A person living in Grand Prairie, Dallas, Fort Worth, Arlington, Mansfield, Burleson, or anywhere else in Texas may wonder when an insurance policy actually goes into force.
From a legal standpoint, an application is a request for a contract of insurance that, as a mere proposal, can become a contract only by the insurance company’s acceptance. This was stated in the 1980 case, Durham Life Insurance Company v. Cole, in an opnion written by the Texas Court of Appeals in Eastland. Another case said, “There is no contract unless and until the application for insurance is accepted by the insurance company.” This was stated by the Houston Court of Appeals (1st) District, in 1996.
Here is an example from the Texas Court of Appeals, Amarillo, in 1960. The case is American Bankers Insurance Company v. Carpenter. Here, Carpenter applied for insurance on his boat while it was rented. The policy that was issued did not cover the boat while rented. Carpenter rejected the contract. The boat was damaged. There was no insurance coverage, because the contract was never accepted.
Courts have held that because an insurance company has no legal obligation to contract, there can be no tort or contract liability based on delay in processing an application. There are many cases supporting this proposition. However, these cases predate the passage of consumer protection statutes that may give rise to liability if the delay constitutes an unfair, deceptive, or misleading insurance practice. The Texas Insurance Code, Section 541.061(2), prohibits an insurance company from failing to provide information that is necessary to make other statements not misleading. Also, the Texas Business & Commerce Code, Section 17.46(b)(2) prohibits causing confusion or misunderstanding as to the source. sponsorship, approval, or certification of goods or services.
In 1986, the Texas Court of Appeals, Fort Worth, said, “An insurer may be statutorily liable for misrepresenting that coverage has taken effect when it has not.” In this case, the agent had said that “we got you covered” and thus the insurer was liable.
Insurance companies must give applicants a written statement of the reasons for declining, canceling, or not renewing certain insurance policies. This is per Texas Insurance Code, Sections, 551.002, 551.055, and 551.109. Insurers and agents are not liable for any statements, disclosures, or communications made in good faith under Section 551.002, except they are not immune from liability for disclosures known to be false, or made with malice or willful intent to injure any person.
An insurer’s written statement giving the reason or reasons for cancellation, declination, or nonrenewal of an insurance policy required by provisions of the Insurance Code must fully explain a decision that adversely affects an applicant or policyholder by denying the applicant or policyholder coverage. The statement shall:
(1) state the precise incident, circumstance, or risk factor or factors applicable to the applicant or policyholder that violate the guideline or guidelines;
(2) state the source of information the insurer relied on regarding the incident, circumstance, or risk factor or factors; and (3) specify any other information deemed relevant by the commissioner.
These three requirements are found in Section 551.002(c).
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