A review of this table indicates that there is no "perfect" cause of action for suits against insurers. A breach of contract claim standing alone provides a limited recovery and no attorneys' fees absent an article 21.21 claim (See Tex. Civ. Prac. & Rem. Code � 38.006). A bad faith claim, as a simple tort action, does not provide for attorneys' fees and with Texas's heightened standard for punitive damages, it will be the rare case in which the plaintiff will be able to collect on a punitive damage finding in a bad faith lawsuit 4. A Stowers claim will only apply in unique third party cases and does not allow for attorneys' fees. Accordingly, it is easy to predict that in the future, the plaintiffs bar will increasingly rely on art. 21.21 as a basis for suing insurers.

B. Bad Faith Becomes Synonymous with art. 21.21

Unlike a claim for bad faith, which the courts still do not consistently apply, article 21.21 is a statutory cause of action that the courts appear to have less trouble interpreting and will likely have less trouble applying in a given case. Furthermore, given the court's recent pronouncements in Universe Life Ins. Co. v. Giles, 1997 WL 378065 (Tex. 1997) (not released for publication), it appears that in terms of proof, the plaintiff should not have any more or less difficulty establishing an article 21.21 case than a bad faith case. Specifically, in Giles, the Texas Supreme Court makes it clear that the standard for bad faith now simply mirrors the statutory language of one of the art. 21.21 laundry list violations. The importance of this comparison between bad faith and article 21.21 justifies quoting Giles' discussion of this point at length. The court in Giles explained:

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:

(ii) 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 provide 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.

The standard has the further advantage of familiarity. The Legislature first included section 4(10)(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. 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.

Giles, 1997 WL 378065. [emphasis added] *7-8

Accordingly, it appears that we now have a common law tort cause of action that merely duplicates a statutory remedy. In fact, in Justice Hecht's concurrence in Giles, he went so far as to suggest that sec. 4 of art. 21.21 should preempt the common-law bad faith tort! Giles, 1997 WL 378065 *26 (Hecht, J. concurring). In Stewart Title Guaranty Co. v. Aiello, 941 S.W.2d 68, 72 (Tex. 1997) the court similarly held that a jury finding that an insurer failed to exercise good faith would sustain a DTPA claim and, conversely, if a bad faith claim fails then a claim for bad faith under article 21.21 or the DTPA also fails.

Therefore, given that the elements of an article 21.21 violation are now unequivocally the same as for bad faith, why would a plaintiff ever plead bad faith if the article 21.21 claim can result in a recovery of attorneys' fees and multiple damages; damages which are unavailable for the bad faith claim? There is even a down-side to pleading bad faith, since, as a tort cause of action, it potentially subjects the plaintiff to the proportionate responsibility scheme of Tex. Civ. Prac. & Rem. Code � 33.001. However, it is likely that plaintiffs will continue to include a cause of action for breach of the duty of good faith and fair dealing in their suits against insurers (out of force of habit and the hope that the Texas Supreme Court pendulum will swing again). Furthermore, in the extremely rare case where the plaintiff can demonstrate malice or fraud, bad faith is the tort that the plaintiff can still hang its hat on to get to the punitive damage bonanza.

III. Litigating the Bad Faith Claim - Some Practical Considerations for Counsel

Assuming the insured still wants to sue his insurer under the bad faith tort theory, the following discussion provides some practical suggestions relative to litigating the bad faith claim. Although every case is unique, the following issues come into play in litigating almost every bad faith case.

A. The Insurance Policy

Get a copy of the insurance policy at issue. Although this simple statement might seem ridiculously self-evident, I have been surprised on more than one occasion to see parties to bad faith litigation get well into a lawsuit without ever having obtained a complete copy of the policy at issue. Do not be surprised if your insured does not have a copy of its policy. A quick and easy way to obtain a copy of the policy is to obtain it from the insured's agent rather than the insurance company. It has been my experience that both independent and captive insurance agents typically have better (and more complete) copies of the insured's policy than the insurance company (where policies are often kept in underwriting departments and might take multiple phone calls to track down and obtain). Although obtaining a copy of the policy would seem like a simple-minded exercise, obtaining a copy of the policy is not always an easy task - particularly where the insured is a corporation that might have a complicated insurance scheme with multiple layers of self-insured retentions and excess coverage. The attorney in the bad faith lawsuit should confirm that he has the complete policy. Many policies contain a form that lists the policy parts by form number. Compare this form against the policy in your possession and confirm that you have the correct policy and all of the appropriate endorsements and exclusions that are supposed to be made part of the policy. You would be amazed at how often the policy the carrier provides you is incomplete or contains the wrong endorsements.
Whether a carrier should pay a claim is ultimately a function of the language of the insurance policy. Before suing an insurer, the plaintiffs attorney should be able to specifically identify the portion of the policy that gives the insured the right to coverage, and defense counsel should be able to identify the specific language that avoids coverage.
Compare the insurer's denial letter to the language in the policy. You may be surprised to find that the carrier is citing to exclusions that don't exist or has wholly failed to take into account exclusions or endorsements that are added to the basic policy language.

In-house insurance adjusters for large carriers typically have on their desk anywhere from 150 - 350 pending claims at any given time. Sheer numbers make it evident that it is impossible for the adjusters to become familiar with the detailed facts of each claim the adjuster is handling or the intricacies of the policy language at issue. Accordingly, with very little effort, the lawyer should be able quickly to become as familiar (if not more familiar) with the facts and policy language associated with a given claim than the insurance adjuster.

