Recently, the Texas Supreme Court issued an opinion on a case involving insurance companies and violations of Insurance Code Chapter 542, which encompasses the Texas Prompt Payment of Claims Act.
The case began with the Plaintiff, Louis Hinojos, who filed suit against State Farm for violation of Insurance Code Chapter 542. Hinojos’ home sustained significant damage after a hailstorm in 2013. After the initial inspection, State Farm’s adjuster assured Hinojos that the value of the claim, which included damages of $755.02, was less than his policy’s deductible; therefore, State Farm would not pay anything on his claim.
Hinojos did not accept the initial evaluation of his claim and requested a second inspection, resulting in the identification of additional damages to his property. State Farm then notified Hinojos in writing that there was “covered damage” in the amount of $3,859.22. Along with this determination, Hinojos also received a payment of $1,995.11. The sum, according to State Farm, reflected the value of the claim, less the insured’s deductible and depreciation. Hinojos proceeded with his lawsuit against State Farm, alleging that State Farm had violated Chapter 542 by failing to timely pay his claim.
Almost two years after Hinojos’ initial claim and over a year of protracted litigation, State Farm invoked the policy’s appraisal clause. This clause essentially allows the appraisers to determine the amount of the loss when the insured and insurer fail to reach an agreement.
The replacement cost for Hinojos’ loss was valued at $38,269.95 and the cash value was $26,259.86. Hinojos received an additional $22,974.74 from State Farm. The sum represented the appraisal award less the earlier payment issued to Hinojos, the deductible, and depreciation.
Soon after the appraisal and award, State Farm filed for summary judgment claiming that “timely tendering of the appraisal award precludes prompt payment damages under Chapter 542 of the Texas Insurance Code”. Hinojos argued that State Farm was indeed subject to statutory liability, as it had failed to issue payment within the deadlines provided by section 542.057. As a result, Hinojos sought out the statutory interest on the difference between the final appraisal award and the partial payment he initially received. The trial court ruled in favor of State Farm and granted their summary judgment. Hinojos appealed, and the court of appeals later affirmed the court’s ruling.
Hinojos further pursued a review of his case by the Texas Supreme Court, and his review was ultimately granted.
Hinojos argued, “[w]hile State Farm paid part of the claim ‘not later than the fifth business day after the notice was made,’ it did not pay the rest of the claim within the statutory time frame.” State Farm responded, stating it “undisputedly paid Hinojos’ claim within 60 days after receiving all information required to evaluate the claim.”
Texas Insurance Code provides that once an insurer receives a claim it has only fifteen days to acknowledge receipt of that claim, investigate, and request from the claimant all “items, statements and forms” in order to evaluate the claim. Once the insurer receives those items, it has fifteen business days to inform the claimant in writing whether the claim is accepted or rejected. If the claim is accepted, in part or in whole, payment must be made within five business days. In order to hold insurance companies accountable for these deadlines, Chapter 542 imposes liability on the insurers when deadlines are missed, thereby allowing the claimant to recover not only the amount of the claim but also statutory interest and attorney’s fees.
In this case, the Texas Supreme Court found that the parties agreed on the key facts that State Farm “accepted” Hinojos’ claim and paid some money toward the claim within the statutory window, and State Farm ultimately paid the full amount it owed to satisfy the claim after the deadline had passed. The question presented to the Texas Supreme Court was, based on these facts, whether State Farm would be liable for damages under Chapter 542.
After consideration of the law and facts, the Texas Supreme Court reversed the judgment of the court of appeals and remanded the case to the trial court.
In making its ruling, the Texas Supreme Court considered a case it had ruled on shortly after the court of appeals made its ruling in this case.
In Barbara Technologies Corp. v. State Farm Lloyds, State Farm rejected the initial claim, deeming damages to be below the policy deductible. After an appraisal determination, State Farm paid the claimant for its claim. The court concluded that an appraisal payment was not “an acknowledgment of liability nor a determination of liability under the policy” for the purpose of assessing damages under Section 542 of the Texas Insurance Code. It further ruled that “[n]othing in the TPPCA would excuse an insurer from liability for TPPCA damages if it was liable under the terms of the policy but delayed payment beyond the applicable statutory deadline, regardless of use of the appraisal process.”
The Court followed the ruling from Barbara Technologies Corp. v. State Farm Lloyds in determining this case and held that State Farm’s later payment of the appraisal award did not bar it from Chapter 542 liability.
State Farm adopted the Court of Appeals’ ruling that State Farm was indeed entitled to summary judgment due to Chapter 542 requiring only “a reasonable payment” within the statutory sixty-day statutory limit, not the full payment. However, the court ruled that Chapter 542 does not discharge prompt payment liability based on partial payment of the amount that “must be paid” under the policy. If this were the case, insurance companies could simply pay a portion toward a valid claim and fully avoid the prompt payment deadline imposed by Texas Legislature.
The court fully rejected this contention and explained, “[t]his encourages insurers to pay the undisputed portion of a claim early, consistent with the statute’s purpose ‘to obtain prompt payment of claims pursuant to policies of insurance.’”
Justice Blacklock further distinguished between the statutory definition of “claim” and the amount owed under a policy. This clearly sets out the difference between the amount State Farm agreed to pay and not the actual amount owed. Chapter 542 expressly defines “claim” to be the amount that “must be paid” and not the amount the insurer agrees to pay. Additionally, it does not provide that partial payment of a valid claim would discharge any liability for statutory interest.
Ultimately, the Texas Supreme Court held that the insurer’s acceptance and partial payment of the claim within the statutory deadline did not preclude liability for interest on amounts owed but unpaid after the expiration of the statutory deadline. Following this ruling, Hinojos must now return to the state court to pursue his claim for relief under Chapter 542.