Prompt Pay And Third Party Claims

Everman insurance attorneys need to know the insurance laws regarding payment of claims the same as any other insurance lawyer. Here is one nuance to the Prompt Pay Statutes that a lot of attorneys are not familiar with. It regards prompt pay and third-party claims.
In looking at the Prompt Pay Statute, on its face, the statute applies only to “first-party” claims. The statute defines “claim” to mean a “first-party claim that: (A) is made by an insured or a policyholder under an insurance policy or contract or by a beneficiary named in the policy or contract; and (B) must be paid by the insurer directly to the insured or beneficiary.” That is the clear language in Section 542.051. This would exclude liability insurance claims for coverage that must be paid to an injured third party.
In spite of the reading of this statute, the Texas Supreme Court ruled in a 1996, opinion that the statute does apply to third-party liability insurance. The style of the opinion is, State Farm Fire and Casualty Company v. Gandy. The court was discussing the liability insurer’s ability to seek a declaratory judgement when issues of coverage and the duty to defend arise. The court stated that if the insured were successful, the insured should be entitled to recover attorney’s fees and penalties under the statute.
In an 2007, opinion, the Texas Supreme Court found that a “first-party claim” is not synonymous with a first-party insurance policy. The case is styled, Lamar Homes, Inc. v. Mid-Continent Casualty Company. The court said that whether a claim falls within the ambit of the statute depends not on the type of policy but on the claimants relationship to the loss: ” a first-party claim is stated when ‘an insured seeks recovery for the insured’s own loss,’ whereas a third-party claim is stated when ‘an insured seeks coverage for injuries to a third-party.'” Therefore, the statute may apply to claims for a defense under the liability policy. However, the statute does not apply to claims brought by third-party insurance policies for losses incurred in satisfaction of a settlement, which was the ruling by the Texas Supreme Court in, Evanston Insurance Company v. ATOFINA Petrochemicals, Inc.
Here is something to keep in mind: Many corporate liability policies contain a self-insured retention or a deductible that results in the reimbursement of defense or indemnity benefits directly to the policyholder. Similarly, some “indemnity only” liability policies only pay benefits after the insured has paid money in settlement of a claim and then submitted the claim to the liability carrier for reimbursement. In either of these situations an argument exists that the statute should apply to the claim because the policy benefit is being paid directly to the insured.