Understanding Insurance Bad Faith Practices
In Texas, insurance companies owe many duties to their policyholders. These duties require insurers to adjust and settle claims in a timely manner.
If an insurance company fails to honor these duties, an insured or claimant can hold them liable for coverage amounts, attorney’s fees, and other penalties.
There are three primary bodies of law that govern the duties owed by insurance companies:
- The implied covenant of good faith
- Unfair competition or deceptive practices
- Timely payment of claims.
Each of these is discussed below.
Implied Covenant of Good Faith
The parties to an insurance contract are generally bound by an implied duty of good faith and fair dealing. The insurer and the policyholder must not take advantage of each other or act in a way that impairs the other party’s rights in the insurance agreement.
An insurance company may be held liable for bad faith if it:
- Unreasonably delays investigation or payment of a claim
- Fails to acknowledge that it received a claim
- Attempts to settle a claim for less than an objectively reasonable policyholder would think is fair
- Requires duplicative or burdensome submittal of information
- Fails to explain why a claim is delayed
- Misrepresents information about claims
- Increases premiums after a claim even if the claimant was not at fault
- Engages in threatening or abusive tactics
- Treats the claimant like an adversary.
These practices may be considered bad faith under the common law in Texas. However, the legislature has also enacted rules regulating the good faith of insurance companies.
Unfair Competition or Deceptive Practices
Chapter 541 of the Texas Insurance Code, as provided in section 541.001, regulates:
“trade practices in the business of insurance by (1) defining or providing for the determination of trade practices in this state that are unfair methods of competition or unfair or deceptive acts or practices; and (2) prohibiting those trade practices.”
Under the law, you may sue your insurance company for:
- Misrepresenting a policy provision or other material facts
- Unwillingness to reach a settlement in good faith when liability is reasonably certain
- Failure to explain why a claim has been denied
- Failure to confirm in a reasonable time whether coverage exists
- Unwillingness to pay a claim if it hasn’t conducted an investigation.
Other prohibited conduct includes:
- Undervaluing claims
- Delaying the adjustment or payment of claims by requesting unreasonable information or other methods
- Counseling a policyholder not to contact a lawyer
- Modifying terms of insurance coverage after a claim
- Failure to keep open lines of communication with the policyholder
- Accusing a policyholder of fraud or criminal behavior without a reasonable basis.
If a policyholder sues their insurance company for a violation of Chapter 541 and prevails, they are entitled to the following damages:
- Actual damages, reasonable and necessary attorney’s fees, and court costs;
- An order requiring the insurance to do or not do something; or
- Other relief as deemed appropriate by the court.
Furthermore, if it is found that the insurance company “knowingly committed the act complained of,” then the policyholder may be entitled to up to three times the amount of the actual damages incurred.
Timely Payment of Claims
Chapter 542 of the Texas Insurance Code requires “the prompt payment of insurance claims.”
When an insurance company receives a claim, it has 15 days to:
- Acknowledge it has received the claim;
- Begin investigating it; and
- Request that the claimant provide all information it reasonably believes is necessary.
Once the insurer has received the information requested, it has 15 business days to notify the claimant that their claim has been accepted or rejected.
If the claim has been accepted, the insurance company:
- Must pay the claim within five business days; or
- Pay the claims within five days of the claimant performing a requirement to receive payment
There is an exception to the five-day requirement; the deadline is extended by 15 days if the claim is due to a weather-related condition or natural disaster.
Suppose an insurer does not pay a claim within the deadline. In most cases, the insurer has to pay the claimant 18 percent annual interest plus the actual amount of the claim.
Contact an Experienced Texas Bad Faith Attorney
Insurers have many duties that require them to treat their policyholders in a fair manner. If your insurance company is not treating you fairly, contact our legal team in Fort Worth at (817) 420-7000. Our insurance lawyers at Stephens Law Firm are here to help.