B. Determine if There is Coverage.

Once you have the insurance policy, the next step is to analyze the coverage at issue in the bad faith lawsuit. In fact, counsel's very first task in handling a bad faith lawsuit should be to analyze the coverage at issue. When asked to defend a bad faith lawsuit, defense counsel should never simply rely on the carrier's coverage analysis or position. The biggest favor that defense counsel can do for the carrier is to conduct an independent review of the coverage issue. By analyzing the coverage issue, defense counsel is in a better position to defend depositions of the insurance company representatives and prepare the appropriate motions on behalf of the insurer if counsel determines that the carrier acted appropriately. However, if in conducting a coverage analysis defense counsel determines that the carrier is continuing to deny a claim that should be covered, it is imperative (under the cloak of defense counsel's attorney-client privilige) to recommend to the carrier to reevaluate its coverage position so that the appropriate settlement or an offer of judgment can be immediately pursued.
For a period of time Texas courts seemed to suggest that the question of whether an insurer committed bad faith could be independent of the question of coverage. In Viles v. Security Nat. Ins. Co., 788 S.W.2d 566, 567 (Tex. 1990), the Texas Supreme Court held that an insurer could be found liable for bad faith even where the underlying claim was not covered. However, in more recent cases, Texas courts seem to have moved far away from the holding in Viles. The major case on this point is Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995), where the court stated: "As a general rule there can be no claim for bad faith when an insurer has promptly denied a claim that is in fact not covered." Subsequently, numerous cases have found no bad faith where there was no coverage. Canutillo Indep. Sch. Dist. v. National Union Fire Ins. Co., 99 F.3d 695, 709 (5th Cir. 1996); Liberty National Fire Insurance Co. v. Akin, 927 S.W.2d 627, 629 (Tex. 1996); Tivoli Corp. v. Jewelers Mutual Insurance Co., 932 S.W.2d 704, 712 (Tex. App.--San Antonio 1996, writ requested); North American Shipbuilding, Inc. v. Southern Marine & Aviation Underwriting, Inc., 930 S.W.2d 829, 835 (Tex. App.--Houston [1st Dist.] 1996, no writ); State Farm Fire & Cas. Co. v. Griffin, 888 S.W.2d 150, 157-58 (Tex. App.--Houston [1st Dist.] 1994, no writ).

Therefore, when handling a bad faith case, the first thing counsel should do after obtaining a complete copy of the policy and the adjuster's file is to conduct a coverage analysis. However, be sure to confirm that the insurer has provided you the entire claim file. Make sure that you are also provided a printout of all notes maintained on the carrier's internal computer or diarying system. Early on in the case you will be asked to produce the insurance policy and the claim file. There is no reason to wait for written discovery requests to begin compiling information that you know you will eventually need.

C. What Facts Would Make Coverage Reasonably Clear

Remember, the issue that defense counsel will be defending in the bad faith case is whether "the insurer knew or should have known that it was reasonably clear that the claim was covered." Universe Life Ins. Co. v. Giles, 1997 WL 378065 *1 (Tex. 1997) (not released for publication). In addition to determining whether coverage truly exists under the policy, the bad faith attorney should immediately determine what caused the carrier to take the coverage position at issue. In other words, what facts or policy language were before the carrier that made coverage either reasonably unclear or uncertain? Make sure that the adjuster's work notes and the reports the adjuster received while processing the claim support the carrier's position in this regard. Once counsel in the bad faith case is comfortable with the carrier's position and the file materials that support or negate the carrier's position, counsel is then in a position to brief the inevitable dispositive motion that should be filed in almost all bad faith lawsuits.

D. Summary Judgment Motions

The Texas Supreme Court in Giles recently made it clear that "bad faith" is not automatically a question of law. Specifically, the court stated:

[W]e 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 cases could possibly justify this judicial sleight-of-hand to circumvent the constraints our Constitution imposes upon this Court.

Giles, 1997 WL 378065 *8.

However, on the same day that the Supreme Court issued Giles, it also issued United State Fire Ins. Co. v. Williams, 1997 WL 377050 (Tex. 1997)(not released for publication), in which the court upheld the trial court's summary judgment in favor of the insured on the plaintiff's bad faith claim. In Williams, the court described the standard for granting summary judgments in bad faith cases using the following language:

[A]n insurer breaches its duty of good faith and fair dealing when the insurer fails to settle a claim if the insurer knew or should have known that it was reasonably clear that the claim was covered. Universe Life Ins. Co. v. Giles, 881 S.W.2d 44 (Tex. App. 1994) [not released for publication]. An insurer does not breach its duty merely by erroneously denying a claim. Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 17 (Tex. 1994). Evidence that only shows a bona fide dispute about the insurer's liability on the contract does not rise to the level of bad faith. National Union Fire Ins. Co. v. Dominquez, 873 S.W.2d 373, 376-77 (Tex. 1994). Thus, [the insurer] was entitled to summary judgment if its summary judgment proof established that there was no more than a good faith dispute regarding the applicability of [the worker's compensation rule at issue].

Id. at *2.

Since the insurer's interpretation of the worker's compensation rule in Williams was "not legally groundless," the court held that the trial court acted properly in granting a summary judgment in favor of the carrier. Id. Therefore, based on the court's holding in Williams, it appears that summary judgment may be proper upon submitting affidavit evidence of the carrier's basis for its coverage position and legal authority to demonstrate that such position was not "legally groundless."
In addition to the Texas Supreme Court's most recent pronouncement in Williams, there are now a significant number of cases where the appellate courts have upheld summary judgment motions on behalf of insurers in bad faith cases. In all of the following recent cases, the trial court's summary judgment in favor of the insurer was upheld: State Farm Fire & Cas. Co. v. Woods, 925 F.Supp. 1174, 1178- 79 (E.D. Tex. 1996); Keightly v. Republic Ins. Co., 1997 WL 229023 (Tex. App.-- Austin 1997)(not released for publication), opinion w'drawn, 1997 WL 420787; Garrison Contractors, Inc. v. Liberty Mut. Ins. Co., 927 S.W.2d 296 (Tex. App.--El Paso 1996, writ granted); Saunder v. Commonwealth Lloyd's Ins. Co., 928 S.W.2d 322 (Tex. App.--San Antonio 1996, n.w.h.); State Farm Lloyds Ins. Co. v. Maldonado, 935 S.W.2d 805 (Tex. App.-- San Antonio 1996, writ requested); Ramirez v. Transcontinental Ins. Co., 881 S.W. 2d 818 (Tex. App.--Houston [14th Dist.] 1994, writ denied); Two Pesos, Inc. v. Gulf Ins. Co., 901 S.W.2d 495 (Tex. App.--Houston [14th Dist. 1995, n.w.h.); Rogers v. Cigna Ins. Co. of Tex., 881 S.W.2d 177 (Tex. App.--Houston [1st Dist.]1994, no writ); Packer v. Travelers Indem. Co. of R.I., 881 S.W.2d 172 (Tex. App.--Houston [1st Dist.] 1994, no writ).
It will be interesting to see how the new "no evidence" summary judgment rule recently promulgated by the Texas Supreme Court will effect summary judgment practice in bad faith cases. See Approval of Revisions to the Texas Rules of Civil Procedure, 60 Tex. B. J. 534 (June 1997). We can probably expect that summary judgment motions will routinely be filed in all bad faith cases in the future.

