The importance of thorough claim investigation: An insurer who “reasonably believes” it has a basis to deny coverage should still make sure it conducts a sufficient investigation into the basis supporting its belief. Failure to do so could result in a finding that the insurer breached the duty of good faith and fair dealing.

An insurer who “reasonably believes” it has a basis to deny coverage should still make sure it conducts a sufficient investigation into the basis supporting its belief. Failure to do so could result in a finding that the insurer breached the duty of good faith and fair dealing.

Any insurance lawyer practicing in Texas knows that in order to show an insurance company has breached its duty of good faith and fair dealing to its insured, the insured must show “there is no reasonable basis for denial of a claim or delay in payment or a failure on the part of the insurer to determine whether there is any reasonable basis for the denial or delay.”[1] Most bad faith cases turn on this first issue, whether the insurer had a reasonable basis to deny the claim, rather than the second, whether the insurer failed to determine if there was a reasonable basis for the denial of the claim; in other words, it failed to investigate. However, as a recent decision from the Fifth Circuit makes clear, an insurer who reasonably believes it has a basis to deny coverage must still conduct a reasonable investigation or it may find itself defending bad faith claims.

In Santacruz v. Allstate Texas Lloyd’s Inc., an insured’s home sustained damage when a severe rainstorm blew several shingles off the roof of his Dallas home.[2] The following day, the insured reported the damage to his homeowner’s insurer, Allstate. Allstate informed the insured that an Allstate adjuster would not be able to inspect the damage for several days. The insured told Allstate that due to the forecasted stormy weather, the insured planned to hire a local contractor to repair the roof as soon as possible. Notwithstanding the insured’s argument that more bad weather was coming, the Allstate representative told the insured Allstate would need to inspect the loss before it was repaired. The insured went forward with repairs immediately.

After the repairs were complete, the Allstate adjuster went to the insured’s home to inspect the roof. The adjuster took pictures of the roof and of the interior of the home. Allstate ultimately denied the claim, relying on the policy provision requiring the insured to “provide [Allstate] access to the damaged property.” Specifically, Allstate argued that the insured’s repair of the roof prior to Allstate’s inspection breached the access provision. The insured filed a lawsuit against Allstate alleging breach of the common law duty of good faith and other causes of action (but not breach of contract). As its defense, Allstate argued that because the insured repaired the roof before the Allstate adjuster inspected the home, the insured breached the policy provision requiring the insured to provide access, which prevented Allstate from determining whether the damage was caused by a covered cause of loss.

The magistrate judge agreed with Allstate and granted summary judgment for Allstate. Specifically, the magistrate judge held that Allstate reasonably believed it could deny the claim because the insured breached the access provision by repairing the roof prior to inspection. Accordingly, the magistrate judge ruled Allstate did not breach the duty of good faith and fair dealing.

However, the Fifth Circuit disagreed. In its opinion, the Fifth Circuit first discussed why it could not conclude that the insured necessarily violated the plain language of the provision requiring access to damaged property. The court explained that the insured did not prevent the adjuster from visiting his home to inspect either before or after the repair. In fact, the insured told the Allstate representative when he was planning on making the repairs. It’s worth pointing out that the court’s discussion of whether the insured actually breached the access provision is likely dicta because whether such a breach actually occurred is immaterial to whether the insurer “reasonably believed” a breach had occurred and thus it had a basis to deny coverage.

The Fifth Circuit went on, however, to state that “even if [the insured] did violate the access provision, Texas’s Anti-Technicality Statute only allows a denial of coverage on that basis if the breach of the provision contributed to the loss or made a loss determination unfeasible.” However, the court did not discuss whether the fact that the roof damage was repaired made it unfeasible to make a loss determination.

Then the Fifth Circuit gets into the meat of its analysis: “Allstate’s rejection of the claim was based not on the 'access' provision itself, but on its view that repairing the roof prior to the adjuster’s inspection prevented Allstate from determining whether the damage was the result of the direct force of wind or of some other, noncovered cause such as normal deterioration or the weight of the rain on the roof.” The court explained that this issue deals not with whether the insurer had a reasonable basis to deny the claim, but whether the insurer conducted a sufficient investigation to determine that the preinspection repair prevented it from determining whether coverage existed or the amount of loss.

The court found that the Allstate adjuster took photographs of the damaged home, but did not talk to the contractor who submitted an affidavit about the damage he saw, did not obtain weather reports and did not inquire with neighbors about similar damage. Based on this investigation, the Fifth Circuit held that a jury could find Allstate failed to perform a sufficiently thorough and objective investigation to determine whether the insured’s damage was attributable to a covered cause of loss. Accordingly, the Fifth Circuit reversed the magistrate judge’s entry of summary judgment and remanded for further proceedings.
The Fifth Circuit’s decision highlights the interplay between an insurer’s determination of coverage and its investigation. Here, the insurer argued that it had a reasonable basis to believe there was no coverage because the insured breached the access provision. In addition to its discussion about why the insured didn’t appear to breach the provision after all (which is not a requirement for a finding of a “reasonable basis to deny”), the court went to great lengths to hold that the real reason Allstate denied coverage was because it was unable to determine whether there was covered damage, not because of the breach of the access provision. The court then determined that a jury could decide that taking pictures of the new roof and the interior damage was not a sufficient investigation and thus summary judgment was improper.

Based on the Fifth Circuit’s decision, an insurer who “reasonably believes” it has a basis to deny coverage should still make sure it conducts a sufficient investigation into the basis supporting its belief. Failure to do so could result in a finding that the insurer breached the duty of good faith and fair dealing.