Texas Amends Insurance Code In Response To Weather Claims
On May 26, 2017, Texas Governor Greg Abbot signed into law Texas House Bill 1774/Senate Bill 10. The new law makes changes to the Texas Insurance Code that will impact the way in which weather claims are brought and how those claims may be defended. The new law becomes effective on September 1, 2017.
The amendments to the Texas Insurance Code add a new Chapter 542A, which governs certain consumer actions related to claims for property damage. Specifically, Chapter 542A applies to any first-party claim which arises from “damage to or loss of covered property caused, wholly or partly, by forces of nature, including an earthquake or earth tremor, a wildfire, a flood, a tornado, lightning, a hurricane, hail, wind, a snowstorm or rainstorm.” Claims against the Texas Windstorm Insurance Agency are exempted from the new law.
Notice, Inspection and Opportunity to Settle
Chapter 542A continues the policies underlying Section 541.154(a) of the Texas Insurance Code that require notice of a potential claim at least 61 days before suit is filed and provide the insurer an opportunity to settle a dispute claim pre-suit.
The scope of Chapter 542A, however, is significantly broader than the notice provisions that currently exist under Section 541.154 and the Texas Deceptive Trade Practices Act (“DTPA”). Chapter 542A broadly applies to any action on a claim against an insurer, including claims for breach of contract, fraud and misrepresentation, common law bad faith, alleged violations of the Texas Insurance Code and the DTPA. This means that Chapter 542A requires a potential claimant to notify its insurer of potential litigation before he or she files suit, regardless of the nature of the claim involved.
The notice also must now contain very specific information about the claim, including: (1) a statement of the acts or omissions giving rise to the claim; (2) the specific amount allegedly owed; and (3) the amount of reasonable attorney’s fees incurred to date in connection with the claim. This notice is not required if notice is impracticable due to an impending statute of limitations deadline or if the claim is being asserted as a counterclaim.
Importantly, the notice provisions under Section 542A.003 provides specific instructions and requirements for the attorney’s fees demand in a pre-suit notice. Unlike the existing notice provision under § 541.154, the amount of attorney’s fees set forth in the demand must be based on the amount of hours actually worked by the claimant’s attorney, as reflected in contemporaneously kept time records.
Once notice is given, § 542A.003 allows for a 60-day deadline for an insurer to make a settlement offer. Section 542A.004 also allows an insurer 30 days in which to request an inspection of the property at issue. If a claimant fails to provide the required notice, choosing instead to simply file a lawsuit, § 542A.005 requires that a court abate the claim. Similarly, a court must abate a claim if an insurer does receive notice, but is denied the opportunity to inspect the property at issue.
Limitations on Prompt Payment Damages
The new law also changes the damages which may be assessed for certain violations of the Prompt Payment of Claims Act. The prior version of the Prompt Payment of Claims Act imposed additional damages equal to 18% per annum of the actual damages on an insurer who violated the Act. However, for those claims covered by new Texas Insurance Code Chapter 542A, an insurer which is not in compliance with the Prompt Payment of Claims Act will now be liable for additional damages of 5% percent per annum interest added onto the post-judgment variable interest rate determined under Texas Finance Code Section 304.003.
Under the Texas Finance Code, the post-judgment interest rate varies between 5% and 15%, depending on the prime rate established by the Federal Reserve.. Thus, insurers in violation of the Act in claims subject to Chapter 542A face a sliding scale of statutory interest damages that will range from 10% to 20% per annum. While the new rate could exceed the existing 18% per annum if interest rates increase significantly to levels not seen in decades, the new interest damages are likely less that the current 18% per annum damages, at least for the foreseeable future. Currently the post-judgment interest rate is 5% per annum, which results in 10% additional interest damages under the Act until such time as the post-judgment variable interest rate is raised.
The new interest calculation only applies to a claim that is first tendered to a carrier after the effective date of the Act on September 1, 2017.
Effect of Insured’s Failure to Make Demand or Allow Inspection Under Chapter 542A– Impact on Attorney’s Fees Recoverability
In weather related first party litigation, the threat of potential attorney’s fees triggered by minor infractions of the Texas Insurance Code has often been used as a hammer to induce settlement. However, the new law links recovery of attorney’s fees to the claimant’s trial recovery and initial demand.
