What is Insurance “Bad Faith” in Texas?

“Bad Faith” under Texas law includes a broad range of insurance misconduct relating to unfair, improper and deceptive claims practices.

It is not any one partiular type of case, but is really a category of cases against an insurance company. Likewise, “bad faith” can be broken down into several different categories:

• Texas Insurance Code Violations: The Texas Insurance Code contains several statutory provision which govern and regulate the business of insurance. It enumerates many types of practices which are considered improper.
• Texas Deceptive Trade Practices Act (DTPA): The DTPA describes business practices in Texas that are considered deceptive and even fraudulent. The DTPA also applies to inurance companies as well.
• Common Law “Duty of Good Faith and Fair Dealing:” In some situations, an insurance company has general duty to act in good faith when handling a claim. This category of bad faith claims arises in Texas common law. It is a claim which addresses the practices and dealings of an insurance company in relationship to how it handles a claim.

What Conduct Constitutes “Bad Faith” Against an Insurance Company?

• Misrepresentation: If an insurance adjuster intentionally tells you something false about your claim or your coverage, that would be considered “bad faith.” For instance, if an adjuster says you don’t have uninsured motorist coverage when you really do, or misrepresentes whether your claim is covered under your policy, then these actions can be considered bad faith.
• Delay: An insurance company has statutory and common law duties to promptly and fairly investigate a claim. Once the claim is investigated, the insurance company also has certain timelines to promptly pay a claim. Failure to do so can amount to violations of the Texas Insurance Code, DTPA, and the “duty of good faith and fair dealing.”
• Fair Claim Evaluation: Once a claim has been established, the insurance company has the duty to promptly investigate and fairly evalutate the claim. The adjuster is not permitted to low-ball or improperly under-estimate your claim in order to wear you down and pay less than what is fair.
• Improper Denial of a Claim: An insurance company is not permitted to deny a claim once liability is “reasonably clear.” In other words, before denying a claim, the insurance adjuster must have a valid reason and may not do so for the purposes of harassment and delay.

Texas Insurance Code Provisions Commonly Relating to Bad Faith Claims.

Texas Insurance Code, Subtitle C. Deceptive, Unfair and Prohibited Practices.

Here are some of the more common violations of the Texas Insurance Code specified in Subtitle C:

Section 541. Unfair Methods of Competition and Unfair or Decpetive Acts or Practices.

Section 541.060.

• Misrepresenting to a claimant a material fact or policy provision relating to coverage at issue. This can arise in situations where an insurance company falsley tells you that a certain coverage doesn’t apply, or that your covergae is invalid.
• Denying or unreasonably delaying a claim or payment on the grounds that some other person may be responsible for the claim. This situation arises when your insurance company fails to honor your claim just because the other driver may be at-fault in the accident. Your insurance company is required to honor your claim and then subrogate and seek reimbursement from any responsbile party should it wish to do so.
• Refusing to pay a claim without conducting a reasonable investigation. When you file a claim, the adjuster is required to investigate the claim, including collecting relevant photographs, damages estimates, and reports; talking to witnesses; and reviewing medical records and bills.

Section 542. Processing and Settlement of Claims.

Section 542.003. Unfair Claim Settlement Practices.

• Knowlingly misrepresenting a material fact about about the policy or its coverage.
• Failure to promptly and fairly settle a claim after liability becomes reasonably clear.
• Forcing a claimant to file a lawsuit by making unreasonably low settlement offers.

Texas Deceptive Trade Practices Act (DTPA) Violations.

Chapter 17. Texas Business and Commerce Code

• Falsely representing that an agreement (incluidng an insurance contract) confers rights, remedies, or obligations that it does not have.
• An “unconscionable” course of action.
• Violation of Texas Insurance Code, Chapter 541.

Violations of the DTPA carry heavy penlaties including treble (triple) damages plus attorney’s fees.

