Thrash v. State Farm Fire & Cas. Co.

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 92-4054
BOBBY THRASH, SR.,
Plaintiff-Appellee,
versus
STATE FARM FIRE & CASUALTY COMPANY,
Defendant-Appellant.
Appeal from the United States District Court
for the Eastern District of Texas
May 28, 1993
( May 28, 1993 )
Before POLITZ, Chief Judge, WISDOM and WIENER, Circuit Judges.
POLITZ, Chief Judge:
Challenging the sufficiency of the evidence to support a
verdict for extracontractual damages, State Farm Fire & Casualty
Company partially appeals the judgment on verdict in favor of Bobby
Thrash, Sr., as modified by the trial court. On the issues
appealed we reverse and render judgment in favor of State Farm.
Background
This dispute arises from a claim Thrash presented to his
insurer, State Farm, shortly after fire destroyed his home near
Reklaw, Cherokee County, Texas. State Farm conducted an
investigation into the circumstances surrounding the destruction of
the Thrash home immediately after the claim was filed.
State Farm's investigator and the local state fire marshal
agreed, after inspecting the scene and interviewing witnesses,
including Thrash, that someone intentionally set the fire by
"pouring flammable liquids in several rooms of the house" and that
Thrash most likely was that person. The evidence indicated that
Thrash: (1) purchased the policy from State farm five weeks before
the fire and after his efforts to sell the house proved futile;
(2) moved out of the house and into a mobile home, carrying his
valuables with him, two weeks before the fire; (3) returned to the
house hours before the fire, locking it behind him, and is the last
person known to be on the premises before the fire; (4) faced
threats from the Internal Revenue Service to foreclose on his house
if he did not either pay off its $9,000 levy or sell the house
within 120 days (he also owed $7,000 in local taxes); (5) was
unemployed and had received no income for months, and could no
longer rely on his ex-wife, and sole source of income, to meet his
obligations.1
1
There was more, including: (1) Thrash was in arrears in
mortgage payment but the balance was only $3,500 leaving a very
sizeable equity; (2) he had recently lost about $200,000 in
bankruptcy; (3) his current marriage was in crisis due to financial
strain; (4) he was facing retirement without any source of income;
and (5) on the night of the fire the entire family was away from
the house at a party planned several weeks in advance.
2
Relying on the conclusions of its independent expert, the
state fire marshal, and the evidence produced in their reports,
State Farm denied the claim and instituted a declaratory judgment
action in federal court to determine its liability. Thrash
counterclaimed for payment under the policy, as well as
compensation for mental anguish and exemplary damages, under the
Texas common law, Texas Insurance Code, and Texas Deceptive Trade
Practices -- Consumer Protection Act. The case proceeded to trial
before a jury.
At the close of the evidence, State Farm moved for a directed
verdict, contending that, as a matter of law, Thrash was not
entitled to damages beyond recovery under the policy. The court
granted the motion, finding insufficient evidence to support
Thrash's claims of either gross negligence or that State Farm had
committed a knowing2 violation of the DTPA, either of which would
have allowed the discretionary imposition of exemplary damages.3
The jury returned a verdict awarding Thrash approximately
$158,000 under the policy, $110,000 for breach of the duty of good
2
The DTPA defines "knowingly" as an "actual awareness of
the falsity, deception, or unfairness of the practice." Tex. Bus.
& Com. Code Ann. § 17.45.
3
Tex. Bus. & Com Code § 17.50(b)(1) (Supp. 1993); Tex.
Civ. Prac. & Rem. Code § 41.003(a)(3) (Supp. 1993). In his brief,
Thrash claims that the court erred in not allowing him to recover
exemplary damages and forcing him to elect among damage awards
under the common law and the DTPA. Thrash has not filed a notice
of appeal; we do not consider these points. F.R.A.P. 4(a)(3). See
also Cyark v. Lemon, 919 F.2d 320 (5th Cir. 1990).
3
faith and fair dealing, $200,000 for deceptive practices, $2,000 in
mandatory treble damages under the DTPA, and $38,000 in attorney's
fees and prejudgment interest. State Farm again sought to limit
the recovery to contractual damages in a motion for judgment
notwithstanding the verdict.4 The court denied the motion but
required Thrash to elect between the $110,000 and $200,000 awards
as they represented compensation for the same mental anguish
damages; State Farm timely appealed challenging only the award of
extracontractual damages.
Analysis
At the outset we stress the limited nature of the appeal: the
sufficiency of evidence to support the award of extracontractual
damages. We are not here presented with a challenge to the jury's
determination that Thrash did not burn down his house. Rather, we
are to consider only whether there is sufficient evidence to
support the award of damages under the Texas common law, as it is
bound up in the Texas Insurance Code and the DTPA.
