Court of Appeals of Texas,

San Antonio.

EMPLOYERS NATIONAL INSURANCE COMPANY, Appellant

v.

Don E. DALROS, Appellee

No. 04-92-00078-CV.

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March 14, 1994.

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Opinion Withdrawn and Judgment Vacated August 1, 1996.

Before CHAPA, C.J., PEEPLES and RICKHOFF, JJ.

CHAPA.

AFFIRMED IN PART, REVERSED AND RENDERED IN PART

*1 Appellee’s motion for rehearing en banc is granted. Our opinion and judgment of March 31, 1993 are withdrawn, and this opinion and judgment are substituted. We granted the motion for rehearing en banc to clarify the standard of review in cases of alleged breach by an insurer of the duty of good faith and fair dealing. The supreme court has since addressed the method by which courts of appeals should conduct legal sufficiency review of fact findings of bad faith against an insurer. Lyons v. Millers Cas. Ins. Co., 37 Tex. Sup.Ct. J. 241 (Dec. 8, 1993). We apply that method today.

The elements of a bad faith cause of action were set out by the supreme court.

A cause of action for breach of the duty of good faith and fair dealing is stated when it is alleged that there is no reasonable basis for denial of a claim or delay in payment or a failure on the part of the insurer to determine whether there is any reasonable basis for the denial or delay.

Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex.1987). Whether there is a reasonable basis for denial is judged by the facts before the insurer at the time the claim was denied. Viles v. Security Nat’l Ins. Co., 788 S.W.2d 566, 567 (Tex.1990).

The duty arises out of the special relationship between the parties to an insurance contract.

In the insurance context a special relationship arises out of the parties’ unequal bargaining power and the nature of insurance contracts which would allow unscrupulous insurers to take advantage of their insureds’ misfortunes in bargaining for settlement or resolution of claims. In addition, without such a cause of action insurers can arbitrarily deny coverage and delay payment of a claim with no more penalty than interest on the amount owed. An insurance company has exclusive control over the evaluation, processing and denial of claims. For these reasons a duty is imposed that “[An] indemnity company is held to that degree of care and diligence which a man of ordinary care and prudence would exercise in the management of his own business.” G.A. Stowers Furniture Company v. American Indemnity Company, 15 S.W.2d 544, 548 (Tex. Comm’n App.1929, holding approved).

Arnold, 725 S.W.2d at 167.

In the context of a workers’ compensation case, the supreme court stated the test somewhat differently, but retained the same reasonable basis requirement. To show that a workers’ compensation carrier has breached the duty of good faith and fair dealing, the claimant:

must establish (1) the absence of a reasonable basis for denying or delaying payment of the benefits of the policy and (2) that the carrier knew or should have known that there was not a reasonable basis for denying the claim or delaying payment of the claim.

Aranda v. Insurance Co. of N. Am., 748 S.W.2d 210, 213 (Tex.1988) (emphasis in original). The first element of the test requires an objective determination of whether a reasonable insurer under similar circumstances would have delayed or denied the claimant’s benefits. Id. The second element balances the right of an insurer to reject an invalid claim and its duty to investigate and pay compensable claims. Id. This element will be met by establishing that the carrier actually knew there was no reasonable basis to deny the claim or delay payment, or that the carrier, based on its duty to investigate, should have known that there was no reasonable basis for denial or delay. Id. Under this test, carriers will not be subject to liability for an erroneous denial of a claim, but remain free to deny invalid or questionable claims. Id.

*2 Legal sufficiency review of jury findings in bad faith cases has been reaffirmed in Lyons. These cases, however, require “a particularized application of our traditional no evidence review.” 37 Tex. Sup.Ct. J. at 243.

[W]hen a court is reviewing the legal sufficiency of the evidence supporting a bad faith finding, its focus should be on the relationship of the evidence arguably supporting a bad faith finding to the elements of bad faith. The evidence presented, viewed in the light most favorable to the prevailing party, must be such as to permit the logical inference that the insurer had no reasonable basis to delay or deny payment of the claim, and that it knew or should have known it had no reasonable basis for its actions. The evidence must relate to the tort issue of no reasonable basis for denial or delay in payment of a claim, not just to the contract issue of coverage.

Id. (citation omitted).

We do not read Lyons to say that any evidence offered by an insured relating to coverage is automatically unrelated to the bad faith claim. The court says the evidence must relate to bad faith and not just to the issue of coverage. Id. Further:

Evidence of coverage might in some circumstances support a finding that an insurer lacked any reasonable basis for denying a claim, for example, when the insurer unreasonably disregards the evidence of coverage.

