Dallas Fort Worth Insurance Lawyer BlogTexas insurance attorneys already know that bad faith claims in Texas only apply to 1st party claims, not 3rd party claims.
The 1994, Texas Supreme Court case styled, Allstate Insurance Company v. Watson, explains how Bad Faith claims apply to 1st party claims. Here is the relevant information from that case.
Kathleen Watson was injured in a car accident. The driver of the other car was M.D. Townley, an insured under an automobile liability policy issued by Allstate Insurance Company. Watson filed suit against Townley alleging that Townley was negligent and that his negligence was a proximate cause of the accident and her injuries. In the same action, Watson also sued Allstate under art. 21.21, section 16, for alleged unfair claim settlement practices in failing to attempt in good faith to effectuate prompt settlement of her claims where liability had become reasonably clear and in denying or unreasonably delaying payment of her claim. Watson alleged that Allstate’s conduct violated 28 Tex.Admin.Code § 21.3 and section 17.46 of the Texas Deceptive Trade Practices–Consumer Protection Act (DTPA). In addition to her claim under art. 21.21, Watson alleged violations of the DTPA, breach of contract, breach of the duty of good faith and fair dealing, and sought a declaratory judgment that Watson was an intended third party beneficiary of the Allstate liability policy.
On Allstate’s motion, the trial court severed the claims against Allstate, struck Watson’s pleadings as to Allstate for failure to state a claim, and granted Allstate’s motion for summary judgment. This Court agreed.
In justifying it’s ruling the Court pointed out as follows.
The express purpose of art. 21.21 is to regulate trade practices in the business of insurance by defining or providing for determination of “all such practices in this state which constitute unfair methods of competition or unfair or deceptive acts or practices ” and prohibiting such practices. Section 4 of art. 21.21 defines those practices that constitute unfair methods of competition or unfair or deceptive acts or practices. Within this list, section 4 does not define unfair claim settlement practices as an unfair or deceptive act or practice.
Board Order 18663 was adopted by the State Board of Insurance pursuant to art.
21.21. Through that order, Watson claims she is entitled to sue Allstate for unfair claim settlement practices. Board Order 18663 does not declare unfair claim settlement practices to be an unfair or deceptive act or practice. Rather, like art. 21.21 of the Insurance Code, this regulation prohibits insurers from engaging in unfair or deceptive acts or practices as defined elsewhere. The relevant portion of Board Order 18663 provides:
(a) Misrepresentation of insurance policies, unfair competition, and unfair practices by insurers, agents and other connected persons are prohibited by Article 21.20 and Article 21.21 or by other provisions of the Insurance Code. No person shall engage in this state in any trade practice that is a misrepresentation of an insurance policy, that is an unfair method of competition, or that is an unfair or deceptive act or practice as defined by the provisions of the Insurance Code or as defined by these sections and other rules and regulations of the State Board of Insurance authorized by the Code.
(b) Irrespective of the fact that the improper trade practice is not defined in any other section of these rules and regulations, no person shall engage in this state in any trade practice which is determined pursuant by law to be an unfair method of competition or an unfair or deceptive act or practice in the business of insurance.
Because Board Order 18663 does not declare unfair claim settlement practices to be an unfair or deceptive act or practice, such practices are not actionable under art. 21.21 by reference to Board Order 18663 alone.
Watson also argued that art. 21.21-2, which defines and prohibits unfair claim settlement practices, is made available as a private cause of action through Board Order 18663. To the contrary, art. 21.21-2 does not create a private cause of action for violations of that statute. Significantly, the legislature in 1985 specifically rejected a proposed amendment to art. 21.21, section 16, that would have created a private cause of action for unfair claim settlement practices as defined in art. 21.21-2. And more recently, in 1991, the legislature deleted a provision from H.B. 2 that would have provided a private cause of action in art. 21.21-2 to any “claimant” for unfair claim settlement practices. In construing art. 21.21 and Board Order 18663 promulgated thereunder, this Court could not ignore the legislature’s refusal to create a statutory private cause of action for unfair claim settlement practices for third party claimants such as Watson.
Art. 21.21, section 16 provides a private cause of action for any practice defined by section 17.46 of the DTPA as an unlawful deceptive trade practice. “Unfair claim settlement practices” is not among the enumerated items defined by section 17.46 as an unlawful deceptive trade practice. While section 17.46 may not be a complete list of unlawful deceptive trade practices for purposes of asserting claims under the DTPA, art. 21.21 expressly makes actionable those acts or practices that, in fact, are defined in section 17.46 as unlawful deceptive trade practices. Unfair claim settlement practices are not listed and, therefore, they are not actionable under art. 21.21, section 16 of the Insurance Code.
To be sure, art. 21.21, section 16 is worded as providing a cause of action to “any person.” This wording is however, for the purpose of the insured not third parties.
Here, Watson is not an insured. Rather, she asserts her claims against Allstate as a third party to the contract between Allstate and its insured. The obligations imposed by art. 21.21 of the Insurance Code are engrafted onto the contract between the insurer and insured and are extra-contractual in nature. A third party claimant has no contract with the insurer or the insured, has not paid any premiums, has no legal relationship to the insurer or special relationship of trust with the insurer, and in short, has no basis upon which to expect or demand the benefit of the extra-contractual obligations imposed on insurers under art. 21.21 with regard to their insureds.
More to the point, in construing art. 21.21, section 16 as Watson would have the Court construe it to give her standing in this case, the court would undermine the duties insurers owe to their insureds. Were the Court to extend to third party claimants the same duties insurers owe to their insureds, insurers would be faced with owing coextensive and conflicting duties. An insurer owes to its insured a duty to defend the insured against the claims asserted by a third party. Recognizing concomitant and coextensive duties under art. 21.21 to third party claimants, parties adverse to the insured, necessarily compromises the duties the insurer owes to its insured. In fact, the logical result of permitting a separate and direct cause of action in favor of third party claimants allows third parties to sue for unfair claim settlement practices even though the insured has no claim for an unfair claim settlement practice. As troublesome, it is conceivable that in attempting to settle claims pursuant to the demands of a third party claimant, insurers may be liable to the insured for settling too quickly. In refusing to provide a direct cause of action for third party claimants, the legislature may well have been aware of this potential for conflicting duties. This Court will not construe art. 21.21 absent explicit directive from the legislature, so as to compromise the insurer’s loyalties and obligations owed to the insured.
The Other Person’s Insurance And Bad Faith
