REPUBLIC INSURANCE COMPANY and Southwest Adjusting Services, Inc., Petitioners, v. Linda H. STOKER and John Stoker, Respondents, 903 S.W.2d 338

ENOCH, Justice, delivered the opinion of the Court, in which PHILLIPS, Chief Justice, and GONZALEZ, HIGHTOWER, HECHT, CORNYN, and OWEN, Justices, join. This case presents the question whether an insurer breaches its duty of good faith and fair dealing to its insured if it denies a claim for an invalid reason when there was at the time a valid reason for denial. The trial court granted

summary judgment against the insureds on their policy claim holding that there was no coverage, but rendered judgment on the jury verdict for the insureds on their extra-contractual claims. The court of appeals affirmed, concluding that a finding of no liability on the policy action does not, as a matter of law, defeat an insured’s extra-contractual claim. 867 S.W.2d 74. The court rested its decision on Viles v. Security Nat’l Ins. Co., 788 S.W.2d 566 (Tex.1990). Because the court of appeals misapprehends Viles, we reverse the judgment of the court of appeals and render judgment that the Stokers take nothing.

This case arises out of a multiple car accident in which the Stokers’ automobile struck the rear end of another vehicle. It is undisputed that an unidentified pickup truck dropped a load of furniture on the highway, causing a chain reaction collision. Also, it is undisputed that this truck was not struck by any of the vehicles involved in the collision. The Stokers had no collision insurance and, therefore, submitted a claim to recover under their uninsured/underinsured vehicle coverage with Republic. Republic hired Southwest to investigate the Stokers’ claim.

Southwest recommended that the uninsured motorist claim be denied because it concluded that Mrs. Stoker, who was the driver, was more than fifty percent at fault in causing the accident. A Republic senior claims examiner confirmed Southwest’s decision. Mrs. Stoker acknowledged at the trial of her bad faith claim that fault is an issue in recovering under the uninsured motorist coverage. The Stokers’ policy provided uninsured motorist coverage for damages caused by an unidentified hit and run vehicle only if the vehicle hit the insureds’ car.

The language of the policy is in accord with the requirements of the Insurance Code regarding uninsured motorist coverage. Tex.Ins.Code art. 5.06 — l(2)(d) (in order to recover under uninsured motorist coverage “actual physical contact must have occurred.”). Republic initially did not rely on the lack of physical contact with the pickup as a reason for denying the Stokers’ claim. Following Republic’s denial of the uninsured motorist claim, the Stokers sued for breach of the insurance contract, breach of the duty of good faith and fair dealing, and violations of the Deceptive Trade Practices Act and

article 21.21 of the Insurance Code. The Stokers predicated all their allegations against Republic and Southwest on the fact that the companies gave an invalid reason for denial of the Stokers’ claim — Mrs. Stoker’s alleged fault. Republic and Southwest responded with a motion for

summary judgment, asserting that because there was no physical contact there was no coverage under the policy, and consequently, the Stokers had no contractual and extra-contractual claims as a matter of law. The trial court granted

summary judgment on the contract issue. However, it submitted the balance of the case to a jury that found that Republic and Southwest had breached their duty of good faith and fair dealing and violated the DTPA and

article 21.21 of the Insurance Code. The statutory violations were premised solely on the Stokers’ bad faith claim. The trial court rendered judgment for the Stokers on the verdict. The court of appeals affirmed both the

summary judgment on the policy claim and the judgment for extra-contractual damages. 867 S.W.2d at 80. The Stokers have not perfected an appeal to this Court of that portion of the court of appeals’ judgment affirming

summary judgment on their policy claim. We therefore take it as established that the uninsured/un-derinsured motorist coverage in the Stokers’ policy does not cover their claim. Additionally, Southwest does not contend here that because it was merely Republic’s agent, it owed the Stokers no duty of good faith and fair dealing. See Natividad v. Alexsis, Inc., 875 S.W.2d 695 (Tex.1994). Nor do the Stokers contend that they were damaged by any delay in the processing of their claim by Republic.

Therefore, the only issue we address is whether the defendants are hable to the Stokers for denying their claim for an incorrect reason — the accident was mostly Mrs. Stoker’s fault — when there was a correct reason for denial which the defendants did not give the Stokers — the incident was not covered by the policy. We note that the issue of Mrs. Stoker’s fault has never been resolved by a jury, but for purposes of this opinion we will assume that Republic was incorrect in its evaluation of Mrs. Stoker’s fault.

An insurer has a duty to deal fairly and in good faith with its insured in the processing and payment of claims. Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex.1987). A breach of the duty of good faith and fair dealing is established when: (1) there is an absence of a reasonable basis for denying or delaying payment of benefits under the policy and (2) the carrier knew or should have known that there was not a reasonable basis for denying the claim or delaying payment of the claim. Aranda v. Insurance Co. of N.

Am., 748 S.W.2d 210, 213 (Tex.1988). “The first element of this test requires an objective determination of whether a reasonable insurer under similar circumstances would have delayed or denied the claimant’s benefits.” Id. This assures that a carrier “will not be subject to liability for an erroneous denial of a claim,” id., as long as a reasonable basis for denial of the claim exists. Lyons v. Millers Casualty Ins. Co. of Texas, 866 S.W.2d 597, 600 (Tex.1993). In affirming the trial court’s judgment, the court of appeals cited to our decision in Viles, 788 S.W.2d 566.