Id.

Don Dalros sued Employers National Insurance Company for breach of the duty of good faith and fair dealing. The jury found that Employers failed to act fairly and in good faith in handling Dalros’s claim for property damage to his swimming pool. The jury awarded mental anguish and exemplary damages.

On the morning of Saturday, June 13, 1987, Dalros drained his pool in order to clean and whitewash the sides. Dalros had performed the same operation about 15 times without incident. After lunch on June 13, however, he returned to the pool to find that it had risen about one foot out of the ground. His neighbor, an engineer, told Dalros that the pool had risen due to “hydrostatic pressure”-heavy rains had saturated the ground and forced the empty pool literally to float out of the ground. Dalros’s expert at trial confirmed this evaluation. On the neighbor’s recommendation, Dalros immediately refilled the pool. The weight of the water lowered the pool, but it was still several inches above ground level and tilted.

On the Monday following this incident, Dalros called his insurance agent who advised him to contact Employers. On Tuesday, June 16 he spoke with Margo Pelayo, an adjuster with Employers, and explained the problem with the pool. Pelayo told Dalros that she would get back with him. Several days later, after failing to hear from Pelayo, Dalros called her back. She told him over the phone that the claim had been denied due to “flooding.” No inspection of the pool or any other type of investigation had taken place. Dalros disputed this conclusion, and Pelayo told him to contact her supervisor, a Mr. Tatum. Dalros tried to call Tatum eight to ten times over the following weeks, but Tatum never returned his calls. By the time of trial Dalros still had not spoken to Tatum.

*3 Some two weeks to eighteen days after the pool first rose out of the ground, cracks began to form in the pool. The cracks were caused by a lack of structural support underneath the pool, which was in turn caused by the floating up of the pool above its foundation of sand and dirt, leaving a void between the pool and its foundation. Dalros’s expert witness testified that the longer the pool remained in an elevated position without remedial work, the worse the damage became.

Not satisfied with the denial of his claim and unable to reach Tatum, Dalros again contacted his agent for help. Patrick Murray, an Employers senior claims representative, made arrangement to inspect the pool on July 20, 37 days after the incident. This was the first time anyone from Employers had seen the pool. Murray took some pictures and told Dalros he would have to discuss the claim with his supervisor. On August 20 Murray sent a letter to Dalros stating that the claim was being denied under exclusions “d” and/or “k”.¹ Dalros denies receiving this letter, but Mrs. Dalros contacted Murray by phone and he told her that the claim was being denied due to policy exclusions regarding flooding and cracking.

Dalros then contacted a friend in the insurance business and an attorney friend to help with the preparation of a formal claim. He filed a “sworn statement and proof of loss,” dated September 22, 1987, with Murray. He attached to the proof of loss a repair estimate of $12,456 from Gary Pools, Inc. and a letter from Dalros’s engineer neighbor. Both the repair estimate and the letter from the neighbor stated that hydrostatic pressure had caused the problems with the pool.

Murray did not resubmit the claim because it had already been denied twice, once by Pelayo and once by him. He said he reopened the file only after Dalros’s attorney made a demand for payment. After receipt of the demand letter, Murray submitted the claim to the home office. In June 1988, Employers sent Dalros a check for $10,000, the available policy limit. Dalros filed this suit in October 1988.

The first jury question inquired:

Do you find that EMPLOYERS NATIONAL INSURANCE COMPANY failed to act fairly and in good faith in handling the Plaintiff’s property damage claim?

In order to find that EMPLOYERS NATIONAL INSURANCE COMPANY failed to act fairly and in good faith in handling the Plaintiff’s property damage claim, you must find that:

1. EMPLOYERS NATIONAL INSURANCE COMPANY knew it had no reasonable basis for delaying payment; or

2. EMPLOYERS NATIONAL INSURANCE COMPANY failed to determine whether there was any reasonable basis for delaying payment.

The jury answered this question affirmatively. The jury awarded Dalros $12,500 as damages for mental anguish proximately caused by Employers’s failure to act fairly and in good faith in the handling of his claim.

