Common Law vs. Statutory Bad Faith Insurance Claims

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If the insurance company doesn’t fairly pay a claim, you may wonder how to pursue your rights.

You may have heard about common law and statutory bad-faith insurance claims.

Common law and statutory bad faith insurance claims are resources that may be available when the insurance company doesn’t handle a claim fairly. However, they are not the same. There are important differences that you should be aware of.

The Houston bad faith insurance attorneys at Haun Mena explain common law vs. statutory bad faith insurance claims.

Common Law vs. Statutory Bad Faith Insurance Claims

Common law bad faith insurance claims are based on legal precedent that has developed through a history of cases over time. Statutory claims are based on laws that are passed by lawmakers.

When you have a bad faith insurance claim, you may pursue a common law claim, statutory action, or both types of claims. The two different types differ in their requirements and the available relief.

Common Law Bad Faith Insurance Claims

Texas recognizes common law bad faith insurance claims. Common law is a body of law that develops over time. Rather than being passed by a legislature, the courts create common law as they issue rulings.

Common law is court-adopted law based on institutionalized beliefs. These beliefs aren’t codified by lawmakers, but they’re accepted by the judiciary as what the law should be. With a common law system, the courts recognize and accept the law as cases are heard. In Texas, an insured may bring a bad faith insurance claim under common law.

Bad faith insurance common law in Texas is that an insurance company has a duty of good faith to its insured. The insurance company has unequal bargaining power, the courts say, and it would be problematic if insurance companies could arbitrarily deny claims. The insurance company must use the degree of care that they would use in the management of their own business.

An insured has a common law bad faith insurance claim when there is no reasonable basis for denying a claim or delaying payment. Arnold v. National County Mutual Fire Insurance Co., 725 S.W.2d 165 (Tex. 1987). The insurance company must have known or should have known that there was no reasonable basis for the delay or denial of payment. State Farm Fire Cas. Co. v. Simmons, 963 S.W.2d 42 (Tex. 1998).

Unlike statutory claims, there’s no finite list under common law of what constitutes insurance bad faith. Rather, it depends on the unique circumstances as compared to reasonable standards of prudence and care.

Statutory Bad Faith Insurance Claims

In Texas, statutory bad faith insurance claims are based on Texas Insurance Code Chapters 541 and 542.

Chapter 541 prohibits unfair methods of competition and deceptive practices in insurance. § 541.003 says that an insurer may not engage in a practice that is defined in the chapter as unfair or deceptive.

The law authorizes a cause of action for someone who has sustained actual damages because of a violation of the law. If an insurer knowingly violates Chapter 541, the plaintiff may seek treble damages or three times actual damages.

Chapter 542 prohibits unfair claims settlement practices. § 541.060 details unfair settlement practices, including:

  • Misrepresenting material facts
  • Failing to settle a claim in good faith
  • Failing to promptly explain the denial of a claim
  • Taking too long to affirm or deny coverage or submit a reservation of rights
  • Requiring tax returns, unless allowed by law

If found in violation of Texas Insurance Code Chapter 542, the insurer is liable to pay the claim along with 18% interest. The plaintiff may claim attorney fees.

Both Chapter 541 and Chapter 542 state that available statutory remedies are in addition to remedies available under common law. (§ 541.207, § 542.061).

Common Law or Statutory Bad Faith – Which Do I Choose?

In most cases, statutory bad-faith insurance claims are more viable for Texas plaintiffs than common law claims. Common law claims are still recognized, but most litigants rely on statutes.

There are a few reasons.

First, the Maryland Ins. Co. v. Head Indus Coatings & Serv., Inc. 938 S.W.2d 27 (Tex. 1996) court ruling stated that an insurer has no duty of good faith to its insured regarding a third-party claim against the insured. The court said that it would be “inappropriate” to extend a duty when the insured is already protected by contractual rights and the Stowers doctrine.

Second, common law claims rely on a showing that the insurance company knew or should have known that there was no reasonable basis for denying the claim. This is a high burden, while statutes require proof of knowledge only in limited circumstances or as a condition for treble damages.

For these reasons, and because the statutory provisions closely resemble many common law examples of bad faith, Texas statutes have largely absorbed common law for bad faith insurance claims. See Higginbotham v. State Farm Mut. Ins. Co., 103 F.3d 456, 460 (5th Cir. 1997).

Talk to an Insurance Bad Faith Lawyer

At Haun Mena, we are skilled and experienced in complex insurance claims. If your claim involves bad faith, we can determine the appropriate basis for a claim, prepare a case strategy, and pursue justice. Our team can explain what to expect and what considerations to be aware of as we prepare and litigate your case.

We are taking new cases now. Contact us today for a consultation regarding your claim and begin.

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