Viles, however, does not support affirmance. In Viles, the insurers investigated and denied the claim based on the ground that the property damage claimed to be covered actually predated coverage. Id. at 566-67. The insurer denied the claim before the Viles submitted a proof of loss and before their time for doing so had expired. After the claim was denied, the Viles did not submit a proof of loss because it would have been futile to do so. At trial, the evidence established, contrary to the insurers’ position, that the damage existing before coverage had already been repaired. Id. at 567 n. 2.

Thus, the claim was improperly denied. Nevertheless, the insurers attempted to justify denial of the claim based on the Viles’ failure to file a timely proof of loss. Id. We rejected this argument stating: “The record shows ... that the insurance companies denied the Viles’ claim before the proof of loss form was due. Hence, the failure to file that form ... could not have been a basis for denial.” Id. at 567-568. We stated in Viles: “Whether there is a reasonable basis for denial [of a claim] must be judged by the facts before the insurer at the time the claim was denied.” Id. at 567.

This statement, does not support the Stokers’ claim in this case. Unlike the situation in Viles, the Stokers’ accident was never covered by their policy because there was no collision with the pickup truck. The facts compelling denial of the Stokers’ claim were in existence at the time of the denial. Republic and Southwest’s reliance on a different, perhaps erroneous, reason for denying coverage is not dispositive. What is disposi-tive is whether, based upon the facts existing at the time of the denial, a reasonable insurer would have denied the claim. Aranda, 748 S.W.2d at 213.

An argument has been made that because a policy claim is independent of a bad faith claim, an insured may recover for a bad faith denial of a claim even if the claim is not covered by the policy. We accept the prem-fee of the argument — that a policy claim is independent of a bad faith claim. Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 17 (Tex.1994). The asserted conclusion, however, does not necessarily follow. Several cases have been cited to us as support for this conclusion, but none of the cases cited holds an insurer liable for denying a claim not covered by the policy.

As we have noted, one element of a bad faith claim is an absence of a reasonable basis for denying or delaying payment of benefits. Arnold, 725 S.W.2d at 167; Aranda, 748 S.W.2d at 213; Viles, 788 S.W.2d at 568. Republic did not fail to determine whether there was a reasonable basis for denying the Stokers’ claim; its decision was timely, it simply made the right decision for the wrong reason. It is further argued that the Stokers should have been entitled to rely on Republic’s reason for denying their claim in deciding whether to file suit.

The Stokers were no more persuaded by the coverage language than they were by Republic’s statement to them that Mrs. Stoker was mostly to blame for the accident. They vigorously contested both reasons for denial of their claim. The Stokers cannot preclude Republic from relying on a reason for denying their claim that existed at the time, even if it was not the reason Republic gave. As a general rule there can be no claim for bad faith when an insurer has promptly denied a claim that is in fact not covered. See e.g., O’Malley v. United States Fidelity & Guar.

Co., 776 F.2d 494, 500 (5th Cir.1985) (noting that no Mississippi ease has ever allowed bad faith recovery for the insured without first establishing liability under the policy); Gilbert v. Congress Life Ins. Co., 646 So.2d 592, 593 (Ala.1994) (plaintiff bears the burden of proving a breach of contract by the defendant); Reuter v. State Farm Mut. Auto. Ins. Co., Inc., 469 N.W.2d 250, 253 (Iowa 1991) (“a bad faith failure to pay the insured when the insured event occurs ... may subject the insurer to tort liability”); Wittmer v.

Jones, 864 S.W.2d 885, 890 (Ky.1993) (noting that in order to establish a tort action for bad faith the insured must first prove that the insurer was obligated to pay under the policy); Pemberton v. Farmers Ins. Exchange, 109 Nev. 789, 858 P.2d 380, 382 (1993) (“An insurer fads to act in good faith when it refuses ‘without proper cause’ to compensate the insured for a loss covered by the policy.”); Bartlett v. John Hancock Mut. Life Ins.

Co., 538 A.2d 997, 1000 (R.I.1988) (“there can be no cause of action for an insurer’s bad faith refusal to pay a claim until the insured first establishes that the insurer breached its duty under the contract of insurance”); see also OstRAGER & Newman, INSURANCE CoveRage Disputes § 12.01 at 503 (7th ed. 1994) (“The determination of whether an insurer acted in bad faith generally requires as a predicate a determination that coverage exists for the loss in question.”); 15A Rhodes, Couch on INSURANCE Law 2d § 58:1 at 249 (Rev. ed. 1983) (“As a general rule, there may be no extra-contractual recovery where the insured is not entitled to benefits under the contract of insurance which establishes the duties sought to be sued upon.”).

We do not exclude, however, the possibility that in denying the claim, the insurer may commit some act, so extreme, that would cause injury independent of the policy claim. See Aranda, 748 S.W.2d at 214. Nor should we be understood as retreating from the established principles regarding the duty of an insurer to timely investigate its insureds’ claims. These circumstances are not present in this case. The Stokers’ claim fails because, as a matter of law, they cannot meet the first prong of the Aranda test.

As all the Stokers’ causes of action are predicated on their bad faith allegation, they are not entitled to recover against defendants. Accordingly, the judgment of the court of appeals in favor of the Stokers is reversed, and judgment is rendered that the Stokers take nothing. . Our attention has been particularly called to Deese v. State Farm, 838 P.2d 1265, 838 P.2d 1265 (1992). The insurance company in Deese did not deny coverage. The dispute was whether portions of the medical bills were not reasonable and therefore not compensable. Id. 838 P.2d at 1266-67.