In a diversity case state law provides the elements of the
plaintiff's case.5 Federal law, however, provides the scale by
which we measure the sufficiency of the evidence to support the
4
The 1991 revisions to the Rules of Civil Procedure
abolished the distinction between directed verdict and judgment
notwithstanding the verdict. Both are now simply labeled judgment
as a matter of law. Fed.R.Civ.P. 50.
5
Ayres v. Sears, Roebuck & Co., 789 F.2d 1173 (5th Cir.
1986).
4
jury's findings.6 Here we consider the law of Texas, specifically
the common-law duty of good faith and fair dealing imposed on an
insurer, and the related duties under the DTPA and Insurance Code.
Our standard of review is narrow. We review the district
court's decision to deny a motion for judgment as a matter of law,
as did the district court,7 according deference to the verdict.
Nonetheless, we recognize that a jury occasionally may become
confused; or, on rare occasions, may breach its obligation to apply
the law fairly to the proven facts. In either case the verdict
must be rejected as a matter of law.
We will reject a verdict in those instances when, despite
"considering all the evidence in the light and with all reasonable
inferences" most favorable to the verdict, we find no evidence of
"such quality and weight that reasonable and fair-minded men in the
exercise of impartial discretion" could arrive at the same
conclusion.8 In such a case the district court is obliged to set
aside the verdict. Such instances are rare, but the case before us
is one of those instances.
6
See Gross v. Black & Decker, Inc., 695 F.2d 858 (5th Cir.
1983).
7
For a scholarly discussion of sufficiency review see
Steven A. Childress & Martha S. Davis, Federal Standards of Review
§ 3.01 (2d ed. 1992).
8
Mozingo v. Correct Mfg. Corp., 752 F.2d 168, 176 (5th
Cir. 1984).
5
In Arnold v. National County Mutual Fire Ins. Co.,9 the Texas
Supreme Court recognized a duty of good faith and fair dealing in
the context of insurance settlement practices. The parameters of
this duty are somewhat indistinct. The court made clear in Aranda
v. Insurance Co. of North America,10 however, that this duty is
breached by the insurer's failure to pay promptly an insured's
claim when liability becomes reasonably clear.11 Obviously, not
every refusal to pay is wrongful. "A carrier maintains the right
to deny an invalid or questionable claim without becoming subject
to liability for bad faith denial of the claim."12 The breach of
this duty also constitutes a violation of the DTPA and Insurance
Code. Thrash relied on all three.
The DTPA provides a private remedy for, inter alia, conduct
proscribed in any of the 24 specified violations of the "laundry
list" (§ 17.46(b)), none of which address settlement practices, and
also for "the use or employment by any person of an act or practice
in violation of Article 21.21, Texas Insurance Code, . . ."13 While
9
725 S.W.2d 165, 167 (Tex. 1987).
10
748 S.W.2d 210, 212-13 (Tex. 1988).
11
Koral Indus., Inc. v. Security-Connecticut Life Ins. Co.,
788 S.W.2d 136, 147 (Tex.App. -- Dallas), writ denied per curiam,
802 S.W.2d 650 (1990).
12
Beaumont Rice Mill, Inc. v. Mid-American Indem. Ins. Co.,
948 F.2d 950, 952 (5th Cir. 1991) (citing Aranda).
13
Tex. Bus. & Com. Code Ann. § 17.50(a)(1) & (4).
6
section 17.46 also declares unlawful any false, deceptive, or
misleading acts, section 17.46(d) disallows a private cause of
action for conduct outside the 24 violations specified in the
statutory litany. Thus, independent of the Insurance Code or
perhaps section 17.50(a)(3) ("unconscionable action or course of
action"), the DTPA does not provide a private remedy for bad faith
settlement practices.
The Insurance Code specifically addresses unfair claim
settlement practices in article 21.21-2. Among those practices is
"[n]ot attempting in good faith to effectuate prompt, fair, and
equitable settlements of claims submitted in which liability has
become clear."14 That section has limited remedial effect, however;
it only provides for the administrative issuance of cease and
desist orders. Section 16 of the Insurance Code, on the other
hand, provides a private cause of action for deceptive acts or
practices specified in rules and regulations adopted by the State
Board of Insurance, or for any practice defined as unlawful by
section 17.46 of the DTPA.
