Understanding First- and Third-Party Claims

Texas instituted additional protection for state residents in 1987, defending them from being mistreated by their insurance providers. The law established a common law duty of good faith and fair dealings, and guarantees insurers the right to pursue legal recourse should their insurance provider act in an unreasonable manner. Because of an insurer’s nearly unlimited resources and superior insight into policies compared to the insured individual, the Texas Supreme Court decided that insurance companies have a clear advantage and a responsibility to not abuse their power. Details of the law can be found in chapters 541 and 542 of the Texas Insurance Code.

Insurance companies act in bad faith when they delay claims or deny them without a valid reason, among other things. When you submit a claim, you have the right to expect it to be processed in a timely manner. There are different types of claims made to insurers, and it is important to understand some of the key differences. Here’s a quick overview:

Third-Party Claims

This type of claim is made when a lawsuit or a claim is filed by an outside party against the insured. A good example is the typical personal injury lawsuit filed after a car wreck when one driver sues the other. The driver being sued would share the information with their insurance provider, who would then make a settlement or hire an attorney. If it goes to court, the hired attorney would defend the driver against any allegations asserted in the lawsuit, and the insurance would cover the expenses. Policies that cover third-party claims contain a clause describing an insurance company’s “duty to defend” the insured.

For third party claims, the duty of good faith and fair dealings is more narrowly defined as acting with the same degree of care and diligence as a sensible person representing themselves when deciding to accept a settlement offer. Commonly known as Stowers duty, this code protects policyholders from being abandoned by their insurance providers if a lawsuit is filed against them. It is activated if:

  1. the claim is within the scope of coverage
  2. the demand is within the policy’s limits
  3. the terms of the demand would be considered reasonable to an ordinarily prudent person representing themselves, assuming the risk of being exposed to excess judgment.

Sometimes called liability claims, there is no contract between the party making the claims and the insurance company. Consequently, the party filing suit is entitled to claim more than what is covered under the policyholder’s plan. This includes medical bills, loss of wages, and compensation for pain and suffering, among other things. The injuries were caused by an outside party, and that party is liable according to the law. If a settlement is not reached, the third party can bring the claim forward to civil court.

Bad faith lawsuits filed against an insurance provider are warranted when the insurer fails in their duty to properly assess or handle third party claims. To determine fault, an attorney will look into how the insurer conducted the claim investigation and the settlement negotiations. The challenge is ultimately proving that the insurer acted in a manner that a reasonable person would not have acted, and mishandled a settlement, exposing the insured to a risk of greater retribution.

First-Party Claims

This type of claim is filed between a policyholder and their insurance provider. The contractual nature of this type of claim relies heavily on the specific language within the policy. The most common example of a first-party claim is a homeowner filing with their insurance provider after a storm damages their home. Insurers are only responsible for the coverage described in the individual policy, so it is important to know all of the details when making a claim. The recent hurricanes ripping through the coast have given insurance providers a lot of first-party claims to handle, and chapters 541 and 542 deal specifically with this type of claim.

Chapter 541 outlines unfair methods of competition, and deceptive acts. Insurance companies must avoid misrepresenting details in their policies, and may not delay or deny reasonable settlement opportunities when the policy provider’s liability is fairly clear. The code also prevents insurers from denying claims without a clear and valid explanation, failing to offer a compromise, and rejecting a claim without conducting an honest investigation.

Chapter 542 addresses bad settlement practices and contains a subchapter titled “Prompt Payment of Claims Act”. This subchapter details how insurance companies “act in good faith” and protects policyholders from waiting an unreasonable amount of time to receive their settlement. The provider has 15 days after receiving the notice for a claim to acknowledge the claim was received, declare that the claim is being processed, and ask the insured for more information to assess the claim. It is the claimant’s responsibility to provide any additional documentation to the insurer after a request has been made.

After the provider receives all the information it requested, they have another 15 days to make a decision about the claim. If the evaluation is not complete at that time, the insurer may request up to 45 additional days to fully assess the claim. The notice must be made in writing to the insured and provide a valid explanation as to why the additional time is necessary. Consent is not required for the extension to be acceptable, but there must some reasonable justification for the additional time. By the end of the 15 days or 45-day extension, a decision must be made in writing. If the conclusion is to validate the claim, payment must be made within five business days. If the claim is denied, the insurance provider must clearly explain the specific reasoning behind the denial, again, in writing.

Liability for Bad Faith Claims

The Texas Insurance Code declares that insurance providers found guilty of acting in bad faith when handling a policyholder’s claim are held liable for the following:

  1. The amount of actual damages, plus court costs and reasonable and necessary attorney’s fees…in addition to 18 percent interest per year
  2. An order enjoining the act or failure to act (a written admission of guilt)
  3. Any other relief the court determines is proper

Note: If the court determines that the insurance provider intentionally acted in bad faith, the law allows for additional compensation up to three times the amount of actual damages.

Insurance providers have a duty to act in good faith and fair dealings, but there is no guarantee this will always happen. You are protected by the law when an insurance company mistreats your reasonable claim and acts in bad faith. If you are currently frustrated with the way your insurance provider is handling a claim, you should get legal help immediately. Policy limits restrict the amount of time you have to deal with this issue, and an appeal for a denied claim can only be submitted once. The best course of action is to retain legal advice from a trusted law firm.

Williams Hart is a nationally-recognized team of professionals, dedicated to protecting the community from bad practices. We have the skills and experience required to successfully defend your claim. For over 30 years, our attorneys have actively preserved justice across the country and here in Texas. Contact us today to get a free consultation at [phone number], chat with us on our website, or send us an email.

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