E. Specific Defenses to Bad Faith Claims

When the tort of bad faith first began developing, it appeared that there was no escape for insurers. However, as the law of bad faith has matured, case law supporting the insurers' defenses has multiplied dramatically. The following cases, mostly reported in just the last year, demonstrate instances where insurers have escaped bad faith lawsuits based upon specific defense theories.

1. Limitations

When an insurance company denies coverage, the limitations period begins to run at the denial. In the absence of an outright denial of coverage, the start of the limitations period is to be determined on a case-by-case basis. Merriman v. Security Ins. Co. of Hartford, 100 F.3d 1187, 1193 (5th Cir. 1996); Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826, 829 n.2 (Tex. 1990).

2. Res Judicata

An employee's state court action against a carrier seeking compensation benefits had a res judicata effect, precluding a claim for breach of the duty of good faith and fair dealing. Patin v. Allied Signal, Inc., 77 F.3d 782, 789 (5th Cir. 1996).

3. Privity

There is no cause of action for breach of the duty of good faith and fair dealing against one not in contractual privity with the claimant. Atwood v.Kansas City Life Ins. Co., 1997 WL 427035 *12 (Tex. App.--Houston [14th Dist.] 1997, n.w.h) (not released for publication); Traver v. State Farm Mut. Auto Ins. Co., 930 S.W.2d 862, 870 (Tex. App.--Fort Worth 1996, writ granted).

4. No Bad Faith in Stowers Actions

If a Stowers claim for failure to settle within policy limits is available, a bad faith cause of action will not be permitted. Maryland v. Head, 938 S.W.2d 27, 27-29 (Tex. 1996); Dear v. Scottsdale Ins. Co., 947 S.W.2d 908, 914 (Tex. App.-- Dallas 1997, writ filed); Trinity Universal Ins. Co. v. Bleeker, 944 S.W.2d 672, 681 (Tex. App.--Corpus Christi 1997, rule 130(d) motion filed)(not released for publication).

5. Surviving Remand

28 U.S.C. � 1445(c) provides that a civil action in any state court arising under the workmens' compensation laws of such state may not be removed to federal court. However, in Patin v. Allied Signal, Inc., 77 F.3d 782, 784 (5th Cir. 1996) the court held that claims against a workers' compensation insurance carrier for breach of the duty of good faith and fair dealing are not immunized against removal to federal court by the provisions of 28 U.S.C. � 1445(c). The court reasoned that a bad faith claim is in the nature of "insurance malpractice" and is separate from and independent of a claim for statutory workers' compensation benefits which claims cannot be removed by statute. Id. at 784.

6. Limited Scope

The tort of bad faith only relates to issues involving the payment of claims. Payment or calculations of premiums are not governed by the bad faith tort. Garrison Contractors, Inc. v. Liberty Mut. Ins. Co., 927 S.W.2d 296, 302 (Tex. App.--El Paso 1996, writ granted). No duty of good faith and fair dealing exists between a surety and bond obligee. (Tacon Mech. Contractors, Inc. v. Aetna Cas. & Surety Co., 65 F.3d 486 (5th Cir 1995). There is no claim for breach of the duty of good faith and fair dealing between an insurance agent and the insured. Cavallini v. State Farm Mut. Auto Ins. Co., 44 F.3d 256, 261-62 (5th Cir. 1995); Maintenance, Inc. v. Hartford Group, Inc., 895 S.W.2d 816, 818-19 (Tex. App.--Texarkana 1995, writ denied).

7. Lack of Coverage Precludes Bad Faith

In Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995), the court held that even though the insurer's basis for denying the claim was incorrect, since there were other reasons for denying the claim the insurer could not be found liable for bad faith. The insurer did not fail to determine whether there was a reasonable basis for denying the claim; although, its decision was timely, it simply made the right decision for the wrong reason.

8. Appraisal

An insurer's reliance on an appraisal award to deny that portion of the claim above the appraisal precludes a bad faith cause of action. Hennessey v. Vanguard Ins. Co., 895 S.W.2d 794, 799 (Tex. App.--Amarillo 1995, writ denied)

9. Declaratory Action

Filing a declaratory action is one method by which an insurance company can, with the aid of the court, obtain an adjudication as to whether, and in what amount, coverage exists under a policy. In McCracken v. U.S. Fire Ins. Co., 802 F.Supp. 30, 37 (W.D. Tex. 1992), the court went so far as to state that "bringing a declaratory judgment action to determine whether coverage should be denied was in and of itself evidence of U.S. Fire's good faith and unwillingness to deny coverage without thoroughly investigating and considering the matter" (emphasis supplied). It should be noted that in McCracken, the insurer brought the declaratory action before denying coverage, and it is questionable as to whether a court would take the same position where coverage is denied before the declaratory action is filed.

IV. Miscellaneous Statutes (other than art. 21.21) Which Could be Implicated in the Bad Faith Action.

In bringing or defending a bad faith lawsuit counsel should keep in mind other causes of action and specific statutes that might be made part of the bad faith claim. Since claims under the DTPA and article 21.21 are the topic of another paper, they are not included in the following discussion.

A. Unfair Discrimination

Article 21.21-8 was a new statute added to the Insurance Code as part of the 1995 tort reform. It applies to all persons and businesses engaged in the business of insurance in the state of Texas. It essentially makes it a violation of the Code for anyone in the industry to engage in unfair discrimination between members of the same class and risk level in determining the amount of premiums, policy fees, and rates charged for any insurance policy or contract or in the benefits thereunder.

It provides for economic damages plus court costs and attorneys' fees for plaintiffs who successfully present a claim of unfair discrimination under the statute and have suffered economic damages. It sets a limit of $25,000 in damages per claimant if the fact-finder finds that such discrimination was committed intentionally. It also allows for the judge to enter an order enjoining such illegal discrimination.

All actions under this statute must be commenced within 12 months after the date on which the claimant was denied insurance on the basis of unfair discrimination. If a court finds that an action was brought in bad faith or for the purposes of harassment, the defendant will be awarded attorneys' fees.

B. Texas Law Governs

Article 21.42 sets forth conditions under which Texas courts are statutorily required to apply Texas law. This section provides that any contract of insurance payable to a resident of Texas by any insurance company doing business in Texas shall be held to be a contract entered into under the laws of Texas relating to insurance. The laws of Texas will govern the insurance contract, even notwithstanding the fact that the policy or contract may provide that the contract was executed (in addition to the premiums payable and policy amount due) outside of Texas.
This basically means that policies issued to Texas residents or contracts which are payable to Texas residents by insurance companies or corporations from out of state will generally be governed by Texas law, notwithstanding language in the contract which may point towards the conclusion that both the parties never envisioned the application of Texas law to the contract.

