Contrary to what Texans for Lawsuit Reform wrote in its press release, the reduction of the penalty interest rate will disincentivize prompt payment during the claims process

Recent changes to Texas insurance law are set to have a considerable impact on Texans affected by Hurricane Harvey. This week, the lobbyist group Texans for Lawsuit Reform (TLR) issued a widely distributed press release concerning the recent changes to Texas insurance law.  In it, they say, “the new law does not affect the claims process.”  They say it “affects only the lawsuits that sometimes follow the claims process.”  They even say, “it does not create a new deadline for action by policyholders.”  There’s quite a bit of confusion about this new insurance law, and to be honest it isn’t very well written, but these statements from TLR aren’t correct.

Less than 1% of claims arising out of a major natural disaster actually result in lawsuits, so contrary to what TLR has distributed, this is very much about the claims process. The better and quicker that process is handled, the less likely it is that the claims process will lead to litigation. The goal of consumer protection laws is to put financial incentives in the right place and avoid litigation. When it comes to insurance, the stronger the penalty for non-compliance, the more likely it is that an insurance company will comply with the law during the claims process so that litigation can be avoided. Reducing the penalty interest rate by nearly 50% disincentives insurance companies to complete and conclude the claims process in a timely and efficient manner. It gives them a financial incentive to hold onto claims payment money longer. It materially affects the promptness with which the claims process is conducted, and it very much matters to Texans.

The part of the new insurance law that everyone is concerned about right now are the amendments to Section 542.060 of the Texas Insurance Code reducing the interest rate from 18% to 10%.  And for Section 542.060, September 1, 2017 is a very important date, because if you notify your insurance company of a claim on or after that date, the rate they must pay if the claim is unlawfully denied is cut nearly in half. This is the case regardless of whether or not a lawsuit is ever filed.

Section 542.060 has been around for a long time, and it has always required the payment of penalty interest on unlawfully delayed insurance claims, regardless of whether a lawsuit is filed.   In fact, our firm has seen many occasions where responsible insurance companies voluntarily complied with this law and paid the 18% interest during the claims process if their first estimate was understated, even in the absence of lawsuit or court order requiring them to do so.

The payment of penalty interest when a lawsuit is filed is treated differently that the ordinary claims process under the law. Under Section 542.060, a recalcitrant insurer must pay penalty interest any time a claim is unlawfully delayed, but they must also pay attorneys’ fees if that delay results in litigation.   This distinction for claims that result in litigation is addressed by a subsection of 542.060, which only requires the payment of attorney’s fees if a lawsuit is filed.

The TLR press release is misleading, because it inaccurately claims that the new insurance law only affects lawsuits and not the ordinary claims process. The reduction in interest materially affects the claims process, because it disincentives insurance companies to act promptly and efficiently. Now they will pay half as much interest if they unlawfully delay a claim during the claims process. At this point, most of us have probably figured out that TLR had a draftsman’s role in House Bill 1774, and they intended its application to the claims process when they designed two different effective date provisions, one for “an action,” and a separate one for “a claim.” Our state lawmakers may be confused about this, but it’s a safe bet that TLR isn’t.

Don’t Trust Everything You Read About The New Insurance Law

So the bottom line is this: If an insurance claim is made before September 1, 2017, then 18% interest applies to the claim if the insurer delays payment.  If the claim is made on or after September 1, 2017, then the new 10% interest rate applies.  And as TLR accurately points out, all of this applies to state law claims, which do not include flood claims made under a National Flood Insurance Program insurance policy. If you have a flood claim under an NFIP policy, your claim is not affected by the new Texas law. But if you have a wind claim or even an excess flood policy issued outside of NFIP, then the prudent course of action is to notify your insurer of your Hurricane Harvey claim before this Friday, September 1, 2017.

After all, there just may be a reason why TLR is suggesting otherwise.