Higginbotham v. State Farm Mutual

REVISED
United States Court of Appeals,
Fifth Circuit.
No. 96-20238.
John HIGGINBOTHAM, Plaintiff-Appellant,
v.
STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-
Appellee.
Jan. 21, 1997.
Appeal from the United States District Court for the Southern
District of Texas.
Before REYNALDO G. GARZA, JONES and DeMOSS, Circuit Judges.
REYNALDO G. GARZA, Circuit Judge:
John Higginbotham brought suit against State Farm Mutual
Automobile Insurance Company alleging both contractual and
extra-contractual causes of action. After the contractual claim
was tried, Judge Lee Rosenthal of the Southern District of Texas,
Houston Division granted summary judgment in favor of the defendant
on plaintiff's extra-contractual claims. After assessing attorney
fees, Judge Rosenthal proceeded to award and then retract an 18
percent statutory fee against the defendant. Plaintiff appeals
both the summary judgment and the retraction of this fee. We
affirm in part and reverse and remand in part.
BACKGROUND
John Higginbotham owned a used 1988 Porsche 911 for which he
had purchased insurance from State Farm Mutual Automobile Insurance
Company under policy number 7504-618-D01-53E. In short, the car
was stolen on June 8, 1993, from an unsecured parking lot next to
Higginbotham's residence. The Porsche was ultimately recovered
later that day, but it had been severely damaged by whomever had
taken the vehicle. It was discovered approximately 25 miles away
from Higginbotham's apartment complex, and it was stripped of its
top, seats, interior and exterior trim, and any untraceable parts
of value. The stripping operation was conducted in such a manner
so as not to damage or destroy mechanical connections, wiring
harnesses, or the engine.
Naturally, Higginbotham reported the theft of his vehicle to
State Farm on June 9, 1993, and made a claim for proceeds under his
policy. The policy specifically provided coverage for direct and
accidental loss to an automobile. Upon conclusion of its
investigation, State Farm determined Higginbotham's "loss was not
accidental and therefore not a covered loss under [his] policy."
State Farm informed Higginbotham of this decision on November 19,
1993, five months after his initial claim.
Higginbotham filed suit in state court in Harris County,
Texas, asserting breach of contract for State Farm's failure to pay
damages resulting from the theft and vandalism to his Porsche.
State Farm removed the suit to federal court on the basis of
diversity. After removal, Higginbotham amended his complaint to
assert additional causes of action for violations of the Texas
Deceptive Trade Practices Act ("DTPA"), violations of the Texas
Insurance Code under article 21.21, negligence, and breach of the
duty of good faith and fair dealing. Higginbotham also contended
that State Farm had violated article 21.55 of the Insurance Code
and requested imposition of an 18 percent penalty fee provided for
by the statute. State Farm filed a motion for summary judgment
seeking relief from Higginbotham's extra-contractual claims, but
the court denied the motion without prejudice. The parties then
filed a joint motion to bifurcate and requested separate trials for
the contract claim and extra-contractual claims. The joint motion
was granted and the breach of contract issue went to trial. The
jury returned a verdict in favor of Higginbotham and awarded him
$30,000, the amount of his coverage.
State Farm then filed, and the court granted, an amended
motion for partial summary judgment on Higginbotham's
extra-contractual causes of action. After granting State Farm's
motion, the district court heard evidence on the various fees that
Higginbotham should be awarded on his breach of contract claim.
After deliberating its decision, the court entered an order
requiring State Farm to pay Higginbotham, inter alia, the 18
percent statutory fee imposed by article 21.55 of the Texas
Insurance Code. State Farm next filed a motion for reconsideration
complaining of this 18 percent fee. The court granted the motion
and retracted the statutory fee. Judge Rosenthal entered a final
judgment that same day. Higginbotham timely filed his notice of
appeal from this final judgment.
DISCUSSION
I. Extra-contractual claims
In his first point of error, Higginbotham argues that the
district court erred by granting partial summary judgment on his
bad faith claim in favor of State Farm. The standard for reviewing
a summary judgment is well established. The movant has the initial
burden of showing that because of the absence of genuine issues of
material fact, it is entitled to judgment as a matter of law. The
critical issue in this appeal is whether State Farm proved that, as
a matter of law, it acted in good faith in denying Higginbotham's
claim.
Under Texas law, there is a duty on the part of the insurer
to deal fairly and in good faith with an insured in the processing
of claims. Arnold v. National County Mut. Fire Ins. Co., 725
S.W.2d 165, 167 (Tex.1987). 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 or when
the insurer fails to determine or delays in determining whether
there is any reasonable basis for denial. Id. In order to sustain
such a claim, the insured must establish the absence of a
reasonable basis for denying or delaying payment of the claim and
that the insurer knew, or should have known, that there was no
reasonable basis for denying or delaying payment of the claim.
Aranda v. Insurance Co. of N. Am., 748 S.W.2d 210, 213 (Tex.1988).