C. Prompt Payment of Claims

Article 21.55 provides that, notwithstanding certain exceptions listed therein, an insurer is required to act on the following no later than the 15th day after the receipt of notice of the claim from the insured, or the 30th business day if the insurer is an eligible surplus lines insurer: 1) acknowledgment of the claim; 2) commence any investigation of the claim; 3) request necessary items for the claimant. In the case of a weather-related catastrophe or major natural disaster (as defined by the State Board of Insurance), insurers are given 15 extra days to handle claims.
The insurer must accept or reject the claim in writing, to the claimant, no later than the 15th business day after the date the insurer receives all the necessary information from the claimant. If the insurer reasonably believes that the loss resulted from arson, the insurer must notify the insured, in writing, of the acceptance or rejection of the claim no later than the 30th day after receiving all of the requested items from the insured. If the claim is denied, the insurer must state in writing the reasons for the denial. If the insurer is unable to notify the claimant within the time frame required, the insurer shall so notify the claimant and give reasons for the necessity of additional time. If the insurer needs additional time, acceptance or rejection of the claim must happen no later than the 45th day after the insurer notified the claimant of its need for additional time.
If the insurer accepts a claim, or part of one, the insurer must pay the claim by the 5th business day after the notice. If the insured accepted the claim on the condition that the claimant take some action, then the date the contingent action is performed becomes the date of notice in the preceding sentence.

The statute provides relief for the policyholder or beneficiary in the case of noncompliance by the insurer. When an insurer is not in compliance with the requirements of this article, the insurer will be liable to pay the holder or beneficiary of a policy under which a claim is made. A jury may award the claimant additional damages in the amount of 18% of the claim per year that is left unpaid. The policyholder or beneficiary may also get their attorneys' fees paid for by the insurer so long as they are reasonable. These fees would be then taxed as part of the costs of the case.
This article does not apply to insurance in the following areas: 1) workers' compensation; 2) mortgage guarantees; 3) titles; 4) health maintenance organizations (HMOs); 5) trusts; 6) bonds; and 7) marine insurance other than inland marine insurance. Insurers in these categories will not be subject to the damage provisions in this section.

D. Misrepresentation by Policyholder

In Texas, before an insurer decides to deny a claim based upon a misrepresentation in the policy application, the insurer should first make sure that the misrepresentation was material to the risk or actually contributed to the contingency causing the policy to be payable. Specifically, Texas Insurance Code Article 21.16 provides as follows:

Any provision in any contract or policy of insurance issued or contracted for in this State which provides that the answers or statements made in the application for such contract or in the contract of insurance, if untrue or false, shall render the contract or policy void or voidable, shall be of no effect, and shall not constitute any defense to any suit brought upon such contract, unless it be shown upon the trial thereof that the matter or thing misrepresented was material to the risk or actually contributed to the contingency or event on which said policy became due and payable, and whether it was material and so contributed in any case shall be a question of fact to be determined by the court or jury trying such case.

The above provision is applicable to all policies issued in Texas. Importantly, courts have required an insurer to plead and prove the following factors in order to successfully rescind the issuance of an insurance policy:

(1) the making of the representation;

(2) the falsity of the representation;

(3) reliance thereon by the insurer;

(4) the intent to deceive on the part of the insured in making same; and

(5) the materiality of the representation.

Mayes v. Massachusetts Mut. Life Ins. Co., 608 S.W.2d 612, 616 (Tex. 1980). Additionally, in an action to have a policy of insurance rescinded based on misrepresentation by the insured, an insurer must prove that it provided the insured with written notice of its intention to not be bound within a reasonable time after discovering the falsity of the representations made. The statute states that 90 days would be considered "reasonable." Tex. Ins. Code art. 21.17.

E. Denial of Coverage Based on Late Notice of a Claim

For many years in Texas, late notice of a claim was an absolute defense to liability on the policy. However, effective May 1, 1973, the State Board of Insurance in Revision of Texas Standard Provision for General Liability Policies Amendatory Endorsement - Notice Order No. 23080 (March 13, 1973), required that insurers must be prejudiced by the insured's failure to forward suit papers or give notice of claims before such a failure will bar liability under the policy. In Chiles v. Chubb Lloyds Ins. Co., 858 S.W.2d 633, 635 (Tex. App.--Houston [1st Dist.] 1993, writ denied) the court held that this rule applies to all general liability policies.

Whether the insurer is prejudiced by the insured's failure to give notice as required by the policy is a question of fact. P. G. Bell Co. v. USF&G, 853 S.W.2d 187, 191 (Tex. App.--Corpus Christi 1993, no writ). However, case law also provides that certain circumstances may constitute prejudice as a matter of law (and thus are capable of being decided by the judge in the context of a motion for summary judgment). See Liberty Mut. Ins. Co. v. Cruz, 883 S.W.2d 164, 164 (Tex. 1993) (holding that when the insurer's first notice of the claim is after a default judgment has been entered against the insured, there exists prejudice as a matter of law).

V. Recent Texas Cases Involving the Breach of the Duty of Good Faith & Fair Dealing

The following summarizes the courts' rulings in some of the most recent bad faith opinions.

1. Stewart Title Guaranty Co. v. Aiello, 941 S.W.2d 68 (Tex. 1997)-here the court determines whether Stewart Title Company's duty of good faith and fair dealing survived the entry of an agreed judgment with its insured, Aiello. The court held that the only relationship between the parties after the entry of judgment was that of creditor and debtor, and the duty did not extend beyond the time when the agreed judgment was entered.

2. Universe Life Ins. Co. v. Giles, 1997 WL 378065 (Tex. 1997) (not released for publication)-the main issue in this case involves whether there was any evidence to support an insured's judgment against his health insurer for the breach of the duty of good faith and fair dealing. In sum, the fundamental disagreement between the justices is who should decide the issue of bad faith. The majority continues to believe that whether an insurer breached its duties should remain a fact question, while the minority believes that the resolution of bad faith disputes should be taken away from the jury and become a question of law. The majority held that treating the issue as one of law would expand the court's ability to overturn bad faith judgments. "We do not believe, however, that the difficulty of no evidence review in bad faith cases could possibly justify this judicial sleight of hand to circumvent the constraints our Constitution imposes upon this Court." The court held that in this case, the record contained legally sufficient evidence to support the jury's finding that Universe breached its duty of good faith and fair dealing. An insurer breaches its duty of good faith and fair dealing when the insurer fails to settle a claim if the insurer knew or should have known that it was reasonably clear that the claim was covered.