In reviewing the jury finding, we must focus on the relationship of the evidence arguably supporting the bad faith finding to the elements of bad faith. Lyons, 37 Tex. Sup.Ct. J. at 243. In a legal sufficiency review, the evidence, viewed in the light most favorable to Dalros, must permit the logical inference that Employers knew it had no reasonable basis for delaying payment, or that it failed to determine whether there was any reasonable basis for delaying payment. Id.. In reviewing a finding under the factual sufficiency standard, we consider and weigh all the evidence of bad faith and reverse for a new trial only if the challenged finding is so against the overwhelming weight of the evidence as to be clearly wrong and unjust. Cain v. Bain, 709 S.W.2d 175, 176 (Tex.1986).

*4 Employers, without an investigation, initially denied Dalros’s claim based on the flooding exclusion. There was no reasonable basis for this denial-no possibility that a flood caused the pool to rise, and Employers concedes that the flooding exclusion has no application to this claim. Later, after a cursory inspection, Employers denied the claim a second time due to “cracking.” The cracking did not occur, however, until fourteen to eighteen days after the claim was made. Had the pool been examined when the claim was first made, no cracking would have been evident and there would have been no basis to deny the claim due to cracking. Further, there was evidence that if the claim had been paid when it was first submitted, the cracking could have been minimized or prevented by repair work. It is unreasonable to deny a claim based on an exclusion that only becomes applicable due to the insurer’s delay in investigating the claim in the first place, and the jury could have so concluded based on the evidence. We conclude that this is some evidence and factually sufficient evidence from which the jury could have concluded that Employers knew or should have known that there was not a reasonable basis for delaying payment of the claim.

Employers contends that exclusion “k” excludes the loss. It argues that any movement of the listed structures, no matter what the cause, is excluded from coverage. It cites several exclusion “k” cases in support of its argument. See General Ins. Co. v. Hallmark, 575 S.W.2d 134, 136 (Tex.Civ.App.-Eastland 1978, writ ref’d n.r.e.) (no coverage for lifting up of foundation caused by leakage of underground pipe which caused soil to expand); Lambros v. Standard Fire Ins. Co., 530 S.W.2d 138, 140 (Tex.Civ.App.-San Antonio 1975, writ ref’d) (no coverage for settling of foundation caused by underground water); Bently v. National Standard Ins. Co., 507 S.W.2d 652, 654 (Tex.Civ.App.-Waco 1974, writ ref’d n.r.e.) (no coverage when drought caused foundation to sink); Park v. Hanover Ins. Co., 443 S.W.2d 940, 942 (Tex.Civ.App.-Amarillo 1969, no writ) (no coverage when leak of water pipe under foundation caused foundation to shift and walls to crack).

Exclusion “k”, however, does not exclude loss caused by “any movement” of the listed structures. It excludes only loss caused by “settling, cracking, bulging, shrinkage, or expansion.” If the language of an insurance contract is plain, it must be enforced as written. Republic Nat’l Life Ins. Co. v. Spillars, 368 S.W.2d 92, 94 (Tex.1963).

Although contracts of insurance are said to be construed strictly in favor of the insured, nevertheless they are to be construed generally as other contracts, in that unambiguous words and phrases are to be taken in their ordinary meaning unless there is something in the contract that would indicate a contrary intention.

Employers Mut. Cas. Co. v. Nelson, 361 S.W.2d 704, 709 (Tex.1962). Giving the words of the exclusion their ordinary meanings, we hold that the pool did not settle, bulge,² shrink, or expand. While it did crack, the evidence supports a theory, as we have said, that the exclusion only became applicable due to Employers’s initial denial and subsequent delay in paying the claim. There is sufficient evidence in support of the jury’s verdict and it must be sustained.

*5 Because Lyons has reaffirmed the validity of the no evidence test in bad faith cases, we overrule Employers’s argument that the trial court erred in refusing to submit a requested question or instruction on the existence of a “bona fide controversy.”

The jury also found that Employers’s failure to act fairly and in good faith in the handling of Dalros’s claim constituted gross negligence and awarded Dalros $250,000 in exemplary damages. Employers argues that there is no evidence or factually insufficient evidence that it was grossly negligent. We agree.

Exemplary damages are recoverable for a breach of the duty of good faith and fair dealing under the same principles allowing recovery of those damages in other tort actions. Arnold, 725 S.W.2d at 168. An insurer is liable for exemplary damages if the bad faith tort was accompanied by gross negligence. Transportation Ins. Co. v. Moriel, 37 Tex. Sup.Ct. J. 450, 460 (Feb. 2, 1994). A defendant is grossly negligent if his or her conduct creates an extreme risk of harm and exhibits such an entire want of care as to establish that he or she was consciously indifferent to the rights, safety, or welfare of the person affected. Id. at 458. The subjective element of gross negligence can be proven by direct or circumstantial evidence. Id. at 459.

