Confusion in Texas Over the "Timely" Handling of Liability Claims
On August 31, 2007, the Texas Supreme Court issued its long awaited decision in Lamar Homes v. Mid-Continent Casualty Company, 2007 WL 2459193. Although the bulk of the decision dealt with coverage under a liability policy for construction defect claims against an insured, another part of the decision has created significant alarm among some American insurers concerning the Court’s willingness to allow the Texas Prompt Payment of Claims statute to apply to defense and indemnity claims under a liability policy. The statute – previously found in Article 21.55 and now found in Article 542.051 of the Texas Insurance Code -- only applies to “first party claims” that “must be paid by the insurer directly to the insured or beneficiary.” Historically, Texas insurers have interpreted the penalty statute to only apply to claims under property, life, health, and other traditional “first party” coverages. In Lamar Homes, the Texas Supreme Court said that the Texas penalty statute also applied to defenses and indemnity claims under liability policies.
The insurer in the case, Mid-Continent, recently filed a motion for reconsideration of the Texas’ high court’s decision specifically challenging the application of the penalty statute to liability coverage. The Hartford recently filed an amicus brief in support of the carrier’s position and other carriers are now evaluating whether they will join in support of the carrier’s opposition to this ridiculous extension of statute that should not apply to a liability policy. Unless it is changed, Lamar Homes will wreak havoc with commercial and personal lines insurers doing business in the Lone Star state. As written, the decision raises numerous significant questions. For example, under the statute, carriers have to “acknowledge claims” within 15 days. It is unclear on how liability insurers can easily comply when receipt of defense bills typically occurs monthly and receipt of settlement demands can occur many times during the life of the file. The Court obviously didn’t contemplate the impact of this ruling on liability policies containing large deductibles or self-insured retentions. “Fronting” policies also create serious workability problems. The statute also triggers a response deadline following receipt of a “final proof of loss,” a concept common in property, life and health policies but unheard of in liability coverage. The statute also imposes an 18% penalty on carriers who violate the time requirements of the Act, but under Lamar Homes it is now unclear whether this penalty applies to every legal bill submitted over the life of the claim or whether the penalties applies to every settlement demand made over the life of a file. The statute also triggers obligations based upon a carrier’s “acceptance or rejection” of the claim, but what happens when only 1 of 10 claims is covered under the policy? Does the 18% penalty apply to the entire amount of the attorney’s fees even though only 1 of 10 claims is covered? Similarly, how would a liability carrier factor in a significant coverage defense—such as “late notice” of the claim by the insured—when the liability carrier fails to comply with the statutory deadlines? The Supreme Court of Texas has made significant strides over the last decade to bring reason and fairness to a court that was previously owned by the Plaintiffs’ bar. This decision needs to be modified to avoid pandemonium among Texas liability insurers, but the decision reflects more on the high court’s lack of understanding of the nuances of insurance company operations than a philosophical shift. We can only hope that the Court reconsiders the applicability of Texas’ Prompt Payment of Claims statute to liability claims and limits the application to the statute to those first party claims to which the statute was intended to apply.