3. United States Fire Ins. Co. v. Williams, 1997 WL 377050 (Tex. 1997) (per curiam) (not released for publication)-the Texas Supreme Court rules that U.S. Fire was entitled to summary judgment if its summary judgment proof established that there was no more than a good faith dispute over the interpretation of a section of the worker's compensation code. An insurer cannot be liable for bad faith because it misinterprets a rule. Reversed and rendered.

4. State Farm Lloyds v. Nicolau, 1997 WL 377346 (Tex. 1997)(not released for publication)-the insureds prevailed in a suit against the carrier for bad faith for denying payment for foundation movement resulting from a plumbing leak. The Supreme Court held that there was sufficient evidence to uphold the jury's bad faith finding. The court held that there was enough evidence in this case to sustain a finding of bad faith under either the Arnold standard or under Giles, decided the same day as the present case. State Farm based its denial of coverage on engineering reports that said that a water leak did not cause the damage to the insureds' home, and asserted that as such, it could not be found liable for bad faith as a matter of law. The court stated that it has never held that the mere fact that a company relies on an expert's report to deny a claim automatically forecloses a bad faith claim. There was evidence that State Farm denied the claim without a reasonable basis or without attempting to determine objectively whether its liability had become reasonably clear. There was also evidence that State Farm and the engineers did not conduct an adequate investigation.

5. Atwood v. Kansas City Life Ins. Co., 1997 WL 427035 (Tex. App.-- Houston [14th Dist.] 1997, n.w.h.)(not released for publication)-this is an appeal from a summary judgment in favor of the insurer arising out of an investment scam perpetrated by a Kansas City agent. The court noted that there is no cause of action for breach of the duty of good faith and fair dealing against one not in contractual privity with the claimant. Half of the appellants never entered into any contract with Kansas City, so they have no claim. Only one party made an allegation in connection with a separate life insurance or annuity policy issued by Kansas City. Because their claims are related to the annuity contract with Kansas City, Kansas City owed them a duty of good faith and fair dealing. Kansas City did not negate these arguments in their motion for summary judgment, so summary judgment was improperly granted in favor of Kansas City on the bad faith issue.

6. Keightly v. Republic Ins. Co., 1997 WL 229023 (Tex. App.--Austin 1997)(not released for publication), opinion w'drawn, 1997 WL 420787-plaintiff sued Republic, a reinsurer for one of National County's policies, for, among other causes of action, breach of the common law duty of good faith and fair dealing. Plaintiff's claim revolves around Republic's conduct in relation to the National County policy, specifically, that with the knowledge and consent of National County, Republic assigned a claims manager to manage the plaintiff's claim; dealt directly with National County's defense counsel; investigated, evaluated, negotiated, and settled such claims; employed independent adjusters and lawyers in defending the claims and paid expenses; and established and funded a bank account in National County's name. Republic's motion for summary judgment was granted, but it did not specify upon which grounds.
The appellate court held that the trial court did not err in granting Republic's motion for summary judgment on plaintiff's cause of action for breach of a common law duty of good faith and fair dealing. Absent privity of contract, such a duty does not arise. Natividad v. Alexsis, Inc., 875 S.W.2d 695, 697-98 (Tex. 1994).

7. Dear v. Scottsdale Ins. Co., 1997 WL 111085 (Tex. App.--Dallas 1997, writ filed)(not released for publication)-Dear alleged that Scottsdale, the attorneys it assigned to defend the claims against him, and the attorneys' investigator improperly investigated, handled, and settled lawsuits against Dear, which were covered by a Scottsdale professional liability insurance policy. The trial court granted all of the appellee's motions for summary judgment.
Dear contended at the appellate court that even though his insurance policy contained a clause giving Scottsdale the right to settle any claim or suit as it "deems expedient," Scottsdale had no right to handle claims as it saw fit or to settle claims within policy limits. He contended that Scottsdale was obligated to satisfy the duty of good faith and fair dealing in handling and settling the claims against him. The court disagreed with the contention that an insurer does not have an absolute right to settle third party claims within policy limits when the insurance policy provides that the insurer may do so when it "deems expedient." The court declined to extend any extra-contractual theories of recovery to allow an insured recovery against an insurer who, pursuant to the express terms of its policy, settles a third party claim within the insurance policy's liability limits. The court also rejected Dear's argument that even if his insurance policy gave the company a contractual right to settle claims without his consent, the company could still be liable if it breached its duty of good faith and fair dealing or acted negligently. The court cited Maryland v. Head, 938 S.W.2d 27, 27-29 (Tex. 1996) (per curiam), for the proposition that Texas law only recognizes one tort duty in third party insurance cases, that being the Stowers duty. According to this duty, if an insurer refuses an offer of settlement when it appears that an ordinary prudent person in the insured's situation would have settled, the insurer may be held liable in damages. Therefore, Scottsdale owed Dear no duty of good faith and fair dealing.
The court also held that the independent adjusting firm could not be held liable for improperly investigating a claim and recommending settlement. Absent a contract, no special relationship exists and the adjusting firm could not, as a matter of law, owe the insured a duty of good faith and fair dealing.

8. Trinity Universal Ins. Co. v. Bleeker, 1997 WL 89093 (Tex. App.-- Corpus Christi 1997, rule 130(d) motion filed)( not released for publication)-case addressing an insurance company's conduct in dealing with settlement offers arising from an automobile collision. The jury found that Trinity breached its common law duty of good faith and fair dealing, among other violations, and judgment was in excess of $77 million. Bleeker possessed an auto liability policy issued by Southern County Insurance Company and Trinity reinsured Southern County's policies and handled their claims. The attorneys for the parties injured by Bleeker made settlement demands within Bleeker's policy limits, in exchange for an interpleader of the policy limits. Trinity did not deposit any funds into the court's registry within the time period for acceptance of the settlement offer. Trinity did not contact Bleeker to discuss the settlement offers.
The court stated that the issue of whether an insurer owes its insured a duty of good faith and fair dealing when dealing with third party claims against its insured was directly addressed by Maryland Ins. Co. v. Head Indus. Coatings & Servs., 938 S.W.2d 27 (Tex. 1996) (per curiam), where the Supreme Court "unequivocally rejected such a cause of action, holding that ‘Texas law recognizes only one tort duty in this context, that being the duty stated in Stowers.'" The trial court's judgment against appellant for breach of duty of good faith and fair dealing was reversed.

