Cancellation Of Policy And Bad Faith

Fort Worth attorneys need to be able to recognize bad faith insurance as it relates to cancellation of an insurance policy.
The Texas Insurance Code, Section 551.109, tells us that upon the request of the insured, the insurance company must provide a written statement of the reason for canceling a policy. The insurance company cannot just cancel your policy without telling you why. The statement they provide must fully explain any decision that adversely affects the policyholder by denying him or her coverage or continued coverage and must:
(1) state the precise incident, circumstance, or risk factor applicable to the policyholder that violate the guidelines;
(2) state the source of information the insurer relied on regarding the incident, circumstance, or risk factor; and (3) specify any other information deemed relevant by the Commissioner of Insurance.
The above 3 requirements are found in Sections, 551.002, 551.055, and 551.109.
The Texas Insurance Code, Section 551.108 tells us that the insurance company must keep information concerning cancellation in accordance with its ordinary practices for maintaining records of expired policies and must make it available to the Department of Insurance upon request.
The Texas Supreme Court declared in 1994, in the case, Union Bankers Insurance Company v. Shelton, that a cause of action for breach of the duty of good faith and fair dealing exists when the insurance company wrongfully cancels an insurance policy without a reasonable basis.
So, what are the elements of a bad faith cancellation?
A cause of action for bad faith cancellation is stated by alleging in a lawsuit:
(1) that the insurance company had no reasonable basis for canceling the policy; and (2) that the insurance company knew or should have known of that fact.
This was discussed by the Texas Supreme Court in the Shelton case.
The Court in Shelton based the cause of action for bad faith cancellation of an insurance policy on the disparity of bargaining power that exists between the insurance company and the insured. This common law cause of action is now a historical anomaly. The Texas Supreme Court changed the former “no reasonable basis” test to a “liability has become reasonably clear” standard that tracks the unfair insurance practices statute, for claims denials. The “reasonably clear” standard applies to claim denials, but there is no statutory parallel for unfair cancellation. Presumably, the “reasonable basis” test still applies to improper cancellations.
The best thing to do when a policy is cancelled is to contact an experienced Insurance Law Attorney. Usually the cancellation is made at or immediately after a claim is made. The cancellation is one way the insurance company will use to keep from having to pay the claim.