18% Penalty – 2

The law in Texas regulating the timely payment of claims is the Texas Prompt Payment of Claims Act.  It starts in the Texas Insurance Code, Section 542.051.  The 18% penalty is found in Section 542.060.

One commentator in, Couch on Insurance, has recognized that statutes which impose penalties for denying or delaying payment of a claim are penal in nature as to insurers and compensatory as to insureds.

The treatise states, ” Statutes imposing penalties on an insurer for its failure to meet its obligation on a contract of insurance have been described as “penal” and “highly penal” in character.  Couch also notes:

In contrast to jurisdictions which view a statutory penalty as punitive in nature, other jurisdictions regard such a statute as merely compensatory rather than penal.  Thus, it has been said that damages allowed by statute for failure to comply with the contract of payment serve as compensation for the cost of collecting the debt.  Otherwise stated, the penalty statutes, although penal in character insofar as the insurer is concerned, are compensatory with respect to the insured, the purpose being to create a cause of action in the insured in order to save him or her the amount of expense necessary to collect upon a policy, payment of which has been vexatiously refused, so that there will be no diminution of the recovery actually to be received.

Hence, the nature of the 18% damages depends on the perspective.  From the insurance company perspective it may seem penal, while from the insured’s perspective it seems compensatory.

Another commentator, Professor Robert Keeton, co-author of, Keeton and Widiss’ Basic Text on Insurance Law, recognizes that the threat of statutory relief may serve as a deterrent to irresponsible rejection of claims.