UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 92-4054

BOBBY THRASH, SR.,

Plaintiff-Appellee,

versus

STATE FARM FIRE & CASUALTY COMPANY,

Defendant-Appellant.

Appeal from the United States District Court

for the Eastern District of Texas

May 28, 1993

( May 28, 1993 )

Before POLITZ, Chief Judge, WISDOM and WIENER, Circuit Judges.

POLITZ, Chief Judge:

Challenging the sufficiency of the evidence to support a

verdict for extracontra ctual damages, State Farm Fire & Casualty

Company partially appeals the judgment on verdict in favor of Bobby

Thrash, Sr., as modified by the trial court. On the issues

appealed we reverse and render judgment in favor of State Farm.

Background1 There was more, including: (1) Thrash was in arrears in

mortgage payment but the balance was only $3,500 leaving a very

sizeable equity; (2) he had recently lost about $200,000 in

bankruptcy; (3) his current marriage was in crisis due to financial

strain; (4) he was facing retirement without any source of income;

and (5) on the night of the fire the entire family was away from

the house at a party planned several weeks in advance.

2 This dispute aris es from a claim Thrash presented to his

insurer, State Farm, shortly after fire destroyed his home near

Reklaw, Cherokee County, Texas. State Farm conducted an

investigation into the circumstances surrounding the destruction of

the Thrash home immediately after the claim was filed.

State Farm's investigator and t he local state fire marshal

agreed, after inspecting the scene and interviewing wit nesses,

including Thr ash, that someone intentionally set the fire by

"pouring flammable liquids in several rooms of the house" and that

Thrash most likely was that person. The evidence indicated that

Thrash: (1) purchased the policy from State farm five weeks before

the fire and after his efforts t o sell the house proved futile;

(2) moved out of the house and into a mobile home, carrying his

valuables with him, two weeks before the fire; (3) returned to the

house hours before the fire, locking it behind him, and is the last

person known to be on the premises before the fire; (4) faced

threats from the Internal Revenue Service to foreclose on his house

if he did not either pay off its $9,000 levy or sell the house

within 120 days (he also owed $7,000 in local taxes); (5) was

unemployed and had received no income for months, and could no

longer rely on his ex-wife, and sole source of income, to meet his

obligations. 12 The DTPA defines "knowingly" as an "actual awareness of

the falsity, deception, or unfairness of the practice." Tex. Bus.

& Com. Code Ann. § 17.45.

3 Tex. Bus. & Com Code § 17.50(b)(1) (Supp. 1993); Tex.

Civ. Prac. & Rem. Code § 41.003(a)(3) (Supp. 1993). In his brief,

Thrash claims that the court erred in not allowing him to recover

exemplary damages and forcing him to elect among damage awards

under the common law and the DTPA. Thrash has not filed a notice

of appeal; we do not consider these points. F.R.A.P. 4(a)(3). S ee

also Cyark v. Lemon , 919 F.2d 320 (5th Cir. 1990).

3 Relyin g on the conclusions of its independent expert, the

state fire marshal, and the evidence pro duced in their reports,

State Farm denied the claim and instituted a declaratory judgment

action in federal court to determine its liability. Thrash

counterclaimed for payment under the policy , as well as

compensation for mental anguish and exemplary damages, under the

Texas common law, Texas Insurance Code, and Texas Deceptive Trade

Practices

-- Consumer Protection Act. The case proceeded to trial

before a jury.

At the close of the evidence, State Farm moved for a directed

verdict, contending that, as a matter of law, Thrash was not

entitled to damages beyond recovery under the policy. The court

granted the motion, finding insuf ficient evidence to support

Thrash's claims of either gross negligence or that State Farm had

committed a knowin g 2 violation of the DTPA, either of which would

have allowed the discretionary imposition of exemplary damages. 3

The jury r eturned a verdict awarding Thrash approximately

$158,000 under the policy, $110,000 for breach of the duty of good4 The 1991 revisions to the Rules of Civil Procedure

abolished the distinction between directed verdict and judgment

notwithstanding the verdict. Both are now simply labeled judgment

as a matter of law. Fed.R.Civ.P. 50.

5 Ayres v. Sears, Roebuck & Co.

, 789 F.2d 1173 (5th Cir.

1986).

4 faith and fair dealing, $200,000 for deceptive practices, $2,000 in

mandatory treble damages under the DTPA, and $38,000 in attorney's

fees and prejudgment interest. State Farm again sought to limit

the recovery to contractual damag es in a motion for judgment

notwithstanding the verdict. 4 The court denied the motion but

required Thrash to elect between the $110,000 and $200,000 awards

as they represented compensation for the same mental anguish

damages; State Farm timely appealed challenging only the award of

extracontractual damages.

