Every year, thousands of Texans purchase insurance policies with the expectation that when disaster strikes—whether it’s a devastating hurricane, a house fire, a major medical emergency, or a severe car accident—their insurance company will honor the contract and provide the coverage they’ve been paying for. Unfortunately, that’s not always what happens.
According to data from the Texas Department of Insurance, the state received more than 26,000 complaints against insurance companies in 2024 alone, with claim denials and underpayment disputes representing the largest category. Even more concerning, industry research suggests that initial claim denials have increased by approximately 23% over the past five years, with many legitimate claims being rejected for reasons that don’t hold up under scrutiny.
Understanding when an insurance denial crosses the line from legitimate business practice into bad faith conduct is crucial for Texas policyholders. The difference can mean tens or even hundreds of thousands of dollars, and in some cases, it’s the difference between financial recovery and financial ruin.
What Exactly Is “Bad Faith” in Insurance Law?
In Texas, insurance companies have two fundamental duties to their policyholders: the duty to investigate claims fairly and thoroughly, and the duty to promptly pay valid claims. When an insurer violates these duties without reasonable justification, it may constitute bad faith—a legal concept that goes beyond simple disagreement over coverage terms.
Under the Texas Insurance Code Section 541, insurers are prohibited from engaging in unfair claim settlement practices, which include refusing to pay claims without conducting a reasonable investigation, failing to acknowledge claims promptly, or not attempting to settle claims fairly when liability is clear.
Bad faith can take several forms, including outright denial of valid claims, unreasonable delays in processing or paying claims, inadequate investigation of the facts, lowball settlement offers that bear no relationship to actual damages, misrepresenting policy terms to avoid payment, and demanding excessive or irrelevant documentation.
According to research published by the American Bar Association, bad faith insurance practices have become increasingly sophisticated. Modern denials often rely on technical policy language interpretations, selective use of expert opinions, or manufactured coverage disputes that can intimidate policyholders into accepting inadequate settlements or abandoning legitimate claims entirely.
The Most Common Bad Faith Tactics Texas Policyholders Encounter
After decades of handling insurance disputes, certain patterns emerge in how companies attempt to deny or minimize legitimate claims. Recognizing these tactics is the first step in fighting back.
Claim denials based on alleged “pre-existing conditions” are particularly common in homeowners insurance. A roof that sustained wind damage during a recent storm might be denied based on alleged prior deterioration, even when the storm clearly caused new and distinct damage. Insurers often send adjusters who are incentivized to find pre-existing issues rather than accurately assess storm damage.
Unreasonable investigation delays represent another widespread tactic. Texas law requires insurers to acknowledge claims within 15 days and to notify policyholders within 15 business days whether they need additional information. Despite these clear requirements, many companies drag out investigations for months, requesting document after document while refusing to make coverage decisions.
Lowball settlement offers that significantly undervalue damages have become standard practice for some carriers. This is especially common in property damage claims, where insurers might offer to cover materials but not labor, refuse to account for matching requirements, or use depreciation schedules that bear no relation to actual replacement costs.
Arbitrary policy interpretation occurs when insurers suddenly interpret policy language in unexpected ways that contradict how similar claims were handled previously or how a reasonable policyholder would understand the terms. The Federal Trade Commission has documented how insurers sometimes adopt restrictive interpretations only after major disaster events that generate large volumes of claims.
Selective expert opinions represent another troubling practice. Insurance companies maintain networks of “independent” adjusters and experts who consistently provide opinions favorable to the insurer’s position. When these experts’ conclusions contradict those of genuinely independent professionals, it raises serious questions about bias and bad faith.
Hurricane and Natural Disaster Claims: Where Bad Faith Runs Rampant
Nowhere is bad faith more prevalent than in claims following major hurricanes and natural disasters. Texas, with its Gulf Coast exposure, has seen this pattern repeat after every major storm from Hurricane Ike to Hurricane Harvey to the recent severe weather events.
After Hurricane Harvey in 2017, the Texas Department of Insurance received more than 15,000 complaints related to claim handling, with many involving complete denials of coverage for obvious storm damage. Common tactics included attributing flood damage to wind (or vice versa) to avoid coverage, requiring policyholders to prove the exact sequence of damage when multiple perils occurred simultaneously, denying structural damage claims by attributing all damage to cosmetic wear and tear, and slow-walking adjustments while homeowners lived in damaged properties.
