Universe Life Insurance v. Giles , 40 Tex. Sup. Ct. J. 810 ( 1997 )

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 eases 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-evidenee 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-evidenee 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); State Farm County Mut. Ins. Co. v. Moran, 809 S.W.2d 613, 618 (Tex.App.—Corpus Christi 1991, writ denied); State Farm Mut. Auto. Ins. Co. v. Zubiate, 808 S.W.2d 590, 596 (Tex.App.—El Paso 1991, writ denied); Automobile Ins. Co. v. Davila, 805 S.W.2d 897, 906 (Tex.App.—Corpus Christi 1991, writ denied); National Union Fire Ins. Co. v. Dominguez, 793 S.W.2d 66, 70 (Tex.App.—El Paso 1990), rev’d, 873 S.W.2d 373 (Tex.1994); Wm. H. McGee & Co. v. Schick, 792 S.W.2d 513, 522 (Tex.App.—Eastland 1990), judgment vacated pursuant to settlement, 843 S.W.2d 473 (Tex.1992); Fidelity & Cas. Co. v. Underwood, 791 S.W.2d 635, 647 (Tex.App.—Dallas 1990, no writ); Allied Gen. Agency, Inc. v. Moody, 788 S.W.2d 601, 607 (Tex.App.—Dallas 1990, writ denied); Paramount Nat’l Life Ins. Co. v. Williams, 772 S.W.2d 255, 264 (Tex.App.— Houston [14th Dist.] 1989, writ denied); Aetna Cas. & Sur. Co. v. Joseph, 769 S.W.2d 603, 606 (Tex.App.—Dallas 1989, no writ). Although we attempted to resolve this dilemma in Lyons and Dominguez, it is clear that our efforts have not been entirely successful. See Miles, 923 S.W.2d at 810 (“[T]he Supreme Court, in its attempt to clarify the legal sufficiency standard for bad faith claims against insurance companies, has ultimately done little to provide lower courts with any guidance for conducting a legal sufficiency review.”).

III.

Opponents of the tort have long suggested that we could avoid any difficulty by simply eliminating the tort altogether. We are not persuaded that so drastic a response is either necessary or advisable.

This Court first recognized the tort more than ten years ago. Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d 165 (Tex.1987). We did so because

[i]n the insurance context a special relationship arises out of the parties’ unequal bargaining power and the nature of insurance contracts which would allow unscrupulous insurers to take advantage of their insureds’ misfortunes in bargaining for settlement or resolution of claims.... An insurance company has exclusive control over the evaluation, processing and denial of claims.

Id. at 167. Before we recognized the tort,

[e]ontraet law served as the exclusive theory on which policyholders could recover from an insurer for the bad faith handling of claims. Although a policyholder may have successfully proved that an insurer wrongfully denied benefits, damages were limited to the amount due under the policy, plus interest. The policyholder was prevented from recovering damages for emotional distress or economic loss caused by the deprivation of policy benefits. Punitive damages also were unavailable to deter insurers from wrongfully or even fraudulently denying claims. Therefore, insurers had nothing to lose by wrongfully denying claims or coercing unfair settlements.

James A. McGuire & Kristin Dodge McMahon, Issues for Excess Insurer Counsel in Bad Faith and Excess Liability Cases, 62 Def. Couns. J. 337, 337 (1995) (citations omitted).

The consequences of a covered loss on the insured and the insurer are often dramatically different. Accordingly, we imposed the tort duty recognizing that insureds who encounter losses they believe to be covered will often be particularly vulnerable to an insurer's arbitrary or unscrupulous conduct. See Lyons, 866 S.W.2d at 600 (referring to the insurer’s “disproportionately favorable bargaining posture in the claims handling process”). People generally buy insurance to protect against risks that they cannot easily afford to pay. When an insurer unreasonably denies a claim, an insured who has suffered a loss that should rightfully be covered may reluctantly choose to drop the claim rather than suffer the emotional and financial burden of litigation. Even insureds who go so far as to hire a lawyer may often be inclined to settle for only a part of their contract damages due to financial stress or other pressures stemming from the loss.

