We have received a number of questions following Hurricane Ike regarding cancellation of insurance policies. Most of the time, the reasons for cancellation are legitimate. Sometimes, the cancellation is based on mistakes of facts. Once in awhile, the cancellation is based on a bad motive and leaves the policyholder in a very difficult situation.
The Texas Supreme Court has considered the arbitrary cancellation of coverage without a reasonable basis to afford the insured an opportunity to pursue a cause of action for breach of the duty of good faith and fair dealing. The language used by the Court is very telling:
In Arnold, we identified several factors giving rise to the special relationship requiring the duty of good faith and fair dealing. The overriding factor is the parties’ unequal bargaining power and the nature of insurance contracts. Arnold, 725 S.W.2d at 167. The insurer has exclusive control over the evaluation, processing, and denial of claims. Id. Without a cause of action for breach of the duty of good faith and fair dealing, unscrupulous insurers would be able to take advantage of their insureds’ misfortunes in bargaining for settlement or in resolving claims by "arbitrarily denying coverage and delaying payment of a claim with no more penalty than interest on the amount owed." Id.
These factors equally apply, and perhaps are even more compelling, when the insurer unilaterally cancels the insured’s policy without a reasonable basis. The insured is not merely at the mercy of the insurer to treat him fairly in the processing of a single claim, but must rely on the insurer’s good faith for the continued existence of any coverage. The insurer’s ability to unilaterally cancel an insurance policy and the insured’s inability to prevent cancellation demonstrates a great disparity in bargaining power between the two parties. Furthermore, a failure to extend the duty of good faith and fair dealing to the cancellation of an insurance policy would allow insurers to avoid bad faith liability by canceling the entire policy rather than denying a single claim.
We hold that a cause of action for breach of the duty of good faith and fair dealing exists when the insurer wrongfully cancels an insurance policy without a reasonable basis. A cause of action is stated by alleging that the insurer had no reasonable basis for the cancellation of the policy and that the insurer knew or should have known of that fact.
Union Bankers Ins. Co. v. Shelton, 889 S.W.2d 278, 283 (Tex. 1994).
Insurance is difficult to obtain after a catastrophe. Some underwriters place pressure and leverage on policyholders by threatening to cancel or non-renew policies if the underwriter does not like the amount of the claim or the progress of the repair. Texas policyholders being threatened with, or actually receiving, cancellation where there is not a reasonable basis have rights under the law.