Texas Supreme Court Clarifies Rules Governing Insurance Bad Faith Claims & Damages
Insurance bad faith claims can be complicated in the state of Texas, as recently highlighted by a recent Texas Supreme Court decision. Yet the case also highlights some important “rules” pointed concerning the Texas Insurance Code, as we discuss in greater detail below.
The case involved insurers and practitioners faced with statutory bad faith claims, and examining the alleged improper conduct with the alleged damages suffered to determine which “rule” applies, given the relevant fact pattern. Ultimately, the court held that where there has been no breach of an insurance policy, extra contractual causes of action are typically not going to be available. The Court helpfully articulated five separate rules clarifying the procedural steps each court should follow in determining which rule applies and what damages apply, if any.
The case fact pattern is similar to many insurance bad faith claim cases: a property owner submits a claim to the insurance company for property damages due to hurricane; their insurance company concludes that property owner suffered damages, but that the damages were less than the deductible; and the property owner then files suit when insurance company does not make payment, arguing that insurance company breached its policy obligations by not paying the full extent of the loss, thus failing to conduct a reasonable investigation into that loss and ultimately violating the unfair settlement practice provisions of the Texas Insurance Code.
Five Rules Governing Contractual & Extra Contractual Claims
The Texas Supreme Court found that, when a carrier complies with its contractual obligations, the exceptions to the general rule precluding statutory bad faith claims are narrow. Ultimately, the Court found that a claim for statutory bad faith could exist independently of a breach of the policy obligations, and that five rules govern the relationship between contractual and extra contractual claims in this context:
- If a policy does not provide the insured the right to receive policy benefits as damages for an insurer’s statutory violation, the insured cannot recover such benefits as damages (in other words, if the insured fails to show that a carrier breached its obligations under a policy, that ends the claim that they engaged in any statutory bad faith conduct);
- If the insured finds that the carrier failed to pay benefits required under the policy, the policyholder can recover damages for the carrier’s breach of the policy obligations and, separately, damages if/when statutory bad faith conduct causes the insurer to breach its obligations;
- A policyholder can recovery policy benefits as damages if the insurer’s statutory violation causes the insured to lose their rights under the policy;
- Although rare, an insurer can be held liable for damages if its conduct causes a policyholder to suffer damages independent of the loss of policy benefits; and
- The insured cannot recover any damages if they had n right to receive benefits under the policy and did not sustain any injury independent of a right to benefits.
Brownsville, Texas Insurance Attorneys Defending Against Bad Faith Claims
When insurance companies deny frivolous or illegitimate claims, it is often because they legitimately have a right to do so. At the law firm of Colvin, Saenz, Rodriguez & Kennamer L.L.P., our insurance coverage attorneys represent insurance companies and others sued over insurance coverage disputes. Contact us today to find out more.