9. Merriman v. Security Insurance Company of Hartford, 100 F.3d 1187 (5th Cir. 1996)-the court stated that the party's reliance on a footnote in Murray v. SanJacinto Agency, Inc., 800 S.W.2d 828 (Tex. 1990), which states that in some cases, the exact date of accrual of a good faith and fair dealings claim is a question of fact to be determined on a case by case basis is misplaced. The important point of Murray is this holding--where an insurance company denies coverage, the limitations period begins to run at the denial. In the absence of an outright denial of coverage, the start of the limitations period should be determined on a case by case basis.

10. Canutillo ISD v. National Union Fire Ins. Co. of Pittsburgh, 99 F.3d 695 (5th Cir. 1996)-the court held that appellant's claim for breach of the duty of good faith and fair dealing failed as a matter of law. The court found that National Union had no duty to defend or indemnify under the policy, and its denial of claims was reasonable, and therefore there could be no claim for breach of the duty of good faith and fair dealing.

11. Patin v. Allied Signal, Inc., 77 F.3d 782 (5th Cir. 1996)-the court holds that "[g]iven the cogent analysis of the Texas Supreme Court that claims against insurers ‘arise under' the common law, not under the TWCA. . .we conclude that claims for the breach of the duty of good faith and fair dealing do not ‘arise under' the state workers' compensation statutes but are, at most, ‘related to' those statutes and do not come within the ambit of the non-removability provision of � 1445(c)." The court affirmed the Patins' motion to remove.

12. Maryland Ins. Co. v. Head Indus. Coatings & Servs., Inc., 938 S.W.2d 27 (Tex. 1996) (per curiam)-the court addressed the issue of whether an insurer owes its insured a duty of good faith and fair dealing to investigate and defend claims by a third party against its insured. The court noted that an insured is fully protected against his insured's refusal to defend or mishandling of a third party claim by his contractual and Stowers rights. Therefore, imposing an additional duty on insurers in handling third party claims is unnecessary and inappropriate.

13. State Farm Lloyds Ins. Co. v. Maldonado, 935 S.W.2d 805 (Tex. App.--San Antonio 1996, Rule 130(d) motion filed)(en banc)-judgment was against an insured accountant on a defamation claim, and the insured and the claimant sued the insured's insurance carrier for bad faith in connection with the carrier's handling of the claim. The court held that the "special relationship" between the insured and insurer is lacking between a third party claimant and the insurer. The court determined that it did not need to address whether the claimant here had a claim for the breach of the duty of good faith and fair dealing because there was not enough evidence to support a recovery for such a breach of the duty if such a duty did exist.

14. Howard v. INA County Mut. Ins. Co., 933 S.W.2d 212 (Tex. App.-- Dallas 1996, writ denied)-the employee insured sued the employer's auto insurer, alleging breach of the duty of good faith and fair dealing in denying his claim for under-insured/uninsured motorist coverage. Plaintiff appeals summary judgment in favor of the insurer. Howard asserted in his dispositive motion that INA wrongfully denied the claim because it had no written rejection of the coverage under article 5.06-1 of the Insurance Code. INA asserted that Howard failed to present competent summary judgment evidence. The court held that Howard failed to allege and present any evidence that a reasonable insurer under similar circumstances would not have denied his claim and that INA knew or should have known that no reasonable basis for denying his claim existed at the time INA denied it. Therefore, the denial of Howard's summary judgment was proper.

15. North Am. Ship Bldg., Inc. v. Southern Marine & Aviation Underwriting, Inc., 930 S.W.2d 829 (Tex. App.--Houston [1st Dist.] 1996, n.w.h.)- North American Shipbuilding appealed a take nothing summary judgment. Southern Marine places insurance with various underwriters, one of which was the underwriters at Lloyd's. The underwriters denied coverage on Shipbuilder's claims and North American sued the underwriters and Southern Marine for breach of the duty of good faith and fair dealing. The trial judge granted summary judgment for the insurance parties. The appellate court held faulty workmanship did not lead to any accident and that the parties, by their language in the policy, did not intend to cover the cost of faulty initial construction. The court agreed with the underwriters' assertion that they had a reasonable basis for denying the claim.

16. Traver v. State Farm Mut. Auto Ins. Co., 930 S.W.2d 862 (Tex. App.-- Fort Worth 1996, writ granted)-this is an appeal from a summary judgment granted in favor of the insurers. The court held that the facts in this case were distinguishable from Arnold and its progeny, cases which imposed the duty of good faith and fair dealing in the first party-insurer context. Here, in the underlying case, the claim was made by a third party, and the first party had no claim. The appellate court reversed and remanded for new trial.

17. Saunders v. Commonwealth Lloyd's Ins. Co., 928 S.W.2d 322 (Tex. App.--San Antonio, 1996 n.w.h.)-here the appellate court affirmed a summary judgment in favor of the insurers in a case where the innocent spouse brought a bad faith action against the insurer who refused to pay her claim after her husband set fire to their home which was community property. Commonwealth argued that it had a reasonable basis to deny her claim because Texas law did not allow the innocent spouse to recover insurance proceeds when community property was destroyed by the arson acts of the culpable spouse. The appellate court agreed that this was a reasonable basis.

18. Garrison Contractors, Inc. v. Liberty Mut. Ins. Co., 927 S.W.2d 296 (Tex. App.--El Paso 1996, writ granted)-here the court held that the duty of good faith and fair dealing does not extend to the calculation and payment of premiums. The trial court properly granted summary judgment in favor of the insurer.

19. Columbia Univ. Life Ins. Co. v. Miles, 923 S.W.2d 803 (Tex. App.--El Paso 1996, writ denied)-the trial court entered judgement on the jury's verdict finding bad faith in attempting to cancel a health insurance policy. The only evidence that Columbia had no reasonable basis to rescind the policy was that it did not contact the insured or his attorney prior to contacting its own attorneys. This is not enough to show that this was an omission in an investigation that was in bad faith. The appellate court held that the attempt to cancel was not in bad faith and reversed and rendered.

