The importance of careful preparation and documentation was the take away lesson in a Texas bad faith case, C.K. Lee v. Catlin Specialty Ins. Co., 2011 U.S. Dist. LEXIS 19145 (S.D. Tex. Feb. 28, 2011).
C.K. Lee owned a commercial shopping center in Houston. Catlin issued a commercial property policy to Lee. On September 12, 2008, Hurricane Ike hit and caused substantial property damage throughout the Texas Gulf Coast area. On September 24, 2008, Lee submitted a claim for damage to the roof of his shopping center to Catlin.
Catlin hired Engle Martin to represent its interests in adjusting the claim. Engle Martin eventually adjusted over 200 Ike-related claims for Catlin.
In November 2008, Engle Martin and Emergency Services Inc., retained by Lee, inspected Lee's property. Engle Martin observed evidence of roof repairs that had apparently been made both before and after Hurricane Ike. Engle Martin decided it was necessary to use an infrared scan of the roof to help identify which damages, if any, were attributable to wind and which, if any, were attributable to sub par, prior repairs or natural deterioration.
Engle Martin retained Project, Time & Cost (PT&C) to conduct the infrared inspection. PT&C's inspection determined there was no wind-related damage to the roof and no breaches or openings created by wind. Instead, the roof had exceeded its life expectancy and was in need of replacement due to normal wear and weathering. Consequently, Catlin decided that the damage to Lee's roof was not caused by winds from Hurricane Ike.
Meanwhile, Lee's contractor, Emergency Services, prepared a report estimating that the total cost of repairing the roof would be $871,187. Engle Martin's estimate for repair of the roof was $22,864.
Lee filed suit for breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas Insurance Code. Catlin moved for summary judgment on all claims but breach of contract, arguing that because there was a bona fide dispute concerning the cause of the damages and whether they were covered under the policy, there was no evidence of bad faith or violations of the Texas Insurance Code.
The court granted the motion on the bad faith claims. Under Texas law, an insurer was in bad faith if it failed to settle the claim even though it knew or should have known that it was reasonably clear that the claim was covered. Evidence that merely showed a bona fide dispute about the insurer's liability on the contract was not bad faith. But denying a claim solely in reliance on an expert's report did not shield the insurer from bad faith liability if there was evidence that the report was not objectively prepared or the insurer's reliance on the report was unreasonable.
Here, the insurer had an independent adjuster and a roof consultant conduct three inspections of the roof. After Engle Martin inspected, it called in PT&C, who conducted the infrared inspection. PT&C then went back to reinspect the roof. Reports were filed after each inspection. Each inspection determined there was no wind-related damage.
Nevertheless, Lee argued there was a genuine issue of mater fact as to both the objectivity of the reports and the reasonableness of Catlin's reliance on them. Lee argued that Catlin failed to reconcile the contradictions of the conclusions found in reports of its experts with those of Lee's expert, Emergency Services. Moreover, Engle Martin's report was biased because it had a financial interest in preparing reports that favored Catlin's position.
The record, however, did not contain a report with conclusions that conflicted with those of Engle Martin and PT&C. Lee's experts had not submitted anything relating to the cause of the damage, but had only submitted an estimate for repairs. Therefore, there was nothing in the record to show that Catlin's decision to believe its own experts, rather than other experts, was unreasonable. Moreover, there was no evidence that the investigations were outcome-oriented or that Catlin expected to receive reports concluding that the claim should be denied. Nor did Lee submit anything to show Catlin's experts were unqualified. Therefore, Lee failed to raise a genuine issue of material fact in support of its contentions that Engle Martin's reports were not objectively prepared or that Catlin's reliance on the reports was unreasonable.
Regarding Lee's claims under the Texas Insurance Code, Lee argued the insurer was required to notify the insured within fifteen business days whether the claim was accepted or denied and the underlying reasons for a rejection. Catlin argued Lee had failed to submit invoices for prior roof repairs and other documentation that had been requested. But Catlin had not demonstrated such evidence was necessary for it to make a determination on coverage. Accordingly, there was a genuine issue of material fact as to whether Catlin's delay in notifying Lee of its decision was warranted on the basis that it had not received all items, statements, and forms that were required for it to determine coverage and the amount of loss.