What Is “Bad Faith” Insurance As It Relates To Settlements?

In an answer to the above question, one attorney said, “It’s hard to define but I know it when I see it.”  That response is fine but what a regular insured person thinks is clearly “bad faith,” the Courts look at differently.

The Texas Insurance Code, Section 541.060, sets forth specific acts that can be considered bad faith in context of settling a claim.  The statute prohibits engaging in any of the following unfair settlement practices with respect to a claim by an insured or beneficiary:

  1. misrepresenting to a claimant a material fact or policy provision relating to coverage at issue;
  2. failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim (a) with respect to which the insurer’s liability has become reasonably clear; or (b) a claim under one portion of a policy of a claim with respect to which the insurer’s liability has become reasonably clear in order to influence the claimant to settle an additional claim under another portion of the coverage, unless payment under one portion of the coverage constitutes evidence of liability under another portion of the policy.
  3. failing to provide promptly to a policyholder a reasonable explanation of the basis in the policy, in relation to the facts or applicable law, for the insurer’s denial of a claim or for the offer of a compromise settlement of a claim;
  4. failing within a reasonable time to: (a) affirm or deny coverage of a claim to a policyholder; or (b) submit a reservation of rights to a policyholder;
  5. refusing, failing, or unreasonably delaying an offer of settlement under applicable first-party coverage on the basis that other coverage may be available or that third parties are responsible for the damages suffered, except as may be specifically provided in the policy;
  6. undertaking to enforce a full and final release of a claim from a policyholder when only a partial payment has been made, unless the payment is a compromise settlement of a doubtful or disputed claim;
  7. refusing to pay a claim without conducting a reasonable investigation with respect to the claim;
  8. with respect to a Texas personal auto policy, delaying or refusing settlement of a claim solely because there is other insurance of a different type available to satisfy all or any part of the loss forming the basis of the claim; or
  9. requiring a claimant, as a condition of settling a claim, to produce the claimant’s federal income tax returns for examination or investigation by the person unless: (a) a court orders the claimant to produce those tax returns; (b) the claim involves a fire loss; or (c) the claim involves lost profits or income.

In the 1988, Texas Supreme Court opinion styled, Vail v. Texas Farm Bureau Mutual Insurance Company, an insurer that denied a fire loss claim, based on an arson defense that the jury rejected, committed an unfair insurance practice by failing to act in good faith to settle once its liability became reasonable clear.


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