Research from United Policyholders, a nonprofit insurance consumer advocacy organization, found that after major disasters, claim denial rates can increase by 40-60% as insurers face unprecedented volumes and seek to minimize payouts. These denials often target the most vulnerable policyholders—those who lack the resources to immediately hire attorneys or independent adjusters.
The Real-World Consequences of Bad Faith Denials
When insurance companies engage in bad faith practices, the consequences extend far beyond mere inconvenience. Families who’ve lost their homes to fire or storm damage are forced to continue paying mortgages on uninhabitable properties while also paying rent elsewhere. Small business owners facing property damage may have to shut down operations permanently if business interruption claims are wrongfully denied. Medical patients can face delayed treatment or financial ruin when health insurance claims are improperly rejected.
The psychological toll is equally significant. Studies published in the American Psychological Association journals have documented increased rates of anxiety, depression, and post-traumatic stress among disaster survivors whose insurance claims were denied or significantly delayed. The betrayal of discovering that the coverage you’ve been paying for won’t be honored when you need it most compounds the trauma of the underlying loss.
What Texas Law Says About Bad Faith Insurance Practices
Texas provides several legal mechanisms for policyholders to fight back against bad faith insurance practices. Understanding these tools is essential for protecting your rights.
The Texas Prompt Payment of Claims statute requires insurers to acknowledge claims within 15 days, request additional information within 15 business days if needed, and notify policyholders of claim acceptance or rejection within 15 business days of receiving all required materials. Violations can trigger statutory penalties of 18% annual interest on the claim amount plus attorney’s fees.
The Unfair Claims Settlement Practices Act prohibits specific bad faith behaviors and allows both the Texas Department of Insurance to take regulatory action and policyholders to bring civil lawsuits. Violations can support claims for actual damages, statutory penalties, and attorney’s fees.
Common law bad faith claims provide additional remedies beyond statutory violations. Texas courts have recognized that when an insurer’s conduct is particularly egregious, policyholders may recover not only the policy benefits wrongfully withheld but also consequential damages and, in some cases, punitive damages.
The Texas Deceptive Trade Practices Act (DTPA) can apply to insurance claim handling in certain circumstances, particularly when insurers make false or misleading representations about coverage or engage in unconscionable conduct. DTPA violations can result in treble damages and attorney’s fees, making it a powerful tool against bad faith insurers.
Red Flags That Suggest Your Claim Is Being Handled in Bad Faith
Recognizing bad faith early can make a significant difference in the outcome of your claim. Watch for these warning signs:
Your adjuster refuses to return phone calls or emails for extended periods despite your repeated attempts to communicate. Normal business practice involves regular communication, even if just to update you on investigation progress.
The insurance company makes repeated requests for the same documentation you’ve already provided, or demands documents that have no clear relevance to your claim. This often signals an attempt to create justification for delay or denial.
The adjuster’s damage estimate is dramatically lower than estimates from independent contractors, and the insurer refuses to provide clear explanations for the discrepancy or won’t consider alternative assessments.
The company cites policy exclusions or limitations that don’t actually appear in your policy, or interprets policy language in ways that contradict the plain meaning of the words or industry standards.
You’re pressured to accept a settlement quickly with warnings that the offer will be withdrawn or reduced if you don’t accept immediately, especially before you’ve had time to fully assess your damages.
The insurer denies your claim without providing a detailed, written explanation of the specific policy provisions that justify the denial and the factual basis for applying those provisions.
Documented Cases: When Bad Faith Cost Insurers Millions
Texas courts have shown willingness to hold insurers accountable for bad faith conduct, with some verdicts sending clear messages about the consequences of misconduct.
In a landmark Houston case, a jury awarded $32 million to policyholders whose hurricane damage claim was denied based on the insurer’s contention that the damage was caused by flood rather than wind, despite clear evidence of wind damage occurring before any flooding. The verdict included substantial punitive damages based on evidence that the company had systematically adopted policies designed to minimize hurricane claim payouts.
Another significant Texas case involved a homeowner whose fire damage claim was denied based on alleged arson, despite the fire marshal’s determination that the fire was accidental. After years of litigation, the policyholder recovered not only the policy limits but also millions in additional damages for the insurer’s knowing use of a biased expert whose opinions contradicted the official investigation.
