I know this may sound like a simple question, but does a policyholder still have a claim against his/her insurer after it has been determined that there is no coverage under the insurance policy? The Texas Court of Appeals in Dallas dealt with this very question in 2001, and their decision may surprise you.
In Gates v. State Farm Co. Mut. Ins. Co., 53 S.W.3d 826 (Tex.App.—Dallas 2001, no pet.), the court of appeals noted that generally the absence of coverage on a policy prevents any recovery under the policy, as well as recovery for bad faith, because the insurer had a reasonable basis for denying the claim. However, the Court did not stop there. Citing the Texas Supreme Court case of Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995), the appellate court recognized that a bad faith claim might exist despite the absence of a breach of the insurance policy. Quoting Stoker, the appellate court stated that:
We do not exclude, however, the possibility that in denying the claim, the insurer may commit some act, so extreme, that would cause injury independent of the policy claim.
The appellate court continued:
Assuming, without deciding, an insurer in denying a claim may commit an act so extreme to cause an injury independent of the policy claim, we conclude an insured may not recover under this theory unless the insured can establish ‘extreme’ conduct by the insurer during the claims process.” Concluding that the plaintiff had failed to show extreme conduct by the insurer during the claims process, the appellate court in Gates denied recovery under the “extreme” bad faith claim.
From Gates we learned that a policyholder may still have a claim for bad faith against his/her insurer even after a court determines there is no coverage under the policy. In order to recover under such a theory, however, a policyholder must show: (1) that the insurer behaved in an extreme manner during the claims process, and (2) that the insurer’s extreme behavior caused injury to the policyholder independent of the policy claim. So, to answer the original question, a policyholder may still have a claim against his/her insurer even when no coverage is found under the policy, but the policyholder must be able to satisfy the “extremely” high burden created by the Texas courts for any such recovery.