What Gets You To Bad Faith

Insurance lawyers have a tendency to talk a lot about “bad faith” in the context of insurance disputes.  However, the Courts have a strong tendency to rule that most cases are simply a breach of the insurance contract and do not amount to “bad faith” and violations of the Texas Insurance Code.  A 2022 opinion discussing this was issued by the Western District of Texas, San Antonio Division.  The opinion is styled, Ted Switzer v. State Farm Lloyds.

Switzer held a property insurance contract with State Farm covering his residential property.  This case arises from Switzer’s claim for coverage benefits due to damage to his property caused by a hailstorm on May 27, 2020.  Based upon allegations that State Farm improperly failed to satisfy its insurance coverage liability, Switzer asserted causes of action for breach of the insurance contract, violation of the Texas Insurance Code , Section 541 for unfair settlement practices, violation of the Prompt Payment Act in Texas Insurance Code, Section 542, violation of the Texas Deceptive Trade Practices Act, (DTPA) breach of duty of good faith and fair dealing, and common law fraud.

State Farm filed this Motion for Partial Summary Judgment on the causes of action of violation of the Texas Insurance Code, Section 541 for unfair settlement practices, violation of the DTPA, breach of duty of good faith and fair dealing, and common law fraud.  State Farm also seeks summaryjudgment dismissal of Switzer’s claim for exemplary damages based upon these causes of action.  In his response, Switzer concedes summary judgment is appropriate on the causes of action of fraud and violation of the DTPA.  Consequently, summary judgment on these two causes of action will be granted.

An insurer holds a duty to deal fairly and in good faith with its insureds.  An insurer breaches this duty and will be liable if it “knew or should have known that it was reasonably clear that the claim was covered.”  Consequently, under this reasonablyclear standard for determina-
tion of liability, an insurer breaches its duty of good faith and fair dealing by denying a claim when the insurers liability has become reasonably clear.

As long as the insurer has a reasonable basis to deny or delay payment of a claim, even if that basis is eventually determined by the fact finder to be erroneous, the insurer is not liable for the tort of bad faith.  This determination of bad faith does not focus on whether the insured’s coverage claim was valid, but, instead, on the reasonableness of the insurer’s conduct in rejecting the claim.  Facts and evidence that show only a bona fide coverage dispute do not rise to the level of bad faith to impose liability.

Similarly, an insurer is obligated to adequately investigate a claim before denying it.  An insurer will not escape liability merely by failing to investigate a claim so that it can contend that liability was never reasonably clear.  Instead, we reaffirm that an insurance company may also breach its duty of good faith and fair dealing by failing to reasonably investigate a claim.  The scope of the appropriate investigation will vary with the claim’s nature and value and the complexity of the factual issues involved.  If an insurer fails to conduct a reasonable investigation, it cannot assert that a bona fide coverage dispute exists.  An insurer fails to reasonably investigate a claim if the investigation is conducted as a pretext for denying the claim, was conducted with an “outcome oriented” approach, or an expert’s report was not objectively prepared.

Although the issue whether an insurer acted in bad faith, or the reasonableness of the insurer’s conduct, is usually a question of fact for the jury, a court may determine as a matter of law that undisputed record evidence establishes an insurer had a reasonable basis for denying or delaying a claim payment.  If the insurer satisfies this summary judgment burden, the burden shifts to the insured to prove, and a court then must determine, whether the insured failed to present evidence sufficient to support a bad faith claim.

This opinion stated the law above.  Then the Court looked at the evidence in the case and ruled in favor of State Farm.


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