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By Kristin C. Cummings and Lindsey P. Bruning
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On Sept. 1, 2017, Texas Insurance Code Section 542A — known as the “Hail Bill” — took effect. Primarily prompted by abuses relating to hailstorm litigation, the new law applies to all first-party property insurance claims involving “forces of nature,” such as earthquake, wildfire, flood, tornado, lightning, hurricane, hail, wind, snowstorm or rainstorm. In passing the new law, the legislature’s clear intent was to minimize abuses in all weather-related litigation, while still providing policyholders with strong protections from improper claim handling practices.

One key aspect of the new 542A is the requirement of presuit notice. Specifically, the law requires that a policyholder must provide written notice to its insurer of any alleged acts or omissions giving rise to a claim under the Texas Insurance Code at least 61 days before filing a lawsuit on the claim. The presuit notice must state the “specific amount alleged to be owed by the insurer on the claim” and the reasonable and necessary attorneys’ fees incurred to date. Upon receipt of the presuit notice, the insurer is entitled to conduct an inspection of the property.

This mandatory presuit notice requirement is intended to provide the insurance company with information regarding the specific nature of the insured’s allegations and an opportunity to investigate the alleged underpayment prior to litigation. Obviously, and even more importantly, the clear intent of this mandatory presuit notice and a statement of the specific amount alleged to be owed on the claim is to encourage resolution of disputed claims without the need for litigation. The insurance company now has an opportunity to tender the amount of the alleged underpayment along with the reasonable and necessary attorneys’ fees incurred by the insured. This allows the insured to resolve its claim for the amount of its alleged damages without the time and expense of litigation.

Now, only six months after the law was enacted, we have the first court decision interpreting 542A. In Carrizales v. State Farm Lloyds, the United States District Court for the Northern District of Texas considered the applicability of the 542A and its notice requirement in a federal court sitting in diversity.[1]

Carrizales arose from a fairly typical dispute over an insurance claim for coverage for alleged damage to Gregorio Carrizales’ home. His home reportedly sustained damage as a result of a May 25, 2015, storm. Carrizales provided notice of the claim to his insurance carrier, State Farm Lloyds, on Nov. 24, 2015. A few months later, on Jan. 26, 2016, State Farm Lloyds received a letter of representation from Carrizales’ attorney, which also requested information relating to the claim.

On March 15, 2016, Carrizales’ attorney sent a demand letter to State Farm Lloyds. The demand letter claimed that State Farm Lloyds had violated its contract, specifically stating that it “failed to pay for the damages, failed to properly account for all of the damages, and properly estimate the value of such damages.”[2] The letter provided State Farm Lloyds with Carrizales’ estimate of the total damages, which amounted to $29,806.64. Finally, the letter claimed that its purpose was to resolve Carrizales’ claim, but further stated that if State Farm Lloyds failed to respond to the letter with an acceptable settlement offer, Carrizales’ counsel would recommend he file suit.

Apparently not very anxious to move the matter forward, almost two years later, on Dec. 6, 2017 (and after the effective date of 542A), counsel for Carrizales filed suit against State Farm Lloyds. The lawsuit alleged breach of contract, breach of the duty of good faith and fair dealing, violations of the Texas Insurance Code and violations of the Texas Deceptive Trade Practices Act. State Farm subsequently removed the suit to federal court on Jan. 12, 2017.

On Feb. 6, 2017, State Farm Lloyds filed a verified motion to abate, claiming that Carrizales had not provided proper presuit notice in accordance with 542A and that the case should therefore be abated until proper notice was provided.

The primary issue for the court’s consideration was whether the presuit notice requirement of 542A was applicable in federal court sitting in diversity. As the court recognized, “federal courts sitting in diversity cases [such as this one], ‘apply state substantive law and federal procedural law.’”[3] The court questioned whether the presuit notice requirement was applicable as it is potentially procedural rather than substantive, given that it required abatement of the litigation if the presuit notice was not given.

In its analysis, the court recognized that the Fifth Circuit had not considered whether 542A or its predecessors were substantive or procedural laws and whether they should be applied in federal court. The court noted, however, that many federal courts — including the Fifth Circuit Court of Appeals — applied the presuit notice requirements of 542A’s predecessors without consideration of their applicability in federal court. Moreover, the court analyzed one prior decision out of the Fifth Circuit, wherein the court held that a similar presuit notice requirement in the medical malpractice context was applicable in federal court. In that case, the court had enforced an abatement for failure to comply with the presuit notice requirement, reasoning that “the notice statute is so intertwined with Texas’s substantive policy on medical malpractice actions that, to give that policy full effect, federal courts sitting in diversity must enforce its requirements.”[4]

In this context, the court found that “the purpose of the similar notice and abatement requirements of sections 542A.003 and 542A.005 is [ ] to encourage settlement of disputes without litigation [and] ‘it would frustrate the purpose of the statute’ for Plaintiff to fail to provide proper pre-suit notice to Defendants.”[5] Accordingly, the court held: “Although sections 542A.003 and 542A.005 present procedural requirements, their relationship to Texas’s substantive policy for claims brought under the Texas Insurance Code requires that they be applied in federal court.”[6]

The court thus granted the insurer’s motion to abate, upholding the automatic abatement pursuant to 542A upon State Farm Lloyds’ filing of the verified motion to abate, and confirming the abatement was to extend until 60 days after Carrizales provides State Farm Lloyds with proper presuit notice.[7]

As the court recognizes, the holding in Carrizales is the first opinion to explicitly confirm that the presuit notice requirement in 542A (as well as its predecessors) is applicable in federal courts sitting in diversity.

But even more importantly, the decision acknowledges and expressly states the primary purpose of the new “Hail Bill” — to promote resolution of disputed weather-related claims without the need for litigation. Upon receipt of a statement of the specific amount alleged to be underpaid, attorneys’ fees incurred and an opportunity to conduct a reinspection, insurance companies are now afforded an opportunity to investigate the alleged underpayment and either simply tender payment of the stated amount alleged to be owed or negotiate a reasonable resolution. And all of this can now be accomplished without resorting to litigation.

Will this avoid all lawsuits? Of course not. Many claims will remain disputed. But many will be resolved without the need for litigation. The Carrizales vs. State Farm Lloyds decision is a step in the right direction in recognizing 542A’s clear statutory intent to foster a prelitigation resolution dialogue and allow insurance companies and their policyholders to resolve disputed claims without the need for litigation. Arguments inconsistent with this clear statutory intent — such as the argument that tender by the insurance company of the specific amount alleged to be owed plus incurred attorneys’ fees does not resolve the dispute — should be rejected by the courts as inconsistent with 542A’s clear statutory intent as recognized in Carrizales.

Kristin C. Cummings is a partner and Lindsey P. Bruning is a senior associate at Zelle LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Carrizales v. State Farm Lloyds, 2018 WL 1697584 (N.D. Tex. April 6, 2018).

[2] Id. at *1

[3] Id. at *2.

[4] Id. at *3 (citing Baber v. Edman, 719 F.2d 122, at 123 (5th Cir. 1983)).

[5] Id. at *4.

[6] Id. (quoting Baber, 719 F.2d at 123).

[7] Id. at *5.