Bad Faith and Insurance Companies
Insurance companies may be liable, under certain circumstances, for bad faith and extra-contractual damages including punitive damages. These circumstances include:
- a wrongful refusal to defend;
- failure to provide an adequate defense;
- breach of its duty to settle;
- breach of its duty to indemnify, or
- breach of its general covenant of good faith and fair dealing.
It is important to remember, however, that the court has also held that an insured who is himself guilty of material fraud may not sue an insurer for bad faith. There are essentially two basic categories of bad faith claims: a handling of a claim including recklessness, unreasonable delay or fraud and a refusal to pay money including a failure to pay policy benefits without reasonable justification.
A claim can potentially result in three types of damages including:
- benefit of the bargain damages for an accompanying breach of contract claim;
- compensatory damages for the tort of bad faith;
- punitive damages for intentional, malicious, fraudulent or grossly negligent conduct.
According to Texas law, punitive damages are generally justified on the basis of an insurer’s bad faith only when it is accompanied by intentional, malicious, fraudulent or grossly negligent conduct.