Union Bankers Insurance Co. v. Shelton , 889 S.W.2d 278 ( 1994 )

CORNYN, Justice,

joined by GONZALEZ and HECHT, JJ.,

concurring and dissenting.

I join Part I but not Part II of CHIEF JUSTICE PHILLIPS’s concurring opinion and in the court’s judgment, except the decision to remand this case for a new trial on the duty of good faith and fair dealing. I do not join in the plurality opinion. While I have no quarrel with the plurality’s conclusion that the bad faith cancellation of an insurance policy should not be treated differently from an insurer’s bad faith nonpayment of a claim, there is no evidence of bad faith cancellation in this case and, thus, a remand is not justified.

I note that the plurality relegates to a footnote the fact that the majority of states hold that “proof of an intent to deceive is not required to avoid a policy of insurance based upon a misrepresentation,” 889 S.W.2d at 282 n. 9. The same footnote also notes that “some treatises and courts” have not found Texas law to be particularly clear on this issue. Id. Because of this, I think it is necessary to address the issues CHIEF JUSTICE PHILLIPS reaches in Part I of his concurring opinion, distinguishing between misrepresentations and warranties.

I

The plurality is just plain wrong to say “[wjithout a cause of action for breach of the duty of good faith and fair dealing ... insurers [can] ... arbitrarily den[y] coverage ... with no more penalty than interest on the amount owed.” 889 S.W.2d at 283 (citing Arnold v. National County Mut. Five Ins. Co., 725 S.W.2d 165, 167 (Tex.1987)). This statement is no more true today than it was when it first was made. To the contrary, even if an insurer that denies a claim prevails at trial, it must pay the costs of its own defense. If the insured prevails, the insurer must pay not only prejudgment interest, but also the insured’s reasonable attorneys’ fees. Tex.Civ.PRAc. & Rem.Code Ann. §§ 38.001-38.006 (Vernon 1986); see also id. § 38.006 (and statutes cited therein); Prudential Ins. Co. of Am. v. Burke, 614 S.W.2d 847, 850 (Tex.Civ.App.—Texarkana 1981), writ ref'd n.r.e., 621 S.W.2d 596 (Tex.1981) (per curiam); American Gen. Fire & Casualty Co. v. McInnis Book Store, Inc., 860 S.W.2d 484, 490-91 (Tex.App.—Corpus Christi 1993, no writ); Hochheim Prairie Farm Mut. Ins. Ass’n v. Burnett, 698 S.W.2d 271, 278 (Tex.App.—Fort Worth 1985, no writ); Vanguard Ins. Co. v. McWilliams, 680 S.W.2d 50, 52 (Tex.App.—Austin 1984, writ refd n.r.e.); Bellefonte Underwriters Ins. Co. v. Brown, 663 S.W.2d 562, 575 (Tex.App.—Houston [14th Dist.] 1983), rev’d in part on other grounds, 704 S.W.2d 742, 745 (Tex.1986); Texas Farmers Ins. Co. v. Hernandez, 649 S.W.2d 121, 124 (Tex.App.—Amarillo 1983, writ ref'd n.r.e.); Aetna Fire Underwriters Ins. Co. v. Southwestern Eng’g Co., 626 S.W.2d 99, 103 (Tex.App.—Beaumont 1981, writ refd n.r.e.) (the purpose of Tex.Civ. Prac. & Rem.Code § 38.006 is to prevent double recovery of attorneys’ fees when they are recoverable under another statute); but see Dairyland County Mut. Ins. Co. v. Childress, 650 S.W.2d 770, 775 (Tex.1983). Further, an insurer may face statutory penalties for improper claims handling. See, e.g., Tex. Ins.Code Ann. arts. 21.21, 21.55 (Vernon 1981 & Supp.1994). Liability for such additional sums, over and above policy benefits, may reasonably be expected to deter even “repeat-players” in litigation, like insurance carriers, from arbitrarily denying benefits under a policy. See Transportation Ins. Co. v. Moriel, 879 S.W.2d at 26 n. 21.

II

A cause of action for breach of the duty of good faith and fair dealing is stated when an insured alleges that the insurer had no reasonable basis for the denial or delay in payment of a claim and that the insurer knew or should have known that fact. Lyons v. Millers Casualty Ins. Co., 866 S.W.2d 597, 599 (Tex.1993); Aranda v. Insurance Co. of N. Am., 748 S.W.2d 210, 213 (Tex.1988). Carriers must maintain the right to deny invalid or questionable claims and not be subject to bad faith liability for an erroneous denial of a claim. Id. The standard we apply in determining whether there is “no evidence” of bad faith is the same standard trial courts apply in ruling on motions for directed verdict and for judgment notwithstanding the verdict¹— whether the evidence presented, viewed in the light most favorable to the verdict or non-movant, and entertaining every reasonable inference in favor of the verdict or non-movant, is such as to “permit the logical inference that the jury must reach.” Transportation Ins. Co., 879 S.W.2d at 24; Lyons, 866 S.W.2d at 600.