A State Board of Insurance order declares unlawful "any unfair
or deceptive act or practice as defined by the Insurance Code."15
The order also makes "any trade practice which is determined
pursuant to law to be an unfair . . . or deceptive act" unlawful
"irrespective of the fact that the improper trade practice is not
14
Tex. Rev. Civ. Stat. art. 21.21-2(2)(d) (Supp. 1993).
15
28 Tex. Admin. Code § 21.3 (1992).
7
defined" elsewhere.
In Vail v. Texas Farm Bureau Mutual Ins. Co.,16 the Texas
Supreme Court determined that the Board's order incorporated the
definitions in article 21.21-2 of the Insurance Code and thus
conduct defined therein became actionable in a suit for damages
even though the article limited its remedy to the issuance of cease
and desist orders. The Vail court also found the breach of the
common-law duty recognized in Arnold to be a practice "determined
pursuant to law" to be "unfair or deceptive." Finally, Vail
recognized a cause of action under the Insurance Code for violation
of an unlisted "false, misleading, or deceptive" action even though
the DTPA itself would not provide a private cause of action for an
unlisted violation. The Texas Supreme Court reasoned that
section 16 of the Insurance Code incorporates listed and unlisted
practices alike because section 16 makes any practice "defined by
Section 17.46 [of the DTPA] . . . as an unlawful deceptive trade
practice" to be a violation of the Insurance Code.17
Thrash asserts a claim flowing from the common law, which was
incorporated into the Insurance Code by the Insurance Board's order
16
754 S.W.2d 129 (Tex. 1988).
17
At least one Texas court has questioned this aspect of
the Vail decision. W.H. McGee & Co., Inc. v. Schick, 792 S.W.2d
513 (Tex.App. -- Eastland 1990), vacated pursuant to settlement,
843 S.W.2d 473 (Tex. 1992). The court noted first that Vail's
discussion of the issue was merely obiter dictum and that the
Insurance Code only adopts as unlawful, practices "defined" in
section 17.46 of the DTPA. According to the court, an unlisted
violation is a priori undefined and thus this aspect of the Vail
decision is dicta. We need not address the issue.
8
and the DTPA by virtue of the DTPA's incorporation of the Insurance
Code. The claim also constitutes an allegation of an independent,
though unlisted, violation of the DTPA laundry list which, although
the DTPA expressly forecloses a remedy, is actionable under
section 16 of the Insurance Code by its incorporation of the DTPA.18
Finally, the claim is independently asserted to be a violation of
the Insurance Code to the extent it is directed to conduct defined
in article 21.21-2, even though that section does not allow private
enforcement.
Obviously, one walks in legally treacherous territory when one
attempts to define the precise boundaries of the duties created by
the common law, the unlisted deceptive trade practices,19 and the
Insurance Code. The parties have opted to treat these duties as
coextensive, focusing only on the remedial aspects of the DTPA.
For purposes of this appeal, and without deciding same, we will
18
Under the advanced Vail logic, the violation would become
actionable under the DTPA under section 17.50(a)(4) even though it
would not directly be actionable under section 17.50(a)(1) because
it constitutes a violation of the Insurance Code rather than a
violation specified in the laundry list. The logic of this evades
us. See Beaumont Rice Mill.
19
The Texas Supreme Court frequently has explained that the
"DTPA does not represent a codification of the common law."
Alvarado v. Bolton, 749 S.W.2d 47, 48 (Tex. 1988) (quoting Smith v.
Baldwin, 611 S.W.2d 611, 617 (Tex. 1980)). The common practice of
collectively referring to these claims as "bad faith" claims is
understandable in light of their complexity and common origin. We
are wary, however, of the implicit assumption that the list of
defined practices in Insurance Code article 21.21-2, the DTPA, and
the common law are all coextensive.
9
accept that premise.20
Every Texas court considering the question agrees that an
insurer only breaches its duty of good faith and fair dealing when
it lacks a reasonable basis for denying or delaying payment of the
claim or when it should have known that no such basis existed.21
20
After the close of the evidence the court instructed the
jury that an unfair or deceptive trade practice under the DTPA
involved:
(1) Misrepresenting to the insured pertinent facts
or policy provisions relating to the coverage
at issue, or
(2) failing to adopt and implement reasonable
standards for prompt investigation of claims
arising under an insurance company's insurance
policies, or
(3) not attempting in good faith to effectuate
prompt, fair, and equitable settlements of
claims submitted in which liability has become
clear, or
(4) failing to exercise good faith in the
investigation, processing, and denial of an
insurance claim.
