The Texas Supreme Court first recognized a cause of action against insurance companies for improper handling of an insurance claim in 1987. The court noted that because of the unequal bargaining power between insured and insurer, “unscrupulous insurers [could] take advantage of their insureds’ misfortunes in bargaining for settlement or resolution of claims” and that “without such an action insurers can arbitrarily deny coverage and delay payment of a claim with no more penalty than interest on the amount owed.” The case was Arnold v. National County Mutual Insurance.
Over the next 30 years since Arnold, the pendulum in Texas swung from large and frequent verdicts against insurers for their “unscrupulous” behavior to practitioners lamenting that bad faith was effectively dead in Texas. After Arnold, insurers worked hard to defang the common law bad faith claim through a series of court decisions. As a result, insureds have turned their attention to two Texas statutes that provide powerful protection against an insurer’s improper handling of claims: Chapters 541 and 542 of the Texas Insurance Code.
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