These cases demonstrate that while fighting bad faith can require significant time and resources, Texas law provides meaningful remedies when insurers engage in egregious misconduct. They also serve as deterrents—insurers who face multi-million dollar verdicts are more likely to reconsider their claim handling practices.
Practical Steps to Take When Your Claim Is Denied or Undervalued
If you believe your insurance claim has been wrongfully denied or unreasonably undervalued, taking the right steps immediately can significantly strengthen your position.
Document everything in writing. All communications with your insurer should be confirmed in writing, even if you’ve had phone conversations. Follow up each call with an email summarizing what was discussed and any commitments made. Keep copies of every document you send and receive.
Request detailed explanations. Under Texas law, insurers must provide written explanations for claim denials, including the specific policy provisions relied upon and the factual basis for the denial. Demand this information in writing if it’s not provided automatically.
Get independent assessments. Hire your own contractors, engineers, or other experts to assess your damages and provide written estimates or reports. These independent opinions can be crucial in demonstrating that the insurer’s position is unreasonable.
Preserve evidence of damages. Take extensive photographs and videos of all damage before making any repairs. Keep receipts for any emergency repairs or temporary housing costs. Maintain detailed records of all expenses related to the loss.
Review your policy carefully. Read the actual policy language rather than relying on the insurer’s interpretation. Look for ambiguities—under Texas law, ambiguous policy terms must be interpreted in favor of coverage. Consider having an attorney review the policy to identify coverage you might not have recognized.
File a complaint with the Texas Department of Insurance. While regulatory complaints don’t directly result in compensation, they create an official record of the insurer’s conduct and can trigger department investigations that sometimes lead to faster claim resolution. File complaints at the TDI complaint portal.
Consider the appraisal process. Many insurance policies include appraisal provisions that allow disputes over the amount of loss to be resolved by neutral appraisers without full litigation. This can be faster and less expensive than court proceedings, though it only addresses valuation disputes, not coverage questions.
Don’t accept the first denial as final. Insurance denials can be appealed through the company’s internal processes. While many appeals are unsuccessful, the process creates additional documentation of the insurer’s position and reasoning, which can be valuable in later legal proceedings.
Know your deadlines. Texas has specific time limits for filing insurance lawsuits. Generally, you must file within two years of the denial or breach, though some circumstances can extend or shorten this period. Missing these deadlines can permanently forfeit your rights.
When to Hire an Attorney—And Why It Often Makes Financial Sense
Many policyholders hesitate to hire attorneys due to concerns about legal costs, particularly when their claim has already been denied and they’re facing financial strain. However, the reality is that experienced insurance attorneys often recover significantly more than policyholders can achieve on their own, even after accounting for legal fees.
Insurance companies have teams of lawyers, adjusters, and experts working to minimize what they pay on claims. Facing these resources without professional legal representation puts you at a severe disadvantage. Attorneys who specialize in insurance claims understand the tactics insurers use, know how to gather and present evidence effectively, can identify bad faith conduct that policyholders might not recognize, have access to expert witnesses and consultants who can counter the insurer’s experts, and understand the full scope of damages you may be entitled to recover.
Moreover, Texas law allows successful policyholders to recover attorney’s fees in many insurance disputes, particularly in cases involving bad faith, violations of the prompt payment statute, or DTPA claims. This means the insurance company, not you, may ultimately pay your legal fees if you prevail.
For Texas policyholders dealing with denied or undervalued insurance claims, particularly those in the Houston area where hurricane claims and flood insurance disputes are common, having experienced legal representation can be the difference between walking away with nothing and recovering the full value of your loss. If you’re facing an insurance company’s refusal to honor your policy, Contact The Law Offices of Colby Lewis today for a consultation about your options and rights under Texas law.
The Insurance Industry’s Perspective—And Why It Doesn’t Hold Up
When confronted with allegations of bad faith, insurance companies typically offer several defenses and explanations for their conduct. Understanding these arguments—and their weaknesses—helps policyholders evaluate whether they’re receiving legitimate claim handling or being subjected to bad faith tactics.
Insurers often argue they’re simply following policy terms and that coverage disputes reflect good faith disagreement over interpretation, not bad faith. While this can be true, it becomes suspect when the interpretation contradicts industry standards, the insurer’s own prior practices, or reasonable expectations created by marketing materials and agent representations.
