Dallas Fort Worth Insurance Lawyer Blog

Insurance lawyers need to know the time lines for an insurance company to pay claims under the Texas Prompt Payment of Claims Act and they need to know the legal reasons for those time lines being extended.

Pursuant to Texas Insurance Code, Section 542.056(d), if the insurance company cannot accept or reject the claim by the initial deadline, the statute lets the insurance company notify the claimant that it cannot accept or reject a claim by the deadline.  This notification has to be sent before the original deadline, and the notice must state the reason why the insurance company needs additional time.  The insurance company then has 45 additional days to accept or reject the claim.

Pursuant to the 1997, 5th Circuit opinion, Higginbotham v. State Farm Mutual Automobile Insurance Co., the insurer’s good faith or its lack of bad faith is no defense.  In reaching this conclusion, the court noted that precedents under the predecessor statute held that an insurance company’s good faith in denying a claim did not relieve the insurer of liability for penalties.  The court concluded that an insurer  that denies a claim takes the risk that it will have to pay the additional damages allowed by the statute.

The next question in this series related to violations of the Texas Prompt Payment of Claims Act is, what are some of the defenses the insurance company has for not making prompt payment on a claim.

The statute contains several provisions by which insurance companies may extend the deadlines.  While, technically, these are not “defenses,” they may help insurance companies avoid liability.  The following events or conditions can extend the deadlines:

a.  Texas Insurance Code, Section 542.055(a) allows eligible surplus lines insurers extra time for acknowledging claims, commencing investigation, and requests for information.

Additional remedies under the Texas Prompt Payment of Claims include attorney fees.  Attorney fees under the statute are governed by the 1997, Texas Supreme Court opinion, Arthur Andersen & Co. v. Perry Equipment Corp.  In that case, the court held that a reasonable fee must be based on eight factors set out by the disciplinary rules.  Fees cannot be awarded simply as a percentage of the recovery, but must be awarded as a dollar amount.  The jury can consider the fact that the plaintiff has agreed to a contingent fee as one factor in deciding what fee is reasonable.  This is discussed in the 1999, Tyler Court of Appeals opinion, Dunn v. Southern Farm Bur. Cas. Ins. Co.

In light of the Arthur Andersen opinion, earlier opinions allowing recovery of a percentage fee under the statute are no longer good law.

If fees an be segregated between the statutory claim and other claims, it is proper to do so, but the defendant needs to object.  Other wise an unsegregated award will be upheld according to the 1998, Waco Court of Appeals opinion, Allstate Insurance Co. v. Lincoln.

Under the 18% penalty imposed by Texas Insurance Code, Section 542.060, what is the effect if there is a finding of multiple violations?  Does the result of result of multiple violations result in multiple penalties?

In applying the Texas Prompt Payment of Claims Act and Section 542.060, the 1999, Tyler Court of Appeals opinion, Dunn v. Southern Farm Bureau, the court found four separate violations by the insurer, but did not discuss whether this made a difference in the damages.

Something to keep in mind is that arguably, an insurance company that violates the statute more than once ought to be more liable than an insurance company that violates the statute only once.  This view is consistent with liberal construction of the statute, and furthers the purpose of encouraging prompt payment of claims.

How to label the 18% penalty in the Texas Prompt Payment of Claims Act is a topic of much discussion in Insurance Law circles.  How is Section 542.060 to be labeled?  Maybe the damages awarded under the prompt payment statute are awarded simply for a failure to comply with a deadline.  The damages are not based on any level of malfeasance of the insurer.  Referring to the treatise, Couch on Insurance, the authors make the following point:

When the statute is silent on the matter, the determination of what kind of conduct of the insurer comes within the scope of the penalty statutes depends basically upon whether the statute is viewed as punitive or as compensatory.  Where it is the latter, the only conduct of the insurer required is of the negative character that the insurer did not pay, and therefore, was sued by the insured, and successfully.  When, however, the statute is viewed as punitive as is generally the case, there must be some misconduct of the insurer to justify the imposition of the penalty.  In general terms, these statutes apply to any improper conduct of the insurer with respect to delay in making payment, refusing to make payment, or stopping the making of payments.

With this analysis, the Texas prompt payment statute would fall within the “compensatory” group because the only conduct required of the insurer is the failure to pay or to timely process the claim, not other misconduct.

Opinions related to the Texas Prompt Payment of Claims Act and in particular the 18% penalty found in Section 542.060, have differed as to whether or not the 18% damages must be exemplary damages and not actual damage.  In that regard;

First, it is not clear at all that the legislature provided this relief without regard to the harm suffered by insureds.  As the respected authorities quoted in other Blogs point out, harm to the insured is a very important consideration.  Absent legislative history either way, or express statutory language either way, courts sometimes assume the grant of the remedy was made without reference to harm suffered by the insured.

Second, the awards necessarily are made with reference to the harm suffered.  An insured suffers harm in the amount of the benefits withheld.  The 18% damages increases and decreases in direct proportion to that harm.  The decisions to the contrary are wrong, because the 18% is multiplied exactly by the “amount of harm” to the insured.

Respected writers, Robert E. Keeton and Alan I. Widiss, argue that damages under the Texas Prompt Payment of Claims Act, Section 542.060(a), have a purpose of providing compensation to the insured.  They write:

The statutory provisions establishing remedies for the late payment or nonpayment of insurance claims are often regarded, and sometimes are characterized by the legislation specifically, as penalties.  Consequently, it is not surprising that some courts have adopted the view that because such legislation is “penal in nature,” the provisions should be subject to strict construction.  However, such awards may also appropriately be viewed as allowing an insured to recover compensation for consequential damages the claimant sustained (1) by having to pay an attorney (as well as other litigation expenses) to secure the insurance benefits and (2) by not having the use of the insurance benefits from the time when the insurance should have been paid.  Even when such a statute provides for an additional recovery of an amount that is calculated as a percentage of the insurance benefit that was due to the insured, in many instances such an amount does not fully indemnify the claimants for all of the adverse consequences that have resulted from the insurer’s wrongful denial of an insured’s claim.  Accordingly, in most circumstances, there is considerable justification for not according such statutory provisions a “strict” construction. 

When an insurer withholds insurance benefits, it deprives the insured of those benefits.  Arguably, that deprivation merits some form of compensation.  When the insurer forces the insured to litigate to recover money that is due under the contract, it imposes additional expenses and aggravation on the insured.  Those are elements the legislature reasonably could find deserve compensation.