“Bad faith” is defined as:
- Misrepresentation of coverage and/or conditions
- Failure to investigate a claim after being notified of a potential loss
- Denial of a claim without conducting a reasonable investigation
- Making an offer to settle a claim that is unreasonable based upon the facts
An example of bad faith would be if you file a claim for damage caused by a hailstorm. You receive a check from his insurance carrier for $3000; however, you know the repair costs for the damage will exceed $18,000. After requesting documentation from the insurance carrier to support their valuation estimate, the insurance carrier refuses to provide him with documentation or respond to your inquiries. At this point, you believe that your insurance carrier is engaging in bad faith.
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Click to CallPrompt Payment Provisions (Chapter 542)
Regardless of whether an insurance carrier acts in bad faith regarding the handling of a customer’s claim, Texas statutes require insurance carriers to adhere to prompt payment provisions contained in Chapter 542 of the Texas Insurance Code.
Prompt payment provisions are as follows:
- An insurance carrier shall send written acknowledgement of receipt of a claim within 15 business days after receipt of such claim;
- An insurance carrier shall request any additional information needed to evaluate the claim within 15 business days after the request is made;
- An insurance carrier shall issue acceptance/denial of a claim within 15 business days after receiving all requested information (45 days in certain instances);
- An insurance carrier shall pay any accepted claim(s) within 5 business days after issuing acceptance (20 business days in certain instances).
If an insurance carrier fails to meet these deadlines, it is subject to penalty interest, currently 18% per annum, along with attorney’s fees. There is no requirement to show bad faith to receive penalty interest and attorney’s fees.
Certain exceptions exist. For example, Chapter 542A addresses certain weather-related claims (e.g., hurricanes and floods); while certain portions of Chapter 542A may alter the applicable interest rates and/or notice requirements. Additionally, if your claim relates to a declared natural disaster, it is recommended that you seek counsel to determine which statutes apply.
Breach of Contract Claim vs. Bad Faith Claim
While bad faith and breach of contract are two distinct claims, an understanding of each matter.
A breach of contract claim is relatively straightforward: your insurance company contracted to provide you with certain benefits/coverage pursuant to your policy, and failed to provide those benefits/coverage. Therefore, you are entitled to receive those benefits/coverage.
On the other hand, a bad faith claim is extracontractual. In essence, a bad faith claim alleges that your insurance company did not merely fail to pay benefits/coverage – but rather engaged in conduct that was unreasonable/unjustifiable and/or deceptive when processing your claim. As previously stated, bad faith claims allow for potentially larger recoveries, including mental anguish damages and/or triple (treble) damages under Chapter 541 of the Texas Insurance Code where the actions were taken knowingly/intentionally.
Frequently, you will be able to assert both claims simultaneously. For instance, you may seek relief for an unpaid benefit under your policy as part of a breach of contract claim and separately seek compensation for the manner in which your insurance company conducted itself throughout the course of processing your claim as part of a bad faith claim. By asserting both claims under Chapter 541 (bad faith) and Chapter 542 (prompt payment), you will likely increase your overall recovery.
Related Article(s)
Statute of Limitations and Additional Timelines
General Two-Year Limitations Period for Bad Faith Claims
As previously discussed, timing plays a huge role in resolving disputes related to insurance claims. Failure to timely comply with a statute of limitations may result in complete dismissal of your lawsuit.
According to Section 541.162 of the Texas Insurance Code, policyholders typically have two years from the date an insurer engages in an unfair/deceptive practice or from the date you should have learned about such action to file a bad faith claim. While the two-year timeframe is commonly referred to as a statute of limitations, it actually operates under a discovery rule. In other words, depending on the specifics of your claim, the clock may start running when you knew or reasonably should have known about the insurer’s misconduct versus when the misconduct took place.
However, there is another factor working in your favor: if you are unable to timely file due to the actions of the insurer preventing you from doing so, you may be granted an additional 180 days beyond the normal statute of limitations timeframe.
The same two-year time frame applies to claims asserted under both Chapters 541 and 542 of the Texas Insurance Code and the Texas Deceptive Trade Practices-Consumer Protection Act (DTPA). If you plan to assert both a bad faith claim and a DTPA claim, then the same timeframes will apply.
