You know that feeling? The one that you get when you walk up to the vending machine, put in your money — or swipe your card — make your selection and … nothing? You paid. You lived up to your end of the bargain. And the machine just sits there. You know that feeling?
The insurance process can be a little like that.
We saw in Part 1 the ubiquity of insurance and the importance of the claims process to virtually every individual and business in the country and the state.
Your client buys an insurance policy to cover their business against bad luck, bad weather or bad actors. The client pays their premiums, and the policy promises certain benefits. If bad things happen that are covered by the policy, your client expects to receive the promised benefits. If the policy proceeds are not forthcoming after a covered loss, your client turns to you because they’ve been denied the value of their bargain.
Why do they turn to you? Because you’re a lawyer, and Texas businesses depend on the law to provide fairness and accountability. At least that’s the theory.
The theory doesn’t always hold up when it comes to the statutory provisions pertaining to the Prompt Payment of Claims Act — Chapter 542 of the Texas Insurance Code — a statute ostensibly enacted to provide enforcement mechanisms for Texas businesses, among others, and their lawyers in transactions between insurance companies and their policyholders.
Texas courts historically imposed a common law duty of good faith on insurance companies doing business in the state and imposed significant damages for its violation. The Legislature understood that Texas businesses could not rely on their insurance policies as intended if claims were not promptly investigated and the payments owed for covered losses were not timely paid. Enter Chapter 542 of the Texas Insurance Code.
Chapter 542 imposed a “strict liability” penalty separate from the duties originally designed to incentivize carriers to avoid egregious but commonplace “unfair practices.” In particular, the statute limited penalties for delayed payments to 18 percent and allowed the insured to receive attorney’s fees necessitated by being forced to pursue unpaid policy benefits.
Texans and Texas businesses operated under these constraints for a few years, but the carriers — most of whom, remember, are not Texas companies — determined that these incentives to act quickly were unacceptable and mounted an intense and expensive lobbying effort, resulting in a couple of significant changes in the potential penalties for failing to timely investigate and pay policy benefits.
The first method that made violations of the statutory standards more palatable was reducing the penalties for delayed payment of claims involving damage to property (which is the type most commonly suffered by Texas businesses) from 18 percent to a figure derived by adding 5 percent to the prime rate. At the time of passage, the damage limit was 10 percent. As of this writing, that figure amounts to 13.5 percent.
The second way the Legislature brought its chisel to bear on a Texas business’ rights was by curtailing the ability to recover attorney’s fees in these cases. Enter Chapter 542A of the Texas Insurance Code.
Considering the two statutes together (Chapters 542 & 542A), the attorney’s fee recovery is now strictly contingent upon the insured giving the carrier a prescribed notice, including the amount being claimed, before filing suit.
The notice requirement gives the carrier another chance to evaluate or “adjust” the loss. It also presents the policyholder’s counsel with a Catch-22 situation.
Suppose the notice recites a claim for damages greater than the amount ultimately determined by the trier of fact to be owed. In that case, the statute punishes the claimant’s inaccuracy by reducing the potential fee award. The reduction of recoverable fees is on a sliding scale based on the discrepancy between the claim amount and the amount awarded, with zero being the low end.
Thus, the insured’s lawyer must — at the risk of failing to make their client whole — precisely determine the loss before having the benefit of discovery and adequate expert consultation, effectively reversing the burden of claim investigation ostensibly imposed by the statute on the carrier. (The claim appraisal process — another way foreign carriers are trying to penalize their policyholders — will require a separate article to discuss.)
Perhaps more insidiously, Chapter 542A prevents foreign insurance companies from being subject to the jurisdiction of Texas state courts.
Any experienced practitioner knows that insurance companies fare better in the federal court system than in the state courts. The reasons for this phenomenon are well beyond the scope of this article, but one cannot truthfully deny its existence.
Often, when unfair claims practices occur, they are the product of a concerted course of action by the carrier, its adjusters and others. Unlike the foreign insurance companies, adjusters are often Texas residents. Joining all involved parties in the lawsuit defeats federal diversity of citizenship jurisdiction, and the case must remain in Texas state court.
Chapter 542A gives the foreign insurance company the right to accept liability on behalf of any of its “agents,” defined as anybody who does anything on behalf of the company. If it does so, then the agent is excluded as a party to the suit. Thus, diversity exists between the Texas business and the foreign insurance company, and the carrier will remove the lawsuit to federal court.
This recitation of legislative actions favorable to foreign insurance companies but harmful to Texas businesses is by no means exclusive. These carriers have manipulated the system and chipped away at Texas policyholders’ rights and remedies in myriad other ways. And they’re not finished.
In Part 3, we’ll examine the claims appraisal process and discover how foreign insurance companies are attempting to force policyholders to hire counsel and then use the courts to prohibit recovery of fees, thus exacerbating the imbalance between carriers and their customers. Stay tuned.
Marc Gravely is the founder of Gravely PC, a Texas-based firm devoted to insurance claim and construction defect disputes on behalf of businesses, homeowners associations and related organizations, and governmental entities.