Dalros sets out the evidence he contends is favorable to the jury’s gross negligence finding: Pelayo denied the claim without an investigation and on the basis of the flood exclusion, which Employers now admits has no applicability to this case. Pelayo’s supervisor Tatum, to whom Dalros was referred for an explanation, never returned his calls. Murray, although faced with a situation he had never encountered, failed to consult an expert. The claim was paid without explanation one year after it was made, and the only apparent difference between the facts known to the insurance company when the claim was made and when it was paid is that Dalros had hired an attorney.

We cannot say that these acts taken together constitute evidence of such an entire want of care as shows conscious indifference to Dalros’s rights or welfare. While they may establish that when Pelayo denied the claim she did so without a reasonable basis, lack of good faith and conscious indifference are not the same concept. Id. at 460. Evidence of the former will not automatically support a finding of the latter. See Automobile Ins. Co. v. Davila, 805 S.W.2d 897, 909 (Tex.App.-Corpus Christi 1991, writ denied) (an unreasonable act will not support exemplary damages award). Pelayo was told over the telephone that the pool had “floated” out of the ground. There was evidence that the area had suffered a long period of unseasonably heavy rains prior to the occurrence. While this does not justify the summary denial based on the flooding exclusion, neither does Pelayo’s denial of the claim rise to the level of conscious indifference. Although we do not approve of Tatum’s failure to return Dalros’s telephone calls, this practice likewise does not support a finding of conscious indifference.

*6 Nor do we attach significance to the fact that the home office paid the claim after Dalros hired a lawyer. The apparent inference is that Employers felt free to deny a claim submitted by a policyholder on his own, but it was constrained to pay the claim when the policyholder hired a lawyer. This inference, however, is too tenuous upon which to base a finding of conscious indifference or an award of exemplary damages.

We therefore sustain Employers’s fifth and sixth points of error. Because of this holding it is unnecessary to discuss Employers’s remaining points concerning the constitutionality of the standard for submission of gross negligence to the jury and the excessiveness of the exemplary damages award.

The exemplary damages award of $250,000 is reversed and it is rendered that Dalros take nothing on his exemplary damages claim. The remainder of the trial court’s judgment is affirmed.

ON APPELLEE’S MOTION FOR REHEARING EN BANC

The insurance policy excluded coverage for swimming pool cracking and bulging. The pool in question cracked a few weeks after it came out of the ground. When all is said and done, the majority concludes that if the insurer had paid the claim immediately, Dalros might have had the pool fixed and the cracking would not have happened. I think this theory on these facts does not support a bad faith tort action.

I respectfully dissent because I find fault with the majority’s application of the evidence to the elements of this cause. Millers Cas. Ins. Co. v. Lyons, 37 Tex. Sup.Ct. J. 241 (Dec. 8, 1993), clarified somewhat the method by which we should conduct our legal sufficiency review of the jury’s finding as to bad faith, there remains a larger debate about whether this cause of action, the good faith covenant, should survive in Texas in a first party context.¹ I submit that it should not.

I wrote the original Dalros as a brief, unpublished, per curium opinion because I thought State Farm Lloyds, Inc. v. Polasek, 847 S.W.2d 279 (Tex.App.-San Antonio 1992, writ requested) was the controlling law in this district. I failed to focus sufficiently on whether Dalros was aggrieved by the insurers’ breach of contract. He was not. There is no breach. And I failed to focus on how Dalros caused this misadventure without the legal complicity in tort of his insurer. He alone was responsible.

I also failed to offer my views on whether the playing field between insurers and insureds is even. My view is that prior to Lyons the doctrine of “bad faith” had become unmanageable; that there remains an implicit presumption that insurers are not equal litigants before our courts; that insurers still do not know how to respond to loss claims; and that in a first party context, the reasoning for the doctrine of bad faith should be revisited. With these reservations in mind, and because after Lyons I am unsure why this court feels we must revisit the original Dalros, I offer some additional thoughts on this case beginning with the facts.