The insured must prove that there were no facts before the insurer
which, if believed, would justify denial of the claim. State Farm
Lloyds Ins. v. Polasek, 847 S.W.2d 279, 284 (Tex.App.—San Antonio
1992, writ denied). However, insurance carriers maintain the right
to deny questionable claims without being subject to liability for
an erroneous denial of the claim. St. Paul Lloyd's Ins. v. Fong
Chun Huang, 808 S.W.2d 524, 526 (Tex.App.—Houston [14th Dist.]
1991, writ denied) (citing Aranda, 748 S.W.2d at 213). A bona fide
controversy is sufficient reason for failure of an insurer to make
a prompt payment of a loss claim. Id. As long as the insurer has
a reasonable basis to deny or delay payment of a claim, even if
that basis is eventually determined by the fact finder to be
erroneous, the insurer is not liable for the tort of bad faith.
Lyons v. Millers Casualty Insurance Co., 866 S.W.2d 597, 600
(Tex.1993).
Here, State Farm denied Higginbotham's claim based on a
number of suspect facts it discovered during its investigation. It
was these facts which provided a reasonable basis for denial.
Higginbotham was associated with Tommy Vander, the owner of
Luxury Auto Unlimited (LAU). LAU was a luxury car repair shop
which specialized in Porsches and other luxury cars. Higginbotham
was listed as a purchaser with buyer's privileges extended to LAU
for car auctions. In fact, Vander and Higginbotham regularly
attended automobile auctions to purchase damaged automobiles for
repair and resale. Vander pled guilty in 1991 to felony theft when
he was arrested for driving a stolen Porsche with a completely
different vehicle identification number from a Porsche which had
been completely burned.
When Higginbotham began parking the Porsche at his complex, he
would normally leave the car in a parking lot surrounded by a fence
and secured access gate. However, approximately two weeks before
the theft, he began parking it in an unsecured lot near the
complex, even though both he and his girlfriend claimed to have had
prior auto break-ins from the unsecured lots at the apartment
complex. The manager and assistant manager of Higginbotham's
complex both stated that Higginbotham's girlfriend complained that
on June 4, 1993 (four days before the theft) Higginbotham's car had
been stolen and that this was justification for a late move-out
notice.
Higginbotham's Porsche was recovered 25 miles from
Higginbotham's apartment complex, but only 1.6 miles away from
Vander's shop. The car was stripped in a manner so as not to
damage or destroy mechanical connections, wiring harnesses, or the
engine. Pro Technik, Porsche specialists hired by State Farm to
investigate Higginbotham's claim, concluded that approximately two
auto technicians with proper tools would require at least eight
hours to strip the Porsche in the manner that it had been left.
Higginbotham's car was discovered approximately six hours after it
had last been seen by Higginbotham.
Higginbotham rebuts these facts by claiming that State Farm
pursued a targeted investigation so as to make him look like an
accomplice. He cites a number of cases which uphold the
proposition that an "outcome determinative" investigation
constitutes bad faith. He refers to a number of instances in which
State Farm allegedly refused to cooperate and merely was looking
for excuses not to pay Higginbotham. However, none of the facts
Higginbotham presents contradicts the facts set out above and,
unlike the cited cases, State Farm did perform a fairly detailed
investigation that began early on and without any preconceived
notions. Although the investigation didn't become so detailed as
to "catch the bad guys," it continued until there was enough
evidence to give State Farm a reason to look twice and reasonably
deny Higginbotham's claim.
We are far from pointing fingers and claiming that
Higginbotham was actually an accomplice in stealing his car, but
given the undisputed facts set out in the record, State Farm had a
reasonable basis to dispute the validity of Higginbotham's claim.
There was a bona fide dispute between the parties which justified
State Farm's failure to pay Higginbotham. As a matter of law,
State Farm did not act in bad faith.
In his second point of error, Higginbotham contends the
district court erred in granting summary judgment in favor of State
Farm with respect to his negligence claim. Although the law has
imposed a duty on the insurer to act in good faith and deal fairly
with the insured, there is no duty beyond the contract itself. In
order for a tort duty to arise out of a contractual duty, i.e.
negligent failure to perform a contract, the liability must arise
"independent of the fact that a contract exists between the
parties." United Serv. Auto. Assn. v. Pennington, 810 S.W.2d 777,
783 (Tex.App.—San Antonio 1991, writ denied). If a defendant's
conduct is actionable only because it breaches the parties'
agreement, as is the case here, the claim is solely contractual in
nature. In fact, in absence of the duty to act in good faith and
deal fairly the only other duty imposed on an insurance company,
under Texas law, is the duty to exercise ordinary care and prudence
in considering an offer of settlement within the policy limits.
G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544,
548 (Tex.Comm'n App.1929, holding approved). In essence, Texas law
does not recognize a cause of action for negligent claims handling.
French v. State Farm Insurance Co., 156 F.R.D. 159, 162
(S.D.Tex.1994).
Higginbotham next argues that the district court erred in
granting summary judgment on his DTPA and Insurance Code violation
claims. The provisions of the DTPA and Insurance code are not
exclusive, but are in addition to any other procedures or remedies
provided for in any other law. Persons who are victims of unfair
or deceptive insurance practices may have a cause of action under
the DTPA, Article 21.21 of the Insurance Code, or both.
