Historical Development Of Texas Bad Faith Law

Someone who has insurance in Grand Prairie, Arlington, Keller, Colleyville, or any other town in Texas would be curious to know what can be done when they are treated wrong by their insurance company. This article is largely taken from a legal book for insurance law attorneys and gives some insight into the legal history of the development of the duty of good faith and fair dealing law, in Texas.
Reviewing the theory’s history aids in understanding the current law which will be discussed in a follow-up article.
The development of the common-law duty of good faith and fair dealing in Texas began in the Texas Supreme Court case, English v. Fisher, decided in 1983. There, the insureds asked the court to recognize an implied covenant of good faith and fair dealing that would require insurance policy proceeds to be paid contrary to the terms of the contract. The court said no. In its divided opinion the court pointed out that in other circumstances a duty of good faith and fair dealing arises from a special relationship between the parties. Insurance was one area where such a duty had been recognized.
Later, in 1987, some lower courts began to recognize this common-law duty of good faith and fair dealing.
Finally, in 1987, in Arnold v. National County Mutual Fire Insurance Co., the Supreme Court held there is a duty of good faith and fair dealing, which is breached if the insurance company denies or delays payment of a claim with no reasonable basis or fails to determine where there is a reasonable basis. The basis for recognizing this duty was stated:
“In the insurance context a special relationship arises out of the parties’ unequal bargaining power and the nature of insurance contracts which would allow unscrupulous insurers to take advantage of their insureds’ misfortunes in bargaining for settlement or resolution of claims. In addition, without such a cause of action insurers can arbitrarily deny coverage and delay payment of a claim with no more penalty than interest on the amount owed. An insurance company has exclusive control over the evaluation, processing and denial of claims. For these reasons a duty is imposed that, an indemnity company is held to that degree of care and diligence which a man of ordinary care and diligence would exercise in the management of his own business.” ….
In the 1988 Supreme Court case, Aranda V. Insurance Company of North America, the court restated these elements to recognize a cause of action when there is no reasonable basis for denying benefits and the insurer knew or should have known that there was not a reasonable basis for denying or delaying payment of the claim.
The Supreme Court expanded the duty to include liability for canceling a policy without a reasonable basis in the 1994 case, Union Bankers Insurance Company v. Shelton.
In the following years, appeals courts struggled with how to review these cases properly. If the appellate courts found any evidence of a reasonable basis for denying the claim, a jury verdict in favor of the policyholder would be reversed.
This led the court to reevaluate the theory in Universal Life Insurance Company v. Giles, decided in 1997 and discussed in the next article.

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