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The Insurer’s Duty of Good Faith and Fair Dealing

The Texas Supreme Court has long recognized that insurance companies owe to their insured the degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business. Essentially, by virtue of the contractual relationship between the parties, insurers have a duty of good faith and fair dealing to their insured. In 1987, the Texas Supreme Court ruled in Arnold v. National County Mutual Fire Insurance Company that an insurer must deal fairly and in good faith with their insured. The Court explained the policy reasons giving rise to the special relationship as:

  1. the unequal bargaining power which would allow unscrupulous insurers to take advantage of their insureds’ misfortunes in bargaining for settlement or resolution of claims;
  2. without such a duty, insurers could arbitrarily deny coverage and delay payment of the claim with no more penalty than the interest on the amount owed; and
  3. an insurance company has the exclusive control over the evaluation, processing and denial of claims.

In 1997, the Texas Supreme Court combined the common law and statutory standards for bad faith into the “reasonably clear” standard, whereby an insured must prove that the insurer has failed to attempt in good faith to effectuate a prompt, fair and equitable settlement of a claim with respect to which the insurer’s liability has become reasonably clear. Insurers do maintain the right to deny questionable or invalid claims. There is no breach of duty when a claim is denied for an invalid reason, so long as there was a valid reason for the denial at the time of the denial. Additionally, the duty of good faith and fair dealing only applies in “first party” actions where an insured is suing his own insurance company and seeking benefits under that policy. The duty does not extend to “third parties”.

If you or someone you know has been involved in a claims dispute with an insurance company, contact the experienced Hurricane Ike attorneys at the Zehl & Associates PC by phone at 1-888-984-1391.