Western District of Texas: An Expert Must Base a Determination of Bad Faith on the Facts Available to the Insurer When it Acted

by Saul Ewing Arnstein & Lehr LLP

[author: Gina Russoniello*]

Falcon v. State Farm Lloyds, No. 1:12-CV-491-DAE, 2014 WL 2711849 (W.D. Tex. June 16, 2014)

The Western District of Texas finds that a policyholder’s expert witness is not qualified to opine when he does not sufficiently examine the facts available to the insurer, and when the expert is not able to define good or bad faith.

In September 2011, a wildfire occurred in Bastrop County, Texas, where Andrew and Donna Falcon lived. The Falcons were evacuated from their home. On September 6, 2011 they contacted State Farm, their homeowners insurer, stating they believed their home had been destroyed. State Farm issued a $5,000 advance to assist them while they were barred from their home.

Although the fire did not cause significant physical damage to the property, the Falcons filed a claim seeking to recover under the policy for damage caused by exposure to the fire’s smoke. On September 9, 2011, State Farm assigned Vidale Coleman, a catastrophe claims adjuster, to evaluate the claim. Coleman drove to the property on September 12, 2011 and found it still standing.

He returned for further inspection on September 16, 2011. According to State Farm, Coleman did not find any direct fire damage to the roof or exterior of the house, but he did find minor fire damage on the deck and damage to the trees and lights in the yard. Coleman allotted for the payment of the expense of cleaning the interior and exterior of the residence by a company called Service Master and for food loss.  When Donna Falcon asked about smoke damage to the carpet, Coleman informed her that she would first need to attempt to clean it before State Farm would authorize replacement. Donna Falcon also asked whether State Farm would replace one of the refrigerators in the home, which she claimed smelled from rotting food remaining inside after the power went out. State Farm ultimately denied coverage for the refrigerator because the damage was not a “covered peril.”

On September 26, 2011 Coleman prepared an estimate allowing for (1) $8,245 for the trees, shrubs, and other plants in the yard; and (2) $8,395.12 for remediation of the house, including cleaning and repairs. State Farm issued a check to the Falcons for $11,643.12 for the total, less the $5,000 advance. State Farm issued an additional check for $1,505.94 to cover the Falcons’ alternative living expenses, food loss, and damage to personal property. On October 7, 2011, Coleman issued a new statement of loss that included an additional $991.90 in forced evacuation expenses and $114.78 to clean the Falcons’ personal property. State Farm ultimately paid another $2,037 in living expenses and forced evacuation expenses.

Donna Falcon later contacted State Farm claiming that she did not have the money to pay Service Master for the cleaning and that she believed State Farm should be responsible for the bill. State Farm informed her that it had already issued payment for this expense and that it was the Falcons’ responsibility to pay the bill.

Subsequently, the Falcons’ attorney sent State Farm a letter seeking full payment of the claim and attaching an estimate from Stephen Hadhazi, a public adjuster, claiming the Falcons were entitled to a payment of $112,766.59 to remediate the property entirely.

On May 7, 2012, the Falcons filed suit against State Farm contending that State Farm failed to properly investigate their insurance claims as required by the policy. The Falcons brought six claims against State Farm, including a claim that State Farm violated its duty of good faith and fair dealing.  The Falcons identified Hadhazi as their expert on bad faith.

State Farm moved to strike the expert testimony of Stephen Hadhazi, arguing that Hadhazi’s opinion should be excluded because: (1) it was based only on the fact that his estimate differed from State Farm’s estimate; (2) it was unreliable because he did not review any of the claims file, the Service Master estimate for remediation, or the depositions of State Farm’s agents or the Falcons’ depositions; and (3) Hadhazi could not properly define good or bad faith.

In response, the Falcons argued that Hadhazi’s licensing as a public adjuster was sufficient to qualify him to assess the “physical loss of or damage to structural or personal property, and structural or personal property values.”

The court agreed with the Falcons that Hadhazi’s licensing as public adjuster qualified him in the area of public adjusting. The court explained, however, that he was not engaged as a public adjuster in this case, but was engaged to provide an independent consultation to the Falcons. Thus, the court held that his experience was not enough to render his testimony reliable when all his opinions were based on “guesswork.”

The court agreed with State Farm that Hadhazi’s failure to speak with anyone at State Farm; failure to review the claim file; failure to review the deposition transcripts; and failure to review the Service Master cleaning estimate established that he could have no basis for understanding the facts available to State Farm. Thus, he was not able to properly opine on State Farm’s alleged bad faith.

Finally, in light of Hadhazi’s inability to define good faith or bad faith, the court concluded that a jury was just as competent to read a statutory definition from the Texas Insurance Code, and that Hadhazi’s opinion was irrelevant and not helpful.

*Gina Russoniello is a summer associate at Saul Ewing.

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Saul Ewing Arnstein & Lehr LLP

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