20. Campbell v. Texas Employers' Ins. Ass'n, 920 S.W.2d 323 (Tex. App.--Houston [1st Dist.] 1996, rule 130(d) motion filed)-summary judgment was entered in this case in favor of the worker's compensation insurance carriers. The issue is whether Campbell's injuries were sustained in the course of his employment. If they were, then summary judgment would have been improper. The court held that there "may well have been a reasonable basis to deny coverage, but they did not prove it was reasonable as a matter of law." Therefore, there was a genuine issue of material fact as to where the injury took place, and thus, whether denial of coverage was reasonable. Reversed and remanded.

21. Southland Lloyd's Ins. Co. v. Tomberlain, 919 S.W.2d 822 (Tex. App.--Texarkana 1996, writ denied)-insurance agent who owned property brought suit against insurers and employee to recover for bad faith failure to investigate and pay fire claims, and insurer counterclaimed against agent and filed third party claim against agency for breach of fiduciary duty. The court held that the following jury instruction was improper: "Did Southland Lloyd's Insurance Company fail to comply with its duty of good faith and fair dealing to Chuck Tomberlain? A party fails to comply with its duty of good faith and fair dealing when either: a. Without reasonable basis, it delays payment of a claim, or b. it knew or should have known, based on its duty to properly conduct an objective investigation, that there was no reasonable basis for delay." Because the court used the word "or" instead of "and," this was error and the entire jury verdict was invalid and the case was reversed.

22. Associated Indem. Corp. v. CAT Contracting, Inc., 918 S.W.2d 580 (Tex. App.--Corpus Christi 1996, writ granted)-surety that paid on performance bond brought action against principals. Defendants counterclaimed for breach of the duty of good faith and fair dealing. The court found that a duty of good faith and fair dealing exists between a surety and principal, that is, the "special relationship" required exists between the parties warranting such a finding. This relationship exists because there is substantially unequal bargaining power, a surety may take advantage of a bond principal in the claims resolution process, etc.

23. Northwinds Abatement, Inc. v. Employers Ins. of Wausau, 69 F.3d 1304 (5th Cir. 1995)(per curiam)-relying on Maintenance, Inc. v. ITT Hartford Group, Inc., 895 S.W.2d 816 (Tex. App.--Texarkana 1995, writ denied), where it was held that an employer does not have a cause of action against a servicing company for breach of the duty of good faith and fair dealing, the employer's counsel in this case abandoned his appeal of the summary judgment in this respect and the Fifth Circuit affirmed the summary judgment order.

24. Tacon Mech. Contractors, Inc. v. Aetna Cas. & Surety Co., 65 F.3d 486 (5th Cir. 1995)-the court recognizes that under Texas law, no duty of good faith and fair dealing exists between a surety and a bond obligee.

25. In Re Vitek, 51 F.3d 530 (5th Cir. 1995)-the court noted that "nowhere in Smoral or Soriano do we find true support for a general principle, of insurance law that forbids an insurer from settling with one of its co-insureds to the disadvantage of another one." Instead, these cases stand for the proposition that the aggrieved insured's right to seek damages from the insurance company for making such a settlement, is by initiating a suit for breach of the duty of good faith and fair dealing.

26. Cavallini v. State Farm Mut. Auto Ins. Co., 44 F.3d 256 (5th Cir. 1995)-here the 5th Circuit squarely rejected the assertion that an insurance agent has an independent duty of good faith and fair dealing. Such an assertion would be inconsistent with the Texas Supreme Court's jurisprudence. Only the insurer owes such a duty. Because there was no contract between the agent and the complaining parties, there could be no duty.

27. Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995)-here the court held that the insurer could not be held liable for breach of the duty of good faith and fair dealing by denying a claim for uninsured/under-insured motorist coverage even though the insurer had the wrong reason for the denial of coverage, because there were in fact correct reasons for denying the claim. Republic did not fail to determine whether there was a reasonable basis for denying the claim, its decision was timely; it simply made the right decision for the wrong reason.

28. Twin City Fire Ins. Co. v. Davis, 904 S.W.2d 663 (Tex. 1995)-the issue in this case is whether the policy proceeds wrongfully denied to an employee by a worker's comp. carrier will, by themselves, support an award of punitive damages. The court held that under Aranda, 748 S.W.2d 210 (Tex. 1988), a worker's compensation claimant must obtain jury findings entitling him to damages in addition to the benefits wrongfully denied in order to recover punitive damages.

29. St. Paul Surplus Lines Ins. Co., Inc v. Dal-Worth Tank Co., Inc., 917 S.W.2d 29 (Tex. App.--Amarillo 1995, rule 130(d) motion filed )-insured brought action against the insurer and its agent for failure to defend and indemnify. The appellate court held that there was sufficient evidence to support the jury's determination that the insurer had breached its duty of good faith and fair dealing. St. Paul contended that the appellee failed to carry its burden as to the bad faith issue. It asserted that its denial was reasonable as a matter of law, because it had information that the notice of suit was late. St. Paul did not deny coverage until 4 months after the default judgment was taken against the insured. The court held that the evidence of notice to St. Paul was sufficient, and that it was unreasonable for the company to deny coverage.

30. Williams v. Crum & Forster Comm. Ins., 915 S.W.2d 39 (Tex. App.-- Dallas 1995), rev'd, 1997 WL 377050 (see #3, above)-Williams appeals a summary judgment in favor of the insurers, contending that the trial court erred in granting the motion because there was a material fact issue as to whether there was a reasonable basis to deny her claim for death benefits. The court agreed. It held that the insurers did not have sufficient evidence as to whether a rule of Worker's Compensation Commission justified denying her claim because it had no evidence before it indicating whether good cause existed for her spouse's abandonment.

31. Seneca Resources Corp. v. Marsh & McLennan, Inc., 911 S.W.2d 144 (Tex. App.--Houston [1st Dist.] 1995, n.w.h.)-insured oil and gas company brought suit against insurance broker for misrepresentation that the policies would cover certain perils. Seneca asserted that the Supreme Court of Texas has discarded the necessity of proving causation once there has been a finding of misrepresentation of policy benefits. It contended that it was entitled to judgment as a matter of law once it proved a misrepresentation by the insurer. The court disagreed and affirmed the take nothing judgment.

