Policyholders attorneys often try to skip the threshold steps of bringing their client’s claim within coverage and allocating between covered and non-covered causes of loss. Instead, the policyholder attorney would have the insurer first disprove coverage, or at least first justify its coverage position. These tactics unfold in a familiar way.
The policyholder attorney will engage a consultant to write up an Xactimate estimate. Or, perhaps a public adjuster already wrote up the estimate and then brought the claim to the attorney. Everything that is wrong with the structure will go into the estimate. Every water-stained ceiling tile, bent AC condenser fin, and dent on the siding will go into the estimate regardless of causation. The bigger estimate, the better to create more leverage. Then the policyholder attorney will simply ride that estimate all the way through the case. To save money, the policyholder attorney will often not retain an engineer to give causation opinions regarding the damage. Or, the policyholder attorney may retain an engineer to provide a stock report that is heavy on magic words but short on competent causation opinions. A common issue is trying to overcome a policy’s limitation requiring a storm-created opening. The policyholder attorney will also try to poke holes in the insurer’s investigation of the claim to muddle the issue of causation.
Judge Sim Lake recently examined a case with some of these characteristics in Papa Yolk’s Grill, Inc. v. AmGUARD Ins. Co., 2020 U.S. Dist. LEXIS 66672 (S.D. Tex. April 15, 2020).
In Papa Yolk’s, the insured owned an all risks policy with a storm-created opening limitation, as well as exclusions for faulty maintenance and wear and tear. The insured’s restaurant allegedly sustained damage from Hurricane Harvey. A field adjuster inspected the loss. The adjuster found water penetration, but no damage to the roof. The adjuster determined that the more likely causes of the water penetration were an AC unit causing pooling on the roof or a roof vent. The adjuster suggested that the insurer could hire a cause-and-origin investigator to look into the cause of the water penetration. The insurer did not do so and denied the insured’s claim based on the adjuster’s investigation.
The insured filed suit for breach of contract, bad faith, alleged violation of the Texas Insurance Code, and alleged violation of the DTPA. The insurer filed a motion for summary judgment after the close of discovery.
The insurer asserted that the insured could point to no evidence that would permit a fact finder to attribute any portion of the damages to a covered peril. In response, the insured asserted that its policy was very broad and anyway the insurer’s conduct of the investigation raised a genuine issue of material fact. The insured also argued that its landlord’s negligence in maintaining the roof could be construed as a covered cause of loss.
The Court quickly disposed of the insured’s attempt to dodge the storm-created opening limitation. The Court found there was no “general coverage” available that did not require evidence of a storm-created opening. The insured also argued that the interplay between the policy’s resulting loss provision and the storm-created opening limitation created an ambiguity. The Court disagreed, finding it was not reasonable for coverage to be allowed where there was no covered cause of loss.
The Court then turned to the insured’s breach of contract claim. The insured’s coverage theory was that the wind caused damage. The insurer pointed out that there was no inspector’s report or witness that supported wind damage. The insured argued that there was no such evidence because the insurer withheld it. The Court opined that the insured’s argument was not proper summary judgment burden-shifting analysis: “[The insurer’s] refusal to provide [the adjuster’s field report] does not relate to [the insured’s] breach of contract claim, which requires a showing that [the insured] suffered a covered cause of loss that [the insurer] refused to pay in breach of the insurance contract.”
The Court refused to consider an affidavit from the insured’s local insurance agent. The Court found that the agent’s affidavit testimony contradicted his earlier deposition testimony and did not explain how he had allegedly gained knowledge that wind pushed water into vulnerable areas of the structure. Pointedly, the Court cited authority allowing district courts to refuse to consider affidavits when they constitute “an obvious sham.”
The insured also tried to turn the adjuster’s recommendation for a cause-and-origin investigator into a fact question. The Court disagreed: “In order to survive summary judgment, [the insured] must show more than some ‘metaphysical doubt’ as to the cause of the water damage. That [the adjuster’s] report suggested there may be some doubt is insufficient; it is not affirmative evidence that the roof was damaged by wind.”
Turning to the issue of allocation, the Court observed that the insured provided no evidence by which a jury could allocate between the landlord’s alleged negligent maintenance (an issue the insured itself had raised) and other causes of loss. The Court did not allow the insured to allocate spoiled food and business interruption because the insured was not seeking a recovery for denied claims as to spoiled food and business interruption.
The Court next considered the insured’s extracontractual claims. The Court began by reciting Texas law that prohibits extracontractual claims against insurers in the absence of a covered claim. The Court elaborated, holding that an insurer’s alleged failure to reasonably investigate a claim is not an exception to the rule of no extracontractual recovery for a non-covered claim. The Court repeated it earlier analysis that there was no covered loss for the insurer to pay, so the insured’s bad faith claims must fail. The insured raised several other arguments, including a request to late-designate an expert, presumably on the issue of wind penetration. The Court disagreed. The request to late-designate an expert only seemed to underscore the insured’s failure to demonstrate a covered cause of loss and to allocate.
There is another principle at work in this opinion, although the Court did not expressly state it. Under Texas law, the insurer does not have an obligation to follow every rabbit trail or bring in every conceivable kind of expert to investigate a loss. The Texas Supreme Court explained in State Farm Fire & Cas. Co. v. Simmons, 963 S.W.2d 42, 43 (Tex. 1998) that “[a]n insurance company’s obligation to investigate is obviously not unlimited. The scope of the appropriate investigation will vary with the claim’s nature and value and the complexity of the factual issues.” Similarly, in State Farm Lloyds v. Polasek, 847 S.W.2d 279 (Tex. App.—San Antonio 1992, writ denied), the Court explained as follows in a case of suspected arson:
Apparently, [the insureds’ position] is that if there is evidence of avenues that the insurer did not investigate (such as learning whether there were sources of loans available to the [insureds]), there is a jury issue whether the insurer breached its duty to investigate. We reject this contention. Even the most thorough investigation must stop somewhere; there is always something else the investigators could have done. The cases have not upheld bad faith judgments for failure to investigate when the insurer simply failed to pursue every lead.
These authorities provide an additional reason that it was proper for the insurer in Papa Yolk’s not to retain the cause-and-origin investigator suggested by the adjuster.