We are in the mainstream in recognizing a bad-faith tort in the context of first-party claims. At least twenty-four states have done the same. See Chavers v. National Sec. Fire & Cas. Co., 405 So.2d 1 (Ala.1981); State Farm Fire & Cas. Co. v. Nicholson, 777 P.2d 1152 (Alaska 1989); Noble v. National Am. Life Ins. Co., 128 Ariz. 188, 624 P.2d 866 (1981); Aetna Casualty and Sur. Co. v. Broadway Arms Corp., 281 Ark. 128, 664 S.W.2d 463 (1984); Travelers Ins. Co. v. Savio, 706 P.2d 1258 (Colo.1985); Buckman v. People Express, Inc., 205 Conn. 166, 530 A.2d 596 (1987); Best Place, Inc. v. Penn America Ins. Co., 82 Hawai'i 120, 920 P.2d 334 (1996); White v. Unigard Mut. Ins. Co., 112 Idaho 94, 730 P.2d 1014 (1986); Erie Ins. Co. v. Hickman, 622 N.E.2d 515 (Ind.1993); Dolan v. Aid Ins. Co., 431 N.W.2d 790 (Iowa 1988); Curry v. Fireman’s Fund Ins. Co., 784 S.W.2d 176 (Ky.1989); State Farm Fire & Cas. Co. v. Simpson, 477 So.2d 242 (Miss.1985); Lipinski v. Title Ins. Co., 202 Mont. 1, 655 P.2d 970 (1982) (common-law bad-faith tort actions against insurers abolished by Mont.Code Ann. § 33-18-242 (1993)); Braesch v. Union Ins. Co., 237 Neb. 44, 464 N.W.2d 769 (1991); United Fire Ins. Co. v. McClelland, 106 Nev. 504, 780 P.2d 193 (1989); State Farm Gen. Ins. Co. v. Clifton, 86 N.M. 757, 527 P.2d 798 (1974); Corwin Chrysler-Plmouth, Inc. v. Westchester Fire Ins. Co., 279 N.W.2d 638 (N.D.1979); Hoskins v. Aetna Life Ins. Co., 6 Ohio St.3d 272, 452 N.E.2d 1315 (1983); Christian v. American Home Assurance Co., 577 P.2d 899 (Okla.1978); Bibeault v. Hanover Ins. Co., 417 A.2d 313 (R.I.1980); Nichols v. State Farm Mut. Auto. Ins. Co., 279 S.C. 336, 306 S.E.2d 616 (1983); Champion v. United States Fidelity & Guar. Co. (In re Certification of a Question of Law), 399 N.W.2d 320 (S.D.1987); Anderson v. Continental Insurance Co., 85 Wis.2d 675, 271 N.W.2d 368 (1978); McCullough v. Golden Rule Ins. Co., 789 P.2d 855 (Wyo.1990).

At least five other state supreme courts have allowed recovery of extra-contractual damages without recognizing the tort. Tackett v. State Farm Fire & Cas. Ins. Co., 653 A.2d 254 (Del.1995); Marquis v. Farm Family Mut. Ins. Co., 628 A.2d 644 (Me.1993); Lawton v. Great S.W. Fire Ins. Co., 118 N.H. 607, 392 A.2d 576 (1978); Beck v. Farmers Ins. Exch., 701 P.2d 795 (Utah 1985); Hayseeds, Inc. v. State Farm Fire & Cas., 177 W.Va. 323, 352 S.E.2d 73 (1986).

Only four state courts of last resort have rejected a tort of bad faith in first-party insurance cases. Spencer v. Aetna Life & Casualty Ins. Co., 227 Kan. 914, 611 P.2d 149 (1980); Kewin v. Massachusetts Mut. Life Ins. Co., 409 Mich. 401, 295 N.W.2d 50 (1980); Haagenson v. National Farmers Union Property & Cas. Co., 277 N.W.2d 648 (Minn.1979); Halpin v. Prudential Ins. Co. of Am., 48 N.Y.2d 906, 425 N.Y.S.2d 48, 401 N.E.2d 171 (1979).

The bad-faith tort has, as Justice Hecht’s concurring opinion points out, been criticized. The criticism has focused in large part upon the extra-contractual damages that may be recovered:

[T]he new tort remedy, although necessary in some form, now shows signs of being too oppressive on an industry whose financial vitality and efficiency are essential to social well-being. Multimillion dollar awards for wrongfully denying claims not only are unnecessary to correct the situation, but such awards, which often have a windfall nature, may raise the cost of insurance for the vast numbers of insureds who are not mistreated and may do great harm to the risk-transfer-and-distribution mechanism in our society by making insurance so expensive that it can no longer be purchased like a household commodity.

