may underlie
the jury verdict finding that St. Paul waived the policy “conditions” relating to
submissions of loss and proof of loss. Indeed, St. Paul offered the waiver
question for the jury and suggested to the district court that the jury charge
already included the necessary instruction on that point. Moreover, St. Paul
acknowledges that it is not the case that the insured must comply with all
document requests made by the insurer, no matter how irrelevant. The insurer
cannot avoid liability under § 542.056 by pointing after-the-fact to missing
information, the absence of which did not affect the insurer’s decision. See
generally Devonshire Real Estate & Asset Mgmt., LP v. Am. Ins. Co., No. 3:12-
CV-2199-B, 2014 WL 4796967, at *22-23 (N.D. Tex. Sept. 26, 2014) (tying the
15-day acceptance/rejection deadline, under § 542.056, to the insurer’s
obligation, under § 542.055, to “request from the claimant all items . . . that
the insurer reasonably believes, at that time, will be required from the
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claimant”); see also Tex. Ins. Code § 542.058 (giving an insurer 60 days to pay
a claim “after receiving all items, statements, and forms reasonably requested
and required under Section 542.055” (emphasis added)). Instead, Texas’s
prompt-payment statutory scheme contemplates several alternatives available
to insurers, including, (1) requesting additional time, pursuant to § 542.056(d);
(2) rejecting an insufficiently supported claim, pursuant to § 542.056(a); or (3)
accepting a claim, but agreeing to only “pay . . . part of a claim” because of
insufficient information of loss, pursuant to § 542.057(a).
IV.
Weiser-Brown cross-appeals claiming that the district court erred in
granting St. Paul’s motion for judgment as a matter of law on Weiser-Brown’s
bad-faith claim, under Texas Insurance Code § 541. Weiser-Brown contends
that it presented evidence at trial that St. Paul violated the Insurance Code by
engaging in bad-faith claims handling and that this claim should have gone to
the jury.
A.
We review the district court’s decision to grant a motion for judgment as
a matter of law de novo. DP Solutions, Inc. v. Rollins, Inc., 353 F.3d 421, 427
(5th Cir. 2003). “Judgment as a matter of law is proper after a party has been
fully heard by the jury on a given issue, and ‘there is no legally sufficient
evidentiary basis for a reasonable jury to have found for that party with respect
to that issue.’” Foreman v. Babcock & Wilcox Co., 117 F.3d 800, 804 (5th Cir.
1997) (quoting Fed. R. Civ. P. 50(a)). We must consider all of the evidence in
the light most favorable to the non-movant, here Weiser-Brown. Foreman, 117
F.3d at 804. However, “there must be more than a mere scintilla of evidence
in the record to render the grant of JMOL inappropriate.” Wallace v. Methodist
Hosp. Sys., 271 F.3d 212, 219 (5th Cir. 2001). We will affirm the district court
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if the result is correct, “even if our affirmance is upon grounds not relied upon
by the district court.” Foreman, 117 F.3d at 804.
Texas Insurance Code § 541.003 provides that “[a] person may not
engage in this state in a trade practice that is defined in this chapter as or
determined under this chapter to be an unfair method of competition or an
unfair or deceptive act or practice in the business of insurance.” The Insurance
Code lists several “unfair method[s] of competition” and “unfair or deceptive
act[s] or practice[s],” such as: “failing to attempt in good faith to effectuate a
prompt, fair, and equitable settlement”; “failing within a reasonable time to . . .
affirm or deny coverage of a claim to a policyholder”; “refusing to pay a claim
without conducting a reasonable investigation with respect to the claim.” Tex.
Ins. Code §541.060(a). The “reasonable-basis test” applies to a cause of action
against the insurer for bad faith under the Insurance Code. See Henry v. Mut.
of Omaha Ins. Co., 503 F.3d 425, 428-49 (5th Cir. 2007). The insurer “will not
be faced with a tort suit for challenging a claim of coverage if there was any
reasonable basis for denial of that coverage.” Id. at 429 (emphasis added)
(citation and internal quotation marks omitted); see also Higginbotham v. State
Farm Mut. Auto. Ins. Co., 103 F.3d 456, 459 (5th Cir. 1997) (“A cause of action
for breach of the duty of good faith and fair dealing exists when the insurer has
no reasonable basis for denying or delaying payment of a claim.”). 10 “Evidence
establishing only a bona fide coverage dispute does not demonstrate bad faith.”
