Golda A. LYONS, Petitioner, v. The MILLERS CASUALTY INSURANCE COMPANY OF TEXAS, Respondents, 866 S.W.2d 597

CORNYN, Justice, delivered the opinion of the Court, in which PHILLIPS, Chief Justice, and GONZALEZ, HECHT, ENOCH and SPECTOR, Justices, join. This case presents us with the opportunity to clarify the method by which Texas courts should conduct legal sufficiency review of factfindings of bad faith against an insurer. After a windstorm, Golda Lyons submitted a claim to Millers Casualty Company, her homeowner’s insurance carrier, for damage to the brick veneer and outside back staircase of her house. Following an investigation, Millers denied Lyons’ claim.

Lyons sued for breach of contract and of the duty of good faith and fair dealing. The essence of this controversy is that while Lyons claims the damage to her house was caused by the windstorm, a covered peril, Millers claims that it was caused by settling of the foundation, an excluded peril. Because we hold that there is no evidence to support the bad faith judgment for Lyons under the substantive test we adopted in Aranda v. Insurance Co. of North America, 748 S.W.2d 210, 213 (Tex.1988), we affirm the judgment of the court of appeals. 798 S.W.2d 339.

Lyons testified at trial that during a storm on April 29,1984, she heard something banging on the outside of the house. She later discovered that bricks within the external veneer were cracked and loose and that the back staircase was standing “out of kilter.” According to Lyons and two of her neighbors, this damage did not exist before the storm. The storm also knocked over a hack-berry tree in Lyons’ yard, which had fallen perpendicular to and away from the residence. Another hackberry tree, located inches from the damaged staircase, remained standing.

After Lyons submitted her claim to Millers, Hal Benoy, an adjustor for Millers, and Charlie Herman, a reconstruction expert hired by Benoy, inspected the house. Herman concluded that the damage was not caused by the storm, but rather by settling and shifting of the foundation. He based this conclusion on several cracks he found in the foundation and the absence of any indication of impact between a tree and the house. Herman also noted that the wood in the staircase was rotted. Millers denied the claim five days after receiving Herman’s written report, less than one month after the storm.

When Lyons protested the denial of her claim, Millers dispatched Clyde Hardy, a registered professional engineer specializing in damage and failure analysis, to reinspect the property. Hardy’s conclusions were identical to Herman’s. He likewise noted the existence of numerous cracks in the foundation, indicating settling and shifting, and the absence of any evidence of contact between a tree and the house. On October 5, 1984, based on Hardy’s report, Millers again denied Lyons’ claim.

In August 1985 Lyons hired Marcus Avila, an architect and resident engineer with Trinity Construction Materials, to inspect the property. By the time of Avila’s inspection, the staircase had collapsed following a second storm on March 28, 1985. Avila concluded that the original damage to the staircase and the brick veneer had been caused by the April 1984 storm. He theorized that the surviving hackberry tree located near the staircase, rather than the one found laying on the ground, struck the house during the first storm, causing the damage.

In February 1986 Lyons sued Millers for breach of contract, violation of the Texas Deceptive Trade Practices Act (DTPA) and the Texas Insurance Code, and breach of the duty of good faith and fair dealing. A jury found that one-quarter of the structural damage to the house was attributable to the windstorm, three-quarters was attributable to settlement of the structure, and that $25,-000 was the reasonable cost to repair the residence.

The jury further found that Millers violated the DTPA, and breached its duty of good faith and fair dealing in failing to pay Lyons’ claim, awarding an additional $75,000 in damages for those claims, plus exemplary damages of $8,700. The trial court rendered judgment on the verdict for $89,950, plus pre-judgment interest and attorneys’ fees. On appeal, the court of appeals determined that there was no evidence of a breach of the duty of good faith and fair dealing or a violation of the DTPA; it therefore rendered a take-nothing judgment on those claims.