*7 After purchasing an insurance contract that provided an exclusion for “Loss … caused by … cracking, bulging, … of … swimming pools,”² Don Dalros (on June 13, 1987) entirely drained his pool immediately after the ground surrounding the pool was saturated by unusually heavy rains. The pool, now an empty tub, rose a foot by the time he got back from his lunch break. His neighbor told him to refill the pool because it rose due to

“hydrostatic pressure”. It settled half way back. Plaintiff’s exhibit 5 is a letter from this neighbor, a structural engineer, generated by his visit on June 13. It states:

The month of June, 1987, was an extremely wet month, it rained nearly every day. Mr. Dalros’s home is located on one of the higher elevations in the area. It would appear that due to excessive rains, the ground became saturated with water to the point that it floated the pool off its original foundation. Due to the unusually high water table the pool was actually hydraulicly lifted out of the ground.

Exhibit 6 is the sworn statement of the proof of loss which states the cause and origin of the loss was “Hydrostatic pressure from subsurface water.” Exhibit 15 is the policy which under exclusions lists, “Loss caused by or resulting from: (1) flood, surface water, … overflow of streams or other bodies of water, … all whether driven by wind or water”; and, “loss caused by settling, cracking, bulging, … or expansion of foundations, … or swimming pools.” Plaintiff’s cause of action is stated in his petition: “By initially denying coverage, with full knowledge that it had no grounds to reject Plaintiff’s claim, Defendant breached its duty of good faith….”

Mr. Dalros describes his next action after refilling the pool on the advice of his neighbor:

Now, let me explain, as it started down, I noticed that it did catch on the lip of the concrete that it had popped up from. And I don’t know, this may have been-could even have been the next day or several days later-but I noticed, then, it looked like it was clearing, but I noticed then that the weight must have started cracking the apron or the other concrete decking. And so I said, “I think that pool wants to go down some, but it’s hanging.” So I got a sledge hammer and started beating the concrete out just in case that pool was hung up on the brim….

Two days after this unusual sledge hammer mitigation, he called his agent and explained the hydrostatic pressure misadventure, and the next day he repeated the same in a call to a Ms. Pelayo-an employee of his insurer. He testified at trial, “I believe I asked her that I had thought I had a complaint. And I don’t remember exactly if I told her then that my pool popped up out of the ground at that time.” A few days later, she told him the claim was denied. Dalros responded to the question, “So she gave you reasons other than flooding?” by stating, “I don’t remember what they were.” He further testified, “I don’t believe I asked her for someone to come look at the pool.” This tepid testimony from the claimant is the strongest testimony supporting the bad faith claim. Based on this, the majority concludes that the jury could have concluded that the pool would not have cracked if Employers had appeared and prevented the exclusion from applying.

*8 I disagree. The evidence restated in this dissent is not sufficient to infer that Employers acted without a reasonable basis, i.e., knew or should have known that it lacked a reasonable basis for its actions.

Perhaps if an adjuster had been on call to rush out and inspect the pool, he might have told Dalros not to break the coping with a sledge hammer, and perhaps if he had brought an expert along, or a ready strike force of swimming pool experts, then, maybe, they could have determined how to save the pool from Dalros’ further negligence. Even so, it was Dalros who delayed thru the weekend before calling; and he couldn’t recall what he told her about the pool or what she eventually told him about why the claim was denied. One cannot infer it was Dalros who selected a policy with a swimming pool bulging or cracking exclusion despite the fact that he was a pool owner, because in Texas one cannot purchase earth movement insurance whether the earth moves by drought or earthquake.

About eighteen days after the swimming pool was drained, on June 13, 1987, it cracked. On July 20, 1987, the insurer inspected the pool and, on August 20, 1987 denied coverage based on the above exclusion. On September 22, 1987, Dalros filed a formal claim (a “sworn statement and proof of loss”); it was not until June of 1988, however, that the claim was paid in full-paid in full in spite of the specific policy exclusion.³

Not only was there no breach of contract and, I submit, no resulting breach of a covenant of good faith, but the insurer paid beyond the terms of the contract. This gratuity became the basis at trial for plaintiff’s argument that this case was all about “fairness,” and for supporting the insurer’s extra-contractual liability. In other words, if they paid a year late they must have been liable; therefore, they should have saved all the heartache and paid in the first place. The shallowness of such reasoning is self-evident.

The next factor that drove this case to an improvident verdict is the existing state of the law on routine first party bad faith claims, a matter that cannot be resolved at this level, yet should be revisited.

