Allstate Held Accountable For Unreasonable Claim Investigation But Court Fell Short Of Finding Knowing Violation of Texas Insurance Code

Allstate was recently held accountable by a San Antonio Court of Appeals for its unreasonable claim investigation; however, the court fell short in upholding an award of treble damages because it failed to find a knowing violation of the Texas Insurance Code. In Allstate Vehicle and Prop. Ins. Co. v. Reininger, 2020 WL 6928405 (Tex. App.—San Antonio Nov. 25, 2020), at issue was whether a cosmetic damage exclusion applied where a metal roof was alleged to be damaged by hail.  The policyholder alleged that he sought from an Allstate agent “apples to apples” coverage from a prior Liberty Mutual policy.  The policyholder alleged he specifically inquired as to whether his roof would be covered as a result of “bad weather, hail or any type of hail and it damaged [his] roof.”  After the policy was in effect, Allstate denied the policyholder’s hail claim citing the “metal roof surfaces cosmetic damage exclusion endorsement.” The endorsement provided that the policy did not cover cosmetic damage caused by hail to metal roof surfaces.  The policy also contained an exception to the exclusion for “sudden and accidental direct physical to a metal roof caused by hail that results in water leaking through the metal surface.”

Allstate denied the policyholder’s claim and the policyholder filed suit against Allstate and the adjuster for breach of contract, fraud, and violations of the Texas Insurance Code and the Deceptive Trade Practices Act.  The policyholder claimed that Allstate had misrepresented the terms of the policy both before purchase and during the adjustment of the hail claim.   The jury found for the policyholder on the breach of contract, fraud, and statutory claims against Allstate. The jury also found Allstate had acted knowingly and assessed additional damages and attorneys’ fees.

On appeal, the court addressed the reasonableness of Allstate’s investigation.  The court noted that the policyholder testified that he disagreed with the adjuster’s opinion with regard to the hail damage.  The Allstate policy required Allstate to retain an engineer in the event of a dispute regarding the alleged damage.  Allstate did not do this.  The policyholder’s expert further testified that the Allstate adjuster should have inspected the interior of the home, even if the policyholder told the adjuster it wasn’t necessary.  Ultimately, the court found that “a reasonable factfinder could conclude Allstate refused to pay [the policyholder’s] claim without conducting a reasonable investigation. We cannot conclude that the jury’s finding that Allstate engaged in those acts is so against the great weight and preponderance of the evidence as to be manifestly wrong and unjust. As a result, the evidence is legally and factually sufficient to support the jury’s finding that Allstate engaged in an unfair or deceptive act or practice.”

Allstate further argued that even assuming it was unreasonable in its investigation, there was no covered damage and thus no liability for violation of the Texas Insurance Code.  The court noted that it is accurate that “an insurer does not violate the Insurance Code by denying a claim that is not covered by the policy.”  However, the court found sufficient evidence that the hail damage to the roof was more than cosmetic, thus the exception to the exclusion applied, citing expert testimony that the useful life of the roof was diminished by structural damage, particularly to the seams that would leak in the future and that were no longer “watertight.”  Interestingly, the court also noted that the policyholder had been unable to secure a new policy because of the damage to the roof.  The court found that “a reasonable factfinder could have found that Allstate’s unreasonable investigation caused it to wrongfully deny a valid claim and therefore caused damage to [the policyholder].”

Allstate then argued that it cannot be liable for statutory claims because there was a bona fide coverage dispute. The court, again finding for the policyholder, ruled that “[t]he evidence here, when considered in the light most favorable to the verdict, would allow a reasonable factfinder to conclude that Allstate’s denial and closure of [the policyholder’s] claim without further investigation was unreasonable. Additionally, this evidence is not so weak as to make a finding in [the policyholder’s] favor manifestly unjust. As a result, we reject Allstate’s contention that this case presents only a bona fide coverage dispute.”

Allstate finally argued that there was no evidence to suggest it acted knowingly in violating the Texas Insurance Code.  The policyholder pointed to evidence showing Allstate: “(1) falsely represented that his Allstate policy would be “apples to apples” with his Liberty Mutual policy; (2) did not explain the distinction between the binder and the full policy; and (3) slipped the cosmetic damage exclusion into his policy without his knowledge.”  The court agreed with Allstate, noting that “the evidence supports a finding that certain actions Allstate took during its handling of [the policyholder’s] claim were unreasonable. However, evidence that a party acted unreasonably, without more, is not sufficient to show that it acted knowingly.”  Accordingly, the court reversed the jury’s award of treble damages and ordered a new trial on the proper amount of attorney’s fees.