Penalties For Delay In Paying Claim

Arlington insurance lawyers will usually know the penalties for insurance companies that do not promptly pay a claim. A 1997, United States 5th Circuit Court of Appeals case illustrates the penalties. The style of the case is, Higginbotham v. State Farm Automobile Insurance Company. Here is what the case tells us.
Higginbotham’s Porsche was stolen on June 8, 1993, from an unsecured parking lot next to his residence. The car was recovered later that day but had been stripped of its top, seats, interior and exterior trim but was not damaged or destroyed with regard to mechanical connections, wiring harnesses or the engine. Higginbotham reported the theft to State Farm on June 9, 1993. State Farm denied his claim five months later on November 19, 1993.
Higginbotham filed suit for breach of contract, violations of the DTPA, violations of the Texas Insurance Code, negligence, breach of duty of good faith and fair dealing, and violation of the Prompt Payment of Claims Act which imposes an 18% penalty on the carrier under certain circumstances. At trial, the jury returned a verdict in favor of Higginbotham for $30,000.00, the amount of his coverage, but the Court directed a verdict in favor of State FArm on the bad faith and extracontractual claims under the DTPA and Insurance Code. Higginbotham appealed.
In a bad faith claim, the insured must establish the absence of a reasonable basis for denying or delaying payment of the claim and that the insurer knew or should have known that there was no reasonable basis for denying the claim. A bona fide controversy is sufficient reason for failure of an insurance company to make prompt payment of a loss claim. In this case, State Farm’s investigation found a number of suspicious circumstances. Higginbotham was associated with Tommy Vander, the owner of Luxury Auto Unlimited. Vander had pled guilty in 1991 to felony theft of a stolen Porsche. Higginbotham began parking the Porsche in the unsecured parking lot two weeks before it was stolen. His girlfriend allegedly reported it stolen to the apartment complex four days before the alleged theft. Higginbotham’s Porsche was recovered 25 miles from his residence but only 1.6 miles from Vander’s shop. The car was stripped in a manner so as not to destroy mechanical connections, wiring harnesses or the engine. Based on these facts, State Farm had a reasonable basis to dispute the validity of the claim and, as a matter of law, State Farm did not act in bad faith.
Extracontractual claims under the DTPA and the Texas Insurance Code require the same predicate for recovery as bad faith causes of action. An insurance company will not be faced with a tort suit for challenging a claim if there was any reasonable basis for denial of that coverage.
The Prompt Payment of Claims Act provides that if an insurance company delays payment of a claim for more than 60 days, the insurance company shall pay, among other damages, 18% per annum as a penalty. In this case, State Farm delayed rejection of the claim for five months. An insurance company’s good faith assertion of a defense does not relieve the insurance company of liability for penalties for tardy payment as long as the insurance company is finally judged liable. In this case, State Farm was judged liable on the coverage claim. State Farm did not notify Higginbotham of its rejection for five months. Therefore, it must pay the 18% penalty.