The Texas Prompt Payment of Claims Act was interpreted by the United States Fifth Circuit in this 2015 opinion. The opinion is styled, Cox Operating, L.L.C. v. St. Paul Surplus Lines Insurance Company.
The facts are kinda long ans somewhat confusing, plus there are other issues in the case. Of relevance here is the Court’s discussing of the Texas Prompt Pay statutes.
Texas Insurance Code, Section 542.054 says in order “to promote the prompt payment of claims,” the act provides for a series of deadlines to which insurers must adhere at each stage of the claim handling process.
First, Section 542.055 provides:
(a) Not later than … the 30th business day after the date an insurer receives notice of a claim, the insurer shall: (1) acknowledge the claim; (2) commence any investigation of the claim; and (3) request from the claimant all items, statements, and forms that the insurer reasonably believes, at that time, will be required from the claimant.
Next, Section 542.056 requires and insurer to notify a claimant in writing of the acceptance or rejection of a claim not later than the 15th business day after the date the insurer receives all items, statements, and forms required by the insurer to secure proof of loss. Then, if the insurer notified the claimant that it was accepting the claim, Section 542.057 provides that the insurer shall pay the claim not later than the fifth business day after the date notice is made. Finally, Section 542.058 provides an alternate payment deadline to the one set out in 542.057: If the insurer, after receiving all items, statements, and forms reasonably requested and required, delays payment of the claim for more than 60 days, the insurer shall pay damages and other items provided by Section 542.060.
Under Section 542.060 the insurer is liable for the amount of the claim and in addition , interest on the amount of the claim at the rate of 18 percent a year as damages, together with reasonable attorney’s fees.
In this Cox Operating case, the penalty was in the millions of dollars. But even in small cases the interest amount adds up fast, especially when the case is litigated and lasts a few years or more. As an example, a ten thousand dollar claim with penalty at 18% is 1,800 after one year or $3,600 after two years, plus attorney fees and court costs. Look again now, an one hundred thousand dollar claim has a penalty of $18,000 after one year and $36,000 after two years. Add to these amounts normal prejudgement interest that is 5 1/5% on the date of this writing and the numbers get big fast.