Insurance Contracts And Breach

Insurance policies are contracts.  A violation of an insurance policy is a usually going to be a breach of the contract.  A lot of insurance law, simply put, is contract law.

So what about the relationship of breach of contract to other theories of liability?

The 1996, Texas Supreme Court opinion, Liberty National Fire Insurance Co. v. Akin, says that “Insurance coverage claims and bad faith claims are by their nature independent.  But, in most circumstances, an insured may not prevail on a bad faith claim without first showing that the insurer breached the contract.”

As discussed in the 1988, Texas Supreme Court opinion styled, Vail v. Texas Farm Bureau Insurance Co., contractual liability is not essential to establish extra-contractual liability, but it helps.  For example, an insurer in the Vail case that owes policy benefits under the contract may also be found to have acted unfairly in refusing to pay those benefits.

On the other hand, the absence of contractual liability may disprove liability under other theories.  For example, if the insurer successfully defends a contract claim by proving the insured committed arson, the insurer would not be liable for failing to act in good faith to settle, because the contract defense also gives the insurer a good faith basis for denying the claim.

Sometimes the insurance company is liable precisely because the insurance contract does not provide coverage.  For example, the insurance company agent may have represented that the policy contains benefits that it does not have, as in the 1979, Texas Supreme Court opinion, Royal Globe Insurance Co. v. Bar Consultants, Inc.

Contract defenses also may have no effect at all on the insurer’s liability.  For example, when an insurer had already denied the claim, the insured’s failure to file a proof of loss as required by the contract did not excuse the insurer from liability for breach of its duty of good faith and fair dealing.  This was discussed in the 1990, opinion styled, Viles v. Security National Insurance Co.  Likewise, an insurer may be liable for statutorily prohibited unfair insurance practices even in the absence of policy coverage, pursuant to the 1992, 5th Circuit opinion, First Texas Savings Association v. Reliance Insurance Co.

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