18% Penalty – 6

How to label the 18% penalty in the Texas Prompt Payment of Claims Act is a topic of much discussion in Insurance Law circles.  How is Section 542.060 to be labeled?  Maybe the damages awarded under the prompt payment statute are awarded simply for a failure to comply with a deadline.  The damages are not based on any level of malfeasance of the insurer.  Referring to the treatise, Couch on Insurance, the authors make the following point:

When the statute is silent on the matter, the determination of what kind of conduct of the insurer comes within the scope of the penalty statutes depends basically upon whether the statute is viewed as punitive or as compensatory.  Where it is the latter, the only conduct of the insurer required is of the negative character that the insurer did not pay, and therefore, was sued by the insured, and successfully.  When, however, the statute is viewed as punitive as is generally the case, there must be some misconduct of the insurer to justify the imposition of the penalty.  In general terms, these statutes apply to any improper conduct of the insurer with respect to delay in making payment, refusing to make payment, or stopping the making of payments.

With this analysis, the Texas prompt payment statute would fall within the “compensatory” group because the only conduct required of the insurer is the failure to pay or to timely process the claim, not other misconduct.

There is a final reason that the 18% award may be viewed as compensatory.  Having stated that the issue is whether the 18% damages are penal or compensatory, for purposes of deciding whether or apply pre-judgment interest, the courts have overlooked on very clear and simple principle.  There are two equally well established rules of statutory construction.  One, as told to us by the 2004, Texas Supreme Court opinion, Brown v. De la Cruz, is that penal statutes are strictly construed.  The other, as told to us by the 1975, Texas Supreme Court opinion, Burch v. City of San Antonio, is that if a statute is remedial, it is given a liberal construction.

The legislature has provided the answer under the prompt payment statute.  The statute is to be “liberally construed” as expressly stated in section eight.  Therefore, the statute must be remedial, not penal.

A court looking only at the current language could conclude that the 18% is itself interest and thus cannot be subject to even more prejudgment interest.