Texas Court Predicts Accrual Date for Prompt Payment of Claims Act

In its recent decision in Cox Operating v. St. Paul Surplus Lines Ins. Co., 2014 U.S. Dist. LEXIS 3140 (S.D. Tex. Jan. 10, 2014), the United States District Court for the Southern District of Texas had occasion to consider when the statutory interest penalty begins accruing for the purpose of Texas’ Prompt Payment of Claims Act (“TPPCA”) TEX. INS. CODE § 542.051, et seq.

St. Paul was the excess pollution liability insurer of Cox, and was found to have breached its coverage obligations following a lengthy jury trial.  Among other things, the jury determined that St. Paul violated the TPPCA by not requesting information from Cox in a timely fashion.  Following the jury verdict, the court assessed a statutory penalty against St. Paul for its violation of the TPPCA, running from October 16, 2006, which the court determined was seventy-five (75) days after July 31, 2006, the date on which the jury concluded that St. Paul was provided with all of the information necessary to make payment on Cox’s claim.  On motion for reconsideration, Cox argued that the statutory penalty should have begun running from an earlier date.  Specifically, Cox argued that the statutory penalty should have begun running from November 17, 2005, which is the date on which the jury determined that St. Paul was in violation of § 542.055 of the Texas Insurance Law, concerning an insurer’s duty to acknowledge and investigate a claim.  Thus, Cox argued that statutory interest period should run from the date that St. Paul breached its duty to investigate rather than the date that it breached its duty to pay.

The court acknowledged that there was little “definitive guidance” on the issue, observing that neither Texas’ Supreme Court nor the Fifth Circuit had considered the accrual date for statutory penalty interest under the TPPCA.  The court nevertheless found guidance from the statutory scheme itself.  § 542.055 states that within fifteen (15) days for admitted insurers, or thirty (30) days for surplus lines insurers such as St. Paul:

… the insurer shall: (1) acknowledge receipt of 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.

Further, § 542.058 states that:

… if an insurer, after receiving all items, statements, and forms reasonably requested and required under Section 542.055 delays payment of the claim for more than 60 days, then the "insurer shall pay damages and other items as provided by Section 542.060.

§ 542.060, in turn, sets forth the statutory penalty interest rate at 18% per year.

In considering these statutory provisions in connection with Cox’s insurance claim, the court observed that Cox provided its initial proof of loss on October 17, 2005, but that St. Paul failed to request information from Cox pursuant to § 542.055 within the thirty-day period.  As such, St. Paul was deemed for the purposes of the accrual date of the statutory interest period to have signaled to Cox as October 17, 2005 “it [had] all the information that it reasonably believes will be required from the insured.”  The court so concluded notwithstanding the fact that St. Paul did not actually have all information necessary to evaluate Cox’s claim and that this information was not, in reality, provided for another year:

While St. Paul may not have been in a position to evaluate the claim on December 16, 2005, that resulted from its failure to meet its claim handling deadline [under § 542.055]. St. Paul cannot avoid statutory penalty interest when it was St. Paul's failure to commence an investigation and request documents that hindered the process under the TPPCA. Under Section 542.058, St. Paul was given 60 days to pay the claim after requesting all information needed from the insured. However, because St. Paul failed to meet its initial obligation to request all items, statements, and forms from Cox in a timely manner after notice of the claim, it relinquished its ability to do so under that statute …

The court, therefore, determined that the proper accrual date for the sixty-day payment window under § 542.058 was October 17, 2005, meaning that payment was due on December 16, 2005, and that interest should be calculated from that date.