The Fifth Circuit Court of Appeals recently held in Kodrin v. State Farm Fire and Casualty Company that where a legitimate dispute exists between insurer and insured as to the nature of loss claimed under a homeowner’s insurance policy, denial of coverage alone is not evidence of bad faith by the insurer.

Following destruction of their home by Hurricane Katrina, the Kodrins submitted a claim for coverage under their homeowner’s policy for loss caused by wind damage. Asked by State Farm to explain why their house was destroyed while others in their neighborhood remained relatively intact, the Kodrins speculated that their damage was caused by a tornado prior to the arrival of the storm surge. State Farm denied the claim.

The Kodrins sued State Farm, alleging that the insurer’s denial of claims and failure to make payment were both acts of bad faith under Louisiana law. The jury delivered a verdict for the insured.

On appeal to the Fifth Circuit, the court agreed with State Farm that there was insufficient evidence to support the finding of bad faith. Notwithstanding this conclusion, however, the court held that there was sufficient evidence to support the jury’s finding that wind damage, if not the tornado posited by the Kodrins, was the cause of the loss. As such, State Farm was required to pay the combined coverage limits set forth in the homeowner’s policy.