State Farm Fire & Cas. Co. v. Simmons, 963 S.W.2d 42, 44 (Tex. 1998).
10 While the court in Higginbotham was describing the elements of a bad-faith claim
under common law, the court explained that “Texas courts have clearly ruled that these
extra-contractual tort claims require the same predicate for recovery as bad faith causes of
action in Texas.” Id. at 460.
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B.
On January 19, 2012, over one year after filing the present lawsuit,
Weiser-Brown filed a third amended complaint adding claims for breach of
duty of good faith and deceptive insurance practices, under Texas Insurance
Code § 541. 11 In its motion for leave to amend the complaint, Weiser-Brown
cited events that took place during the course of the litigation as the basis for
the new bad-faith claim. Specifically, Weiser-Brown claimed that based on St.
Paul’s corporate deposition and motion for partial summary judgment, it was
evident that St. Paul was basing its decision to deny coverage on reasons that
it knew to be false. Shortly before trial, the district court ruled on several
motions in limine. Relevant here, the district court excluded evidence of post-
litigation conduct by St. Paul. The district court also excluded testimony of
Weiser-Brown’s expert, Bill Arnold. At the close of Weiser-Brown’s case, the
district court granted St. Paul’s motion for judgment as a matter of law on the
bad-faith claim.
C.
We find that the district court properly granted judgment as a matter of
law, as there was no legally sufficient evidentiary basis for a reasonable jury
to have found that St. Paul violated Texas Insurance Code § 541. See Foreman,
117 F.3d at 804. As previously described, a claim of bad faith under the Texas
Insurance Code requires a showing that there was no reasonable basis to deny
or delay payment of the claim. See Henry, 503 F.3d at 428-29. The evidence
presented at trial, however, established a bona fide coverage dispute between
Weiser-Brown and St. Paul. See Simmons, 963 S.W.2d at 44. The control-of-
well insurance policy at issue required “an unintended subsurface flow of oil,
11 At trial, Weiser-Brown’s counsel made clear that it was not pursuing a common law
bad-faith claim, only a statutory bad-faith claim, under § 541.
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gas, water, and/or fluid from one subsurface zone to another subsurface zone
via the bore of the Well, which cannot be controlled by the blowout preventer
. . . or other equipment required.” Determining whether such a covered event
took place at the Viking No. 1 well required analysis of complex subsurface
geological conditions. In fact, Weiser-Brown did not submit a claim until seven
months after the incident because it did not know if it had coverage for what
had occurred. Therefore, seven months after the incident in question, St.
Paul’s adjuster, BC Johnson, had to reconstruct what happened at the well.
Weiser-Brown emphasizes that in June 2009, BC Johnson’s Bob Kachnik
reached a preliminary conclusion that there was no coverage but did not inform
Weiser-Brown of a potential coverage issue until September 2009. 12 As noted
above, Weiser-Brown does not dispute that in June 2009, BC Johnson was still
waiting to receive documents from Weiser-Brown. At that time, Kachnik
requested that St. Paul hire an expert “to take a second look at his conclusion
that the insured has not supported . . . that a [control-of-well] event occurred.”
The expert, David Watson, wrote an eighteen-page report in which he
concluded that “[t]he available evidence does not demonstrate an underground
blowout in either the original or the sidetrack wellbore.” Watson indicated,
however, that additional pieces of information “would benefit my
interpretation of the well operations and my opinions may change or be
supplemented.” Upon receipt of Watson’s report, Kachnik acknowledged that
Watson’s “definition of an underground blowout may be a bit strict.” However,
Kachnik stated that “he makes some good points and asks for additional
information,” and, with St. Paul’s permission, sent the report to Weiser-Brown
on September 29, 2009, soon after it was written. Rather than support a bad-
12 At trial, Kachnik denied having reached such a conclusion and asserted St. Paul’s
claim notes mischaracterized his position.
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faith finding, the evidence of St. Paul’s and BC Johnson’s conduct from June
to September 2009 demonstrates an effort on their part to obtain an expert
opinion on a complicated coverage issue.
Of course, the jury ultimately disagreed with Kachnik and Watson and
found that the Viking No. 1 well did experience an underground loss of control.
However, the evidence at trial was insufficient to support a conclusion that
coverage was obvious or that St. Paul had no reasonable basis to deny Weiser-
Brown’s claim. Simmons, 963 S.W.2d at 44 (“Evidence establishing only a bona
fide coverage dispute does not demonstrate bad faith.”). At trial, Weiser-
Brown’s own expert described what took place at the well as “quite
complicated.” While he testified that the Viking No. 1 did experience an
underground, interzonal flow, he explained that it was “not a raging flow from
one zone to another,” but an “intermittent partial flow” that the operator could
only “partially control.”
