Bad Faith Insurance – What Is Not

Knowing what is not “bad faith” insurance is as important as knowing what is bad faith insurance so that a client can be properly advised.
A 1994, Texas Supreme Court opinion helps to understand what is not bad faith. The style of the case is, Allstate v. Watson. Here is the relevant information from that case.
Kathleen Watson was injured in a car accident on March 31, 1989. The driver of the other car was M.D. Townley, an insured under an automobile liability policy issued by Allstate Insurance Company. Watson filed suit on June 28, 1989 against Townley alleging that Townley was negligent and that his negligence was a proximate cause of the accident and her injuries. In the same action, Watson also sued Allstate under the Texas Insurance Code for alleged unfair claim settlement practices in failing to attempt in good faith to effectuate prompt settlement of her claims where liability had become reasonably clear and in denying or unreasonably delaying payment of her claim.
On Allstate’s motion, the trial court severed the claims against Allstate, struck Watson’s pleadings as to Allstate for failure to state a claim, and granted Allstate’s motion for summary judgment.
To be sure, the Insurance Code is worded as providing a cause of action by an insured to “any person.” And “any person” is defined as to include an insurance company.
Watson, however, is not an insured. Rather, she asserts her claims against Allstate as a third party to the contract between Allstate and its insured. The obligations imposed by the Insurance Code and common law are engrafted onto the contract between the insurer and insured and are extra-contractual in nature. A third party claimant has no contract with the insurer or the insured, has not paid any premiums, has no legal relationship to the insurer or special relationship of trust with the insurer, and in short, has no basis upon which to expect or demand the benefit of the extra-contractual obligations imposed on insurers under the Insurance Code with regard to their insureds. Nothing in the common law suggests that the extra-contractual obligations, rights, and remedies of the Insurance Code extend to third party claimants.
More to the point, in construing the Insurance Code as Watson would have us construe it to give her standing in this case would undermine the duties insurers owe to their insureds. There is nothing inconsistent between the common law duty of good faith and fair dealing owed by an insurer to its insured and a duty imposed under common law and the Insurance Code on an insurer as to its insured prohibiting unfair claim settlement practices. To extend to third party claimants the same duties insurers owe to their insureds, insurers would be faced with owing coextensive and conflicting duties. An insurer owes to its insured a duty to defend the insured against the claims asserted by a third party. Recognizing concomitant and coextensive duties to third party claimants, parties adverse to the insured, necessarily compromises the duties the insurer owes to its insured. In fact, the logical result of permitting a separate and direct cause of action in favor of third party claimants allows third parties to sue for unfair claim settlement practices even though the insured has no claim for an unfair claim settlement practice. As troublesome, it is conceivable that in attempting to settle claims pursuant to the demands of a third party claimant, insurers may be liable to the insured for settling too quickly. In refusing to provide a direct cause of action for third party claimants, the legislature may well have been aware of this potential for conflicting duties.
Thus, Watson, as a third party claimant, lacks standing to sue Allstate directly for unfair claim settlement practices.