Roger C. Henderson, The Tort of Bad Faith in Firstr-Party Insurance Transactions: Refining the Standard of Culpability and Reformulating the Remedies by Statute, 26 U. Mich. J.L. Ref. 1, 32 (1992) (citations omitted). This concern is obviously legitimate; we have long-recognized that the insurance industry is peculiarly affected with a public interest. See Daniel v. Tyrrell & Garth Inv. Co., 127 Tex. 213, 93 S.W.2d 372, 374-75 (1936). We do not believe, however, that it justifies eliminating the cause of action. Even the tort’s most outspoken critics recognize that “some measures were needed to redress the legitimate complaints of in-sureds_” Henderson, 26 U. Mich. J.L. Ref. at 31-32. And one commentator recently noted that changes in Texas law have gone far to constrain past excesses that may have adversely affected the insurance industry.² R. Brent Cooper, Insurance Code and Bad Faith — Recent Statutory and Case Law Developments and How to Take Advantage of Them—Defense Perspective, in Advanced DTPA/Insueance ConsumeR Law COURSE (State Bar of Texas 1996) (noting that the number of bad faith lawsuits has dramatically declined and that “insurers are finally finding themselves in a position to adjust claims on the true merits of the claim without the foreboding shadow of bad faith hanging over their head [sic]”).

Moreover, this Court has carefully defined the conditions under which plaintiffs may recover the two primary forms of extra-contractual damages most common in bad faith cases, punitive and mental anguish damages. We have recognized that even if an insurer is hable for bad faith, a plaintiff may not recover punitive damages on that basis alone. Moriel, 879 S.W.2d at 18. Instead, “[o]nly when accompanied by malicious, intentional, fraudulent, or grossly negligent conduct does bad faith justify punitive damages.” Id. The plaintiff in a bad faith case must therefore prove that “the insurer was actually aware that its action would probably result in extraordinary harm not ordinarily associated with breach of contract or bad faith denial of a claim — such as death, grievous physical injury, or financial ruin.” Id. at 24.³ This relatively stringent standard of proof ensures that punitive damages will ordinarily be available only in exceptional cases.

Similarly, concerned with the subjective nature of mental anguish damages, we have admonished courts to closely scrutinize such awards. Parkway Co. v. Woodruff, 901 S.W.2d 434, 444 (Tex.1995). In most cases, plaintiffs may not recover mental anguish damages unless they introduce “direct evidence of the nature, duration, and severity of their mental anguish, thus establishing a substantial disruption in the plaintiffs’ daily routine.” Id. This standard ensures that fact-finders are provided “with adequate details to assess mental anguish claims.” Id. In the context of bad faith actions, mental anguish damages will be limited to those cases in which the denial or delay in payment of a claim has seriously disrupted the insured’s life.

Accordingly, we believe the better approach is to clarify the “no reasonable basis” standard for the tort rather than to abandon an established and widely recognized cause of action.

IV.

In Aranda, we attempted to articulate a standard for recovery that balanced the remedial purposes of the bad-faith tort against the carrier’s right to deny invalid or questionable claims. Aranda, 748 S.W.2d at 213. As we discussed above, however, the “no reasonable basis” element of the tort has injected needless complexity into no-evidence review of bad faith claims.

In clarifying the tort, we look first to other jurisdictions that recognize a bad faith cause of action. Of these jurisdictions, the majority will not impose liability so long as the coverage issue is “fairly debatable.” William T. Barker & Paul E.B. Glad, Use of Summary Judgment in Defense of Bad Faith Actions Involving First-Party Insurance, 30 TORT & Ins. L.J. 49, 52 (1994). The highest courts of at least sixteen different states impose liability for bad faith under some variant of this standard. Gilbert v. Congress Life Ins. Co., 646 So.2d 592, 593 (Ala.1994); Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 572 (1986); Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1275 (Colo.1985); Garnett v. Transamerica Ins. Servs., 118 Idaho 769, 800 P.2d 656, 666 (1990); Dolan v. Aid Ins. Co., 431 N.W.2d 790, 794 (Iowa 1988); Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky.1993); Andrew Jackson Life Ins. Co. v. Williams, 566 So.2d 1172, 1184-1185 (Miss.1990); Tynes v. Bankers Life Co., 224 Mont. 350, 730 P.2d 1115, 1124 (1986); Pickett v. Lloyd’s, 131 N.J. 457, 621 A.2d 445, 453 (1993); Tokles & Son, Inc. v. Midwestern Indem. Co., 65 Ohio St.3d 621, 60S N.E.2d 936, 943 (1992); Rumford Property & Liab. Ins. Co. v. Carbone, 590 A.2d 398, 400 (R.I.1991); Walz v. Fireman’s Fund Ins. Co., 556 N.W.2d 68, 70 (S.D.1996); Billings v. Union Bankers Ins. Co., 918 P.2d 461, 464-65 (Utah 1996); Bushey v. Allstate Ins. Co., 164 Vt. 399, 670 A.2d 807, 809 (1995); Warmka v. Hartland Cicero Mut. Ins. Co., 136 Wis.2d 31, 400 N.W.2d 923, 925 (1987); State Farm Mut. Auto. Ins. Co. v. Shrader, 882 P.2d 813, 825 (Wyo.1994).

