History Of Duty Of Good Faith And Fair Dealing In Texas

How does someone in Grand Prairie, Dallas, Fort Worth, Arlington, Mansfield, Keller, Azle, Coppell, Sasche, Bedford, or anywhere else in Texas know when the insurance company is acting in “bad faith”? The answer is not easy, but to understand, it helps to know the history a little.
When reviewing the theory of the duty of good faith and fair dealing, understanding the history aids in understanding its current form. But first, when in a situation where you suspect something “ain’t right”, you should consult an experienced Insurance Law Attorney. Even experienced attorneys will argue over this theory and how it applies to the facts of a particular situation.
The Texas Supreme Court, in 1983, in the case, English v. Fischer, is where the development of the common-law duty of good faith and fair dealing in Texas began. There, the plaintiff’s asked the court to recognize an implied covenant, or promise, of good faith and fair dealing that would require the insurance policy proceeds to be paid contrary to the terms of the contract. The court declined. But, the justices on 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.
After the ruling above, some lower courts then recognized this common-law duty of good faith and fair dealing. This happened in the case, Aetna Cas. & Sur. Co. v. Marshall, which is a 1987, Court of Appeals, Houston [1st Dist.] case.
Eventually, in Arnold v. National County Mutual Fire Insurance Co., the Texas Supreme Court held there is a duty of good faith and fair dealing, which is breached, or broken, when the insurance company denies or delays payment of a claim with no reasonable basis or fails to determine whether there is a reasonable basis. The basis for recognizing this duty was stated this way:
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 insurance companies 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 prudence would exercise in the management of his own business.”…
Later, in 1988, the Texas Supreme Court, in the case, Aranda v. Insurance Company of North America, restated the above elements to recognize a cause of action when there is no reasonable basis for denying benefits and the insurance company knew or should have known that there was not a reasonable basis for denying or delaying payment of the claim.
In 1994, in Union Bankers Insurance Company v. Shelton, the Texas Supreme Court expanded the duty to include liability for canceling a policy without a reasonable basis for doing so.
Over the following years, the courts struggled with how to look at and review these cases. When reviewing courts found any evidence of a reasonable basis for denying the claim, a jury verdict finding a breach of the duty of good faith and fair dealing would be reveresed. This happened in the case, Lyons v. Millers Casualty Insurance Co., a 1993 case.
Finally, in 1997, the court reevaluated the theory in the case, Universal Life Insurance Company v. Giles. Read about this more on Saturday.

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