Texas courts have long taken the position that “[w]hen covered and excluded perils combine to cause an injury, the insured must present some evidence affording the jury a reasonable basis on which to allocate damages.”[1] “Failure to provide evidence upon which a jury or court can allocate damages between those that resulted from covered perils and those that did not is fatal to an insured party’s claim.”[2] This requirement is simply an extension of the insured’s burden under Texas law to plead and prove that damages are covered in order to recover under its insurance policy.[3]

If an insured does, in fact, recover under its insurance policy and pursues bad faith claims, Texas courts saddle the insured with the burden of proof in that context as well. The insured must show that the insurer “knew its actions were false, deceptive or unfair.”[4] “The issue in bad faith focuses not on whether the claim was valid, but on the reasonableness of the insurer’s conduct in rejecting the claim.”[5] Evidence showing nothing other than a bona fide dispute does not support a finding of bad faith.[6]

As one court recently held, these burdens are fully applicable in Texas hail claim litigation.

In Nasti v. State Farm Lloyds, the U.S. District Court for the Southern District of Texas, Houston Division, confirmed the insured’s ultimate burden to allocate damages between covered and excluded perils and to show that its insurer acted in bad faith.[7]

Nasti involved a claim for storm damage to the insured’s residence in The Woodlands, Texas. The residence was insured by State Farm. The initial adjuster handling the claim found wind damage to the roof and water damage to interior ceilings of Nasti’s home but estimated the necessary repairs below the policy’s $6,584.00 deductible. Nasti, being unsatisfied with State Farm’s findings, requested a reinspection by another adjuster. State Farm’s second adjuster found no storm-related damage to the roof of Nasti’s residence.[8]

In the resulting litigation against State Farm, Nasti asserted causes of action for breach of contract, violations of the Prompt Payment of Claims Statute, violations of the Texas Insurance Code and violations of the Texas Deceptive Trade Practices Act. In support, Nasti presented an estimate and report written by his expert, public adjuster Shannon Kimmel. Kimmel stated in his report that he believed State Farm’s adjusters’ inspections were inadequate and unreasonable.[9] Kimmel’s estimate totaled $49,808.47, which he stated was solely for covered damage resulting from wind and hail. Kimmel’s report also included photographs showing what he claimed was significant damage on multiple slopes of the roof.[10]

State Farm filed a motion for summary judgment seeking, among other things, summary judgment on Nasti’s breach of contract and bad faith claims under the Texas Insurance Code. In ruling on State Farm’s motion, the court shed light on the application of the insured’s burden under Texas law to allocate between covered and excluded perils and also confirmed the insured’s burden under Texas law to show that the insurer acted in bad faith, as opposed to simply the existence of a bona fide dispute over the existence of covered damage.

In seeking summary judgment on Nasti’s breach of contract claim, State Farm argued that Nasti had not presented any evidence that distinguished between damage caused by covered versus damage caused by noncovered perils.[11] After acknowledging Nasti’s burden under Texas law to segregate covered or storm-caused damage from noncovered damage, the court pointed to Kimmel’s report. Quoting the San Antonio Court of Appeals’ opinion in Southland Lloyds Insurance Company v. Cantu, the court opined that the jury would not be required to guess what percentage of the damage was caused by the storm, but would be faced with a credibility question: Nasti claimed that 100 percent of the damage itemized in Kimmel’s report was covered, storm-related damage, while State Farm claimed that some of the damage was from other causes and excluded.[12] The court rejected State Farm’s argument that Nasti must “parcel out” covered and noncovered damages for purposes of a summary judgment motion, stating that “[r]equiring such evidence of proportionate causation in terms of precise percentages for purposes of summary judgment ... would be premature and introduce needless complication.”[13] In doing so, the court confirmed the insured’s burden under the Texas concurrent causation doctrine.