Common Law Duty of “Good Faith and Fair Dealing.”

In Arnold v. National County Mutual Fire Insurance Co., 725 S.W.2d 165 (Tex. 1987), the Texas Supreme Court held that every insurer has a common law duty to deal fairly and act in good faith. This is because Texas law deems the relationship between and insurance company and its policyholders as a “special relationship.” Therefore, an insurer owes it policy holder the duty to fairly and promptly investigate a claim, evaluate the claimant’s damages and losses, and make payment once the claim is reasonably established.

Not only can an insurer be responsible for paying the claim, but the insurance company can also be liable for damages or losses caused by the delay or failure to pay a claim, as well as puntive damages.

But Here’s the Catch: “Bad Faith” Only Applies to “First-Party” Claims.

One misconception is that “bad faith” applies to all insurance companies in all types of claims. That is not correct. Generally, bad faith claims only apply to “first-party” claims and not “third-party” claims. So what’s the difference between a first-party and third-party claim?

First-Party Claims Explained.

“First-party” claims are claims which are made either with your own insurance company or through a policy where you are included as a covered person. For example, if your are in a car accident and file a claim with your insurance company for your car repairs or medical bills, then this is conisdered a “first-party” claim. It is called first-party claim because you purchaed the policy and you are named as the covered party. Therefore, you have a direct contractual relationship with the insurance company.

Even if you are not expressly named in the policy, a claim can be considered a first-party claim if you are defined as a “covered person” in the policy. For instance, if you are a passenger in a friend’s car and are injured in an accident, then that insurance polcy may provide medical benefits for your injuries, such as Personal Injury Protection (PIP), Medical Payments coverage (Med-Pay), or even Uninsured/Under-Insured Motorist coverage (UM/UIM). If the policy provided any of these coverages, you would be considered a “first-party” because, as a passenger, you are included as a “covered person” under the policy.

Bad faith only applies to first-party claims because you are directly insured by the policy’s terms. Because the policy provides that direct contractual relationship, the insurance company owes you the legal duties to act in good faith and in compliance with the Texas laws and regulations.

Third-Party Claims Explained.

A “third-party” claim is where there is no contractual relationship between the insurance company and the claimant. For instance, if you are involved in a car accident and you beleive the other driver is at-fault, your claim with the other vehicle’s insurance company is considered a third-party claim. This is becuase there is no direct contract between you and the other insurance policy. You are considered a stranger to the policy because you are not named in the policy nor defined as a covered person.

Instead, it is the other driver that is the covered person. The insurance adjuster is technically investigating your claim in order to determine if their driver has any legal exposure to you. If the insurance adjuster determines that the accident was their driver’s fault, then most reputable adjusters will make efforts to satisfy your claim. But they do this not becuase of any legal duty owed to you. Rather, the adjuster is paying your claim in order to protect their driver from your claim.

In this respect, the insurance adjuster has no legal duty to act in good faith towards you. If the insurance adjuster believes it is in their driver’s best interest to settle your claim, then the adjuster will do so for the benefit and protection of their driver. It is this indirect relationship between you and the other insurance company which prevents you from making any claim against the other insurance company for “bad faith.”

Get the Guidance and Legal Advice you Need Before its too Late.

Maneuvering the legal streets of an insurance company’s duties and responsibilites in a claim is confusing, to say the least. The last thing you want to do is be under the wrong impression about your claim and how it is supposed to be handled.

That is why getting the legal advice of an attorney experienced in dealing with insurance companies is a must. Otherwise, you run the risk or making costly mistakes in your case and setting yourself up for failure. The insurance companies are experienced in handling claims and do so on a daily basis. That’s why you need the help of an attorney who knows your rights.

Robert C. Slim has been practicng personal injury law in the Dallas/Fort Worth area since 1994. He knows his way around the insurance busniess as well as the courthouse. Get your Free Consultation today from someone who knows about your case and cares about you as a client.