On September 1, 2017, Senate Bill 10 / House Bill 1774 (the “Hailstorm Bill”) goes into effect. [1] Proponents of the Hailstorm Bill will likely argue that the bill does not represent a significant regression of policyholder rights; [2] however, aggressive insurers could try to use the Hailstorm Bill to adversely affect a broad category of claims, including, potentially, all business interruption claims. For example, these carriers could contend that the Hailstorm Bill: drastically reduces the penalty for failing to promptly pay a claim; [3] imposes heightened notice obligations, which these insurers would likely use to forestall subsequent bad-faith claims; [4] compares the amount demanded in the presuit notice to the amount of damages actually received in an attempt to lower the attorneys’ fees that policyholders can recover;[5] and allow insurers to accept liability for adjusters and other agents that would require policyholders to nonsuit those individuals who normally destroy diversity. [6] Consequently, while proponents touted the Hailstorm Bill as a tailored remedy to curb the allegedly abusive action by a handful of “storm-chasing lawyers,” [7] the Hailstorm Bill, in the hands of aggressive insurers, will likely be argued to have meaningfully eroded a number of rights of Texas policyholders for an undefined and unknown number of claims. As policyholders look to obtain the coverage they rightfully purchased, there are three practical takeaways from the Hailstorm Bill that policyholders should consider.

First, the Hailstorm Bill accomplishes the majority of its objectives through the creation of Chapter 542A of the Texas Insurance Code (“Chapter 542A”). [8] Chapter 542A only applies to insurers and agents, which includes an “employee, agent, representative or adjuster who performs any act on behalf of an insurer.” See 542A.001(2). Claims against others “engaged in the business of insurance” are not expressly covered by Chapter 542A or its restrictive provisions. While prudent policyholders will evaluate each situation to determine whether the requirements of Chapter 542A apply, given the parties involved, policyholders should also guard against attempts by others “engaged in the business of insurance” to use Chapter 542A against them. [Who do you have in mind here? And, if there are folks in this category, why not name them? I’m not sure I understand who, other than an “employee, agent, representative or adjuster who performs any action behalf of an insurer” that we have in mind here.]

Second, it is likely that insurers will attempt to broaden Chapter 542A’s beyond its intended application. Chapter 542A applies to first party claims made under “an insurance policy providing coverage for real property or improvements to real property” for claims that arise “from damage to or loss of covered property caused, wholly or partly, by forces of nature.”[9] While Chapter 542A requires that the policy at issue provide “coverage for real property or improvements to real property,” the statute embraces “Claims” for “covered property” with no express requirement that the “property” for which the policyholder seeks coverage be limited to the real property covered by the policy. [10] There have been numerous statements made as to the purpose of the Hailstorm Bill that should provide guidance to courts on the limited purpose that Chapter 542A was created to address. [11] In the interim, however, policyholders should be prepared for insurers to argue that Chapter 542A has a much broader application, and would, for example, apply to business interruption claims given that coverage for business interruption is traditionally provided as part of, or by endorsement to, property polices. Until the Texas courts recognize and confirm Chapter 542A’s limited scope, policyholders will have to evaluate whether to comply with Chapter 542A’s requirements on all claims for any “covered property” under any policy that provides some coverage for real property.

Third, Chapter 542A requires policyholders to provide presuit notice of several components, including “the specific amount alleged to be owed by the insurer on the claim for damage to or loss of covered property.” [12] At trial, Chapter 542A compares the actual amount of damages received to the amount demanded in the presuit notice to determine a policyholder’s right to recover attorneys’ fees on the following scale:

  • Recovery of 80% or more of damages demanded in presuit notice entitles a policyholder to 100% of its reasonable and necessary attorneys’ fees;
  • Recovery of less than 20% of damages demanded in presuit notice eliminates the policyholder’s ability to recover any attorneys’ fees; and
  • Recovery between 20 and 79% of damages demanded in presuit notice entitles the policyholder to recover the corresponding percentage of its reasonable and necessary attorneys’ fees. [13]

Claims, however, can increase over time as policyholders discover additional damages and decrease as the policyholder and insurer resolve portions of the claim. Chapter 542A, however, does not provide any guidance on handling these practical issues. Prudent policyholders should consider submitting a detailed claim from the beginning that allocates damages under the appropriate sublimits (and alternative sublimits). To be sure, this level of detail will increase the claim preparation costs for policyholders and represents another instance in which the Hailstorm Bill shifts costs and exposure from the insurers to policyholders; but, it will likely be a necessary cost until Texas courts provide guidance on these points.