Contractual Limitation Provision
Policyholders often are unaware that their insurance contract may contain a limitation on the time in which they can bring a breach of contract claim.
Most Texas-based insurance contracts contain language that limits the time in which a breach of contract claim can be brought to two years and one day from the date of loss. This is unlike the typical four-year statute of limitations applied to breaches of contract claims in Texas. Courts generally uphold these contractual limitation provisions as enforceable.
Therefore, you may have two years in which to bring a bad faith claim but only one year and one day in which to bring your breach of contract claim – and if you fail to timely assert your breach of contract claim, it may be dismissed altogether regardless of the status of your bad faith claim.
Review your policy carefully. If you are unsure about how any contractual limitation language affects your particular situation, contact counsel prior to expiration of any contractual limitations period.
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In addition to compliance with statutory limitations periods, there are numerous other deadlines that may impact your ability to successfully resolve your insurance claim:
Notification of Loss: Most policies require notification by you of any loss/potential loss shortly thereafter. The time frame for what constitutes “shortly thereafter” varies, but failure to notify in a timely fashion may create legitimate issues regarding entitlement to indemnification. Where in doubt, report your loss/potential loss as quickly as possible.
Proof of Loss: Depending upon your policy, there may be a specific time frame in which you must submit a formal proof-of-loss statement. Failure to comply with this deadline may cause complications with respect to resolution of your claim, or worse yet, render your entire claim uncollectible.
Requests for Appraisals: If your policy contains an appraisal clause (which is common among homeowners’ policies), there may be specific deadlines relating thereto. While appraisal provides a useful mechanism for resolving disputes concerning the extent/value of damage resulting from a covered event, you must invoke it by the relevant time frames.
Practical Tip: Maintain a basic claim-tracking log. Record all interactions – date/time/individual name/contact method – details regarding content discussed/inquiries made/responses received. Confirm verbal communications by sending follow-up emails/written confirmations. Documentation will aid greatly in the eventual prosecution of your claim.
Identifying Bad Faith Practices
Tactics Utilized by Insurers to Delay/Pay Unfairly
Adjusters/lawyers employed by insurers work on behalf of their respective companies. Their primary goal is protecting their employer’s financial interests; thus, their goals do not align with yours in all cases.
Common bad-faith tactics used by insurers include:
- Requesting repeated additional documentation pertaining to a submitted claim although sufficient supporting documentation has been provided;
- Ignoring communication attempts made by insured parties;
- Providing inadequate justification for undervaluing claims;
- Misrepresenting scope/coverage of policy in order to deter insured parties from pursuing valid claims;
- Requesting unnecessary documentation that bears no relation to processing/evaluation of a submitted claim;
Consequences associated with these types of activities exist. For example, delaying payment on a roof claim until six months post-damage creates an opportunity for water/mold damage – thereby increasing the severity/scope of damage beyond that originally suffered. Furthermore, delaying payment on an automobile total-loss claim increases out-of-pocket expenses incurred by the insured party for renting alternative transportation intended to be paid for by their auto-insurance company.
Maintain documentation of all correspondence with your insurer. Copy all letters/e-mails/submitted forms; document dates/times/names of individuals contacted; note responses/rebuttals provided. Documenting evidence demonstrating violations of Chapter 541 and/or Chapter 542 serves as evidence should litigation ensue.
Misrepresentation of Claims; Denial of Claims
The insurer is obligated to provide a written explanation for their denial of your claim. If that explanation misrepresents your policy, i.e., states that a benefit does not exist when it clearly does, then this is a basis for making a bad-faith claim. Similarly, if the insurer’s adjuster places a value on your damaged property that is substantially less than the estimated cost of repairing such damage, and cannot provide documentation supporting the adjusted valuation method, this too could serve as the basis for a bad-faith claim.
If you receive a low settlement offer or a denial of your claim that appears to be inconsistent with the terms of your coverage, obtain an independent estimate or appraisal regarding your damaged property. Do not simply rely upon the insurer’s initial evaluation.