Analysis

At the outset we stress the limited nature of the appeal: the

sufficiency of evidence to support the aw ard of extracontractual

damages. We are not here presented with a challenge to the jury's

determination that Thrash did not burn down his house. Rather, we

are to consider only whether ther e is sufficient evidence to

support the award of damages under the Texas common law, as it is

bound up in the Texas Insurance Code and the DTPA.

In a diversity case state law provides the elements of the

plaintiff's case. 5 Federal law, however, provides the scale by

which we measure the sufficiency of the evidence to support the6 See Gross v. Black & Decker, Inc.

, 695 F.2d 858 (5th Cir.

1983).

7 For a scholarly discussion of sufficiency review see

Steven A. Childress & Martha S. Davis, Federal Standards of Review

§ 3.01 (2d ed. 1992).

8 Mozingo v . Correct Mfg. Corp. , 752 F.2d 168, 176 (5th

Cir. 1984).

5 jury's findings. 6 Here we consider the law of Texas, specifically

the common-law duty of good f aith and fair dealing imposed on an

insurer, and the related duties under the DTPA and Insurance Code.

Our standard of review is narrow. We review the district

court's decision to deny a motion for judgment as a matter of law,

as did the district court, 7 according deference to the verdict.

Nonetheless, we recognize that a jury occasionally may become

confused; or, on rare occasions, may breach its obligation to apply

the law fairly to the proven facts. In either case the verdict

must be rejected as a matter of law.

We will reject a verdict in those instances when, despite

"considering all the evidence in the light and with all reasonable

inferences" most favorable to the verdict, we find no evidence of

"such quality and weight that reasonable and fair-minded men in the

exe rcise of impartial discretion" could arrive at the same

conclusion. 8 In such a case the district court is obliged to set

aside the verdict. Such instances are rare, but the case before us

is one of those instances.9 725 S.W.2d 165, 167 (Tex. 1987).

10 748 S.W.2d 210, 212-13 (Tex. 1988).

1 1 Koral Indus., Inc. v. Security-Connecticut Life Ins. Co.

, 788 S.W.2d 136, 147 (Tex.App. -- Dallas), writ denied per curiam

, 802 S.W.2d 650 (1990).

1 2 Beaumont Rice Mill, Inc. v. Mid-American Indem. Ins. Co.

, 948 F.2d 950, 952 (5th Cir. 1991) (citing Aranda ).

13 Tex. Bus. & Com. Code Ann. § 17.50(a)(1) & (4).

6 In Arnold v. National County Mutual Fire Ins. Co.

, 9 the Texas

Supreme Court recognized a duty of good faith and fair dealing in

the context of insurance settlement practices. The parameters of

this duty are somewhat indistinct. The court made clear in A randa

v. Insurance Co. of North America

, 10 however, that this duty is

breached by the insurer's failure to pay promptly an insured's

claim when liabil ity becomes reasonably clear. 1 1 Obviously, not

every refusal to pay is wrongful. "A carrier maintains the right

to deny an invalid or questionable claim without becoming subject

to liability for bad faith denial of the claim." 12 The breach of

this duty also constitutes a violation of the DTPA and Insurance

Code. Thrash relied on all three.

The DTPA provides a private remedy for, i nter alia

, conduct

proscribed in any of the 24 specified violations of the "laundry

list" (§ 17.46(b)), none of which address settlement practices, and

also for "the use or employment by any person of an act or practice

in violation of Article 21.21, Texas Insurance Code,

. . ." 13 While14 Tex. Rev. Civ. Stat. art. 21.21-2(2)(d) (Supp. 1993).

15 28 Tex. Admin. Code § 21.3 (1992).

7 section 17.46 also declares unlawful any false, deceptive, or

misleading acts, section 17.46(d) disallows a priva te cause of

action for conduct outside the 24 violat ions specified in the

statutory litany. Thus, independent of the Insurance Code or

perhaps s ection 17.50(a)(3) ("unconscionable action or course of

action"), the DTPA does not provide a private remedy for bad faith

settlement practices.

The Insurance Code specifically addresses unfair claim

settlement practices in article 21.21-2. Among those practices is

"[n]ot attempting in good faith to effectuate prompt, fair, and

equitable settlements of claims s ubmitted in which liability has

become clear." 14 That section has limited remedial effect, however;

it only provides for the administrative issuance of cease and

desist orde rs. Section 16 of the Insurance Code, on the other

hand, provides a private cause of action for deceptive acts or

practices specified in rules and regulations adopted by the State

Board of Insurance, or for any practice defined as unlawful by

section 17.46 of the DTPA.