I agree that we must begin our analysis with Arnold v. National County Mut. Ins. Co., 725 S.W.2d 165 (Tex.1987):

A cause of action for breach of the duty of good faith and fair dealing is stated when it is alleged that there is no reasonable basis for denial of a claim or delay in payment or a failure on the part of the insurer to determine whether there is any reasonable basis for the denial or delay.

Id. at 167. The rationale for imposing this duty on insurers was as follows:

In the insurance context a special relationship arises out of the parties’ unequal bargaining power and the nature of insurance contracts which would allow unscrupulous insurers to take advantage of their insured’s misfortunes in bargaining for settlement or resolution of claims. In addition, without such a cause of action insurers can arbitrarily deny coverage and delay payment of a claim with no more penalty than interest on the amount owed. An insurance company has exclusive control over the evaluation, processing and denial of claims.

*9 Id.

Too little justification was offered by Justice Ray when the Texas Supreme Court elected to extend from the third party to the first party context, an unrelated duty to investigate and pay claims timely. He cited the 1929 decision of the Commission of Appeals of Texas in Stowers for support. The Stowers decision, however, was based on (1) a contractual provision which prohibited the insured from interfering in any settlement negotiations, and (2) upon agency. The Commission held:

Where one acts as agent under such circumstances, he is bound to give the rights of his principal at least as great consideration as he does his own.

G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544, 548 (Tex. Comm’n. App.1929, holding approved).

Dalros was not in an agency relationship, nor a fiduciary relationship; rather, he was in an adversarial relationship, as contracting parties in dispute typically are. The duty to investigate, of course, first arose in the context of Stowers, with its reliance on principles of agency. But in Viles v. Security Nat’l Ins. Co., 788 S.W.2d 566, 568 (Tex.1990), Justice Doggett cites Arnold, concluding that “[t]he ‘special relationship’ between the insured and insurer imposes on the insurer a duty to investigate claims thoroughly and in good faith, and to deny those claims only after an investigation reveals there is a reasonable basis to do so.” That third party claims involving agency relationships differ from this “special relationship” in first party adversarial claims, however, was not addressed. While anyone would agree that insurers should, as a customary, good business practice, investigate claims so that they are not unreasonably denied, the question in the present case is what kind of an investigation should we require in the face of an obvious policy exclusion, and to what extent should we judicially supervise this practice? The majority opinion entirely relies on its theory that if the claim had been investigated the cracking would have been prevented or minimized, or, even more hypothetically, an early examination would have revealed no cracking so the exclusion would not have yet applied. These theories are not factually sufficient evidence that Employers should have known it had no reasonable basis for delaying payment.

Many other questions remain unanswered. Are we now going to impose a further duty on insurers to physically inspect every damaged auto, or every home? Should we require them to bring a team of experts? Should they investigate every leaking roof or minor traffic accident with the same care or concern that we might see when, for example, the federal government investigates an airline disaster? Are they obligated to show up within a set number of days? In the context of the present case, should they have told Dalros how to avoid damaging his pool or to otherwise assist him in mitigating his damages? Are these to be the new obligations that we will judicially impose on insurers?

*10 As I mentioned previously, Dalros told his agent and the adjuster by telephone what had happened. Why should the insurer not believe him? This is how insurance claims are resolved every day. Yet under Arnold we see that liability under circumstances such as these is founded upon the rubric of public policy. Indeed, the principal rationale for the Arnold opinion was former Justice Ray’s stated concept of public policy. Arnold cited Stowers and Stowers will not, I submit, support the conclusion that the parties in this case had unequal bargaining power. This is particularly true in view of the fact that sixty-four years after Stowers, we have a highly regulated insurance industry.

Nor is such a conclusion in the present case supported by any fact in this record or, indeed, by any inference from the record. If we are to engage in drawing inferences, one could just as likely infer the opposite (i.e., that Dalros, a twenty year veteran of the Air Force, who at the time of trial worked for Atascosa Rural Water, not a young naive man, went to the marketplace and selected from the many insurance agents the one he wanted, and selected from all the carriers a reputable one and, finally, from the coverage available one he could afford with provisions he required and was therefore in a superior bargaining position). Of course, neither the inference that there was unequal bargaining power at the time of contract nor an inference that Dalros shopped for the policy he wanted would be entirely appropriate because the Insurance Board does not allow either party to freely draft or select provisions.

