When does my insurance company have to act in "good faith"?

Under Texas law the parties to a contract must act in good faith in the performance of a contract. Thus, in most situations your insurance company is legally obligated to act in "good faith" while they are dealing with you regarding a claim on your own insurance policy. Unfortunately, insurance companies often ignore their legal obligations until you hold their feet to the fire.

As a Tyler injury attorney I often hear complaints about the bad faith conduct of an insurance adjuster who works for the insurance company that insured the driver that caused the accident. The legal relationship between the injured victim and the insurance company that is guilty of bad faith determines the remedies that the injured victim has or doesn’t have against that insurance company. In Texas when you buy automobile insurance you enter into a contract with your insurance company. If you make a claim for benefits under your automobile insurance policy then you are making what is often referred to as a “first party claim.” By contrast, if you are hit by a drunk driver and make a claim against the drunk driver’s insurance policy you are not a party to the insurance contract between the drunk driver and his insurance company. You are a “third party” to that contract and thus you are making what is referred to as a “third party claim.”

Up until the mid 1990s, insurance adjusters handling third party claims had a legal duty to conduct themselves in good faith and could be sued for bad faith if they failed to conduct themselves properly. However, during the 1990s the Texas Supreme Court eliminated the duty of good faith and fair dealing in connection with the handling of third party claims. Thus an insurance adjuster handling a third party claim can misbehave quite badly and your only remedy is to cease negotiations with them and proceed to trial on the underlying claim.

In connection with first party claims, such as when you make an underinsured motorist claim under your own insurance policy, the insurance company still has a duty to deal with you in good faith. Unfortunately, the insurance adjusters that handle first party claims are usually the same adjusters that handle third party claims and they treat all claimants the same and frequently are guilty of bad faith. Under current Texas law the procedure for making a bad faith claim against your own insurance company is that you must complete the litigation of the underlying claim, prevail on that underlying claim, and then you may file a bad faith lawsuit against your insurance company for misconduct committed during the handling of the initial claim.