Liability On Insurance Policy

Seeing if there is liability on the insurance policy is one of the first things an insurance attorney needs to do when meeting with a prospective client.

In 1996, the Texas Supreme Court stated in Liberty Nat’l Fire Ins. Co. v. Akin, 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.

In 1998, the Texas Supreme Court stated in Vail v. Texas Farm Bur. Mut. Ins. Co. that contractual liability is not essential to establish extracontractual liability, but it helps.  For example, an insurer 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 insurer is liable precisely because the insurance contract does not provide coverage.  For example, the insurer’s agent may have represented that the policy contains benefits that it does not have.  This is seen in the 1979, Texas Supreme Court opinion, Royal Globe Ins. Co. v. Bar Consultants, Inc. and the 2000, Austin Court of Appeals opinion, Stumph v. Dallas Fire Ins. Co.

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