While insurance claims may be far from the first priority for clients affected by Hurricane Harvey, a new law takes effect on Sept. 1, 2017, that may affect first-party property insurance claims stemming from Harvey, floods and other "forces of nature." Although Texas Gov. Greg Abbott signed House Bill 1774 into law in May 2017, the new law is generating significant interest and substantial media attention in light of Hurricane Harvey. This client alert is designed to explain the new law to facilitate an appreciation of the changing legal landscape and to enable informed decision-making.
Application of the New Law
The new law amends the Texas Insurance Code and, among other things, affects a policyholder's ability to recover its attorney's fees in litigation against insurers and reduces the amount of penalty interest an insurer must pay if it fails to pay claims promptly or wrongfully denies a meritorious claim.
The new law will apply to actions brought against insurers for breach of contract, negligence, misrepresentation, fraud, breach of a common law duty, actions under Chapters 541 and 542 of the Insurance Code and under the Texas Deceptive Trade Practices Act.
Pre-Suit Notice Requirements May Affect a Policyholder's Ability to Recover Attorney's Fees
Starting Friday, Sept. 1, the new law requires a claimant to provide written notice to its insurer at least 60 days before bringing an action against the insurer. The new law's notice requirement is important for the reasons summarized below, and may give insurers time to evaluate a claim, inspect the affected property and pay a claim without any need for litigation.
The notice required by the new law must provide 1) a statement of the acts or omissions giving rise to the claim, 2) the specific amount alleged to be owed by the insurer on the claim for damage to or loss of covered property, and 3) the amount of reasonable and necessary attorney's fees incurred by the claimant. Importantly, sending notice under the new law does not relieve a policyholder of its obligation to provide notice as required by its insurance policy.
If a policyholder fails to provide the pre-suit notice before bringing an action, 1) the policyholder is barred from recovering attorney's fees, and 2) the insurer is entitled to an abatement of the action until notice is given.
Moreover, even if the notice is given, it is important for the policyholder to be accurate in its estimate of its claim. The new law limits – or bars – the recovery of attorney's fees based on how accurately the policyholder estimated its damages. For instance, if the damages a policyholder is awarded is 20 percent or less than its estimate, the policyholder is barred from recovering attorney's fees. If the estimate-to-damages ratio is between 20 percent and 80 percent, then the policyholder can only recover that ratio multiplied by the amount of its attorney's fees. Only if the policyholder recovers 80 percent or more of its estimate will the policyholder be entitled to its full amount of attorney's fees.
Reduced Penalty Interest for Violations of Insurance Code Chapter 542
Another change resulting from the new law relates to the amount of interest a policyholder is entitled to receive as a penalty for an insurer's failure to comply with Chapter 542 of the Insurance Code, which contains requirements applicable to the payment of claims. Prior to Sept. 1, the existing law provided that a policyholder is entitled to receive 18 percent penalty interest on the amount of a claim that is not paid in accordance with Chapter 542. Beginning Sept. 1, the new amount of interest is 5 percent above the rates published by the Texas Consumer Credit Commissioner. In essence, the rate of penalty interest falls from 18 percent to 10 percent as of Sept. 1.
Given Hurricane Harvey's timing, it is difficult to predict whether the new law will substantially affect policyholders' rights. It would appear that the changes brought about by the new law would affect a policyholder if 1) an insurer failed to comply with the Insurance Code, or 2) litigation over coverage were filed. Neither of those events are certain to occur. As such, this client alert should not be understood as encouraging policyholders to hastily make claims or bring lawsuits before Sept. 1. Rather, the purpose of this alert is to inform clients of the change in the law so that they may make informed decisions that best serve their interests.