Although the standard has the benefit of being fairly widespread, we reject it for two reasons. First, adopting the “fairly debatable” standard would not resolve the conflict that we face. A jury finding of bad faith would still be predicated upon a negative proposition — that coverage of the insured’s claim was not fairly debatable. See, e.g., Gilbert, 646 So.2d at 593 (stating that plaintiff in bad faith case must prove “the absence of a debatable reason”); Tokles & Son, 605 N.E.2d at 943 (holding that insured not liable for bad faith when claim was fairly debatable); Billings, 918 P.2d at 464-66 (holding that trial court properly denied insurer’s directed verdict on bad faith claim when coverage was not fairly debatable as a matter of law); Warmka, 400 N.W.2d at 925 (“The plaintiff cannot maintain a cause of action for the tort of bad faith if the validity of his claim was fairly debatable.”); Barker & Glad, supra, at 50.

In addition, in many jurisdictions the term is virtually synonymous with our present no-reasonable-basis standard. See, e.g., Gilbert, 646 So.2d at 593 (“[TJhe plaintiff in a [bad faith] case has the burden of proving ... the absence of any reasonably legitimate or arguable reason for [the insurer’s refusal of a claim]) (internal quotations omitted); Tokles & Son, 605 N.E.2d at 943 (stating that an insured breaches the duty of good faith and fair dealing when it “lacks a reasonable justification” for refusing to pay a claim); Warmka, 400 N.W.2d at 925 (“the plaintiff must show the absence of a reasonable basis for denying benefits under the terms of the policy”). Adopting the “fairly debatable” standard would simply not eliminate the conflict with our no-evidence standard of review.

The Legislature’s recent amendment of Article 21.21, section 4 of the Insurance Code suggests a more workable approach. In 1995, the Legislature amended Article 21.21, Section 4, of the Insurance Code to define unfair insurance settlement practices. The amendment provides in part:

Sec. 4. The following are hereby defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance:

‡ ‡ ‡ ‡ $

(10) Unfair Settlement Practices, (a) Engaging in any of the following unfair settlement practices with respect to a claim by an insured or beneficiary:

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(11) failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim with respect to which the insurer’s liability has become reasonably clear....

Tex. Ins.Code art. 21.21, § 4(10)(a)(ii). Section 16 of Article 21.21 gives a private right of action for violations of Section 4(10)(a)(ii). In section 4(10)(a)(ii), the Legislature has drawn a line that defines when an insurer’s denial or delay in paying an insurance claim is no longer merely erroneous but in bad faith.

Although section 4(10)(a)(ii) does not, by its terms, govern common-law bad-faith actions, we believe that the standard it establishes will prove workable in such actions. Adopting this standard has several advantages. First and foremost, requiring a bad faith claimant to prove that a carrier failed to attempt to effectuate a settlement after its liability has become reasonably clear eliminates the conflict with our no-evidence standard of review. Moreover, this solution unifies the common law and statutory standards for bad faith. The “reasonably clear” standard also allows for a factual inquiry that trial courts can easily and intelligently craft into a jury charge.⁴

The standard has the further advantage of familiarity. The Legislature first included section 4(10)(a)(ii) in the laundry list of claims available to private litigants under section 16 of Article 21.21 in 1995. See Acts 1995, 74th Leg., ch. 414, § 11,1995 Tex. Gen. Laws 2988, 2999. But the Insurance Code has prohibited insurers from engaging in the conduct now described in section 4(10)(a)(ii) since 1973. See Unfair Claims Settlement Practices Act, 63rd Leg., R.S., ch. 319, § 1, 1973 Tex. Gen. Laws 735, 737, codified at Tex. Ins.Code art. 21.21-2, § 2(d). Thus, we impose no new requirements upon insurers by applying the standard to the common law bad faith cause of action.

