Is Late Payment Of A Claim, Bad Faith Insurance?

Most people in Weatherford, Mineral Wells, Aledo, Azle, Willow Park, Hudson Oaks, and other places in Parker County would have a hard time understanding what constitutes “bad faith” in insurance. But most would believe that being late in paying a claim is bad faith. That does not appear to be the case.
The United States 5th Circuit made a ruling in a case in 1997, that addresses this issue. The style of the case is Higginbotham v. State Farm Mutual Automobile Insurance Company. Here are some of the background facts.
Higgnbotham’s Porsche was stolen on June 8, 1993, from an unsecured parking lot next to his residence. The car was later recovered that day but it had been stripped of its top, seats, interior and exterior trim but was not damaged or destroyed with regard to mechanical connections, wiring harnesses or the engine. Higginbotham reported the theft to State Farm on June 9, 1993. State Farm denied his claim five months later on November 19, 1993.
Higginbotham sued for breach of contract, violations of the Texas DTPA, violations of the Texas Insurance Code, negligence, breach of duty of good faith and fair dealing, and violation of Section 542.051 of the Insurance Code which imposes an 18% penalty on the carrier under certain circumstances. At trial, the jury returned a verdict in favor of Higginbotham for $30,000, the amount of his coverage, but the Court directed a verdict in favor of State Farm on the bad faith and extra-contractual claims under the DTPA and Insurance Code. Higginbotham appealed.
This appeals court said the trial court’s judgment in favor of State Farm on the bad faith, DTPA and Insurance Code violations are affirmed. But the trial court’s judgment with regard to the Prompt Payment of Claims Act for penalty for delay in notification of denial was reversed.
In a bad faith claim, the insured must establish the absence of a reasonable basis for denying or delaying payment of the claim and that the insurer knew or should have known that there was no reasonable basis. A bona fide controversy is sufficient reason for failure of an insurer to make prompt payment of a loss claim. In this case, State Farm’s investigation found a number of suspicious circumstances. Higginbotham was associated with Tommy Vander, the owner of Luxury Auto Unlimited. Vander had pled guilty in 1991 to felony theft of a stolen Porsche. Higginbotham began parking the Porsche in the unsecured parking lot two weeks before it was stolen. His girlfriend allegedly reported it stolen to the apartment complex four days before the alleged theft. Higginbotham’s Porsche was recovered 25 miles from his residence but only 1.6 miles from Vander’s shop. The car was stripped in a manner so as not to destroy mechanical connections, wiring harnesses or the engine. Based on these facts, State Farm had a reasonable basis to dispute the validity of the claim and, as a matter of law, State Farm did not act in bad faith.
Extra-contractual claims under the DTPA and the Insurance Code require the same predicate for recovery of bad faith causes of action. An insurer will not be faced with a tort suit for challenging a claim if there was any reasonable basis for denial of that coverage. The Prompt Payment of Claims Act provides that if an insurer delays payment of a claim for more than sixty days, the insurer shall pay, among other damages, 18% per annum as a penalty. In this case, State Farm delayed rejection of the claim for five months. An insurance company’s good faith assertion of a defense does not relieve the insurer of liability for penalties for tardy payment as long as the insurer is finally judged liable. In this case, State Farm was judged liable on the coverage claim. State Farm did not notify Higginbotham of its rejection for five months. Therefore, it must pay the 18% penalty.
The Prompt Payment of Claims Act has to be read carefully to understand when it has been violated. The time period for acceptance or rejection of the claim varies depending on the type of insurance company involved in the claim and on the type of claim being asserted. An experienced Insurance Law Attorney can apply the particular facts of a case to the statute and advise accordingly.