The court also instructed the jury on the common-law bad faith
claim that Thrash was obligated to establish one of the following:
(1) State Farm had no reasonable basis for denial
of Mr. Thrash's claim or for delay in payment;
or
(2) State Farm failed to determine whether there
was a reasonable basis for the denial or
delay; or
(3) State Farm failed to promptly and equitably
pay Mr. Thrash's claim when liability became
reasonably clear.
Neither party objected to these instructions. We will
assume that the court correctly instructed the jury on the duties
created under the tripartite scheme recognized in Vail and say only
that we find no plain error in the suggested description of the
controlling law.
21
E.g., Aranda, 748 S.W.2d at 212; Arnold, 725 S.W.2d at
167; Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826, 831 (Tex.
10
We therefore review the evidence in light of the instructions
given, looking for evidence upon which reasonable jurors could
conclude that State Farm breached its duty of good faith and fair
dealing.
To succeed in his claim for payment under the policy Thrash
had to prove that the conditions in the policy were satisfied. The
burden then shifted to State Farm to prove arson as the cause of
the fire. The question whether the decision to deny coverage
amounts to a breach of State Farm's duty of good faith and fair
dealing is entirely different, however; the burden there lies
squarely on the plaintiff. After scouring the record, we conclude
that no reasonable juror could have concluded that State Farm knew
that it lacked a reasonable basis for believing that Thrash was
responsible for the fire or, based on its duty to investigate,
should have known the same.
Thrash argues that the investigator hired by State Farm did
not conduct a sufficiently thorough physical investigation before
concluding that he started the fire. While we reject Thrash's
characterization of the instant investigation, we agree that there
may be situations in which the selection of a third party to
investigate a fire may be so suspect or the circumstances may so
strongly indicate an inadequate investigation as to render the
1990) (stressing that the refusal to pay must be unreasonable).
State Farm Lloyds, Inc. v. Palasek, 847 S.W.2d 279 (Tex.App. -- San
Antonio 1992, no writ); Terry v. Kentucky Cent. Ins. Co., 836
S.W.2d 812 (Tex.App. -- Houston [1st Dist.] 1992, no writ);
St. Paul Guardian Ins. Co. v. Luker, 801 S.W.2d 614 (Tex.App. --
Texarkana 1990, no writ).
11
results of that investigation of no value. Indeed, there may be
cases in which the very handling of the investigation is itself a
violation of the duty of good faith and fair dealing insofar as the
actions of the investigator can fairly be attributed to the
insurer.22 In either event, this is not such a case; the results
of the investigation bolstered State Farm's already substantial and
reasonable basis for denying Thrash's claim.
There is no evidence that a more thorough investigation would
have uncovered evidence affirmatively disproving arson or Thrash's
involvement, nor is there any indication that a more thorough
investigation would otherwise have undermined State Farm's basis
for so suspecting. Furthermore, even disregarding the results of
the physical investigation, State Farm possessed overwhelming
evidence of arson including the conclusion of the local fire
marshal, evidence that Thrash purchased the policy shortly before
the fire, was the last person seen at the house before the fire,
and that he moved many if not most of his belongings from the house
shortly before the fire.
We must judge the insurer's actions against a standard of
reasonableness as of the time of its challenged decision in light
of all relevant circumstances. That the jury may have decided
Thrash did not commit arson is not dispositive of this issue.
State Farm is not bound to prove that it was correct in its
judgment; rather, it was for Thrash to prove that it had no
22
See Automobile Ins. Co. v. Davila, 805 S.W.2d 897
(Tex.App. -- Corpus Christi 1991, writ denied).
12
reasonable basis for denying his claim.23 We conclude and hold that
such a basis existed as a matter of law and that State Farm did not
breach its duty of good faith and fair dealing. Accordingly, we
reverse the award of $2,000 in mandatory treble damages under
section 17.50(b)(1) of the DTPA. We likewise reverse the award of
$200,000, premised on a finding of mental anguish and violation of
the DTPA.24 Only the contractual damages under the policy may be
awarded.
The judgment appealed is REVERSED and judgment in favor of
State Farm is RENDERED.
23
Texas Empl. Ins. Ass'n v. Puckett, 822 S.W.2d 133
(Tex.App. -- Houston [1st Dist.] 1991, writ denied).
24
The only evidence adduced at trial to support an award to
compensate for mental anguish was Thrash's and his family's
testimony to the effect that Thrash was "embarrassed and worried"
over this lawsuit. Texas law does not recognize as compensable
mere worry or embarrassment. Hicks v. Ricardo, 834 S.W.2d 587
(Tex.App. -- Houston [1st Dist] 1992 no writ history). Thrash's
argument that the refusal to pay constituted libel per se for which
no proof of injury is required, suspect as it is, will not be
considered for the first time on appeal.
13