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.