Texas Third-Party Bad Faith: What You Need To Know

Texas law does not allow third parties to pursue bad faith insurance claims. A third-party claim is made by someone who is neither the policyholder nor the insurance company. Only first-party claims, made by the policyholder, are permitted. However, Texas law does recognise two types of bad faith insurance claims: common law bad faith and statutory bad faith.

Texas law does not allow third-party bad faith claims

A first-party claim occurs when an individual files a claim with their insurance company after an accident or injury. For example, if someone's roof is damaged by hail, they would file a first-party claim with their homeowner's insurance company. If the insurance company breaches its duty of good faith, they could file a first-party bad faith lawsuit.

A third-party claim involves liability insurance, which is a policy purchased to protect oneself from claims made by others. A third-party bad faith claim may occur when an insurance company unreasonably fails to defend, indemnify, or settle a claim made against the policyholder. For instance, if someone hits another vehicle and the driver of the other vehicle files a lawsuit, the insurance company has a duty to defend the policyholder in the lawsuit and pay the damages (up to the policy limit). If the insurance company refuses to defend the policyholder or settle with the other driver, the policyholder would file a first-party bad faith claim.

However, Texas law does not allow the third party (i.e. the victim) to file a bad faith claim against the insurance company for refusing to pay the damages. While Texas law requires insurance companies to act in good faith towards policyholders, third parties may not pursue insurance bad faith claims.

Common law bad faith claims can only be pursued by policyholders

Texas law recognises two types of bad faith insurance claims: common law bad faith and statutory bad faith. Common law bad faith claims can only be pursued by policyholders (first parties) against their insurance company. A third-party claim, on the other hand, is made by someone who is neither the policyholder nor the insurance company. Texas courts have maintained that third parties may not pursue insurance bad faith claims.

To bring a common law bad faith claim, the plaintiff must prove that their insurance coverage was unreasonably denied or delayed and that the insurance company should have known that its liability was reasonably certain. It is not enough for the plaintiff to successfully appeal a claim; they must demonstrate that the insurer knew its liability to pay the claim was reasonably certain and still chose to deny the claim or engage in conduct to unreasonably deny it. This could include deliberately lying to the insured by saying the claim is not covered, or summarily denying the claim without conducting a proper investigation.

Common law bad faith claims have several disadvantages. For instance, they can only be brought against an insurance company by a policyholder, not a third party. Therefore, most attorneys prefer to pursue statutory bad faith claims, which allow for both first- and third-party bad faith claims.

Statutory bad faith claims are based on prohibited actions outlined in the Texas Insurance Code

Texas law allows for two types of bad faith lawsuits: common law bad faith claims and statutory bad faith claims. While common law bad faith claims are based on legal precedent, statutory bad faith claims are based on prohibited actions outlined in the Texas Insurance Code.

Chapter 541 of the Texas Insurance Code identifies "unfair methods of competition and unfair or deceptive acts or practices", which are sometimes referred to as bad faith conduct. This includes a range of improper insurer conduct, such as:

• Misrepresenting the terms of a policy
• Making misleading or untrue statements in advertising an insurance policy
• Misrepresenting material facts in a claim
• Failing to reasonably explain why a claim was denied
• Denying a claim after failing to conduct a reasonable investigation
• Failing to render a decision within a reasonable period
• Refusing to reach a reasonable settlement

Chapter 542 of the Texas Insurance Code, also known as the "Unfair Claim Settlement Practices Act", further elaborates on these prohibited actions. It specifically addresses the prompt payment of claims, including rules regarding the timing of communications and payment of claims.

It is important to note that statutory bad faith claims are limited to first-party claims, where the policyholder seeks compensation from their insurer after an accident or injury. Third-party bad faith claims, on the other hand, involve a claimant seeking compensation from another party's insurance company. Texas law does not recognise third-party bad faith claims.

Insurance companies cannot reject legitimate claims or misrepresent policy terms

Texas law requires insurance companies to act in good faith toward policyholders. This means that insurance companies cannot reject legitimate claims or misrepresent policy terms. "Good faith" is a legal term for dealing with policyholders in an honest and reasonable manner.

However, insurance companies may try to use abusive tactics to deny or stall legitimate claims. For example, they may delay a claim unreasonably and unnecessarily, hoping that the policyholder will drop it. They may also lie about or misrepresent the policy or the claims process, or fail to disclose coverage or deadlines.

If an insurance company is acting in bad faith, the policyholder may be eligible to collect compensation for the full extent of damages incurred, plus any court costs and legal fees. An attorney can help determine if insurance bad faith occurred and hold the insurer legally responsible for its actions.

To prove a bad faith claim in Texas, the policyholder must show that the insurance company denied their claim even though liability was reasonably clear. Alternatively, they can show that the insurance company did something prohibited by Chapter 541 or 542 of the Texas Insurance Code, which outlines unfair or deceptive acts or practices in the business of insurance. This includes misrepresenting a material fact or policy provision related to coverage, failing to attempt a fair settlement when liability is reasonably clear, and failing to provide a reasonable explanation for the denial of a claim.

Bad faith claims require proof of unreasonable or grossly negligent conduct

Texas law recognises two types of bad faith insurance claims: common law bad faith and statutory bad faith. To prove bad faith, claimants must show that the insurance company engaged in unreasonable or grossly negligent conduct. This can include withholding benefits unreasonably, failing to investigate a claim, or misrepresenting policy terms.

Common Law Bad Faith Claims

Common law bad faith claims require proof that the insurance company unreasonably denied or delayed a claim, even though liability was reasonably clear. The plaintiff must demonstrate that the insurer had good reason to know its liability to pay the claim and still chose to deny it or engage in conduct to unreasonably deny it. This may include:

• Misrepresenting the terms of a policy
• Making misleading or untrue statements in advertising
• Misrepresenting material facts in a claim
• Failing to reasonably explain why a claim was denied
• Denying a claim without conducting a reasonable investigation
• Failing to render a decision within a reasonable period
• Refusing to reach a reasonable settlement

Statutory Bad Faith Claims

Texas law also identifies specific conduct that may give rise to a statutory bad faith claim under Chapter 541 of the Texas Insurance Code, also known as the Unfair Methods of Competition and Unfair or Deceptive Acts or Practices Act. This includes:

• Misrepresenting a material fact or policy provision related to coverage
• Failing to attempt in good faith to reach a prompt and fair settlement when liability is reasonably clear
• Failing to promptly provide a reasonable explanation of the basis for the denial of a claim
• Failing to affirm or deny coverage within a reasonable period
• Refusing to pay a claim without conducting a reasonable investigation

Proving Bad Faith Claims

Proving bad faith requires more than showing that a claim was wrongfully denied or delayed. The plaintiff must demonstrate that the insurance company's conduct was unreasonable or grossly negligent, causing recognised damages. This could include deliberately lying to the insured about the scope of their policy or failing to conduct a proper investigation before denying a claim.

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