Higginbotham asserts causes of action under both. Although these
claims are individual causes of action which do not depend on each
other for support, 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. Emmert v.
Progressive County Mutual Insurance Co., 882 S.W.2d 32, 36
(Tex.App.—Tyler 1994, writ denied) (see State Farm Lloyds, Inc. v.
Polasek, 847 S.W.2d 279, 282 n. 2 (Tex.App.—San Antonio 1992, writ
denied)). Plainly put, an 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. Emmert, 882 S.W.2d
at 36.
Since State Farm was found not to have acted in bad faith, it
is clear we must defer to the Texas courts and affirm the lower
court's summary judgment for State Farm and against Higginbotham on
his claims for violations of the DTPA and the Insurance Code.
II. Texas Insurance Code Article 21.55
Higginbotham contends that Judge Rosenthal erred in awarding
and then retracting the 18 percent per annum statutory fee
available under Texas Insurance Code article 21.55. State Farm
argues that Judge Rosenthal's decision should stand for three
reasons. First, it claims that Higginbotham waived his article
21.55 claim because it wasn't included in his notice of appeal.
Second, it claims that Higginbotham waived his right to statutory
penalties by failing to adduce any evidence to support such a
recovery. Finally, it claims that Higginbotham's arguments and
cases are based on an old statute, article 3.62, which has been
repealed.
A. Notice of Appeal
State Farm asserts that Higginbotham's 21.55 claim was not
included in his notice of appeal and, as such, should not be an
issue before us. It cites Capital Parks, Inc. v. Southeastern
Advertising and Sales System, Inc., 30 F.3d 627, 630 (5th
Cir.1994), a case in which we found that a motion for leave and
reconsideration was not properly before us because it was filed
after the lower court entered a final judgment and the appellant
only appealed from the final judgment. Central Parks is
distinguishable from the present case in that, here, Higginbotham
appealed from a final judgment in which the order granting State
Farm's motion for reconsideration was filed before final judgment
was entered. Obviously, State Farm's reliance on this case was
misplaced and its argument moot because Higginbotham appealed from
a final judgment which included in its parameters the lower court's
order granting State Farm's motion for reconsideration. Thus, this
issue is properly before us.
B. 21.55 elements
State Farm next argues that Higginbotham failed to prove all
the elements of his 21.55 claim. Article 21.55 § 3(f) states, in
relevant part, as follows:
If an insurer delays payment of a claim following its receipt
of all items, statements, and forms reasonably requested and
required, as provided under Section 2 of this article, for a
period specified in other applicable statutes or, in the
absence of any other specified period, for more than 60 days,
the insurer shall pay damages and other items as provided for
in Section 6 of this article.
Higginbotham made a claim for proceeds on June 9, 1993. State Farm
chose to reject Higginbotham’s claim, which necessarily means it
failed to pay within 60 days of its receipt of all necessary
paperwork, as specified by § 3(f). The evidence in the record
clearly reveals that 21.55 was violated. Thus, State Farm
subjected itself to section 6 damages, including the 18 percent per
annum fee and reasonable attorneys’ fees.
C. TEXAS INSURANCE CODE ARTICLE 3.62
No case has interpreted 21.55 with regards to the issue of
timely notification of rejection of a claim. Therefore, we look to
cases interpreting the statutory predecessor to 21.55, that being
article 3.62 of the Texas Insurance Code, for guidance. Case law
interpreting 3.62 clearly states that an insurance company's good
faith assertion of defense does not relieve the insurer of
liability for penalties for tardy payment, as long as the insurer
is finally judged liable. See Key Life Insurance Co. of South
Carolina v. Davis, 509 S.W.2d 403, 405 (Tex.Civ.App.—Beaumont 1974,
no writ). However, there may be no liability for statutory damages
if it is subsequently determined, by litigation, that the claim in
question is invalid and not payable. TEX.INS.CODE ANN. art. 21.55
§ 3(g).
A wrongful rejection of a claim may be considered a delay in
payment for purposes of the 60-day rule and statutory damages.
More specifically, if an insurer fails to pay a claim, it runs the
risk of incurring this 18 percent statutory fee and reasonable
attorneys’ fees. In sum, State Farm took a risk when it chose to
reject Higginbotham’s claim. State Farm lost when it was found
liable for breach of contract. Therefore, it must pay this 18
percent per annum interest and reasonable attorneys’ fees.
Judge Rosenthal erred when she retracted the statutory damages
provided for by article 21.55. This issue is reversed and remanded
so that the lower court can determine the additional amount of
money owed to Higginbotham for the 18 percent per annum penalty and
reasonable attorneys’ fees.
CONCLUSION
Accordingly, based on the foregoing reasons, we AFFIRM the
summary judgment in favor of the defendant, but REVERSE and REMAND
Judge Rosenthal's retraction of the penalty imposed by Texas
Insurance Code article 21.55 with instructions to calculate the
amended award.