18% Penalty – 5

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.

Third, the awards were also made without reference to any need to punish the insurer and without reference to its culpability.  So, this supports the opposite conclusion.  Since the award is made without reference to the need to punish the insurer, the damages must be actual damages.  Because the proposition is equally plausible under the statute, this provides no basis for deciding the issue.

As a number of courts have held, the damages are awarded despite the insurer’s good faith.  As an example see, Higginbotham v. State Farm Mut. Auto. Ins. Co., an opinion issued in 1997, by the U.S. 5th Circuit.

In contrast, another statute, Section 541.152(b), provides for additional damages if the insurer acted knowingly.  At common law, punitive damages are available if the insurer’s conduct was intentional, malicious, fraudulent, or grossly negligent.  This can be seen in the 1994, Texas Supreme Court opinion styled, Transportation Ins. Co. v. Moriel.