18% Penalty – 3

Insurance lawyers who publish books, such as Robert E. Keeton and Alan I. Widiss, who publish Keeton and Widiss’ Basic Text on Insurance Law, have detailed the purposes of the 18% penalty found in the Texas Prompt Payment of Claims Act.

Imposing legislatively prescribed remedies whenever an insurer unsuccessfully contests a claim, even though the insurer acts reasonably in doing so, serves to compensate the insured for both the delay in the receipt of payment and the costs of engaging in the controversy with the insurer in order to recover (which in some circumstances are substantial).  A denial of an insurance claim typically has several consequences for an insured.  First, any time there is a denial of an insurance claim, that action obviously extends the period during which the insured must incur the adverse economic consequences of the loss without the benefit of being indemnified by the insurance.  Second, an insured who is forced to litigate to recover insurance incurs legal expenses – which include, but are not limited by the fees charged by a attorney – to secure the insurance payments.  Third, many insureds also sustain a variety of consequential problems, including harm to credit standing and loss of business.  When an insured is compelled to resort to litigation to recover insurance benefits, the insured is denied indemnification for what, at least in many instances, is a very significant aspect of the economic risks incident to the hazards against which the insured sought protection when the insurance was purchased.  Thus, when the payment of insurance benefits is only made after an insured has sought the assistance of an attorney and the legal process, the insured not only sustains added legal expenses but is denied the right to indemnification (which is one of the risks insureds seek to avoid through the acquisition of insurance).  Third,  most insureds have reasonable expectations that the net value to them of their insurance coverage, in the event of a loss, will not be reduced by a recalcitrant insurer.  If, because the insurer is found to have acted reasonably in rejecting the claim, an insured’s recovery is limited to an award of the amount of insurance benefits due, the amount provided by the insurance coverage – after the insurance recovery is reduced by the insured’s payment of the lawyer’s fee and other litigation expenses – is obviously diminished.  The net amount actually received by such a claimant is then insufficient to indemnify the insured, often falling far short of that which the insured reasonably anticipated would be available as an insurance benefit to offset the economic loss that resulted as a consequence of the insured event.  In such instances, it is surely a defensible legislative choice to determine that a layperson’s reasonable view of insurance benefits should be protected by allowing the insured to recover full indemnification whenever an insured is compelled to resort to a lawsuit in order to recover the insurance benefits – that is, to receive a total recovery from the insurer that provides net to the insured no less than the insurance benefits the claimant reasonably anticipated would be paid in the event of a loss.  Professors Keeton and Widiss conclude:  This is another situation in which contradictory canons of statutory construction potentially apply to a question of legislative interpretation: on the one hand, the canon of “strict” construction of “penal” statutes, and on the other hand, the canon of “liberal” construction to effectuate the apparent legislative purpose of protecting victims of wrongful denial of insurance benefits.