18% Penalty – What Does It Apply To?

The Texas Prompt Payment of Claims Act is found in the Texas Insurance Code, Section 542.051.  Under Section 542.060, a violation of the Prompt Payment of Claims Act allows recovery of an 18 percent interest on damages.  The question then becomes does the 18 percent apply when there is trebling of damages?

Texas Insurance Code, Section 541.152(b), allows recovery of actual damages caused by the unfair practices of an insurance company and then allows trebling of those damages if the conduct was committed “knowingly.”  The same facts may establish a violation of chapter 542 and a violation of chapter 541, but one is not a per se violation of the other.  Thus, an insured has to show actual damages caused by the unfair insurance practice.  It is unlikely that the 18 percent award could be shown to be damages caused by the unfair insurance practice.  The violation does not cause the 18 percent damages; it just causes the insurance company to be liable for those damages.  As a result, it seems unlikely the 18 percent damages ever would be subject to trebling.

The answer to how to apply the 18 percent damages would depend on whether the 18 percent is viewed as “damages,” “interest,” or a “penalty.”

The original Prompt Pay Statute called the 18 percent “damages.”

Several courts have called the 18 percent a “penalty.”

Other courts call the 18 percent “damages” or “statutory damages.”

At times the 18 percent is referred to as “interest.”

The 18 percent has also been called a “statutory fee.”

It is not clear what the Legislature intended in calling the 18 percent “damages.”  If the award really is “damages” as the statute says, trebling it would be improper and would constitute a double recovery.  If the award is interest, the Texas Supreme Court has already said interest is not subject to trebling in the 1998, opinion styled, St. Paul Surplus Lines Ins. Co. v. Dal-Worth Tank Co.