Texas Supreme Court: Insurer’s Bad Faith Conduct Measured By What Insurer Knew At Time

The Texas Supreme Court reversed an award of extra-contractual damages against an insurance company, saying a lower court had improperly considered evidence that was not available to the insurer.  The case is Minnesota Life Ins. Co. v. Vasquez, 2006 WL 889724 (April 7, 2006).

In June 2000, Joe Vasquez became seriously ill and was hospitalized in a coma.  He and his wife, Elia, had a mortgage insurance policy that would pay out only if either of them died due to an accident.  Of course, under such policies, death from illness is defined as not accidental.  Twelve days after he was hospitalized, Mr. Vasquez came out of the coma, and while no one else was present, fell, hit his head, and died.   The insurance company took a long time deciding if the fall was the sole cause of death, as required by the policy.  Ultimately, even though the company believed the records were somewhat less than conclusive, it paid the balance on the mortgage.  However, Ms. Vasquez sued the insurer for deceptive claims handling, saying the company had refused to settle when coverage became reasonably clear.  A jury awarded $310,000 plus $37,000 in attorney fees on her claims for mental anguish and other damages.

The award was upheld by the Court of Appeals, but the state supreme court reversed, saying the lower court had improperly considered all the evidence in hindsight, rather than just the information that was reasonably known to the insurer at the time.  "Unquestionably, the insurance company here might have done better," the Supreme Court said.  However, the court said, under Texas law extra-contractual damages are reserved for cases in which the insurer knew its practices were deceptive.  The court said it found no such indications in this case.

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