How Texas Handles Unfair Claims Settlement Practices

The way insurance claims are handled has a direct impact on whether the insurance industry keeps the trust of the public. Texas takes unfair claims settlement practices seriously — and the state has clear laws that spell out what carriers and adjusters can and can't do when processing claims. Agents who understand these rules are better equipped to advocate for clients and recognize problems when they occur.

Here's how Texas regulates unfair claims settlement practices.

What Are Unfair Claims Settlement Practices?

Unfair claims settlement practices are actions by an insurer or its representatives that violate standards of good faith and fair dealing during the claims process. These practices are prohibited under Chapter 542 of the Texas Insurance Code.

The rules exist because claim time is when policyholders are most vulnerable — they've suffered a loss, they're counting on the coverage they paid for, and they often don't have the expertise to push back against an insurer's decision. Texas law requires insurers to act fairly during that process.

Practices Specifically Prohibited Under Texas Law

Chapter 542 identifies specific practices that are considered unfair. The most important ones include:

Misrepresenting policy provisions relating to coverage. Telling a claimant that a loss isn't covered when the policy actually covers it, or twisting policy language to minimize a claim.

Failing to acknowledge and act reasonably promptly on communications. Insurers must respond to claim communications within reasonable timeframes, not ignore or delay them.

Failing to adopt and implement reasonable standards for prompt investigation of claims. Claims must be investigated efficiently, not drawn out artificially.

Refusing to pay claims without conducting a reasonable investigation. Denying a claim without actually looking into it is a direct violation.

Not attempting in good faith to settle claims when liability is reasonably clear. If it's clear the insurer owes, they must make a good-faith effort to settle — not force the claimant into litigation.

Compelling policyholders to sue to recover amounts due. Forcing litigation over clearly owed claims is explicitly prohibited.

Failing to promptly provide a reasonable explanation of the basis for denying a claim. If a claim is denied, the insurer must explain why, in writing and in terms the policyholder can understand.

Delaying payment without reasonable basis. Once liability is established, payment must be made within statutory timeframes.

The Prompt Payment of Claims Act

Texas also has specific deadlines for claims handling under the Prompt Payment of Claims Act, part of Chapter 542. These deadlines include:

Acknowledging receipt of a claim within 15 days

Beginning investigation within 15 days

Accepting or rejecting the claim within 15 business days after receiving all required information (with possible extensions for reasonable cause)

Making payment within 5 business days of notifying the claimant that the claim has been accepted

If an insurer violates these deadlines without reasonable cause, the policyholder may be entitled to additional damages, including 18% annual interest on the claim amount plus attorney's fees.

What This Means for Agents

You're not the one handling claims directly — but your clients will come to you when claims go sideways. Understanding unfair claims practices helps you in several ways:

Advising clients appropriately. When a client believes their claim is being handled unfairly, you can help them understand their rights and the proper channels to pursue.

Referring clients to TDI. Policyholders can file complaints with TDI's consumer protection division when they believe unfair practices are occurring. Knowing this gives you a real resource to offer.

Recognizing red flags when placing coverage. Some carriers have better claims-handling reputations than others. Being aware of the rules helps you make better placement decisions for clients.

5 Frequently Asked Questions

• Can an agent be held liable for unfair claims practices? Unfair claims practices are typically directed at the insurer and adjusters handling claims, not selling agents. However, agents can face liability if they misrepresent coverage at the time of sale in ways that affect later claims.
• How does a client file a complaint about unfair claims practices? Complaints go to TDI's Consumer Protection division through the TDI website at tdi.texas.gov. The client can file online, by mail, or by phone.
• What penalties can insurers face for violations? Penalties include fines, the 18% interest and attorney fees under the Prompt Payment Act, additional bad-faith damages in civil court, and regulatory action up to license suspension or revocation.
• Is the 15-day response requirement a hard deadline? It's a statutory requirement with some room for reasonable cause extensions. Chronic or unjustified missed deadlines create liability for the insurer.
• Do these rules apply to all lines of insurance? Yes. Chapter 542 applies broadly to all types of insurance regulated by TDI, including life, health, property, casualty, and related lines.

Know the Rules That Protect Your Clients

Understanding claims handling rules makes you a better advisor and a more trusted agent. At JustInsurance, our Texas prelicense and CE courses cover Texas insurance law — including claims handling regulations — in clear, practical language.

Enroll today and become the kind of agent clients rely on when things get tough.