Another rationale from Arnold is that the nature of insurance contracts is that they allow “unscrupulous insurers to take advantage of their insured’s misfortunes in bargaining for settlement or resolution of claims.” Arnold, 725 S.W.2d at 167 (emphasis added). Why do we presume that any litigant comes to our courts having acted unscrupulously? Who are these “unscrupulous” insurance people who live among us? Why are there no similar protections in the law of contracts from, say, unscrupulous lawyers, accountants, or doctors? In Arnold, the record revealed that an admittedly inexperienced insurance lawyer (rather than an unscrupulous one) concluded that juries would not like motorcyclists driving too fast while intoxicated, and decided not to settle the claim. In the case before us, the facts reveal not only no unscrupulous insurers but, to the contrary, an insurer who was beneficent: it paid in the face of an obvious exclusion.

Many contractually-based transactions do not imply a covenant of good faith and fair dealing. Cf. English v. Fischer, 660 S.W.2d 521, 524 (Tex.1983) (Spears, J., concurring). There is, for example, no good faith implied covenant in contingency fee contracts between lawyers (who are, after all, specialists) and injured workers. Surely injured workers could also suffer unequal bargaining power when, for example, they must comprehend the terms of contingency fee agreements, referral fees, or evaluate the likelihood of a favorable outcome in a given case. Could not an insured just as easily be the victim of an unscrupulous lawyer?

*11 Our goal should be fairness to all litigants before the court. If we were to look only to policy grounds for justifying extra-contractual liability in first party cases, however, we would find the argument to the contrary more persuasive.⁴ First, the parties to insurance contracts, or to any contract, should be able to foresee the limits of their liability. As a general rule, for example, contractual damages do not include mental anguish, emotional trauma, or punitive damages. CALAMARI AND PERILLO, CONTRACTS §§ 14-3, 14-5 (3d ed.1987). What has life in litigious America come to when a “victim” can collect $250,000 for a $10,000 claim over a cracked swimming pool that was subject to a clear exclusion. Is this a reasonable or foreseeable result of an insurance contract? How, then, can the contracting parties know the limits of their liability? How, for that matter, can actuaries set rates? Are we not creating a judicial slot machine where there should be a marketplace? Second, insureds already enjoy a significant advantage since it is well-settled that insurance policies are interpreted and construed liberally in favor of the insured and strictly against the insurer. See, e.g., Ramsey v. Maryland Am. Gen. Ins. Co., 533 S.W.2d 344, 349 (Tex.1976). Arguments that insurer and insured have unequal bargaining power, or that insurance contracts are contracts of adhesion, should be scrutinized in the light of these well-settled principles. Third, the insurance marketplace is already subject to intense regulation and control through the State Insurance Board, a body that now largely controls the terms of insurance contracts. See Mutual Life Ins. Co. v. Daddy$ Money, Inc., 646 S.W.2d 255, 257 (Tex.App.-Dallas 1982, writ ref’d. n.r.e.). If unscrupulous insurers are on the loose for long, complaints to the Insurance Board generate investigations and the offending company is eliminated from the marketplace. The judiciary does not need to craft new remedies. Fourth, aggrieved insureds already possess statutory sources of relief in (1) the Deceptive Trade Practices Act, (2) article 21.21 of the State Insurance Code, and (3) article 21.21-2, the Unfair Claim Settlement Act. They also have common law causes of action for breach of contract, fraud, and negligence-a fourth is unnecessary. Fifth, and most importantly, public policy supports allowing parties the freedom to deny liability and litigate rather than face unlimited financial risks. See Polasek, 847 S.W.2d at 225. The costly process of defending claims often forces unreasonable settlements because the litigation costs more than the claim, another fact that could be inferred from this record. In addition, litigants are often allowed court-ordered access to the files of other claimant or insureds, who may feel a strong desire for the confidentiality of their claims.

Lyons did not review the the faulty reasoning found in Arnold, but did restate the Arnold test and agreed there was no evidence that the insurer had no reasonable basis to deny payment even though (1) the claims adjuster refused to speak to Lyons after the investigator was sent and after denial, and (2) he refused to interview neighbors. The court stated (in footnote 3) that failure to speak with an insured after denial does not support an inference that the insurer acted unreasonably in denying the claims, and that, viewed in this light, the neighbors’ testimony was cumulative to Lyon’s.