Lyons complains here of the court of appeals’ conclusion that no evidence supports the jury’s finding of bad faith. We first recognized an insurer’s tort duty of good faith and fair dealing to its insured in Arnold v. National County Mutual Fire Ins. Co., 725 S.W.2d 165 (Tex.1987), in which we stated: 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 (emphasis added). That duty arises from the special relationship between the insurer and the insured resulting from the insurer’s disproportionately favorable bargaining posture in the claims handling process. A year later, in Aranda v.

Insurance Co. of North America, we said that to establish an insurer’s liability for the tort of bad faith the insured must prove: (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. 748 S.W.2d 210, 213 (Tex.1988) (emphasis in original).

We also distinguished the insurer’s liability under the contract of insurance from the insurer’s liability for the tort of bad faith. “[C]arriers,” we stated, “will maintain the right to deny invalid or questionable claims and will not be subject to [bad faith] liability for an erroneous denial of a claim.” Id. In other words, if the insurer has denied what is later determined to be a valid claim under the contract of insurance, the insurer must respond in actual damages up to the policy limits.

But as long as the insurer has a reasonable basis to deny or delay payment of the claim, even if that basis is eventually determined by the factfinder to be erroneous, the insurer is not liable for the tort of bad faith. Appellate review of the legal sufficiency of the evidence supporting a judgment for the insured in a bad faith case, however, presents unusual problems. Primary among these is the conundrum of a reviewing court scouring the record to evaluate an insurer’s claim that there is “no evidence” of a negative fact, that is, that the insurer had no reasonable basis to deny or delay payment of a claim.

The traditional statement of the standard of review for legal sufficiency requires a court to consider only the evidence favoring the judgment for the insured and to disregard all evidence to the contrary. See, e.g., Havner v. E-Z Mart Stores, Inc., 825 S.W.2d 456, 458 (Tex.1992); W. Wendell Hall, Revisiting Standards of Review in Civil Appeals, 24 St.Mary’s L.J. 1045, 1133 (1993); William Powers, Jr. & Jack Ratliff, Another Look at “No Evidence” and “Insufficient Evidence," 69 Texas L.Rev. 515, 522 (1991); Robert W.

Calvert, “No Evidence” and “Insufficient Evidence” Points of Error, 38 Texas L.Rev. 361, 362-63 (1960). Our courts of appeals have struggled to reconcile the insurer’s substantive rights under the Aranda test and the traditional statement of the no evidence standard of review. See State Farm Lloyds, Inc. v. Polasek, 847 S.W.2d 279, 283 (Tex.App.-San Antonio 1992, writ denied) (surveying cases and noting “confusion about the proper approach for assessing the legal sufficiency of a bad faith finding”).

As this case demonstrates, we believe that when 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 the 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. See Pittman v.

Baladez, 158 Tex. 372, 312 S.W.2d 210, 216 (1958). 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. This is nothing more than a particularized application of our traditional no evidence review. This focus on the evidence and its relation to the elements of bad faith is necessary to maintain the distinction between a contract claim on the policy, and a claim of bad faith delay or denial of that claim, which arises from the tort duty we imposed on insurers in Arnold and Aranda.

The evidence offered by Lyons in support of the bad faith finding consisted of Avila’s opinion that the windstorm caused the damage, and the testimony of Lyons and her neighbors that the brick veneer and staircase were visibly damaged after the storm. This evidence supports the jury’s finding that Lyons’ damage was caused in part by the wind, and therefore her claim was covered by the Millers policy. In other words, Millers was mistaken as to its contract liability.

The jury was entitled to resolve the conflict between Lyons’ evidence that the windstorm caused the damage and Millers’ evidence that the settling of the foundation caused the damage. If the jury concluded that the former is more credible, and some evidence supports that finding, our inquiry as to contractual liability is concluded. But the issue of bad faith focuses not on whether the claim was valid, but on the reasonableness of the insurer’s conduct in rejecting the claim.

