Related Practices
Bona Fide Dispute Displaces Bad Faith
The Zelle Lonestar LowdownMarch 27, 2026
In Joseph Johnson v. State Farm Lloyds, No. 03-24-00314-CV, 2026 WL 827624, at *2 (Tex. App. Mar. 26, 2026), the Austin Court of Appeals considered an insurer’s liability for bad faith when that insurer denied a claim on the basis of inconsistent statements by the insured. The insured in this case operated a skydiving business and stored his business equipment in a rented space in a hangar. At some point, the property was stolen and the insured reported the loss to his insurance carrier.
The policy provided coverage for theft but noted that peril did not include “loss caused by theft committed by an insured.” When the theft was reported, the insurer investigated the loss and noted that there were discrepancies in the insured’s story, including evidence that the theft was staged, leading the carrier to deny the claim.
Suit was brought alleging bad faith and breach of contract. The insurer filed a motion for summary judgment arguing that “multiple witnesses testified that [the insured] staged the theft and [the insured] was still in possession of the allegedly stolen items after reporting the theft.” The insurer maintained that the witness testimony created a bona fide dispute “conclusively establishing that its liability was not ‘reasonably clear.’” The trial court agreed, granted summary judgment, and rendered a take nothing judgment against the insured.
On appeal, the court plainly reiterated the evidence the insured must present to meet its burden in showing bad faith:
In a bad faith case, the plaintiff has the burden to prove that the insurance company had no reasonable basis for denying the claim. The insured’s evidence must relate to the tort issue of no reasonable basis for denial, not just to the contractual issue of coverage. “The focus on the evidence and its relation to the elements of bad faith is necessary to maintain the distinction between a contract claim on the policy and a claim of bad faith delay or denial of that claim, which arises from the tort duty we imposed on insurers in Arnold and Aranda.” “Evidence that merely shows a bona fide dispute about the insurer’s liability on the contract does not rise to the level of bad faith.” An insurer cannot, as a matter of law, be liable for bad faith insurance practices if it had a reasonable basis to withhold payment. A bona fide dispute about the insurer’s liability on the insurance contract supplies that reasonable basis.
Id. (internal citations omitted).
The appellate court reviewed the evidence presented by both parties to determine whether the insurer had a reasonable basis to deny the claim. It concluded that there was “ample evidence” to create a bona fide dispute and found the insurer was not liable for bad faith, “even if a jury could have resolved the coverage issue in [the insured’s] favor.” Id.at *3.
The court further analyzed whether the insurer conducted a “reasonable investigation.” The court noted that the insurer did not simply deny the claim without any investigation. The claim file, which was extensive and detailed, provided evidence of the investigation into the circumstances of the theft, interviews, conversations, attempts to communicate, and notes regarding same. The court recognized that “[e]ven the most thorough investigation must stop somewhere; there is always something else the investigators could have done.” Id. at *4. But the court further recognized that an insurer is not required to pursue every lead. Instead, the investigation must simply be reasonable and nonbiased.
Ultimately, the court noted that if there is evidence of a “robust and bona fide dispute,” then there is no bad faith liability. Id.at *5.
Notably, the court did find there was more than a scintilla of evidence that the loss was indeed theft and reversed the take nothing judgment. The matter was remanded to the trial court on the breach of contract claim. But the threat of bad faith is gone.
The Lowdown: Texas has a bad reputation for its bad faith laws. But when an insurer can demonstrate a robust investigation that is objectively reasonable, as long as there is a bona fide dispute, there is no bad faith liability—even if an insurer may be wrong about a fact or coverage. Texas insurers should always conduct a reasonable and unbiased investigation. And with such a reasonable investigation, when there is a bona fide dispute as to the existence of coverage, insurers should feel comfortable taking the position they believe is correct without the fear of unfair bad faith allegations.
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The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