*12 I feel Dalros presents a particularly clear record of an insurer who possessed evidence reasonably showing that Dalros’ claim might not be valid, as it fell under an obvious exclusion. There was no question at any time, and there is no argument now, with Dalros’s initial statement that the pool floated out of the ground due to hydrostatic pressure. The majority would judicially impose an additional obligation on insurers, i.e., that they must immediately, or at least within thirty-seven days, get an expert to the site and conclusively establish the facts, lest they erroneously accept the report of the insured as true.

Again, I emphasize that Dalros caused his swimming pool to crack, and that the insurance policy he purchased specifically excluded such a loss.⁵ The insurer had no contractual, common law or legal responsibility in this case and we should not judicially impose one now. The plaintiff pled only a bad faith cause. This was not a verdict based on the denial of a claim or, in my opinion, on an unreasonable delay in paying.

The majority writes around Lyons and holds to a traditional standard of review, focusing on whether there is some plausible theory that there was not a reasonable basis for the denial. Under this standard, the insured does not have to show that no reasonable basis existed for denying or delaying payment of the claim if an appellate court can surmise one from the record. Moreover, viewed in the most favorable light, such an analysis erroneously equates an incorrect denial of a claim with a bad faith denial. See Arranda v. Ins. Co. of North America, 748 S.W.2d 210, 213 (Tex.1988) (insurers can safely deny “invalid or questionable claims” and they “will not be subject to liability for an erroneous denial of a claim”); Polasek, 847 S.W.2d at 286; St Paul Guardian Ins. Co. v. Luker, 801 S.W.2d 614, 612-22 (Tex.App.-Texarkana 1990, no writ). A denial of a claim can be erroneous and still be in good faith. Luker, 801 S.W.2d at 621. Following the logic of the majority, however, we require insurers to, as the plaintiff in Polasek argued, “leave no stone unturned.”

Under the “no evidence” standard set forth in Lyons and under the facts from the record as set forth above, I would hold that the plaintiff failed to establish that his insurer did not timely investigate and, furthermore, that he failed to establish that his insurer did not possess evidence reasonably showing the insured’s contract claim might not be valid. Accordingly, he failed to conclusively prove the opposite of the vital fact (the absence of a reasonable basis to deny the claim). As I stated in the original Dalros opinion, this first party bad faith action is not viable as a matter of law.

I respectfully dissent.

	Footnotes
1		Exclusion “d” excludes coverage for: Loss caused by or resulting from: flood, surface water, waves, tidal water or tidal wave, overflow of streams or other bodies of water, or spray from any of the foregoing, all whether driven by wind or not; Exclusion “k” excludes coverage for: Loss under Coverage A caused by settling, cracking, bulging, shrinkage, or expansion of foundations, walls, floors, ceilings, roof structures, walks, drives, curbs, fences, retaining walls or swimming pools.
2		Employer’s describes Dalros’s pool as “bulging out of the ground.” “Bulge” is defined as “to jut out: SWELL … of a structure under pressure: to bend outward <the wall buckled and bulged > … to become protuberant …”. WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 293 (1981). A “bulge” is thus a swelling or protuberance of a part of an object, as opposed to a movement of the whole object. Dalros’s pool was floated out of the ground as a unit. The pool itself did not swell, jut out, bend outward, or become protuberant. It did not bulge.
1		See generally Comment, Bad Faith: Limiting Insurers’ Extra-Contractual Liability in Texas, 41 Sw. L.J. (1987).
2		In its entirety, the provision, exclusion “k” under the policy, reads as follows: Loss under Coverage A caused by settling, cracking, bulging, shrinkage, or expansion of foundations, walls, floors, ceilings, roof structures, walks, drives, curbs, fences, retaining walls or swimming pools.
3		Employers sent Dalros a check for $10,000, the available policy limit.
4		See generally Comment, Bad Faith: Limiting Insurer’s Extra-contractual Liability in Texas, 41 Sw. L.J. (1987).
5		As I noted in the per curiam opinion, exclusion “k” has been cited several times as controlling. See General Ins. Co. v. Hallmark, 575 S.W.2d 134, 136 (Tex.Civ.App.-Eastland 1978, writ ref’d. n.r.e.); Lambros v. Standard Fire Ins. Co., 530 S.W.2d 138, 140 (Tex.Civ.App.-San Antonio 1975, writ ref’d.); Bentley v. National Standard Fire Ins. Co., 507 S.W.2d 652, 654 (Tex.Civ.App.-Waco 1974, writ ref’d. n.r.e.); Park v. Hanover Ins. Co., 443 S.W.2d 940, 942 (Tex.Civ.App.-Amarillo 1969, no writ).