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. In this case, however, Lyons offered no evidence that the reports of Millers’ experts were not objectively prepared, or that Millers’ reliance on them was unreasonable, or any other evidence from which a factfinder could infer that Millers acted without a reasonable basis and that it knew or should have known that it lacked a reasonable basis for its actions.

In contrast, Miguel Aranda pleaded not only facts supporting coverage, but also alleged that the insurance companies ignored their own adjusters’ advice to pay his claim. Aranda, 748 S.W.2d at 213-14. Under the rule established in Aranda, Millers could deny Lyons’ claim without exposing itself to a bad faith judgment if it reasonably relied on expert reports indicating her loss was not caused by a covered peril, even though its liability on the insurance policy was ultimately established.

Focusing on the specific elements that must be proved to support a finding of bad faith and the evidence offered to support that finding, we agree with the court of appeals that there is no evidence that Millers had no reasonable basis to deny payment of Lyons’ claim. By cross-application Millers contends that the court of appeals should have rendered judgment in its favor on the contract claim allegedly because there was no evidence providing a basis for the jury to allocate the damage between the storm and structural problems.

When 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 the damage. Paulson v. Fire Ins. Exch., 393 S.W.2d 316, 319 (Tex.1965). Millers asserts that Lyons failed to provide such evidence, as her expert admitted the “likely” presence of some preexisting damage and that determination of the extent of storm-related damage would be “very hard.” Expert allocation of damages between covered and excluded risks is not, however, necessarily required; circumstantial evidence can suffice.

See United States Fidelity and Guar. Co. v. Morgan, 399 S.W.2d 537, 540 (Tex.1966). The testimony of Lyons and her neighbors that there was no preexisting damage to the staircase or brick veneer constituted some evidence of the extent of damage attributable solely to the windstorm. As additional grounds for rendition, Millers relies on the court of appeals’ determination that the charge improperly instructed the jury on allocation of the cause of the damage to support its assertion that the erroneous submission constituted a waiver of Lyons’ contract claim.

We agree with the court of appeals that the appropriate disposition is remand rather than rendition. Accordingly, we affirm judgment of the court of appeals. . The court of appeals did find legally and factually sufficient evidence to support the jury's finding that 25% of the damage was attributable to the windstorm, but nonetheless reversed and remanded the contract claim because of the submission of an erroneous jury issue.

Question two asked the jury to determine the percentage of damage caused by windstorm and the percentage caused by "settlement of structure.” The court of appeals concluded that the question should have been submitted in terms of the policy exclusion, which excluded losses not only from settling but from "settling, cracking, bulging, shrinkage, or expansion of foundations.” The court also determined that question two did not properly place the burden of proof on Lyons to prove that the damage was not caused by foundation problems. 798 S.W.2d at 345. Lyons has not challenged these determinations. .

This case was tried under the Aranda formulation of the bad faith test, and we therefore restrict our analysis accordingly. . Evidence that (1) the claims adjuster refused to speak to Lyons after an investigator was sent out and the claim was denied, and (2) the adjuster did not interview her neighbors, does not amount to more than a scintilla of evidence supporting bad faith. See Kindred v.

Con/Chem, Inc., 650 S.W.2d 61, 63 (Tex.1983) ("when the evidence offered to prove a vital fact is so weak as to do no more than create a mere surmise or suspicion of its existence, the evidence is no more than a scintilla and, in legal effect, is no evidence”). The testimony of her neighbors was cumulative of Lyons’ own opinion that damage was visible after the storm. The adjuster’s refusal to speak to Lyons after the claim was denied the first time is not behavior we condone, but does not support an inference that Millers’ acted unreasonably in denying the claim based on Herman’s report. .

Question two asked the jury to determine the percentage of damage caused by the windstorm and the percentage cause by "settlement of structure." The court of appeals determined both that the question should have been submitted in terms of the more precise language of the policy exclusion and the burden of proof should have been placed on the insured to show that the damage was not caused by foundation problems. 798 S.W.2d at 345. As Lyons does not challenge these conclusions in her application for writ of error, we consider neither.