How to Handle Bad Faith Insurance Claims in Texas: Best Practices for Carriers
Bad faith insurance claims are among the most serious disputes an insurer can face in Texas. With potential exposure to extra-contractual damages, attorney’s fees, and reputational harm, carriers must be proactive in their claim handling processes. Understanding Texas law on bad faith insurance, recent case precedents, and proven best practices can help insurers minimize risks while protecting their policyholders and business interests.
What Is a Bad Faith Insurance Claim in Texas?
In Texas, insurers owe their policyholders a duty of good faith and fair dealing. A bad faith claim arises when an insured alleges that the carrier wrongfully denied or delayed payment of benefits without a reasonable basis. Common allegations include:
- Failing to properly investigate a claim
- Misrepresenting policy terms
- Delaying payments without cause
- Refusing to settle within policy limits when liability is clear
Texas courts often examine not just whether a claim was denied, but whether the insurer had a reasonable basis for its decision at the time it was made.
Key Texas Statutes and Legal Standards
Several laws govern bad faith claims in Texas:
- Texas Insurance Code, Chapter 541: Prohibits unfair or deceptive acts by insurers.
- Texas Insurance Code, Chapter 542: Known as the “Prompt Payment of Claims Act,” it requires insurers to acknowledge, investigate, and pay claims within specific deadlines. Failure can result in penalties and attorney’s fees.
- Common Law Duty of Good Faith: Even outside the Code, Texas courts recognize an implied duty of good faith in all insurance contracts.
Together, these frameworks give policyholders multiple avenues for pursuing claims — making compliance and careful handling critical for insurers.
Recent Texas Case Precedents
Several recent cases illustrate how Texas courts are treating bad faith allegations:
- USAA Tex. Lloyds Co. v. Menchaca (2017) – The Texas Supreme Court clarified the relationship between policy benefits and bad faith claims, holding that policyholders must generally show a right to benefits under the policy to recover extra damages.
- Barbara Technologies Corp. v. State Farm Lloyds (2019) – The Court ruled that even after an insurer pays an appraisal award, a policyholder may still pursue statutory interest and attorney’s fees under the Prompt Payment of Claims Act.
- Ortiz v. State Farm Lloyds (2019) – Confirmed that insureds cannot recover for both breach of contract and appraisal award payments unless additional damages are shown.
These rulings highlight that insurers must act promptly, document thoroughly, and comply with both contractual and statutory duties.
Best Practices for Texas Insurance Carriers
To reduce the risk of disputes and litigation, carriers should adopt the following best practices:
1. Conduct Timely and Thorough Investigations
- Acknowledge claims quickly and follow statutory deadlines under Chapter 542.
- Document each investigative step — adjuster notes, expert reports, and communications.
- Address both coverage and liability questions before making decisions.
2. Communicate Clearly and Consistently
- Provide policyholders with written explanations for denials or delays.
- Reference specific policy provisions and factual findings.
- Maintain consistent internal and external messaging to avoid misrepresentation claims.
3. Train Adjusters and Staff on Texas Standards
- Regularly update teams on Texas Insurance Code requirements.
- Emphasize the importance of meeting statutory deadlines.
- Educate staff on recent court rulings that affect claim handling.
4. Leverage Early Legal Counsel
- Engage experienced insurance defense attorneys when complex claims arise.
- Early involvement can help identify potential “bad faith traps” and build defensible strategies.
5. Preserve Evidence and Records
- Keep detailed claim files, including emails and phone logs.
- Ensure electronic claim systems maintain accurate, time-stamped entries.
- Strong records are essential in defending against allegations of delay or misconduct.
How TMF & Associates Helps Insurers
With more than 40 years of trial experience, Thomas M. Fountain & Associates, PLLC has defended Texas insurers in thousands of lawsuits and nearly 100 jury trials. The firm understands how plaintiffs’ counsel pursue bad faith claims — and how to counter them effectively. By combining early intervention, deep knowledge of the Texas Insurance Code, and trial-tested strategies, TMF & Associates positions insurers for successful outcomes.
Conclusion
Bad faith insurance claims in Texas carry significant risks for carriers, but they are also highly defensible when handled correctly. By implementing strong claim handling procedures, complying with Texas Insurance Code requirements, and engaging experienced trial counsel, insurers can reduce exposure and maintain trust with policyholders.
Need guidance on a pending or threatened bad faith claim in Texas? Contact TMF & Associates at HoustonTrialLaw.com to speak with an experienced insurance defense attorney.