There must necessarily be a logical connection, direct or inferential, between the evidence offered and the fact to be proved. Id. In addition, the proffered evidence must “ris[e] to a level that would enable reasonable and fair-minded people to differ in their conclusions.” Transportation Ins. Co., 879 S.W.2d at 25. A piece of evidence that does not “make a fact that is of consequence to the determination of the [bad faith] action more or less probable,” is not material to the issue of bad faith, and is therefore “no evidence.” Transportation Ins. Co., 879 S.W.2d at 24-25; see Tex.R.Civ.Evid. 401.

The plurality cites three pieces of evidence as “some evidence” of bad faith: Union Bankers’ initial correspondence with Shelton, its failure to discuss the claim with Shelton before making a determination to deny the claim, and the language on the first page of the policy. I start with the third piece of evidence. Whether the face of the policy mentioned all or only one of Union Bankers’ remedies for a misrepresentation does not have any bearing on the question of bad faith. This fact makes it neither more nor less probable that Union Bankers had a reasonable basis for invoking some remedy.

Second, whether Union Bankers talked to Shelton before making its determination is relevant only to the “knew or should have known” element of bad faith. Whether Union Bankers “should have known” it lacked any reasonable basis is only an issue if there is evidence that Union Bankers in fact lacked a reasonable basis. If Union Bankers had a reasonable basis for testing Shelton’s claim in court, and talking to Shelton would not have eliminated that reasonable basis,² then failure to talk to Shelton is not evidence of an absence of a reasonable basis. National Union Fire Ins. Co., 873 S.W.2d at 376-77.

Only after an appellate court has determined what potential basis an insurance company may have had for denying a claim can the court conduct a meaningful review of whether the insured has presented sufficient evidence that the insurer lacked a reasonable basis for denying or delaying the claim. Id. at 376. Union Bankers presented a genuine fact issue concerning Shelton’s intent to deceive,³ and therefore Union Bankers did no more than insist upon a judicial determination of its liability under the terms of Shelton’s policy. Proof that its version of the facts and interpretation of the applicable law did not ultimately prevail, without more, is no evidence that Union Bankers had no “reasonable basis” for testing Shelton’s claim in court. Transportation Ins. Co., 879 S.W.2d at 31; National Union Fire Ins. Co., 873 S.W.2d at 376 (“As we held in Lyons, evidence of insurance coverage alone does not go to the issue of the standard articulated in Aranda, absence of a reasonable basis_”).

Finally, the initial correspondence between Union Bankers and Shelton indicates only that Union Bankers was willing to give Shelton the benefit of the doubt until it finished its investigation. An initial statement that Shelton’s omission was “probably an oversight,” is not evidence that the ultimate decision to rescind the contract and refund collected premiums was made without any reasonable basis.

While the evidence does not conclusively establish that Shelton had an intent to deceive, it certainly does establish that Union Bankers had a reasonable basis to challenge Shelton’s claim. Shelton has not introduced a scintilla of evidence to indicate that Union Bankers lacked a reasonable basis, and so on this ground I respectfully dissent.

1 . Although Union Bankers may also be able to claim it was entitled to go to court on the basis of a "tenable, but incorrect, legal position," see 889 S.W.2d at 286 (Phillips, C.J., concurring), the case should be decided on "no evidence" grounds. Because Union Bankers had a reasonable basis to challenge Shelton's claim, i.e., that Shelton intentionally misrepresented his physical condition, as a matter of law Union Bankers could not have acted "without any reasonable basis.” National Union Fire Ins. Co. v. Dominguez, 873 S.W.2d 373, 376-77 (Tex.1994).

2 . No evidence appears in the record that Union Bankers would have discovered, upon talking to Shelton, that it lacked a reasonable basis for cancelling coverage. Therefore, the absence of discussion is not evidence of bad faith. See National Union Fire Ins. Co., 873 S.W.2d at 377 ("While that letter is some evidence of coverage it is not evidence of an absence of a reasonable basis.... Dominguez presented no evidence that casts doubt on National Union’s reliance on the medical professionals who diagnosed the condition, or on Dominguez’ own statements on insurance forms....”).

3 . The record reveals considerable evidence from which the jury could have concluded that Shelton intended to deceive his insurer. Although his wife was insured, Shelton went without insurance for several years. Less than six months after purchasing his policy with Union Bankers, Shelton sought medical attention for his condition. Two months after that, Shelton elected to undergo surgery because the pain in his knee had become so severe that he could no longer work. Prior to surgery, he informed one of his doctors that he had experienced discomfort and pain for "the last five years.” Although the jury elected not to do so, it certainly could have concluded that Shelton decided he would no longer self-insure at precisely the time when he anticipated large medical bills. This "adverse selection” behavior of insureds who pay premiums only when a loss is virtually certain is precisely the behavior that policy questionnaires are designed to combat.