How Do I Know If My Insurance Underpaid Me?
How Texas defines bad faith insurance claims, and when to pursue one
on August 31, 2020
Updated on June 17, 2022
When you purchase an insurance policy, you trust that the insurer will live up to its end of the bargain. That is to say, you expect the insurer will actually provide coverage as provided by your policy. But as we all know, this is not always the case. Many insurance companies will play hardball with their own customers, relying on every available legal tactic to avoid paying anything–or paying out but grossly undervaluing the actual cash value and underpaying the claim.
In some cases, an insurer's delay or denial may actually be illegal. This is known in Texas law as a bad faith claim. There are actually two kinds of bad faith insurance claims: those falling under common law and those defined by the Texas Insurance Code.
Common Law Bad Faith
The common law on insurance bad faith dates back to a 1983 decision from the Supreme Court of Texas, English v. Fischer. In that case, the justices found that there was a “covenant of good faith and fair dealing” between an insurance company and its policyholders. And given that the insurance company is almost always in a superior bargaining position, it was sometimes necessary for the courts to enforce this covenant of good faith to protect the policyholder.
In recent years, however, Texas courts have clarified and limited the scope of this common law bad faith rule. As the law currently stands, a policyholder must prove there was egregious conduct on the part of the insurer. So a mere allegation that the insurer improperly denied or underpaid insurance claims is not enough.
Statutory Bad Faith
Statutory bad faith claims rely on Chapter 541 of the Texas Insurance Code. This chapter deals with “deceptive, unfair, and prohibited” trade practices. In the context of insurance, this can include any or all of the following acts by an insurance company:
The insurer misrepresents a “material fact or policy provision” to the claimant
The insurance company fails to make a settlement attempt in good faith when presented with a claim that is “reasonably clear” in establishing the insurer's liability
If the insurer denies or underpays a claim, it fails to “promptly” give the policyholder a “reasonable explanation” for its decision
In the case of car insurance, the insurer delays or refuses to settle a claim “solely because” other insurance may also cover the same accident
The insurance company makes unreasonable demands for documentation for paying a claim, such as requesting to see your tax returns without a court order
This is not an exhaustive list. Many other acts may form the basis for a statutory bad faith claim in Texas. A qualified Texas bad faith insurance attorney can provide legal advice to help you calculate the value of your claim and explain the claims process. A Texas insurance claim attorney can negotiate insurance disputes, and if necessary file a legal action on your behalf with more specific advice tailored to your situation. Many lawyers offer a free consultation and may represent you on a contingency fee arrangement.
What Damages Can You Obtain in a Texas Bad Faith Insurance Lawsuit?
So what can you do when an insurer acts in bad faith? Well, you can take them to court. And if you prevail, the judge can order the insurance company to pay triple damages—three times the amount you should have received from the insurer—as well as legal fees and court costs. In extraordinary cases, a court can even order punitive damages to punish the insurer for its conduct.
If you’d like more general information about this area of the law, see our insurance law overview.