32. Aetna Cas. & Surety Co. v. Garza, 906 S.W.2d 543 (Tex. App.--San Antonio 1995, dism'd by agreement)-the insured sued his carrier and adjuster for bad faith for not paying his fire loss claim. The trial court entered a jury finding in favor of insured and the insurer and adjuster appealed. The court noted that Aetna's conduct in targeting the insureds and ignoring other possible suspects for the cause of the fire was evidence the jury could consider in the bad faith issue. Here the evidence of the existence of coverage and the method that the company used in investigating the claim, and the extent of loss relates to bad faith and the jury could have properly found bad faith against the carrier. The court further held that there could be no individual liability on the part of the adjuster because the duty of good faith and fair dealing cannot be delegated.

33. Two Pesos, Inc. v. Gulf Ins. Co., 901 S.W.2d 495 (Tex. App.-- Houston [14th Dist. 1995, n.w.h.)-this is an appeal from a summary judgment in a declaratory judgment action brought by Gulf Insurance Co. to determine coverage under a general liability policy issued to Two Pesos. Two Pesos counterclaimed, alleging bad faith in denial of coverage. Trial court granted the motion in the counterclaim. The court held that here, since coverage was excluded on both the face of the policy and as a matter of general insurance law, the insurer had a reasonable basis for denying coverage. Therefore, Two Pesos could not recover on its counterclaims.

34. Liberty Mut. Fire Ins. Co. v. Crane, 898 S.W.2d 944 (Tex. App.-- Beaumont 1995, n.w.h.)-a worker brought suit against his worker's comp. carrier for breach of settlement agreement and bad faith refusal to pay for surgery. The appellate court held that there was sufficient evidence of the insurer's bad faith refusal to pay for the necessary surgery. The carrier failed to accept ample evidence of the worker's injuries, and "shopped around" until it found someone to give an opinion that he was not injured and did not need the surgery so that it could deny coverage. There was no reasonable basis to deny his claim.

35. Hennessey v. Vanguard Ins. Co., 895 S.W.2d 794 (Tex. App.-- Amarillo 1995, writ denied)-insureds brought suit against homeowner's insurer alleging bad faith. The appellate court held that there was no viable cause of action for breach of the duty of good faith and fair dealing because the carrier had a reasonable basis, based on an appraisal award, to deny the part of the insured's claim that was above that appraisal. Vanguard's evidence that it selected an independent appraiser as provided for in the contract and abided by the results of the appraisal is sufficient to establish that it had a reasonable basis for denial of that excessive portion of the claim.

36. Henry v. Chubb Lloyds Ins. Co. of Texas, 895 S.W.2d 810 (Tex. App.--Corpus Christi 1995, writ denied)-in this case, the insured brought suit against an under-insured motorist carrier for the breach of the duty of good faith and fair dealing in settling the UIM claim. The trial court entered judgment in the insurer's favor. The Henry's claim that they would not have settled the contractual claim if they had known it was improper for Chubb to reduce their under-insured benefits in the manner it was done. The court held that if they had exercised due diligence in litigating their claim in the first action, they would have been put on notice of the need for altering the pleadings to include the causes of action pled in the second action. They could have sued Chubb their for breach of the duty but they did not because the basis for their breach of duty claim is a case that was decided one year after the final judgment in the first action.

37. Maintenance, Inc. v. ITT Hartford Group, Inc., 895 S.W.2d 816 (Tex. App.--Texarkana 1995, writ denied)-here the insured, who had risk pool coverage through the worker's comp. pool sued the company to recover for bad faith in connection with the lenient handling and payment of claims. Summary judgment was for the insurer. The court held that when an insurance company breaches its duty of good faith and fair dealing in the handling and payment of claims, and if it has contracted with an agent to perform such claims handling services for it, only the company and not the agent can be liable for the breach. As Hartford here is the agent for claims handling purposes and is not an insurer, it has no liability to Maintenance for breach of a covenant of good faith and fair dealing. The employer, though, does have a remedy in the statute under which an insured aggrieved by an act of the pool can appeal to the SBI and obtain relief therefrom.

38. Allstate Ins. Co. v. Evins, 894 S.W.2d 847 (Tex. App.--Corpus Christi 1995, n.w.h.)-here an uninsured motorist carrier and the adjusters sought a writ of mandamus to require the trial court to sever extra-contractual from contractual claims brought against them by the insureds. The court denied relief, holding that a jury instruction instructing the jury on how to consider offers of settlement is sufficient, and that severance would not be required. "We see no reason to assume that the jury would not. . .follow an instruction limiting their consideration of settlement offers to the determination of bad faith claims." The decision as to whether to sever should be left with the discretion of the trial judge.

39. Darby v. Jefferson Life Ins. Co., 1995 WL 258120 (Tex. App.-- Houston [1st Dist.] 1995, n.w.h.)(not released for publication)-in this case the insured sued the carrier after it denied her coverage for hospitalization and then revoked her underling health insurance policy. Darby asserted that the trial court erred in granting a reformed final judgment which disregarded the jury's finding of bad faith. The appellate court found that it was error to disregard the breach of good faith and fair dealing issues, as it was unreasonable, under the circumstances, to deny Darby's claim on the basis that she had made misrepresentations on her policy. First the carrier claimed undisclosed preexisting conditions as a reason for denying Darby's claim. Later, it claimed a misrepresentation defense. Given this activity, Jefferson life knew or should have known that it did not have a reasonable basis for denying Darby's claim. Jefferson Life knew that the application contained misrepresentations and issued the policy in violation of its own underwriting rules.

VI. Conclusion

Despite 10 years of intense litigation and dozens of important decisions, the courts in Texas are still sending mixed signals making it clear that the parameters of the bad faith tort are far from settled. Attorneys who bring and defend bad faith claims are still best served by not forgetting the basics of any insurance litigation - focus on the policy and the facts made available to the insurer. If the attorneys have paid attention to these basics, counsel will have placed themselves in the best position possible to meet the eventual (and presently unpredictable) judgment of the superior courts.

1. Tex. Civ. Prac. & Rem. Code 38.006
2. Stewart Title Guaranty Co. v. Aiello, 941 S.W.2d 68, 72 (Tex. 1997). (No exemplary damages or mental anguish damages available in a breach of contract case.)
3. Tex. Civ. Prac. & Rem. Code � 4.002(b)(2).
4. See Universe Life Ins. Co. v. Giles, 1997 WL 378065 (Tex. 1997) (not released for publication); State Farm Lloyds v. Nicolau, 1997 WL 377346 (Tex. 1997) (not released for publication). Justice Spector in the recent Giles case noted:"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."

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