Is a claim against an insurance company for bad faith good law in Texas?
Yes. Texas still recognizes claims against insurers for bad faith. Both the common-law tort for breach of the duty of good faith and fair dealing and statutory causes of action under the Texas Insurance Code remain valid and are frequently litigated in Texas courts.
I. Common‑Law Bad Faith in Texas
Rule
The Texas Supreme Court first formally recognized a common‑law cause of action for insurer bad faith in Arnold v. National County Mutual Fire Insurance Co., 725 S.W.2d 165 (Tex. 1987). The court held that insurers owe insureds a duty of good faith and fair dealing in the processing and payment of claims.[1]
A cause of action exists when an insurer denies or delays payment of a claim without a reasonable basis or fails to determine whether a reasonable basis exists for denial or delay. Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987).[1]
This duty arises from the “special relationship” between insurer and insured due to unequal bargaining power and the insurer’s control over claim handling.[1]
Elements
Texas cases following Arnold generally frame the test as:
- The insurer had no reasonable basis for denying or delaying payment of policy benefits; and
- The insurer knew or should have known that no reasonable basis existed.
This formulation was reaffirmed in Republic Insurance Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995), which cited earlier precedent defining the elements of the bad‑faith tort.[2]
II. Limitations on Bad Faith Claims
Coverage Requirement (General Rule)
Texas courts have clarified that, as a general rule, there can be no bad‑faith liability if the insurer correctly denies a claim that is not covered by the policy. Republic Insurance Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995).[2]
The Texas Supreme Court reiterated this principle in USAA Tex. Lloyds Co. v. Menchaca, 545 S.W.3d 479 (Tex. 2018), explaining that extra‑contractual claims typically fail when:
- the insured cannot establish a right to benefits under the policy.
However, Menchaca clarified several rules governing these claims, including that damages may still be recoverable if the insurer’s statutory or bad‑faith conduct causes an independent injury separate from policy benefits.[3]
III. Statutory Bad Faith Under the Texas Insurance Code
In addition to the common‑law tort, Texas statutes provide causes of action against insurers for unfair claim‑handling practices.
Texas Insurance Code Chapter 541
The Code prohibits unfair settlement practices, including:
- failing to attempt in good faith to effectuate a prompt and fair settlement; and
- refusing to pay claims without a reasonable investigation.
These statutory provisions supplement common‑law bad‑faith claims and provide private causes of action with potential damages and attorney’s fees.[3]
Prompt Payment of Claims Act (Chapter 542)
Texas also imposes deadlines for insurers to process and pay claims. If an insurer delays payment beyond statutory limits after receiving necessary information, it may be liable for statutory damages and interest. Tex. Ins. Code § 542.058.[4]
IV. Current Status of Texas Law
Bad‑faith claims remain firmly recognized in Texas through:
- Common‑law duty of good faith and fair dealing (from Arnold), and
- Statutory remedies under the Texas Insurance Code.
Later cases like Republic Insurance Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995) and USAA Tex. Lloyds Co. v. Menchaca, 545 S.W.3d 479 (Tex. 2018) did not eliminate the cause of action, but instead clarified the relationship between contractual coverage, statutory claims, and extra‑contractual damages.
Conclusion
A claim against an insurance company for bad faith remains good law in Texas. The claim exists both as a common‑law tort for breach of the duty of good faith and fair dealing and as statutory causes of action under the Texas Insurance Code, though modern Texas Supreme Court cases impose important limits—particularly the requirement that the insured generally establish coverage or an independent injury.