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Bad Faith Insurance Practices

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Bad faith is the short-hand term for an insurer failing to act with good faith and deal fairly with one of its insureds. Theoretically, the law expects that a person's insurer will treat them fairly and with good faith - not denying a claim without a reasonable basis. Most insureds expect to be treated fairly by their own insurer. 

But we all know that insurers deny claims without a reasonable basis all the time. In the 1980's the Texas Supreme Court decided an opinion with regard to a workers compensation claim. In that case the Court said that an injured worker, who had a workers compensation claim, was an insured of the workers compensation insurer and was entitled to be treat fairly and in good faith by the insurer. If the insurer did not treat him fairly - by making a reasonable investigation and having a reasonable basis if the claim was denied - and act in good faith with him - by not unreasonably delaying or denying benefits he was entitled to - the workers could sue the insurer for "bad faith" and obtain damages for the delay and/or denial. Later decisions applied this same duty to all first party insurance claims.

But, over the last 20 years, the principle of holding insurers to this duty of good faith and fair dealing has been eroded and reduced by subsequent appellate opinions, to the point that it barely survives today. A case in point is the following:

Thompson v. Zurich American Ins. Co. ,(C.A.5 (Tex.))
Insurance - Insurer did not act in bad faith in relying on expert's opinion to initially deny coverage.
The mere fact that the orthopedic surgeon on whose medical opinion a workers' compensation insurer relied in initially denying coverage for an injury to an employee's knee, on the theory that the injury was not caused or aggravated by any work-related accident but resulted from a preexisting condition, had a history of working extensively for insurers, had not treated the employee but relied exclusively on medical reports, and rendered an opinion contrary to that of other physicians, one of whom did not examine the employee until after coverage was denied and the other of whom did not communicate his contrary findings to the insurer, was insufficient, without more, to show that insurer acted in bad faith in relying on surgeon's opinion to initially deny coverage. A bad faith claim could likewise not be based on the insurer's five- month delay in paying the claim after another doctor's report partially controverted that of the insurer's expert.

In this case, it appears that a full investigation by the insurer is not required to deny a claim. A reasonable investigation of a claim would include obtaining all treating doctors' reports. In this case, the insurer could rely on an opinion by one of its doctors who never examined the injured worker. Further, there was no duty for the insurer to investigate and obtain medical records from the treating doctors. Once the insurer got a report from its doctor that it could use to deny the claim, it was not liable. Further, even when it got a medical report that put it on notice that its doctor could be wrong, the insurer had no duty to investigate further. The worker loses because, in reality, there is no longer a duty by his insurer to treat him fairly and with good faith. Apparently the duty of an insurer now is to obtain an opinion it likes and then stop any further investigation.

If you have a claim against an insurer, the best practice is to get an experienced lawyer and make sure that ALL the information necessary for the insurer to determine the claim is presented to the insurer as soon as possible and with a demand for coverage and benefits. You can no longer rely on the principle that your insurer has to treat you fairly and with good faith.