Discrimination Against Policyholders
Texas law further restricts the ability of insurers to discriminate against policyholders on the basis of race, sex, or other prohibited classifications. Such discrimination is specifically prohibited with regard to both the underwriting of insurance (i.e., determining which applicants are eligible to purchase a particular type of insurance and at what premium), and the processing of claims. The Texas Department of Insurance (TDI) has established standards for the fair treatment of policyholders and insureds. If you feel that you have been treated unfairly compared to similarly situated policyholders and that the difference in treatment had no relationship to the merits of your claim, you may want to consult with an attorney.
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Documenting and Processing Your Claim
The manner in which you initially report and document your claim will greatly influence the way your claim is processed. Consider the following checklist as guidance:
- Report the loss as soon as possible. Many policies contain requirements regarding notification.
- Immediately document the extent of damage. Photograph and videotape the damage from several different vantage points prior to commencing clean-up or repair activities.
- Gather relevant documents. Include receipts, repair estimates, police reports, etc., as applicable to your specific circumstances.
- Submit your claim in writing whenever possible. Retain a copy of all correspondence sent to the insurer.
- Verify delivery. Use certified mail for mailed correspondence. Request a confirmation of delivery receipt for electronic communications. This initiates the fifteen-business-day statutory timeline.
- Keep a diary log. Record each conversation with the insurer, including date, time, name of person contacted, and summary of discussion.
The 15-business-day prompt-payment timeline begins when the insurer receives notice of your claim; therefore, verifying delivery is important.
Interacting with the Insurer
Document as much as possible. Follow up any telephone conversations with a written email summarization of the discussion: “As stated in our telephone conversation today, you advised that a field representative would inspect the premises on [Date].”. The purpose of creating such documentation is to create a paper trail and avoid any future disagreements concerning what was communicated.
If an adjuster fails to respond to inquiries, it is acceptable to send a written reminder requesting additional information within a reasonable time frame prior to the expiration of statutory deadlines. If communication ceases entirely, you may desire to contact the Texas Department of Insurance (TDI). Filing a complaint with TDI is free and may result in the insurer taking some form of corrective action.
Using Experts and Appraisals
One strategy to maximize your leverage when you perceive yourself being undervalued by an insurer is to retain an independent expert early. An independent expert may be a public adjuster, contractor, or other professional who provides an objective estimate of your damages.
Many Texas residential homeowner and commercial property insurance policies include an appraisal provision: in the event you and the insurer disagree as to the amount of loss, either party may initiate an appraisal proceeding whereby both parties appoint an appraiser and designate a third-party arbitrator (umpire) to settle any dispute arising from differing opinions. While this option may serve as an alternative to litigation, it must be initiated appropriately and timely.
Obtaining an independent expert opinion early in the process not only strengthens your bargaining power, but demonstrates that you take your claim seriously and have conducted adequate research into your entitlement to compensation.
Recognizing When to Consult an Attorney
You do not need to allow matters to deteriorate totally before consulting with an attorney. In many instances, it is advisable to consult with counsel early in the process of addressing a potential bad-faith claim. Early consultation may assist in avoiding unnecessary delays, establishing clear lines of communication, and potentially preventing costly litigation later.
Indicators suggesting you should seek counsel:
- Significant delay in receiving any response relative to your claim;
- You received a denial of your claim without providing a clear or documented reason for same;
- The insurer’s proposed settlement is substantially less than your actual losses;
- The insurer ceased communicating with you;
- You are reaching a deadline and unsure what steps you should take;
At Wyly & Cook, we represent policyholders throughout Texas in bad-faith insurance claims and provide complimentary case evaluations. We charge no fee unless we secure reimbursement for you.
Potential Remedies and Damages Available in Texas Bad-Faith Actions
Penalty Interest; Reasonable Attorney Fees Pursuant to Chapter 542
If your insurer failed to meet any of the prompt payment deadlines previously referenced, you are entitled to penalty interest at 18 percent per annum (or 18 percent per annum as set forth in Chapter 542A for weather-related claims) on your unpaid claim, along with reasonable attorneys’ fees. Penalty interest accrues beginning on the date payment became due.
Importantly, even if the insurer ultimately pays your claim in full, the penalty interest remains owing. Missed payments constitute violations regardless of subsequent payment, and continue to accumulate interest until payment is made in full.
Chapter 542 provides for penalty interest via a strict liability standard. Thus, you are not required to establish that the insurer acted in bad faith to trigger applicability of these provisions; only that they failed to meet deadlines provided pursuant to Chapter 542.