Companies frequently claim that extensive documentation requests and investigation are necessary to prevent fraud. While fraud prevention is legitimate, the Insurance Information Institute estimates that actual fraudulent claims represent only about 5-10% of all claims. Using fraud concerns to justify denying legitimate claims or making the claims process so burdensome that policyholders give up constitutes bad faith.
Insurers sometimes argue that they have a duty to their shareholders to minimize claim payouts and operate profitably. However, this duty cannot override their contractual obligations to policyholders. When companies prioritize profit margins over honoring valid claims, they cross the line into bad faith territory.
Recent Developments: How Technology Is Changing Bad Faith Claims
The insurance industry is increasingly using artificial intelligence, drone assessments, and automated claim processing systems. While technology can potentially improve claim handling, it also creates new opportunities for bad faith conduct.
According to reporting by ProPublica, some insurers have deployed AI systems that automatically flag claims for denial based on factors that may have nothing to do with coverage legitimacy. These systems can perpetuate bias, make erroneous decisions based on incomplete data, and deny valid claims without meaningful human review.
Drone assessments of property damage, while efficient, can miss critical damage that would be identified through in-person inspection. When insurers rely solely on drone footage to deny claims without conducting thorough ground-level investigations, it may constitute bad faith failure to investigate.
Automated claims processing can speed payment of straightforward claims but may also result in automatic denials when claims don’t fit pre-programmed parameters, even if they involve valid coverage. The lack of human judgment in these systems can lead to bad faith denials of claims that deserve individual consideration.
What Happens If You Can’t Afford to Fix the Damage While Fighting the Insurer?
One of the cruelest aspects of bad faith insurance denials is that they often leave policyholders unable to repair damage to their homes or property, even while continuing to pay mortgages and insurance premiums. This creates a difficult situation: make repairs you can’t afford and risk the insurer claiming you can’t prove the extent of original damages, or live with the damage while fighting the claim.
Texas courts have recognized this dilemma and generally allow policyholders to make necessary repairs while preserving their claims. However, it’s crucial to document everything thoroughly before making any repairs. This includes extensive photographs and video, written estimates from multiple contractors, reports from engineers or other experts if structural issues are involved, and keeping all damaged materials that might serve as evidence.
If you must make emergency repairs to prevent further damage, document the necessity and keep detailed records of all costs. Insurance policies typically require policyholders to mitigate damages, so reasonable repairs to prevent additional deterioration are often recoverable even if the underlying claim is disputed.
Some contractors are willing to work on a lien basis, where payment is deferred until the insurance claim is resolved. While this involves risk for both the contractor and the policyholder, it can be a practical solution when repairs cannot wait for claim resolution.
The Path Forward: Protecting Yourself and Holding Insurers Accountable
Bad faith insurance denials represent a fundamental breach of the insurance contract and the duty of good faith that insurers owe their policyholders. While the insurance industry would characterize most denials as legitimate coverage disputes, the data tells a different story—one of systematic underpayment, manufactured coverage disputes, and claim handling practices designed to maximize insurer profits at the expense of vulnerable policyholders.
Texas law provides robust protections for policyholders, including statutory penalties, attorney’s fees, and the possibility of substantial damages when bad faith is established. However, these protections are meaningful only when policyholders understand their rights and are willing to assert them.
If you’ve experienced an insurance claim denial or believe your claim has been unfairly undervalued, don’t assume the insurer’s position is correct or final. Question denials that don’t make sense, demand detailed written explanations, get independent assessments of your damages, preserve all evidence meticulously, and consult with experienced legal counsel to understand your options.
The insurance industry’s bad faith practices continue partly because many policyholders accept denials without challenge, either out of ignorance of their rights or fear of taking on large corporations. Every policyholder who fights back and holds insurers accountable not only helps themselves but also contributes to broader accountability that benefits all insurance consumers.
Remember that the insurance policy you’ve been paying premiums on for years represents a contract—one that creates legal obligations on both sides. When insurers fail to honor that contract in good faith, Texas law provides remedies. Using those remedies effectively often requires professional legal assistance, but the investment can mean the difference between financial recovery and financial disaster.
Whether you’re dealing with a denied hurricane claim, an undervalued property damage assessment, a rejected business interruption claim, or any other insurance dispute, understanding your rights under Texas law is the first step toward holding your insurer accountable and recovering the coverage you’re entitled to receive.
