Articles Posted in Delay in Paying Claim

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.

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.

Respected writers, Robert E. Keeton and Alan I. Widiss, argue that damages under the Texas Prompt Payment of Claims Act, Section 542.060(a), have a purpose of providing compensation to the insured.  They write:

The statutory provisions establishing remedies for the late payment or nonpayment of insurance claims are often regarded, and sometimes are characterized by the legislation specifically, as penalties.  Consequently, it is not surprising that some courts have adopted the view that because such legislation is “penal in nature,” the provisions should be subject to strict construction.  However, such awards may also appropriately be viewed as allowing an insured to recover compensation for consequential damages the claimant sustained (1) by having to pay an attorney (as well as other litigation expenses) to secure the insurance benefits and (2) by not having the use of the insurance benefits from the time when the insurance should have been paid.  Even when such a statute provides for an additional recovery of an amount that is calculated as a percentage of the insurance benefit that was due to the insured, in many instances such an amount does not fully indemnify the claimants for all of the adverse consequences that have resulted from the insurer’s wrongful denial of an insured’s claim.  Accordingly, in most circumstances, there is considerable justification for not according such statutory provisions a “strict” construction. 

When an insurer withholds insurance benefits, it deprives the insured of those benefits.  Arguably, that deprivation merits some form of compensation.  When the insurer forces the insured to litigate to recover money that is due under the contract, it imposes additional expenses and aggravation on the insured.  Those are elements the legislature reasonably could find deserve compensation.

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.

The law in Texas regulating the timely payment of claims is the Texas Prompt Payment of Claims Act.  It starts in the Texas Insurance Code, Section 542.051.  The 18% penalty is found in Section 542.060.

One commentator in, Couch on Insurance, has recognized that statutes which impose penalties for denying or delaying payment of a claim are penal in nature as to insurers and compensatory as to insureds.

The treatise states, ” Statutes imposing penalties on an insurer for its failure to meet its obligation on a contract of insurance have been described as “penal” and “highly penal” in character.  Couch also notes:

Under the Texas Prompt Payment of Claims Act, what is subject to the 18% penalty?  This will be a multi blog topic.

Courts are split on the issue of whether the 18% award is subject to prejudgment interest.  See the difference in 1995, Fort Worth Court of Appeals opinion, Marineau v. General American Life Ins. Co. and the 1997, Eastern District of Texas opinion styled, Teate v. Mutual Life Ins. Co. of New York.

The cases that consider the issue and decline to award prejudgment interest do so based on their reasoning that the 18% award is punitive in nature.  The courts reason that because punitive damages are inherently penal they should not be enlarged by the imposition of prejudgment interest.  For support, look at the 1999, Tyler Court of Appeals opinion Dunn v. Southern Farm Bur. Cas. Ins. Co. and the 2000, Dallas Court of Appeals opinion, Texas Farmers Ins. Co. v. Cameron, and the 2000, San Antonio Court of Appeals opinion, J.C. Penny Life Ins. Co. v. Heinrich.

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.”

When an insurance company makes an unjustified delay in paying a claim the Texas Prompt Payment of Claims Act allows interest on the amount of the claim at the rate of 18 percent a year as damages.  This statute is found in the Texas Insurance Code, Section 542.060(a).  But the statute does not say which amount is subject to this penalty.  Is it the amount of the claim submitted by the claimant, or is it the amount of the claim paid by the insurer, or is it the amount of the claim as ultimately determined by the trier of fact?  This is important to know because the insured may “claim” too much, the “claim” paid by the insurance company may be too small, and often no one knows the amount the notice of the “claim” is first given.

This issue is discussed in the 2004, Texas Supreme Court opinion styled, Republic Underwriters Insurance Co. v. Mex-Tex, Inc.  The court concluded that the “claim” is “the amount ultimately determined to be owed, which of course would be net of any partial payments made prior to that determination.”  The court felt this would encourage insurance companies to pay the undisputed portion of a claim early, which was consistent with the statute’s purpose to obtain prompt payment of claims.

The court also held that the 18 percent would be assessed on the entire amount of the claim in the insurer’s tender of partial payment was not unconditional.  Otherwise, the court reasoned, the insurance company could delay payment by insisting on a release to which it was not entitled.

How do you calculate the beginning date and end date for violation of the Texas Prompt Payment of Claims Act?  The start date was calculated in the previous post.  Here is a discussion on the end date for calculation.

The statute does not say when the penalty stops accruing.  No court has addressed this specific issue.  Several courts have simply held that the penalty accrues from the date of the violation up to the date of judgement, without any analysis for choosing that date.  This was done in the 2010, 5th Circuit opinion, Great American Insurance Co. v. AFS/IBEX Financial Services, Inc.  Also in the 2004, Texas Supreme Court opinion, Texas Farmers Insurance Co. v. Cameron.  Other courts have held that the penalty accrues until the insurer settled.  This was seen in the 2000, San Antonio Court of Appeals opinion, Cater v. United Services Automobile Ass’n and in the 1196, Texarkana Court of Appeals opinion, Southland Lloyd’s Insurance Co. v. Tomberlain.  One approach is to end the accrual of the 18% damages on the day of the judgment.  This is the approach taken in Mid-Century Insurance Co. v. Barclay, which is from the 1994, opinion of the Austin Court of Appeals.  The statute itself, neither embraces nor rejects this approach.

Another approach would be to continue accruing the 18% damages until the insurer fully discharges its liability, including payment of the 18% damages and attorney’s fees.  An argument for this approach is that, presumably, the Legislature intended the 18% damages partially to compensate claimants for the delay and partially to punish insurers for violations.  If the 18% damages accrue only up to the time of judgment, this would mean that while the insurer is contesting liability, perhaps even in good faith and reasonably, these extra damages would accrue, but once the claim is finally established, the incentive to pay would be removed.  Arguably, it makes no sense to compensate the claimant when his claim is disputed, but once it is certain to no longer compensate him.  Likewise, it makes no sense to punish the insurer for withholding a disputed claim, but to no longer punish it for withholding an established claim.  Case law makes clear the statute recognizes that the insurer denies the claim at its risk.  If the insurer gambles and loses, it pays these additional damages.  Similarly, if the insurer wants to gamble on continuing to contest the claim once judgment has been rendered, that choice may bear financial consequences.  Interestingly, in the Cater case above, the court ended the penalty on the date the claim was paid, to shorten the time period, presumably as a reward or encouragement for the insurer to pay the claim.  Conversely, the penalty should be extended when the insurer continues to refuse to pay, especially after the judgment is rendered.

When does the time to start calculating the time a payment is due under an insurance policy claim?  Good question but not an easy answer.

The penalty for violation of the Texas Prompt Payment of Claims Act is an 18% penalty on the amount due and owing on the claim according to Insurance Code, Section 542.060.  However, the date that amount accrues is not so easy.

The statute does not say when the penalty accrues.  On approach would be to begin accruing the 18% damages from the date the claim was received.  This focuses on the length of time the claimant has been without his or her money, instead of focusing on the length of time the insurer has been in error.  This approach encourages prompt payment of claims.  As the claim proceeds towards payment, the insurer’s incentive to pay the claim would increase.  Any error, even at the last stage, would accrue damages at 18%, retroactive to the date the claim was filed.  This approach has the benefit of making payment of the claim more important to the insurer, even as the passage of time makes payment of the claim more important to the insured.

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