As many of you know, an insurer has an obligation to deal with its insureds in a fair manner and in good faith. Many insurance policies detail these obligations, leading many to believe that an insurer’s good faith duties arise through the underlying insurance policy. However, as the Texas Supreme Court noted in the case below, the insurer’s duty of good faith and fair dealing does not arise from the underlying contract – i.e. the insurance policy.
In Viles v Security National Insurance Co., 788 S.W.2d 566 (Tex. 1990), the Texas Supreme Court dealt with a lawsuit revolving around the issue of whether the proof of loss was filed in a timely manner by the insured. Under the insurance policy, the insured was obligated to submit a sworn proof of loss within 91 days of the loss. After the Viles filed their claim, an adjuster for the insurer inspected the insured house. Several weeks after the adjuster inspected the home, the insurer sent an engineer to conduct an additional inspection. After the engineer’s inspection, the adjuster returned to the house and informed the Viles that the bulk of their claim had been denied. After the denial, the Viles filed suit. At the trial level, the record showed that the adjuster’s denial of the claim occurred before the 91-day time period for filing the sworn proof of loss had expired. The record also showed that the Viles eventually filed a sworn proof of loss after the 91-day time period.
Citing to a prior case, the Texas Supreme Court noted that, “this court recognized a duty on the part of the insurers to deal fairly and in good faith with their insureds.” Id. at 567. The Texas Supreme Court continued, “[t]hat duty emanates not from the terms of the insurance contract, but from an obligation imposed in law as a result of a special relationship between the parties governed or created by a contract.” Id. (internal quotations and emphasis removed). As such, the Court concluded that a breach of the duty of good faith and fair dealing will give rise to a cause of action in tort that is separate from any cause of action for breach of the underlying insurance policy. With respect to the Viles matter, the Court concluded that “[w]hile failure to file a proof of loss, if not waived by the insurer, bars a breach of contract claim, it is not controlling as to the question of breach of the duty of good faith and fair dealing.” Id.
The Texas Supreme Court concluded by stating that “[t]he ‘special relationship’ between the insured and insurer imposed on the insurer a duty to investigate claims thoroughly and in good faith, and to deny those claims only after an investigation reveals there is a reasonable basis to do so.”
So there you have it: in Texas, an insurer’s duty of good faith and fair dealing primarily arises out of case law, not the underlying contract. Texas law mandates that an insurer has a duty to its insureds to “investigate claims thoroughly and in good faith.” Under Texas law, an insurer can only deny a claim after a thorough investigation shows that there is a reasonable basis to deny that claim.