Related Practices

Texas Prompt Payment of Claims Act: When Are Insurance Code Chapter 542 Penalties Not Owed?

June 11, 2024

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There are a litany of deadlines an insurer must be mindful of, and this is especially true in Texas, which imposes a number of statutorily prescribed deadlines during the claim adjustment process. The Texas Prompt Payment of Claims Act (“TPPCA”) codified under Chapter 542, Subchapter B, of the Texas Insurance Code, imposes procedural deadlines on insurance companies during the claim adjustment process.[1] Although some of the TPPCA’s deadlines are straight forward, several of these deadlines are far more nebulous when an insurer has not yet received all of the information that it has reasonably requested from the claimant/insured in its investigation, such as an outstanding request for information (“RFI”) or proof of loss (“POL”).

Despite its multiple subsections, the general contours of the TPPCA can be succinctly summarized:

First, Section 542.055, entitled Receipt of Notice of Claim, provides that within fifteen days of receiving notice of a claim, the insurer must acknowledge receipt of the claim, commence an investigation, and request all items, statements, and forms that the insurer reasonably believes, at the time, will be required from the claimant.

Next, Section 542.056, entitled Notice of Acceptance or Rejection of Claim, requires the insurer to notify a claimant in writing of the acceptance or rejection of a claim not later than the 15th business day after the date the insurer receives all items, statements, and forms required by the insurer to secure final proof of loss. The statute allows insurers to extend this deadline for an additional forty-five days if the insurer is unable to accept or reject the claim and notifies the claimant of the reasons that the insurer needs additional time.

Under Section 542.057, entitled Payment of Claim, if the insurer accepts the claim and notifies a claimant under Section 542.056 that the insurer will pay a claim or part of a claim, it has five days to do so.

Section 542.058, entitled Delay in Payment of Claim, provides that if an insurer, after receiving all items, statements, and forms reasonably requested and required under Section 542.055, delays payment of the claim for more than 60 days, the insurer shall pay damages and other items as provided by Section 542.060.

Finally, all deadlines are extended by 15 calendar days (not business days) if the claim arises from a weather-related catastrophe.[2]

The TPPCA provides a private right of action for the enforcement of these deadlines via penalty interest when an insurer violates a TPPCA deadline and a claimant obtains a legal judgment against the insurer.[3] Interest accrues at an annual rate of 18 percent.[4] For claims involving “forces of nature,” however, Chapter 542A of the Texas Insurance Code provides a different interest calculation that presently results in a lower annual rate (currently 13.5 percent).[5]

Outstanding RFIs and POLs can make identifying the TPPCA’s deadlines challenging; in particular, the accrual dates for Section 542.056 and 542.057 deadlines may become problematic. Fortunately, there are a few Texas cases that offer some guidance on the interaction between RFIs, POLs and the TPPCA deadlines.

A. TPPCA deadlines and Requests for Information

When an insurer issues an RFI to a claimant/insured, the TPPCA’s deadlines under Section 542.056 can become a bit murky. Section 542.056 of the TPPCA requires the insurer to “notify a claimant in writing of the acceptance or rejection of a claim not later than the 15th business day after the date the insurer receives all items, statements, and forms required by the insurer to secure final proof of loss.”[6] Notably, the TPPCA does not provide a definition or additional guidance as to what constitutes “all items, statements, and forms required by the insurer to secure final proof of loss.”[7] But some courts have examined this issue and provided guidance.

In Weiser-Brown Operating Co. v. St. Paul Surplus Lines Ins. Co., the U.S. Fifth Circuit Court of Appeals examined when an insurer has “all items, statements, and forms required by the insurer to secure final proof of loss.” The insured, Weiser-Brown Operating Co., filed a claim with its insurer under its control-of-well policy.[8] After acknowledging the loss, the insurer’s independent adjuster sent Weiser-Brown an RFI seeking seventeen categories of documents.[9] A month after receiving the RFI, Weiser-Brown had responded to some, but not all, of the requests.[10] The independent adjuster sent a follow up letter acknowledging the receipt of these documents, but its letter noted that several categories of documents remained outstanding.[11]

A little over a month later, the independent adjuster advised Weiser-Brown that its consultant had determined that there had not been a covered loss event, based on his review of the documents provided.[12] Weiser-Brown continued to send documents to the independent adjuster over the following months until it advised Weiser-Brown that its expert had not altered his opinion.[13] The independent adjuster advised that if Weiser-Brown disagreed with the expert's conclusions, that it could submit a response and provide “any information or documentation in support” of its position.[14] Weiser-Brown provided a one-page response in which it challenged the neutrality of the expert.[15] Litigation followed.

The suit culminated in a trial in which the jury concluded that the insurer had violated the TPPCA because it had failed to notify Weiser-Brown that it had accepted or rejected the claim within fifteen days of receiving “all items, statements, and forms required by the insurer to secure final proof of loss.”[16] The insurer appealed.