To support summary judgment on Nasti’s bad faith claims, State Farm argued that a bad faith finding is precluded when there is no breach of contract and/or when there is a bona fide coverage dispute.[14] In response, Nasti again pointed to Kimmel’s report to support an argument that the damage was so obvious State Farm and its adjusters could not have ignored it if they were acting in good faith.[15] Because State Farm’s summary judgment motion on Nasti’s breach of contract claim failed, the court honed in on whether the case simply involved a bona fide dispute. The court held that “the evidence submitted by Nasti in the form of Kimmel’s report suggest[ed] only a factual dispute over covered damage under the [policy]” and granted State Farm summary judgment on Nasti’s bad faith claims.[16] Citing to numerous Texas Supreme Court cases, the court reaffirmed that under Texas law, a finding of bad faith requires a showing that the insurer “knew its actions were false, deceptive or unfair” which is not established by a mere allegation that the insurer was incorrect about the “factual basis for its denial of a claim.”[17] Bad faith claims arise where the insurer commits acts “so extreme, that could cause injury independent of the policy claim.”[18]

In sum, the court in Nasti relied on a single piece of summary judgment evidence to assess the applicable burdens of proof — Kimmel’s expert report expressly stating that 100 percent of the damage resulted from wind and hail, as well as stating that State Farm’s adjusters’ inspections were inadequate. Based on that report, the court found Nasti satisfied his burden as to the existence of covered damage sufficient to survive summary judgment, but he failed to meet his burden to establish there was a sufficient basis to support his extra-contractual claims. Moreover, it is clear that the policyholder in Nasti will have the burden to allocate between covered and noncovered damage at trial.

Cases like Nasti and its counterparts affirm the insured’s burdens of proof and what constitutes a bona fide coverage dispute in the ongoing onslaught of Texas hail claims and resulting litigation.

[1] Lyons v. Miller Cas. Ins. Co., 866 S.W.2d 597, 601 (Tex.1993).

[2] Nat’l Union Fire Ins. v. Puget Plastics Corp., 735 F.Supp.2d 650, 669 (S.D. Tex. 2010).

[3] Employers Cas. Co. v. Block, 744 S.W.2d 940, 944 (Tex.1988), overruled in part on other grounds by State Farm Fire & Ca. v. Gandy, 925 S.W.2d 696 (Tex.1996).

[4] Minnesota Life Ins. Co. v. Vasquez, 192 S.W.3d 774, 775 (Tex.2006).

[5] Lyons v. Miller Cas. Ins. Co., 866 S.W.2d 597, 601 (Tex.1993).

[6] Nat’l Union Fire Ins. Co. v. Dominguez, 873 S.W.2d 373, 376-77 (Tex.1994).

[7] Nasti v. State Farm Lloyds, Civil Action No. 4:13-CV-1413 (S.D. Tex. Jan. 9, 2015).

[8] Id. at *1.

[9] Id.

[10] Id. at **1, 4.

[11] State Farm Lloyds’ Motion for Summary Judgment at p.15, ECF No. 21.

[12] Nasti, quoting Southland Lloyds Ins. Co. v. Cantu, 399 S.W.3d 558, 576 (Tex.App. — San Antonio 2011, pet. denied) (“[U]nlike in Wallis, the jury here was not required to guess what percentage of the damage was caused by the hailstorm; instead, the jury was faced with a credibility question: the Cantus claimed all the damage itemized in Barton’s report was due to hail, while Southland claimed some of the damage was caused by ordinary wear and tear.”).

[13] Nasti

[14] State Farm Lloyds’ Motion for Summary Judgment at p.15-18, ECF No. 21.

[15] Nasti’s Response to State Farm’s Motion for Summary Judgment at p.10, ECF No. 22.

[16] Nasti

[17] Id. citing Minnesota Life Ins. Co. v. Vasquez, 192 S.W.3d 774, 775 (Tex.2006) (extra contractual claims under the Insurance Code require evidence the insurer “knew its actions were false, deceptive or unfair”); Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 17 (Tex.1994) (bad faith claims are subject to the bona fide dispute rule, under which bad faith is not established where insured merely claims insurer was incorrect about the “factual basis for its denial of a claim”).

[18] Id. citing Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex.1995) (bad faith claims may arise where the insurer commits acts “so extreme, that would cause injury independent of the policy claim”).