Section 542A.007 limits an attorney’s fees recovery to the lesser of: (1) the amount of fees incurred by the claimant in bringing an action; (2) the fees recoverable under another law; or (3) an amount based on the difference between the demand and the amount awarded in a judgment. Under this final provision, the court would divide the amount to be awarded by the amount of the initial demand to obtain a ratio. This ratio is then be multiplied against the amount of fees actually incurred by the claimant. Thus, an excessive demand will result in a substantial reduction of recoverable attorney’s fees, or no recovery at all; but a reasonable or even low demand will result in a recovery of attorney’s fees in excess of the fees actually incurred.
The new law also provides additional and very important restrictions on an attorney’s fees recovery. If a defendant is not given notice as required, § 542A.007(d) prevents a court from awarding any attorney’s fees incurred after the defendant files a separate pleading with the Court. The separate pleading must be filed within 30 days of the date the defendant filed its original answer. The outright bar on recovering attorney’s fees created by § 542A.007(d) should serve as a substantial incentive to follow the law for those lawyers that have traditionally ignored the pre-suit notice requirements in the Texas Insurance Code. Otherwise, insurers will have a valuable tool at their disposal to defend themselves when sued without any prior notice.
Acceptance of Liability and the Impact on Removability
The new law also includes provisions relating to the potential liability of third parties. A common occurrence in recent weather related first party litigation involves the inclusion in a lawsuit of local or independent adjusters or consultants in a claim. Among other impacts, their inclusion prevents insurers from removing a state-filed case to federal court.
Under the new law, however, an insurer can remove the local adjuster or consultant from a claim altogether by agreeing to be liable for any conduct by such local adjuster or consultant. Under § 542A.006, an insurer may accept any liability this third party, as its agent, might have to the claimant by providing written notice to the claimant. If an insurer accepts its agent’s liability before an action is filed, a claimant has no cause of action against the agent, and if the claimant files an action, the court must dismiss that action with prejudice. Alternatively, if the insurer accepts its agent’s liability while an action is pending, the court must also dismiss that action with prejudice.
How exactly this will impact weather-related insurance claims is not yet known. If an insurer receives the required notice before a lawsuit is filed and makes a timely election, the insurer should be able to remove the case to federal court even if the local adjuster or consultant is named because the claimant has no realistic chance of recovering against the local adjuster or consultant. Indeed, the acceptance of liability provision was explicitly designed to create an option to remove the case.
However, under existing precedent, if the insured makes the election while an action is pending, the subsequent dismissal of the local adjuster or consultant likely will not allow the insurer to remove the case. The jurisprudence surrounding the removal statute states that the removability of a case is determined as of the date of filing, and a case becomes removable at a later date only by some voluntary action by the claimant. Thus, if the claimant does not provide the required notice and files suit, the insurer does not have the opportunity to make that election beforehand. Although this may create an incentive to file without notice, the corresponding prohibition on recovering attorney’s fees arguably makes it less likely that a claimant would do so.
The new law nonetheless does carve out a few exceptions to this provision. First, an insurer cannot accept the liability of a local adjuster or consultant if the insurer is in receivership at the time a claimant files an action against the insurer. Second, an insurer’s election of liability cannot be used to obtain the dismissal of an action against an agent if the election of liability allows the insurer to avoid liability for any claim-related damage caused to the claimant by the agent’s acts or omissions. However, if an insurer makes an election of liability in an action where the agent is not a party, evidence of the agent’s acts or omission may be offered at trial and included in the judgment against the insurer. Finally, the insurer may not condition the acceptance of liability in such a way as to avoid responsibility for the local adjuster’s or consultant’s acts or omissions.
Importantly, an insurer which accepts the liability of a local adjuster or consultant will be required to make that person available for deposition under § 542A.006(d). If the insurer fails to make that agent available, §§ 542A.007(a), (b), and (c), which relate to attorney’s fees, will not apply to the action in which the insurer made the election, unless the court finds: (1) a change in circumstances which makes it impracticable to make the agent available; (2) the agent whose liability was assumed would not have been a proper party to the action; or (3) obtaining a deposition of the agent is not warranted under the law.
The new amendments to the Texas Insurance Code potentially have significant impact on how weather-related claims are brought and defended. Insurers and policyholders alike should take careful note of these changes, particularly in the beginning stages of a claim. The stringent pre-suit notice requirements should afford insurers an opportunity to try to resolve claims one last time before becoming embroiled in protracted litigation and, if necessary, use that additional time to demand an appraisal on a disputed loss to limit its potential exposure on extra-contractual claims.