A State Board of Insurance order declares unlawful "any unfair

or deceptive act or practice as defined by the Insurance Code." 1 5

The order also makes "any trade practice which is det ermined

pursuant to law to be an unfair

. . . or dece ptive act" unlawful

"irrespective of the fact that the improper trade practice is not16 754 S.W.2d 129 (Tex. 1988).

17 At least one Texas court has ques tioned this aspect of

the Vail decision. W .H. McGee & Co., Inc. v. Schick , 792 S.W.2d

513 (Tex.App.

-- Eastland 1990), v acated pursuant to settlement

, 843 S.W.2d 473 (Tex. 1992). The court noted first that V ail 's

discussion of the issue was merely obiter dictum and that the

Insuran ce Code only adopts as unlawful, practices "defined" in

section 1 7.46 of the DTPA. According to the court, an unlisted

violation i s a priori un defined and thus this aspect of the Vail

decision is dicta. We need not address the issue.

8 defined" elsewhere.

In Vail v. Texas Farm Bureau Mutual Ins. Co.

, 16 t he Texas

S upreme Court determined that the Board's order incorporated the

definitions in art icle 21.21-2 of the Insurance Code and thus

conduct defined therein b ecame actionable in a suit for damages

even though the article limited its remedy to the issuance of cease

and desist orders. The V ail court also found the breach of the

common-law duty recognized in Arnold to be a practice "determined

pursuant to law" to be "unfair or deceptive." Finally, V ail

recognized a cause of action under the Insurance Code for violation

of an unlisted "false, misleading, or deceptive" action even though

the DTPA itself would not provide a private cause of action for an

unlisted violation. The Texas Supreme Court reasoned that

section 16 of the Insurance Code incorporates listed and unlisted

practices alike because section 16 makes any practice "defined by

Section 17.46 [of the DTPA] . . . as an unlawful deceptive trade

practice" to be a violation of the Insurance Code. 17

Thrash asserts a claim flowing from the common law, which was

incorporated into the Insurance Code by the Insurance Board's order1 8 Under the advanced Vail logic, the violation would become

actionable under the DTPA under section 17.50(a)(4) even though it

would not directly be actionable under section 17.50(a)(1) because

it constitutes a violation of the Insurance Code rather than a

violation specified in the laundry list. The logic of this evades

us. See Beaumont Rice Mill

.

1 9 The Texas Supreme Court frequently has explained that the

"DTPA does not represent a codification of the common law."

Alvarado v. Bolton

, 749 S.W.2d 47, 48 (Tex. 1988) (quoting Smith v.

Baldwin

, 611 S.W.2d 611, 617 (Tex. 1980)). The common practice of

collectively referring to these cla ims as "bad faith" claims is

understandable in light of their complexity and common origin. We

are wary, however, of the implicit assumption that the list of

defined practices in Insurance Code article 21.21-2, the DTPA, and

the common law are all coextensive.

9 and the DTPA by virtue of the DTPA's incorporation of the Insurance

Code. The claim also constitutes an allegation of an independent,

though unlisted, violation of the DTPA laundry list which, although

the DTPA expressly forecloses a remedy, is actio nable under

section 16 of the Insurance Code by its incorporation of the DTPA. 18

Finally, the claim is independently asserted to be a violation of

the Insurance Code to the extent it is directed to conduct defined

in article 21.21-2, even though that section does not allow private

enforcement.

Obviously, one walks in legally treacherous territory when one

attempts to define the precise boundaries of the duties created by

the common law, the unlisted deceptive trad e practices, 1 9 and the

Insurance Code. The parties have opted to treat these duties as

coextensive, focusing only on the remedial aspects of the DTPA.

For purposes of this appeal, and without deciding same, we will2 0 After the close of the evidence the court instructed the

jury that an unfair or deceptive trade practice under the DTPA

involved:

(1) Misrepresenting to the insured pertinent facts

or policy provisions relating to the coverage

at issue, or

(2) failing to adopt and implement reasonable

standards for prompt investigation of claims

arising under an insurance company's insurance

policies, or

(3) not attempting in good faith to effectuate

prompt, fair, and equitable settlements of

claims submitted in which liability has become

clear, or

(4) failing to exercise good faith in the

investigation, processing, and denial of an

insurance claim.

The court also instructed the jury on the common-law bad faith

claim that Thrash was obligated to establish one of the following:

(1) State Farm had no reasonable basis for denial

of Mr. Thrash's claim or for delay in payment;

or

(2) State Farm failed to determine whether there

was a reasonable basis for the denial or

delay; or

(3) State Farm failed to promptly and equitably

pay Mr. Thrash's claim when liability became

reasonably clear.

