In May, Governor Abbott signed a new bill aimed at decreasing perceived hailstorm litigation abuse. Curbing hail storm litigation has been a priority for Governor Abbott this year. The new law, House Bill 1774/Senate Bill 10, will become effective on September 1, 2017, and is codified in the Texas Insurance Code.
The new law makes a few key changes to the procedure for bringing certain property damage claims against insurers and insurance agents. The majority of the bill amends the Texas Insurance Code by adding Chapter 542A, specifically applying to claims regarding property damage or loss caused in any part by “forces of nature.” Although the early impetus for the bill was hailstorm litigation, the bill’s broad scope includes additional weather events such as earthquakes, wildfires, floods, tornados, lightning, hurricanes, wind, snow and rain storms. Chapter 542A applies to these weather-related actions against an insurer or agent, including: common law causes of action, causes of action under the Insurance Code for unfair methods of competition, unfair or deceptive acts and delayed payment of claims, as well as causes of action for deceptive trade practices under Chapter 17 of the Business & Commerce Code. The changes to the Texas Insurance Code affect how claimants must bring suit, who claimants can sue and how much claimants can recover.
Under Chapter 542A, claimants for weather-related property damage must give insurers 61 days written notice as a prerequisite to filing suit on their claims. At first glance, this provision may seem no different than the current notice provision under the Texas Insurance Code. However, Chapter 542A’s notice provision lays out specific requirements for notice and includes harsher penalties for failure to comply. Generally, Chapter 542A notice must include a statement of the acts or omissions giving rise to the claim, the specific amount alleged to be owed on the claim and the amount of reasonable and necessary attorney’s fees as of the date of notice. Chapter 542A notice requires claimants to calculate attorney’s fees based on how many hours the claimant’s attorney actually worked. Further, with few exceptions, failure to provide the requisite notice can result in abatement of the suit and the court prohibiting recovery of any attorney’s fees incurred after the date the defendant filed a pleading with the court. An insurer who does not receive notice can prevent the claimant from recovering attorney’s fees by pleading lack of notice within 30 days of filing its answer and proving lack of notice.
The new law amends the Texas Insurance Code’s § 541.156(a) settlement provision to include Chapter 542A claims as well. A party who receives notice under § 541.154 or Chapter 542A of the Texas Insurance Code may make a settlement offer within 60 days of receipt of notice. The new law makes no changes to the prior settlement process aside from adding Chapter 542A claims. Typically, a claimant who rejects an offer made under § 541.156(a) risks limited recovery depending on the amount found by the trier of fact. Based on the wording of the amendment, it appears the potential ramifications for rejecting a timely settlement offer apply to claimants under Chapter 541 and Chapter 542A alike.
Additionally, if timely requested within 30 days of notice, the claimant must allow the insurer to reasonably inspect the property at issue in the claim. Failure to provide pre-suit notice or the opportunity to inspect will result in abatement.
One of the most notable changes is the claimant’s ability to pursue an action against the insurance agent or adjuster. Chapter 542A gives insurers an election to assume an agent’s potential liability to the claimant. If the insurer makes such an election by giving written notice before the claimant files an action, any cause of action related to a claim against an agent is extinguished and any action against the agent shall be dismissed with prejudice. Further, if the insurer makes the election after the claim is already filed, the court shall dismiss the action against the agent as well. Practically, this could affect the number of weather-related insurance claims that are removable to federal court under diversity jurisdiction. If the insurer has the election to keep a non-diverse agent out of the suit, the insurer may be able to remove cases to federal court more frequently.
Chapter 542A prohibits this election in some instances. Insurers should also note that the new law still requires insurers to make an agent available for deposition, even if the insurer assumes an agent’s potential liability.
The new law affects weather-related claimants’ recovery amount for attorney’s fees, damages, and the insurer’s penalty for delayed payment of claims. Unless the claimant fails to give pre-suit notice, attorney’s fees may be available to a successful claimant. Chapter 542A details a scheme for the amount of attorney’s fees based on the “lesser of” three options. Generally, attorney’s fees are limited to the lesser of the following: (1) the amount found by the trier of fact; (2) the amount that may be awarded under other applicable law; or (3) the amount calculated by: (a) dividing the property damage judgment amount by the amount alleged in the pre-suit notice; and (b) multiplying that number by the total amount of attorney’s fees determined by the trier of fact. However, Chapter 542A also sets out a couple of exceptions to the general “lesser of” rule. If the amount calculated by dividing the judgment amount by the notice amount is greater than or equal to 0.08, the court must award the full amount of attorney’s fees found by the trier of fact. But, if the number calculated by such calculation is less than 0.02, the court may not award attorney’s fees to the claimant. Essentially, Chapter 542A incentivizes claimants to be more thoughtful and realistic when alleging claim amounts in their pre-suit notice to insurers.
As discussed earlier, the amendment to the Texas Insurance Code § 541.156(a) settlement provision could affect weather claimants’ recovery. Both insurers and claimants should keep this amendment in mind when considering settlement options.
Chapter 542A also amends § 542.060 of the Insurance Code. Section 542.060 places an 18% penalty on insurers for failing to promptly pay a claim. However, claims now under Chapter 542A have a new rule for penalizing delayed payments. Chapter 542A requires the penalty be determined by adding 5% to the interest rate determined by § 304.003 of the Texas Finance Code. This interest rate can range from 5-15%, and is determined on a monthly basis. Currently, the penalty would be 10%, based on the current interest rate of 5%. While a change in the interest rate could raise the penalty to as much as 20%, such a drastic change is unlikely based on past trends.
Insurers and weather-related claimants should keep these changes in mind, especially during the pre-suit stage. Overall, the changes seek to remove some of the incentives to flood insurers with weather-related litigation. Through the heightened notice requirement, reduced penalties and limited attorney’s fees, attorneys may be less likely to over-litigate weather-damage claims that can be resolved without a lawsuit.
From our Houston office, Lugenbuhl shareholder Donna Thomisee focuses her practice on litigation and insurance coverage and defense. View her profile to learn more about her experience or visit our Insurance practice section to learn more about our firm’s expertise and services. Recent graduate of Baylor Law School, Briana Loughlin, also contributed to this article.
The content of this article is not intended to serve as an exhaustive review of the laws, statutes or issues related to insurance litigation, and it is not intended to provide legal advice. The opinions expressed through this article may not reflect the opinions of the firm, individual attorneys or clients.