Damages Pursuant to Chapter 541 (Bad-Faith)
Should you successfully establish bad-faith conduct pursuant to Chapter 541, in addition to entitlement to your policy proceeds, you may also pursue damages including:
- Actual damages; namely: amounts payable under your policy together with any resulting consequential damages associated with the actions or omissions of the insurer;
- Mental Anguish Damages: Although subject to judicial discretion, Texas courts permit recovery for mental anguish experienced as a direct result of an insurer’s unreasonable or knowing failure to perform contractual obligations.
- Reasonable Attorneys’ Fees: Statutorily permitted in virtually all bad-faith claims
- Treble Damages: Should an insurer engage in unreasonable or intentional acts/omissions related to their duties or responsibilities under Chapter 541, you may be entitled to treble damages equaling up to three times your actual damages.
Additional remedies may be available under the Texas Deceptive Trade Practices Act (DTPA), dependent upon the specifics of your case.
Other Potential Damages
Subject to the manner in which the insurer’s actions impacted you personally, you may be entitled to recover various forms of additional damages including:
- Consequential Damages: e.g., if forced to occupy a hotel room for extended periods while awaiting resolution of your claim due to delay by the insurer in paying for needed repairs, those costs may be recoverable.
- Mold Remediation Costs: If the delay in resolving your claim resulted in mold growth which was not present prior to the original loss, you may be able to recover costs associated with cleaning up that mold.
- Lost Income: Depending upon the nature of your claim (commercial vs. personal), prolonged delay by the insurer may lead to lost revenue/business income attributable solely to such delay.
- Pre-Judgment Interest and Court Costs: Both are recoverable and tend to increase in larger cases.
Punitive Damages: Although rarely available, punitive damages may be permissible in extreme situations involving fraudulent concealment of coverage or similar egregious misconduct.
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Does failing to meet deadlines always equate bad faith?
No. Failure by an insurer to meet timely deadlines imposed pursuant to Chapter 542 results in automatic imposition of penalty interest at 18 percent per annum (or rate prescribed pursuant to Chapter 542A for weather-related claims) and attorney fees. However, bad faith requires proof by the policyholder that the insurer engaged in unreasonable or knowing conduct, not merely that they were late.
However, repeated patterns of tardiness combined with inadequate communication can support a bad-faith claim.
May I bring a claim for emotional distress if I experience emotional distress as a result of dealing with my insurer?
Yes. Mental anguish damages are available in Texas bad-faith claims. Courts consider whether the policyholder suffered actual emotional distress and whether such emotional distress was material. Emotional distress claims are typically given greater weight where there exists documentation reflecting financial hardship resulting from emotional distress or physical impairment.
Do natural disasters affect deadlines?
Yes. Following declaration of emergency/disaster by state or federal authorities, the Texas Department of Insurance (TDI) has jurisdiction over extending deadlines for insurers. Even during emergencies/disasters, however, insurers remain responsible for maintaining regular communication with policyholders. Chapter 542A sets out special guidelines governing deadlines and interest rates applicable to weather-related claims.
Must I accept the appraisal offered by my insurer?
If included in your policy agreement, an appraisal provision establishes a procedure requiring binding arbitration on questions relating to the amount of loss. However, participation in arbitration does not address whether or not there exists coverage for any portion of claimed losses. Therefore, if you believe your appraisal is inaccurate, using an appraisal process and retaining an appraiser selected by you may provide advantages in negotiations or mediation efforts.
Resources and Next Steps
If you need to dig into the law yourself, the key statutes are:
- Texas Insurance Code, Chapter 541 — Unfair Settlement Practices
- Texas Insurance Code, Chapter 542 — Prompt Payment of Claims
- Texas Insurance Code, Chapter 542A — Weather-Related Claims
You can also file a complaint directly with the Texas Department of Insurance if your insurer isn’t following the law. TDI oversees insurance companies doing business in Texas and can take enforcement action against repeat violators.
If you believe your insurer has acted in bad faith, the best next step is to speak with a lawyer who handles these cases. At Wyly & Cook Law Firm, we offer free consultations and only get paid if we recover for you. You can reach us at (713) 275-8230 or through our website at wylylawfirm.com.