Neither party objected to the se instructions. We will

assume that the court correctly instructed the jury on the duties

created under the tripartite scheme recognized in Vail and say only

that we find no plain error in the suggested description of the

controlling law.

21 E .g.

, Aranda , 748 S.W.2d at 212; A rnold , 725 S.W.2d at

167; Murray v. San Jacinto Agency, Inc.

, 800 S.W.2d 826, 831 (Tex.

10 accept that premise. 20

Every Texas court considering the question agrees that an

insurer only breaches its duty of good faith and fair dealing when

it lacks a reasonable basis for denying or delaying payment of the

claim or when it should have known that no such basis existed. 2 11990) (stressing that the refusal to pay must be unreasonable).

State Farm Lloyds, Inc. v. Palasek

, 847 S.W.2d 279 (Tex.App.

-- San

Antonio 1992, no writ ); Terry v. Kentucky Cent. Ins. Co.

, 836

S.W.2d 812 (Tex.App.

-- Houston [1st Dist.] 1992, no writ );

St. Paul Gu ardian Ins. Co. v. Luker , 801 S.W.2d 614 (Tex.App. --

Texarkana 1990, no writ ).

11 We therefore review the evidence in light of the instructions

given, looking for evidence upon which reasonable j urors could

conclude that State Farm breached its duty of good faith and fair

dealing.

To succeed in his claim for payment under the policy Thrash

had to prove that the conditions in the policy were satisfied. The

burden then shift ed to State Farm to prove arson as the cause of

the fire. The question whether the decision to deny coverage

amounts to a breach of State Farm's duty of good faith and fair

dealing is entirely different, however; the burden there lies

squarely on the plaintiff. After scouring the record, we conclude

that no reasonable juror could have concluded that State Farm knew

that it lacked a reasonable basis for believing that Thrash was

responsible for the fire or, based on its duty to investigate,

should have known the same.

Thrash ar gues that the investigator hired by State Farm did

not conduct a sufficiently thorough physical investigation before

concluding that he started the fire. While we reject Thrash's

characterization of the instant investigation, we agree that there

may be situat ions in which the selection of a third party to

investiga te a fire may be so suspect or the circumstances may so

stron gly indicate an inadequate investigation as to render the22 See Automobile Ins. Co. v. Davila , 805 S.W.2d 897

(Tex.App. -- Corpus Christi 1991, writ denied ).

12 results of that investigation of no value. Indeed, there may be

cases in which the very handling of the investigation is itself a

violation of the duty of good faith and fair dealing insofar as the

actions of the investigator can fairly be attributed to the

insurer. 22 In either event, this is not such a case; the results

of the investigation bolstered State Farm's already substantial and

reasonable basis for denying Thrash's claim.

There is no evidence that a more thorough investigation would

have uncovered evidence affirmatively disproving arson or Thrash's

involvem ent, nor is there any indication that a more thorough

investigation would otherwise hav e undermined State Farm's basis

for so suspecting. Furthermore, even disregarding the results of

the physical investigation, State Farm possessed overwhelming

evidence of a rson including the conclusion of the local fire

marshal, evidence that Thrash purchased the policy shortly before

the fire, was the las t person seen at the house before the fire,

and that he moved many if not most of his belongings from the house

shortly before the fire.

We must judge the insurer's actions against a standard of

reasonableness as of the time of its challenged decision in light

of all relevant circumstances. That the jury may have decided

Thrash did not commit arson is not dispositive of this issue.

State Farm is not bound to prove that it was correct in its

judgment; rather, it was for Thrash to pro ve that it had no23 Texas Empl. Ins. Ass'n v. Puckett , 822 S.W.2d 133

(Tex.App. -- Houston [1st Dist.] 1991, writ denied ).

2 4 The only evidence adduced at trial to support an award to

compensate for mental anguish was Thrash's and his family's

testimony to the effect that Thrash was "embarrassed and worried"

over this lawsuit. Texas law does not recognize as compensable

mere worry or embarrassment. H icks v. Ricardo

, 834 S.W.2d 587

(Tex.App.

-- Houston [1st Dist] 1992 no writ history ). Thrash's

argument that the refusal to pay constituted libel per se for which

no proof of injury is required, suspect as it is, will not be

considered for the first time on appeal.

13 reasonable basis for denying his claim. 23 We conclude and hold that

such a basis existed as a matter of law and that State Farm did not

b reach its duty of good faith and fair dealing. Accordingly, we

reverse the award of $2,000 in mandatory treble damages under

section 17.50(b)(1) of the DTPA. We likewise reverse the award of

$200,000, premised on a finding of mental anguish and violation of

t he DTPA. 24 Only the contractual damages under the policy may be

awarded.

The judgment appealed is REVERSED and jud gment in favor of

State Farm is RENDERED.