Bad Faith Insurance Claims: Texas Policyholder Rights

What Is a Bad Faith Claim

When an insurance company fails to uphold the duties it owes to its policyholders, the insurance company has committed a bad faith act.

Insurance companies owe their policyholders (or "insureds") important duties by virtue of the insurance contract, including the duty of good faith and fair dealing. For example, when a policyholder files a claim with his or her insurance company, the insurer is required to conduct a reasonable and full investigation into the claim. The insurance company cannot arbitrarily deny the claim, delay payment or decide to pay less than the full value of benefits owed under the insurance policy.

Unfortunately, these and other bad faith practices have become far too common in the insurance industry. While many insurers are more than happy to accept a policyholder's premiums, they have been less than willing to pay out the same policyholder's legitimate claims - even when those claims clearly are covered by the policies they issued.

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Examples of Bad Faith Acts

Bad faith acts can occur under any type of insurance policy, including auto, homeowners, health, disability, life insurance, boat and recreational vehicle policies. Some examples of bad faith acts include:

• Unreasonably delaying payments.
• Denying a claim when liability is reasonably certain.
• Failing to defend a policyholder against a third-party claim.
• Failing to complete the claims process within a reasonable time.
• Failing to investigate a claim for benefits under an insurance policy.
• Placing the insurance company's own financial interests over the policyholder's.
• Misrepresenting the meaning of a provision in an insurance contract to the policyholder.
• Offering or paying less than what is owed under the terms and conditions of the insurance policy.

In some cases, insurance companies also will use a policyholder's previous claims history as grounds to deny a current claim. This practice is a bad faith act. Insurance companies have the opportunity to assess the risk a particular policyholder may pose at the time the policy is underwritten. Based on this risk, the insurance company decides the cost and level of protection it will offer the policyholder. After the underwriting process is completed, however, the insurance company should not use a particular policyholder's claims history as a reasonable basis to deny a new claim for benefits.

What Protections Are Available Under Texas Law?

Under the Texas Insurance Code, insurance companies underwriting any type of insurance policy in the state are required to meet certain standards of conduct. For example, the state regulates how much time insurance companies have to process claims. Currently, insurance companies have 15 days from the date they have received a claim to send the policyholder a written acknowledgment of receipt of the claim; begin an investigation into the claim; and request all necessary statements, forms and other information from the policyholder to process the claim.

The Texas Unfair Claim Settlement Practices Act (Insurance Code 542.001-542.302) also provides a list of insurer settlement practices that are illegal in the state. These include:

• Knowingly misrepresenting pertinent facts or policy provisions relating to the policyholder's claim.
• Failing to acknowledge with reasonable promptness pertinent communications concerning policyholders' claims.
• Failing to adopt and implement reasonable standards for prompt investigation of claims arising under its policies.
• Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims submitted in which liability has become reasonably clear.
• Committing other actions which the State Board of Insurance has defined, by regulations adopted pursuant to its rule-making authority, as unfair claim settlement practices.
• Compelling policyholders to take legal action to recover the total amount of benefits due to them under the insurance policy under its policies by offering substantially less than the amount ultimately recovered in a lawsuit.
• Failure of any insurance company to maintain a complete record of all the complaints which it has received during the preceding three years or since the date of its last examination by the commissioner of insurance, whichever time is shorter.

Contact an Experienced Attorney

Many people who have been offered an unfair settlement or had their claim unfairly denied by their insurance companies may feel powerless to do anything about it. They believe that with the insurance company's power, money and resources, they have no other option but to accept what they have been offered.

This, however, is not true. Texas insurance policyholders who have been victimized by the bad faith acts of an insurance company have legal options available to them, including filing a lawsuit against the insurer. In some cases, state law allows policyholders to receive punitive damages and attorney fees in addition to any amounts owed to them under their insurance contracts.

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Author Credentials: Ian is the founder and Editor-in-Chief of Disabled World, a leading resource for news and information on disability issues. With a global perspective shaped by years of travel and lived experience, Ian is a committed proponent of the Social Model of Disability-a transformative framework developed by disabled activists in the 1970s that emphasizes dismantling societal barriers rather than focusing solely on individual impairments. His work reflects a deep commitment to disability rights, accessibility, and social inclusion. To learn more about Ian's background, expertise, and accomplishments, visit his full biography.