The “reasonably clear” standard recasts the liability standard in positive terms, rather than the current negative formulation.⁵ Under this standard, an insurer will be liable if the insurer knew or should have known that it was reasonably clear that the claim was covered. See Aranda, 748 S.W.2d at 213.

V.

However, we reject the suggestion that whether an insurer’s liability has become reasonably clear presents a question of law for the court rather than a fact issue for the jury. Treating the issue as one of law would undeniably expand this Court’s ability to overturn bad-faith judgments. We do not believe, however, that the difficulty of no-evidence review in bad faith eases could possibly justify this judicial sleight-of-hand to circumvent the constraints our Constitution imposes upon this Court. See Choate v. San Antonio & A.P. Ry., 91 Tex. 406, 44 S.W. 69, 69 (1898); Tex. Const. art. V, § 6.

We have long recognized that the Texas Constitution confers an exceptionally broad jury trial right upon litigants. See State v. Credit Bureau of Laredo, Inc. 530 S.W.2d 288, 291-93 (Tex.1975); Tolle v. Tolle, 101 Tex. 33,104 S.W. 1049, 1050 (1907); Tex. Const. art. I, § 15; art. Y, § 10. And we have warned that courts must not lightly deprive our people of this right by taking an issue away from the jury. Young v. Blain, 245 S.W. 65, 67 (Tex. Com.App.1922, judgm’t adopted, holding approved). A court may be entitled to decide an issue as a matter of law when there is no conflict in the evidence, but when there is evidence on either side, the issue is a fact question. Id. Justice Hecht’s concurring opinion identifies no circumstances that make a jury unsuited to decide whether an insurer has denied or delayed payment of a claim after its liability has become reasonably clear.⁶ We therefore hold that whether an insurer acted in bad faith because it denied or delayed payment of a claim after its liability became reasonably clear is a question for the fact-finder.

VI.

The trial court submitted this case under the “no reasonable basis” standard. Under either that standard or the “reasonably clear” standard, however, there is some evidence to support the jury’s finding that Universe acted in bad faith. Universe explains its reasons for continuing to deny Giles’s claim in its petition in this Court as follows:

The denial of the claim as a pre-existing condition was justified because the undisputed medical records revealed that Mrs. Giles had “a positive history of heart disease,” that she had probably suffered a heart attack that was caused by atheros-clerotic cardiovascular disease, that the atherosclerotic cardiovascular disease was an illness that had been medically treated with Mevacor, and that she had received treatment for this illness within the twelve months preceding the issuance of the policy. The Mevacor and Lorelco that were prescribed as a treatment for an illness that was later positively diagnosed as atherosclerosis, constitutes medical care or treatment within the exclusionary language of the policy.

Giles’s medical records do not say that she had “a positive history of heart disease”; they say she had “a positive history of heart disease with a mother who recently had coronary artery bypass grafting.” Two sentences before, the same record states: “She [Giles] has never had any history of heart problems.” The medical records do not reflect that Giles was treated for heart disease before her insurance coverage became effective. While she had been treated for high cholesterol for some time, Universe points to no evidence that such treatment was tantamount to treatment for heart disease. In fact, all the evidence was to the contrary.

From the medical records, it should have been reasonably clear to Universe that Giles’s claim should be paid. Universe does not argue that the records were unreliable; to the contrary, Universe relied on them. Nor is there evidence of any need for further investigation after Giles’s physicians wrote to Universe. Giles’s physicians clarified her medical records within four months of her surgery. Coverage of the claim was reasonably clear by then, yet Universe continued to deny coverage for an additional seven months. The jury could have logically concluded that Universe denied Giles’s claim without a reasonable basis and that its purported rebanee on Giles’s medical records was a mere pretext. Applying the traditional standard of no-evidence review, we conclude that some evidence supports the jury’s finding that Universe was liable for bad faith.

VII.

Universe also complains that there is no evidence to support the punitive damages awarded. Giles argues that Universe did not preserve its complaint. Contrary to Giles’s argument and the court of appeals’ statement that Universe did not “specificaby attack the sufficiency of the evidence to support the punitive damages award,” 881 S.W.2d at 52, Universe raised this very complaint in its second point of error in the court of appeals and in its motion for rehearing. Universe has preserved its complaint.

