Benbrook insurance attorneys can discuss the penalties for delays in paying a claim. These penalties are spelled out in the Texas Prompt Payment of Claims Act (TPPCL) and are found in the Texas Insurance Code.
The amount of an insured’s claim (and/or the amount for which an insurer is liable) is often based on third-party invoices that the insured has not incurred, in amounts the insured cannot necessarily predict, at the time the insured submits its notice of claim to the insurer. Consider duty to defend or environmental clean-up coverage, where the amount of the claim can increase every month.
Naturally, there are questions regarding when the 18% penalty begins to accrue on such claims. The TPPCA language does not provide specific guidance on these calculations, but courts in the Fifth Circuit have recently indicated the methodology is based on the date of the TPPCA violation and not necessarily the date the cost was incurred.
The insured in Cox Operating had liability coverage for legally required pollution clean-up and incurred covered pollution clean-up costs in differing amounts per month over a two year period. The insurer violated §542.055(a) early in that two-year period, before many of the pollution clean-up costs were incurred. The insurer argued it was unjust for the 18% penalty to be based on the ultimate claim amount, and urged the court to follow
Lamar Homes, Inc. v. Mid-Continent Cas. Co. and hold that accrual should not begin until after the insured incurred the cost.
The Fifth Circuit rejected the argument for several reasons. The insurer in Lamar Homes wrongfully denied its duty to defend, which constituted a §542.058 violation, and there was no indication the insurer violated §§ 542.055 or 542.056 prior to denying coverage. The Fifth Circuit also distinguished Lamar Homes by indicating that, because it was a duty to defend case, the claim had “no finite value” at the time the insurer denied the claim. Thus the penalty could not be calculated until the cost was actually incurred.
This “finite value” reasoning was also used in a federal district court case, Devonshire Real Estate v. American Ins. Co., involving property damage where the court rejected the insurer’s argument that the 18% penalty could not accrue on additional damage amounts until the supplemental documentation was submitted to the insurer. The court distinguished Lamar Homes by stating, in Lamar, “the insured . . . suffered an actual loss that is quantified after the insured retains counsel and begins receiving statements for legal services” but the insured in Devonshire “suffered an actual loss when its property was damaged by a wind and hail storm.”
Nevertheless, a concrete methodology for calculating the penalty interest on claim amounts that increase over time cannot be gleaned from these cases. For obvious reasons, §§ 542.055 or 542.056 violations are uncommon in duty to defend cases, but if there were such a violation, it is not clear whether or not these courts would wait for the insured to incur a defense cost before the penalty on that cost could accrue. Further, it is unclear how these courts would have calculated the penalty in Cox Operating had there only been a §542.058 violation in the middle of the two-year pollution clean-up process.
Absent legislation or guidance from the Texas Supreme Court, it appears in some cases that the penalty can accrue on costs the insured has not incurred or paid. The insurers in Cox Operating and Devonshire focused their arguments on Lamar Homes, which the courts could distinguish. The issue has yet to be fleshed out, and parties on both sides of the issue in future disputes will no doubt formulate new arguments for the courts to consider.
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