The Zelle Lonestar Lowdown
May 21, 2025
In Texas, bad faith claims arising under the Texas Insurance Code or the common law are routinely asserted by plaintiffs in first-party insurance disputes. While these causes of action are frequently pled, mere disagreement between an insurer and a policyholder over coverage doesn’t ordinarily give rise to bad faith. Texas courts have long recognized the bona fide dispute doctrine, which holds that “[e]vidence establishing only a bona fide coverage dispute does not demonstrate bad faith.” Weiser-Brown Operating Co. v. St. Paul Surplus Lines Ins., 801 F.3d 512, 526 (5th Cir. 2015) (cleaned up). Stated differently, “[a]s long as the insurer has a reasonable basis to deny or delay payment of a claim, even if that basis is eventually determined by the fact finder to be erroneous, the insurer is not liable for the tort of bad faith.” Higginbotham v. State Farm Mut. Auto. Ins, 103 F.3d 456, 459 (5th Cir. 1997) (citation omitted). U.S. District Court Judge Reed O’Connor recently granted summary judgment in favor of Central Mutual Insurance Company on an insured’s bad faith claims, finding that only a bona fide dispute existed between the parties.
Smith v. Central Mutual Insurance Company arose out of an insurance coverage dispute between the insured, Robert Smith, and Central Mutual Insurance Company. No. 4:24-CV-00723-O, 2025 WL 1170320, at *1 (N.D. Tex. Apr. 22, 2025). On April 28, 2021, Mr. Smith’s home sustained damage due to a hailstorm. Id. Mr. Smith submitted a claim for coverage, asserting that the entire roof needed replacement. However, Central Mutual—after conducting four inspections and consulting with two field adjusters, an engineer, and a building consultant—contended that only a limited number of roof tiles were damaged and required replacement. Id.
Mr. Smith ultimately filed suit alleging breach of contract as well as violations of the Texas Insurance Code Chapter 541, Texas Deceptive Trade Practice Act (statutory bad faith), and breach of the duty of good faith and fair dealing (common law bad faith). Id. Central Mutual moved for summary judgment, arguing that there was no evidence of bad faith or breach of contract, and that the dispute was merely a bona fide coverage disagreement. Id. at *2. More specifically, Central Mutual argued that it relied in good faith on two field adjusters, an engineer, and a building consultant—all of whom opined that damage to Mr. Smith’s roof was limited. Id.
In response, Mr. Smith contended that, instead of fairly adjusting his claim, Central Mutual conducted an “outcome-oriented” investigation, focusing on notes Central Mutual made to one of its adjusters. Id. These notes indicated that Central Mutual asked its consultants to prepare an estimate for only those portions of the roof they identified as being damaged. The Court observed that Mr. Smith failed to explain how Central Mutual asking its adjuster to estimate damages related to specific portions of the roof was outcome-oriented. The Court concluded that the evidence in the record showed only “a bona fide dispute over the portion of [Mr. Smith]’s roof that was damaged by hail during the Loss Event” Id. Judge O’Connor granted summary judgment on all of Mr. Smith’s bad faith causes of action in favor of Central Mutual. Id. at *2-*3.
The Smith decision reaffirms the bona fide dispute doctrine as a defense against bad faith claims under Texas law. Particularly where an insurer can demonstrate a reasonable basis for its coverage decision—supported by expert opinions and thorough investigation. Absent evidence suggesting that it was unreasonable for an insurer to rely on the opinions of its experts (i.e. evidence that the expert’s report was not objectively prepared or the insurer’s reliance on the report was unreasonable), courts are unlikely to find an insurer acted in bad faith.
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