You may have heard the term “bad faith insurance,” but was not sure what that actually meant. Bad faith insurance describes a claim that an insured person or business has against their insurance company for unlawful and inappropriate claims handling actions. An insurance company owes a duty of good faith and fair dealing to the people and businesses it insures, and those people or businesses who believe that an insurance company has not acted fairly and in good faith may have a claim against the insurance company for common law bad faith and statutory violations.
In Texas, the principle behind bad faith law is derived from the notion that an insured is at a significant disadvantage both during the claims process and in a lawsuit against the insurance company. Considering the amount of money Texans pay toward their insurance premiums and the important protections insurance companies promise in return, insured parties need to be able to count on their insurers to reasonably provide the services and financial support called for by insurance contracts when covered losses occur.
To successfully pursue a common law bad faith claim against an insurance company, a plaintiff must show that the company’s conduct was unreasonable and that the company knew it. In the words of the Texas Supreme Court decision on the matter, the conduct must be “egregious.” Statutory violations, on the other hand, work much like strict liability and the insurer can be held liable for damages caused by unreasonable delays in responding to and paying claims, as well as for misrepresentations regarding the policy, the claim, or coverage.
The duty of good faith and fair dealing originated in the common law (from court case decisions rather than by statute) when the Texas Supreme Court first recognized a covenant of good faith and fair dealing between an insurer and its insureds based upon the “special relationship” between insured and insurer. In Texas, when insurance companies are adjusting their customers’ insurance claims, they also owe their insureds statutory duties codified in Chapters 541 and 542 of the Texas Insurance Code.
The different types of insurance claims are basically classified in two ways, either a third party of first party claim. A third party claim is one where a claim is made or a lawsuit is filed by a third party against an insured. A common and easy to understand example of a third party claim is a typical personal injury lawsuit arising from a car wreck. For example, when two vehicles are involved in a car wreck and one of the drivers sues the other driver. The driver who was sued would report the lawsuit to his/her automobile insurance carrier and, assuming the claim is covered by the insurance policy, the insurer will hire an attorney to represent the insured and defend him/her against the allegations and claims asserted in the lawsuit filed by the other driver, pay the attorney’s legal bills and ultimately, if necessary, pay money on behalf of the insured pursuant to a settlement or bench or jury verdict. Sometimes there is a question whether a third party lawsuit is covered by an insurance policy, which is called determining whether an insurance company owes a “duty to defend” it’s insured. The duty of good faith and fair dealing that the insurance company owes to its insured when dealing with a third party claim against one of its insureds is often referred to as the Stowers doctrine, and it requires the insurance company to exercise that degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business in determining whether to accept a settlement offer made to it. This duty is activated when a settlement demand is made that meets the following criteria, (1) the claim against the insured must be within the scope of coverage; (2) the demand must be within policy limits; and (3) the terms of the demand must be such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the insured’s potential exposure to an excess judgment.
In determining whether the claimant’s demand was reasonable under the circumstances, along with other factors, a judge or jury would consider how the claim investigation was conducted, the trial defense, and the insurer’s conduct during settlement negotiations. Nevertheless, the ultimate issue to be determined is whether the claimant’s demand was reasonable under the circumstances such that an ordinarily prudent insurer would have accepted it.
A first party insurance claim is a claim made by an insured to his/her own insurance company. A common example of a first party claim would be if an insured’s roof was damaged by a hailstorm and the insured then submits a claim to his/her homeowner’s insurance carrier for the damage done to the roof.
Chapters 541 and 542 of the Texas Insurance Code discussed above codifies the duties that an insurance company owes to its policyholders when adjusting first party insurance claims.
Chapter 541 sets out Unfair Methods of Competition, Unfair or Deceptive Acts or Practices that insurance companies should not engage in, as well as Unfair Settlement Practices, which includes things like: misrepresenting a material fact or policy provision; failing to attempt in good faith to effect a prompt, fair and equitable settlement where the insurer’s liability has become reasonably clear; failing to provide a policyholder with a reasonable explanation of why a claim was denied or offer of compromise; and refusing to pay a claim without conducting a reasonable investigation.
Chapter 542, subchapter B of the Texas Insurance Code is also known as the “Prompt Payment of Claims Act” and it provides insurance companies a blueprint for acting in “good faith.” For example, not later than the 15th day or, if the insurer is an eligible surplus lines insurer, the 30th business day after an insurer receives notice of the claim, the insurer shall: (1) an acknowledge receipt of the claim notice; (2) advise that an investigation of the claim is being commenced (and begin the investigation); and (3) ask the insured to provide the insurance company with documents and information necessary to adjust and evaluate the claim.
Once the request is made, the burden is now upon the insured to provide the insurer with the requested documents or information and after the insurer has received all the information it requested, it then has fifteen (15) business days (or thirty (30) calendar days for arson claims) in which to decide the claim. If the insurer is unable to complete its evaluation of a claim within that time, it may request up to forty-five (45) additional calendar days (Note: not business days) in which to continue its evaluation of the claim. This request for additional time must be made in writing and provide the insured the reasons why such additional time is necessary. The insurer does not need the consent of its insured for such an extension, but it must give reasonable grounds for obtaining the additional time.
The insurance company’s decision must be made at the end of the 15/30 days or the additional 45 days, whichever is applicable. If the decision is made to pay the claim, payment must be submitted to the insured within five (5) business days. If the claim is denied, the denial must be in writing to the insured, stating the specific reasons for denial.
If a bad faith insurance claim proceeds to trial, it is possible for a successful plaintiff to recover compensatory damages – money for expenses incurred because of the unreasonable behavior of the insurer. In this context, compensatory damages can include not only financial losses but also damages for mental and emotional harm.
In addition, if the insurance company can be clearly shown to have behaved with either fraud or malice in its bad faith claim denial, the plaintiff policy holder may also receive exemplary damages, also called punitive damages – those meant to punish the insurer for its wrongful behavior. However, the Texas statute does cap the amount of punitive damages that may be assessed, except when the defendant insurer’s behavior was bad enough to violate certain criminal laws. Texas appears to be moving away from common law bad faith claims, which are often vague, to statutory claims, which are easier to prove, but may not lead to as much money for the plaintiff. However, the Texas Insurance Code still provides substantial remedies to policy holders against their insurers and is still considered a consumer-friendly statute in a pro-business state. If you believe your insurance company has not treated you fairly or has wrongfully denied or underpaid a valid claim, it is worth talking to a Texas attorney who understands bad faith claims in the state.
Whether you are a policy holder wondering whether your insurer has acted in bad faith or an insurance company seeking to defend against a bad faith claim or needing advice about the legal distinction between good and bad faith claim handling, an experienced insurance attorney should be consulted for advice and guidance.