Texas Legal Glossary · Personal Injury

Bad Faith (Insurance)

Written and reviewed by Shane M. Boasberg, founder of SMB Law, PC · Licensed in Texas since 2003 · Updated October 2026

Definition: Bad faith is a Texas claim against your own insurer for unreasonably denying or delaying a valid claim, grounded in the common law duty of good faith and fair dealing and Insurance Code Chapters 541 and 542. It does not reach the other driver’s insurer.

Also called: insurance bad faith, breach of the duty of good faith and fair dealing, unfair settlement practices

What bad faith means in Texas

Bad faith describes an insurer’s breach of the duty it owes its own policyholder. The Texas Supreme Court recognized the common law duty of good faith and fair dealing in Arnold v. National County Mutual Fire Insurance Co., 725 S.W.2d 165 (Tex. 1987), reasoning that the unequal bargaining power between an insurer and an insured justifies a tort duty beyond the contract. An insurer breaches it when it denies or delays a claim after liability has become reasonably clear, or fails to conduct a reasonable investigation.

The Legislature added statutory teeth. Chapter 541 of the Insurance Code lists unfair settlement practices, including misrepresenting the policy, failing to promptly explain a denial, and failing to attempt a fair settlement when liability is reasonably clear. Chapter 542, the Prompt Payment of Claims Act, sets deadlines for acknowledging, investigating, and paying claims, with statutory interest and attorney’s fees for violations.

How it works in practice

Bad faith is a first-party concept. It applies to claims under your own policy: uninsured and underinsured motorist coverage, PIP, collision, homeowners, and health. In Allstate Insurance Co. v. Watson, 876 S.W.2d 145 (Tex. 1994), the Court held that an injured third party has no bad faith claim against the at-fault driver’s liability carrier, because that insurer owes its duties to its own insured, not to the person suing them. The lever against a liability carrier that refuses a reasonable settlement is instead the Stowers demand.

A typical first-party case starts when an insurer lowballs or denies a UIM claim after its own insured was hit by an underinsured driver. The insured must generally establish entitlement to benefits before extra-contractual damages are recoverable, and under Chapter 541 a knowing violation can support up to three times actual damages. Chapter 542 adds interest at the statutory rate and attorney’s fees when the insurer misses its deadlines, which often accrues even while coverage is disputed.

Why it matters in your case

Many Austin drivers end up claiming against their own policies because the at-fault driver carried minimum limits. When your own carrier treats you like an adversary, the bad faith framework is what changes the conversation. It also explains a common frustration: the other driver’s adjuster can be slow and unreasonable without legal consequence to the insurer, which is why Stowers and a filed lawsuit, not a bad faith claim, are the tools for that situation.

This entry explains Texas law in general terms and is not legal advice for any specific situation. Statutes and case law change; the date above reflects the last review.