In Moriel, we held that punitive damages can be awarded for bad faith only when an insurer was actually aware that its actions involved an extreme risk — that is, a high probability of serious harm, such as death, grievous physical injury, or financial ruin — to its insured and was nevertheless consciously indifferent to its insured’s rights, safety, or welfare. 879 S.W.2d at 22-23. Giles argues that this standard should not apply in this ease because Moriel was decided after the parties tried this case. But Moriel only “elarif[ied] the standards governing the imposition of punitive damages in the context of bad faith insurance htigation.” Id. at 12. Accordingly, Moriel applies in this ease.

The record reflects that medical care providers repeatedly asked Giles about payment of her bibs. Although Giles testified that these inquiries caused her great distress, there is no evidence of the type of risk required for punitive damages. Though Universe may have been aware of Giles’s distress, there is no evidence that Universe’s claims decision was bkely to cause any extreme risk to Giles.

Accordingly, we hold that there is no evidence to support the punitive damages award.

VIII.

We hold that the record contains legally sufficient evidence to support the jury’s finding that Universe breached its duty of good faith and fair dealing. We also hold that Universe waived its complaint about the legal sufficiency of the evidence supporting the mental anguish damages award. Finally, we hold that the record contains no evidence to justify the jury’s award of exemplary damages or to support Universe’s argument that the parties settled the dispute before trial. Accordingly, we affirm the judgment of the court of appeals for bad faith and actual damages, reverse the judgment for exemplary damages, and reform the judgment to award Giles only actual damages, prejudgment and postjudgment interest, and costs.

1 . Although we have often stated that a reviewing court must disregard all evidence that is contrary to a jury finding in performing a no-evidence review, that is not to say that courts must disregard undisputed evidence that allows of only one logical inference. See Wininger v. Ft. Worth & D.C. Ry. Co., 105 Tex. 56, 143 S.W. 1150, 1152 (1912); Texas & N.O. Ry. Co. v. Rooks, 293 S.W. 554, 556-57 (Tex.Comm’n.App.1927) (overruling motion for rehearing).

2 . We have recognized the bad-faith tort only in the first-party context. A first-party claim is one in which an insured seeks recovery for the insured’s own loss. Dennis J. Wall, Litigation and Prevention op Insurer Bad Faith 324 (1995). We recently declined to extend the bad-faith cause of action to the third-party context, in which an insured seeks coverage for injuries to a third party. Maryland Ins. Co. v. Head Indus. Coatings and Services, Inc., 938 S.W.2d 27, 28 (Tex.1996) (per curiam). We did so because the cause of action would impose a higher burden upon an insured alleging an injury resulting from an insurer’s failure to settle a third-party’s claim than the insured faces in a cause of action under G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544 (Tex.Comm'n App.1929, holding approved).

3 . One commentator has gone so far as to suggest that it is "virtually impossible” to recover punitive damages in a bad faith case. Mark Gergen, A Cautionary Tale About Contractual Good Faith in Texas, 72 Tex. L.Rev. 1235, 1247 (1994). While we believe this is an overstatement, it illustrates that punitive damages in Texas bad faith cases will be limited to highly unusual and particularly egregious situations, as they should be.

4 . However, we reject the suggestion in Justice Hecht's concurrence, 950 S.W.2d at 69, that section 4 of Article 21.21 preempts the common-law bad-faith tort.

5 . An insurer will not escape liability merely by failing to investigate a claim so that it can contend that liability was never reasonably clear. Instead, we reaffirm that an insurance company may also breach its duty of good faith and fair dealing by failing to reasonably investigate a claim. See Arnold, 725 S.W.2d at 167.

6 . Furthermore, the contention that we should treat the issue as one of law radically departs from a wealth of caselaw holding that reasonableness is ordinarily a question of fact. See, e.g., Adam Dante Corp. v. Sharpe, 483 S.W.2d 452, 456 (Tex.1972); Blanks v. Southland Hotel, 149 Tex. 139, 229 S.W.2d 357, 360 (1950); Lang v. Henderson, 147 Tex. 353, 215 S.W.2d 585, 587 (1948); McAfee v. Travis Gas Corp., 137 Tex. 314, 153 S.W.2d 442, 447 (1941); J. Weingarten, Inc. v. Brockman, 134 Tex. 451, 135 S.W.2d 698, 699 (Comm’n App.1940).