Weiser-Brown contends that “St. Paul engaged in an outcome-oriented
investigation” and that BC Johnson and Watson were not independent.
However, other than the fact that Kachnik suggested three “minor edits” to
Watson’s report, there was no evidence at trial that Kachnik and Watson
worked together, much less that they conspired to deny coverage to Weiser-
Brown. There was no evidence that either Kachnik or St. Paul influenced
Watson’s conclusion. While Weiser-Brown contends that “St. Paul permitted
its engineering consultant to confirm [Kachnik’s] conclusion by using a wrong
and overly restrictive definition of the term on which it based its denial of
coverage,” the fact that Kachnik acknowledged this weakness in Watson’s
report supports the opposite of a concerted effort to deny coverage. The
evidence at trial was insufficient to support Weiser-Brown’s allegations of bad
faith and, thus, the district court properly granted judgment as a matter of
law. See Foreman, 117 F.3d at 804 (quoting Fed. R. Civ. P. 50(a)).
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Further, contrary to Weiser-Brown’s contention, the district court did not
improperly exclude evidence that would have supported the bad-faith claim.
As this court has repeated, “[d]istrict courts are given broad discretion in
rulings on the admissibility of evidence; we will reverse an evidentiary ruling
only when the district court has clearly abused this discretion and ‘a
substantial right of [a] party is affected.’” Rock v. Huffco Gas & Oil Co., Inc.,
922 F.2d 272, 277 (5th Cir. 1991) (quoting Muzyka v. Remington Arms Co., Inc.,
774 F.2d 1309, 1313 (5th Cir. 1985)); see also Sprint/United Mgmt. Co. v.
Mendelsohn, 552 U.S. 379, 384 (2008) (“In deference to a district court’s
familiarity with the details of the case and its greater experience in evidentiary
matters, courts of appeals afford broad discretion to a district court’s
evidentiary rulings.”). Further, “we may not disturb the district court’s
exclusion of the evidence . . . if that ruling can be upheld on other grounds,
regardless of whether the court relied on those grounds.” Brazos River Auth.
V. GE Ionics, Inc., 469 F.3d 416, 423 (5th Cir. 2006) (citation and internal
quotation marks omitted).
Weiser-Brown first argues that the district court erred in excluding
evidence of St. Paul’s post-litigation conduct, which, Weiser-Brown contends,
supported its bad-faith claim. Before the district court, Weiser-Brown
indicated that it wanted to introduce numerous post-litigation filings, “even
copies of the answer [St. Paul] might have filed to the complaint.” On appeal,
Weiser-Brown limits its focus to St. Paul’s unsuccessful summary judgment
motion, filed in November 2011. Weiser-Brown claims that St. Paul’s motion
was based on “grounds that [St. Paul] knew were meritless,” such as late notice
and questions of well ownership. However, Weiser-Brown misconstrues St.
Paul’s summary judgment motion. As Weiser-Brown describes, “St. Paul
moved for partial summary judgment on the bases that (1) Weiser-Brown’s
notice of loss was untimely and (2) the question about the insurable interest
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was unresolved.” Neither of these descriptions is accurate. In the cited motion,
St. Paul did state, in the statement of undisputed facts, that “Weiser-Brown
gave its first notice to St. Paul of the two alleged well control incidents some
seven months later.” However, St. Paul did not argue that summary judgment
was warranted on that basis. Further, St. Paul discussed the unresolved
insurable interest issue in the same context that it has done so before us—
arguing that the claims-handling deadlines provided by the Prompt-Payment
Statute had not been triggered. Rather than containing arguments that St.
Paul “already conceded were baseless,” the motion for summary judgment
raised complex legal issues involving, among other things, 13 interpretation and
application of the Prompt-Payment Statute. Faced with a category of evidence
that, if admitted, could result in extensive post-litigation filings, which, even
if relevant, would likely confuse the jury, the district court did not abuse its
discretion by excluding evidence of St. Paul’s post-litigation conduct. Fed. R.
Evid. 403 (“The court may exclude relevant evidence if its probative value is
substantially outweighed by a danger of one or more of the following: unfair
prejudice, confusing the issues, misleading the jury, undue delay, wasting
time, or needlessly presenting cumulative evidence.”).
