David v. Goliath: ‘Bad Faith’ Denial of Insurance Claims in Texas

It’s hard to take on Goliath. And today’s insurance companies are about as close to Goliath as you can get. However, some insurance laws in Texas level the playing field and give the Davids of the world a fighting chance. If you suspect an insurance company has mishandled, delayed, or wrongfully denied your insurance claim, they may be acting in ‘bad faith’ and you may be able to recover damages for their unreasonable actions.

In The Universal Life Insurance Company, AIA Services Corporation, and AIA Insurance, Inc. v. Ida M. Giles, the Texas Supreme Court defined bad faith as “failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim with respect to which the insurer’s liability has become reasonably clear.” In Giles, the insurance company refused to pay $50,000 for a woman’s heart surgery because of errors and ambiguities in her medical history. Even after her doctors clarified the errors, the insurance company still refused to pay her medical bills. The Supreme Court concluded that the insurance company failed to act in good faith even when its liability had become clear and sustained a large jury’s verdict in her favor.

Although a determination of ‘bad faith’ is ultimately decided by a jury at trial, Texas law provides guidance that can help determine whether you might have a claim against your insurance company. Insurance companies may not do the following in Texas:

  • Refuse to pay a claim without conducting a reasonable investigation with respect to the claim;
  • Misrepresent your policy, which includes making an untrue statement about a material fact, failing to tell you certain material facts, or misrepresenting the law;
  • Fail to promptly acknowledge communications pertinent to a claim;
  • Compel you to sue for the amount due under the policy by offering substantially less than what is due;
  • Fail to meet certain deadlines in responding to, investigating, and accepting or rejecting claims.

If your insurer has acted in bad faith, it may have also breached your insurance policy or violated the Texas Deceptive Trade Practices Act.

Texas laws that deal with ‘bad faith’ insurers apply to most types of insurance policies, including auto, homeowners, health insurance, and life insurance.

Bad faith acts by insurance companies are serious violations of trust, and the financial awards in court can reflect that. In some cases, recovery can include:

  • Up to three times actual damages, if the insurer knowingly or intentionally violated the law;
  • Attorneys’ fees, interest, and costs of court;
  • Mental anguish, if the insurer’s wrongdoing caused a high degree of mental pain and distress;
  • Punitive damages, if the insurer’s conduct was malicious.

Tort reform in Texas has tilted the law favorably towards insurance companies and tightened the wronged party’s ability to recover damages, but even relatively small claims can still result in a good recovery of damages, such as in the Giles case above. Asking an attorney to help you navigate these laws can make a big difference. If you suspect your insurer has acted unreasonably in its handling of an insurance claim, it might be advisable to get a legal opinion. My law firm has significant experience in this area of law, and I would be happy to help you on your way to some peace of mind.

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