Three Ways an Insurer Can Be Liable for Bad Faith
When an insurance company fails to act honestly, fairly, or promptly when handling a claim, it can be held liable for bad faith. In Texas and other states, insurers are legally obligated to treat policyholders with good faith and fair dealing. When they fail to uphold these duties, policyholders have the right to pursue legal action for compensation. Below are three common ways insurers can be held liable for bad faith conduct.
1. Unreasonable Denial of Claims
One of the most frequent forms of bad faith occurs when an insurer denies a legitimate claim without a valid reason. This includes rejecting claims without investigating properly or relying on misleading interpretations of policy language. For example, if an insurer denies coverage by citing an exclusion that doesn’t apply or ignores key evidence supporting the claim, this may qualify as bad faith. Insurers must provide clear, factual justifications for claim denials, and failure to do so can make them legally responsible for damages beyond the original policy limits.
2. Failure to Properly Investigate
Before approving or denying a claim, an insurance company is required to conduct a prompt, fair, and thorough investigation. When an insurer delays or performs an inadequate review—such as ignoring documentation, failing to interview witnesses, or overlooking important evidence—it breaches its duty of good faith. This tactic often serves to delay payment or justify a low settlement. Texas law, in particular, prohibits insurers from intentionally dragging out the claims process or failing to communicate with policyholders about missing information needed to process their claims.
3. Delaying or Underpaying Valid Claims
Another major cause of bad faith liability is when insurers intentionally delay or undervalue legitimate claims. Some companies may offer settlements far below what is owed or use excessive bureaucracy to avoid timely payment. These practices create unnecessary financial hardship for policyholders who rely on their insurance coverage after a loss. In Texas, insurers must follow specific deadlines under the Texas Insurance Code, which requires acknowledgment, investigation, and payment within set timeframes. Failure to comply can result in penalties, interest, and additional damages for bad faith conduct.
Conclusion
Insurers are expected to uphold fair dealing and honesty when processing claims. When they deny, delay, or underpay without valid justification, they can be held accountable for acting in bad faith—ensuring that policyholders have recourse when trust in the insurance process is broken.