Similarly, we do not find that the district court abused its discretion in
excluding testimony of Weiser-Brown’s expert, Bill Arnold. Federal Rule of
Evidence 702 provides:
A witness who is qualified as an expert by knowledge,
skill, experience, training, or education may testify in
the form of an opinion or otherwise if:
(a) the expert’s scientific, technical, or other
specialized knowledge will help the trier of fact to
13 In the motion for summary judgment, St. Paul also argued that Weiser-Brown’s
breach-of-contract claim had no merit because “St. Paul did not deny coverage prior to
Weiser-Brown’s filing suit.” On appeal, Weiser-Brown does not attack that argument as
being previously-resolved or concededly baseless.
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understand the evidence or to determine a fact in
issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable
principles and methods; and
(d) the expert has reliably applied the principles
and methods to the facts of the case.
Fed. R. Evid. 702. This rule “imposes a special obligation upon a trial judge to
‘ensure that any and all scientific testimony . . . is not only relevant, but
reliable.’” Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 147 (1999)
(quoting Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 589 (1993)). “The
expert testimony must be relevant, not simply in the sense that all testimony
must be relevant, Fed. R. Evid. 402, but also in the sense that the expert’s
proposed opinion would assist the trier of fact to understand or determine a
fact in issue.” Bocanegra v. Vicmar Servs., Inc., 320 F.3d 581, 584 (5th Cir.
2003) (citing Daubert, 509 U.S. at 591-92). With respect to reliability, the
district court has “broad latitude” when deciding whether such testimony is
reliable, and thus admissible, as well as when deciding how to test the
testimony’s reliability. Kumho, 526 U.S. at 141-42, 152 (“The trial court must
have the same kind of latitude in deciding how to test an expert’s reliability . . .
as it enjoys when it decides whether or not that expert’s relevant testimony is
reliable.”).
The district court expressed concerns about both the relevance and
reliability of Weiser-Brown’s expert’s testimony. We share those concerns.
Weiser-Brown contends that Arnold’s testimony would have supported its
claim for bad faith, under § 541 of the Texas Insurance Code, as Arnold would
have testified that St. Paul violated the “accepted practice” in the insurance
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industry when it failed to send Weiser-Brown a reservation-of-rights letter. 14
In his expert report, Arnold stated: “It is clear that sometime between the
assignment of the claim to BC Johnson Associated (BCJ) by [St. Paul] and the
engagement of David Watson, [St. Paul] and its adjuster, BCJ, perceived a
potential coverage issue that should have been disclosed to [Weiser-Brown].”
Arnold was referring to the delay from June 2009, when Kachnik expressed
concerns about coverage, to September 2009, when St. Paul’s retained expert
wrote a report that was forwarded to Weiser-Brown. Arnold’s conclusory
statement that St. Paul should have informed Weiser-Brown of the potential
coverage problem before obtaining an expert to investigate the issue was based
on Arnold’s view of “[c]ustom and practice in the industry.” The district court
was concerned that such an untestable, conclusory statement would not assist
the jury in evaluating St. Paul’s claim-handling behavior. Further, the
majority of Arnold’s relevant work experience had been as an in-house risk
manager for various oil and gas companies. Other than his work for Travelers
Insurance Company, ending in 1978, Arnold’s experience was from the
perspective of the insured, making insurance claims. Significantly, Arnold did
not know if there were any local or national standards that adjusters had to
follow. While Arnold concluded in his expert report that St. Paul did not meet
the standards “on how insurers are to treat their policy holders” as set forth in
the Texas Insurance Code, he admitted during his deposition that he did not
know whether St. Paul was required to send a reservation-of-rights letter
under the Texas Insurance Code. Given the conclusory nature of his proposed
testimony, coupled with his lack of knowledge regarding the Texas Insurance
14 Weiser-Brown also contends that Arnold would have testified that St. Paul’s
summary judgment motion was improper. However, we have already concluded that the
district court did not abuse its discretion when it excluded evidence of St. Paul’s post-trial
conduct.
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Code and lack of recent experience adjusting insurance claims, we find no
abuse of discretion in the district court’s decision to exclude Arnold’s testimony.
Accordingly, we find that the district court did not abuse its discretion in
excluding certain evidence and properly granted judgment as a matter of law
on Weiser-Brown’s § 541 bad-faith claim.
V.
For the foregoing reasons, we AFFIRM the district court in all respects.
28