September-21-2022

The Texas Prompt Payment of Claims Act – Penalties and Interest After Appraisal

According to the Texas Prompt Payment Act, insurance companies are now obligated to make timely payments to their policyholders. In this article, the insurance claims attorneys at MMA Law Firm explain the history behind this law and the consequences of partaking in bad faith practices.

What Is the Texas Prompt Payment of Claims Act (TPPCA)?

The Texas Prompt Payment of Claims Act, or TPPCA, was passed by the Texas Legislature in the early 2000s to encourage insurance companies to undertake prompt investigation and payment of claims to policyholders. The Act imposes an affirmative duty on insurers to promptly pay claims as soon as they become aware that the claims are subject to payment per the terms and conditions of the holder’s policy. In addition, the Texas prompt payment act sets some other important ground rules as described below.

Under the TPPCA, insurers must pay out claims within 60 days of receiving all necessary forms, statements, and other items. In addition, within 15 days of receiving these submissions, the insurer must notify their policyholders if the claim has been rejected and must provide a valid reason if this is the case. Alternatively, the insurer can ask for more time, up to 45 days, to review a claim. Together, these timeframes comprise the 60-day window afforded by insurance companies under the TPPCA.

Bad Faith Tactics and TPPCA Violations

Despite the efforts of the Texas legislature to reel in the conduct of insurance companies through the Texas prompt payment act, many have persisted in utilizing bad faith tactics to avoid their obligations to policyholders and, specifically, to avoid paying claims. Bad faith in the insurance arena is when an insurance company knowingly misrepresents policy language to avoid or delay payments, fails to disclose a policy limitation or exclusion, or makes unreasonable demands of a policyholder to prove a covered loss.

Penalties for Late Payment and Underpayment

If found to have violated the provisions of the TPPCA and acted in bad faith, an insurer can be made to pay interest of up to 18% per year and pay back the attorneys’ fees incurred by the policyholder in having to pursue legal claims against the insurer.  

Texas Supreme Court Rulings

The Texas Supreme Court recently passed down its opinion on Barbara Technologies
Corp. v. State Farm Lloyds, No. 17-0640, 2019 WL 2666484, at *1 (Tex. June 28, 2019). The court reversed the judgment of the court of appeals in this insurance dispute, holding that the invocation of a contractual appraisal provision after denying a claim does not, as a matter of law, insulate the insurer from liability under the Texas Prompt Payment of Claims Act. This ruling shows a broadening of TPPCA damages and, therefore, appraisal awards.

Barbara Technologies Corporation v. State Farm Lloyds

Factual Background:

Issue of whether a policyholder can recover TPPCA damages “when it is undisputed that the insurer investigated the claim, rejected it, invoked the policy’s provision for an appraisal process, and ultimately paid the insured in full in accordance with the appraisal.”

The Court:

  • Neither proves nor disproves liability under the Texas Prompt Payment of Claims Act (TPPCA)
  • Upends years of decisions from U.S. District Courts, Texas intermediate appellate courts, and the Fifth Circuit — which generally held that the timely payment of an appraisal award barred all claims.
  • Allows a policyholder to recover penalty interest and attorney’s fees in addition to the actual claim amount.

The Decision:

  • The majority of the Supreme Court of Texas disagreed with the policyholder and insurer, reversing and remanding the case.
  • Additionally, the court rejected the insurer’s argument that the appraisal included a request for additional information under section 542.055(b), implicating the TPPCA, and extended the deadline to pay the claim.
  • The court also addressed and rejected the policyholder’s arguments in favor of its traditional motion for summary judgment. It reiterated that the payment of an appraisal award is not an admission or finding of liability under the TPPCA.

Ortiz v. State Farm Lloyds

Factual Background:

The policyholder filed suit against his insurer for breach of contract, common-law bad faith, statutory bad faith, and violations of the TPPCA. The insurer then invoked appraisal and paid the actual cash value of the appraisal award less than the deductible. The trial court granted, and the court of appeals affirmed, the insurer’s motion for summary judgment on all claims based on then-existing case law since the insurer timely paid the appraisal award

The Court:

  • Addresses whether causes of action for breach of contract, common-law bad faith, and statutory bad faith under Chapter 541 of the Texas Insurance Code survive the timely payment of an appraisal award.

The Decision:

  • Summary judgment was granted regarding causes of action for common-law bad faith, statutory bad faith, and breach of contract. The court ruled that summary judgment regarding the TPPCA claims was improper in light of the Barbara Technologies opinion.

Finding the Right Insurance Claim Attorney Near You

The attorneys at McClenny Moseley & Associates are well positioned to protect clients against bad faith insurance practices and ensure that the Texas prompt payment act is followed. If you have been denied coverage or your claim was rejected by your insurance company, get in touch with our Houston insurance claims lawyers today.