United States: Texas Legislature Aims To Curb First-Party Property Insurance Abuses Occasioned By Weather Related Events

Law: Texas HB1774
         Texas State Legislature

It is no secret the state of Texas has experienced its fair share of foul weather and property damage claims within the last five years. In 2016, the state experienced one of, if not its most expensive hail and storm season in recent memory with an estimated half-a-million hail-damage claims alone. Insured losses for these claims have totaled more than $4,000,000,000. Along with the uptick in claims, the state experienced a flood of hail-related lawsuits exploiting provisions of Texas law. These suits have been known to generate substantial fees for often times meritless claims.

The suits have triggered concern and worry from Texas citizens across the state. A 2017 Texas Department of Insurance Report informs there was a 1,400% increase in the number of hail and windstorm related insurance lawsuits from 2012 to 2015. The obvious concerns include insurers exiting the market, refusing to cover hail-related claims, or increasing premiums outside of the reach of many homeowners; all of which would leave insureds otherwise exposed to risks.

Lawmakers addressed the concern in the 2017 Texas State Legislature Regular Session, when the legislature passed Texas HB 1774 and its Senate counterpart, SB 10. The measure aims to address specific abuses of the existing Insurance Code, including trumped up property damage claims, penalties and legal fees. The bill was signed by the Governor on May 26, 2017, effecting the legislation on September 1, 2017. The new law adds Section 542A to the Texas Insurance Code, designed to address first party property claims arising from forces of nature, including earthquakes or earth tremors, wildfires, floods, tornados, lightning, hurricanes, hail, wind, snowstorms, or rainstorms.

In a number of problematic suits, insurers were not aware that the insured suffered property damage as a result of the storm events. To address this, Chapter 542A first requires written notice before suit can be filed. Sec. 542A.003 requires the plaintiff to provide written notice to the insurer not later than the 61st day before the date a claimant files an action. The notice must provide: 1) a statement of the acts or omissions giving rise to the claim; 2) the specific amount alleged to be owed; and 3) the amount of reasonable and necessary attorney's fees incurred by the claimant. If a pre-suit notice is not provided, the court is precluded from awarding attorney's fees incurred after the date the defendant files the pleading with the court.

The new law further facilitates claim adjustment by providing insurers with a right to inspect the damaged property. Under Sec. 542A.004, an insurer may, no later than the 30th day after receiving a pre-suit notice, send a written request to the claimant to inspect, photograph, or evaluate the property that is the subject of the claim. The subsection requires the inspection, photography, and evaluation to be completed not later than the 60th day after the date the person receives the pre-suit notice, if reasonably possible.

The law continues on to protect the interest of insurers by allowing an insurer to file a plea of abatement not later than the 30th day after the original answer is filed if no pre-suit notice is provided or if a reasonable opportunity to inspect the property was not provided to the insurer.

Perhaps most importantly, the new law prescribes the manner in which attorney's fees are calculated in suits to which Chapter 542A applies. Sec. 542A.007 informs attorney's fees will be the lesser of:

  1. the amount of reasonable and necessary attorney's fees supported at trial by sufficient evidence and determined by the trier of fact to have been incurred by the claimant in bringing the action;
  2. the amount of attorney's fees that may be awarded to the claimant under other applicable law; or
  3. the amount calculated by:
    1. dividing the amount to be awarded in the judgment to the claimant by the amount alleged to be owed in the pre-suit notice; and
    2. multiplying the amount determined under "A)" by the total amount of reasonable and necessary attorney's fees supported at trial

If, however, the claimant receives 80% or more of the initial amount demanded in the pre-suit notice, the court shall award the full amount of reasonable and necessary attorney's fees supported at trial. If the claimant is awarded 20% or less of the initial amount demanded, the court may not award attorney's fees.

Additionally, the new law allows an insurer to assume the liability of the insurer's agent for the agent's acts or omissions related to the claim by providing written notice to the claimant. If the insurer makes the agent available at a reasonable time and place to give deposition testimony and the insurer assumes the liability of the insurer before a claimant files an action, the law provides no cause of action exists against the agent. If liability is assumed after the claimant files suit, the law instructs the court to dismiss the action against the insurer with prejudice. This provision of the new law appears to aim at preventing an insured defeating diversity jurisdiction by adding a non-diverse party. As a result, the provision allows for more opportunities to remove the matter to federal court. This, however, comes with a risk. Once an insurer assumes the agent's liability, the insurer may not revoke and a court may not nullify the insurer's election.

HB 1774 alters the rule for penalties assessed against insurers for failing to promptly pay claims. The general rule under Section 542.060 is an insurer is liable for 18% per year on the amount of the claim. HB 1774 changes the general rule to specifically address claims to which Chapter 542A applies. Now, Insurers will be liable for simple interest on the amount of the claim determined by adding five percent to the interest rate under Section 304.003, Finance Code. As of the date of June 2017, the interest rate under Section 304.003 is 5%. Thus, the penalty under Section 542.060, as amended by HB 1774, will total 10%. This is a significant reduction from 18% typically awarded for the failure to promptly pay claims.

In sum, HB 1774 appears to walk the line of providing insureds with a remedy to seek fair compensation for wrongful denials under property insurance policies, while still protecting insurers and the general public from abusive law suits. Traditional remedies under Texas law remain, but loopholes allowing for abusive litigation have been addressed by the new law. These changes go into effect on September 1, 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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