On appeal to the Fifth Circuit, the insurer contended that the deadlines imposed by Section 542.056 were never triggered, because it never received “all items, statements, and forms required by the insurer to secure final proof of loss.”[17] The parties did not dispute that the insurer never accepted or rejected Weiser-Brown’s claim until after the lawsuit was filed. The insurer maintained that a few pieces of information requested in the RFIs were missing, however, in which case Section 542.056’s deadlines never began to run.[18]

The Fifth Circuit rejected the insurer’s argument. The Court focused its analysis on the contents of the independent adjuster’s communications with Weiser-Brown, noting that the independent adjuster’s earliest communications to Weiser-Brown identified documents or information needed to complete its investigation. Its later correspondence, by contrast, did not request additional information or indicate that the insurer’s determination of coverage was dependent on missing documents.[19] Moreover, the insurer’s expert was able to conclude that there was never a loss of well control, even though Weiser-Brown provided some, but not all, of the documents requested by the independent adjuster.[20] Thus the Fifth Circuit concluded that Section 542.056’s deadlines had begun to run, because “[n]ot only was information alleged to have been missing not requested in communications from [the insurer] . . . this information also was not determinative of [the insurer’s ] position refusing Weiser–Brown's claim.”[21]

B. TPPCA deadlines and Proofs of Loss

Among other things, a POL asks the insured to identify the damaged property at issue and the amount of damages being claimed. The completion and return of a POL itself can impact the accrual of deadlines under Section 542.056 if its completion is reasonably necessary to “secure final proof of loss” as contemplated in the TPPA.

For example, in Kahlig Auto Group v. Affiliated FM Insurance, a car dealership filed a claim with its insurer involving hail damage to several insured locations.[22] In its motion for summary judgment, Kahlig argued that the insurer owed prompt payment penalties because it did not pay or deny the claim within sixty days of receiving notice of the loss.[23] The district court disagreed and reasoned that the insurer had never received information it requested from Kahlig, which included “the dollar amount being claimed” and “supporting documentation for the amount being claimed.”[24]. The court also distinguished this outstanding information from the partial information provided in Weiser-Brown noting that “the two pieces of information sought by the insurer were critical because, without it, the insurer had no decision to make because it could have reasonably assumed Kahlig had decided against filing a claim.”[25] Kahlig appealed to the Fifth Circuit.

Kahlig’s appeal focused on the accrual date for the insurer to make a claim payment under Section 542.057. Although not emphasized in the underlying district court’s opinion, Kahlig’s policy, like many policies, listed the completion of a POL as a condition precedent to payment. This requirement means that a POL can directly impact the accrual deadline under Section 542.057. Section 542.057 requires an insurer to pay all or part of the claim within five business days of giving the claimant notice that it has accepted all or part of the claim (20 days for a surplus lines carrier).[26] In addition, the TPPCA allows an insurer to condition payment on the claimant’s performance of an act—like returning a POL.[27] If an insurer conditions payment on the completion of a POL, the insurer must pay the claim within five business days after the claimant performs the act (or 20 days if a surplus lines carrier).[28]

On appeal, Kahlig proposed several accrual dates for the accrual of this deadline. These included the date the insurer acknowledged coverage and the date it received an estimate of loss from Kahlig’s independent adjuster.[29] The one date Kahlig did not propose was the date it submitted a POL to AFM.

The Fifth Circuit pinned the TPPCA’s accrual date to the date Kahlig submitted its completed POL. In reaching this conclusion, the court noted that Kahlig’s proposed accrual dates:

Contravene[d] the policy: The policy requires, for example, Kahlig to send [the insurer] a sworn proof of loss and a detailed inventory of all property losses claimed. The October 3, 2019 accrual date follows from this proof of loss requirement, and summary judgment was proper on this claim.[30]

Thus, under the Fifth Circuit’s reasoning, if a policy conditions payment of a claim on the completion of a POL, payment deadlines under the TPPCA will not begin to accrue until after the return of the executed POL.

The result in Kahlig is consistent with another Texas federal court decision examining this issue. In Lakeside FBBC, LP v. Everest Indemnity Insurance Co., the owners of an apartment complex brought an action against their insurer alleging, among other causes of action, violations of the TPPCA arising out their insurer’s adjustment of a hail and tornado claim filed by the complex.[31] The insurer required the completion of a POL as a condition of payment in its policy with Lakeside.[32] The insurer “made this requirement clear to Plaintiff, repeatedly requesting that Plaintiff sign the initial Proof of Loss to permit the insurer to issue payment on the undisputed amounts.”[33] In applying Section 542.056 and Section 542.057 the court reasoned that “the deadline to pay was not triggered until Plaintiff returned the signed Proof of Loss.”[34]

C. Navigating the TPPCA’s deadlines when RFIs or POLs are involved

These decisions highlight key points when considering the TPPCA’s deadlines in light of outstanding RFIs or a POL. First, as it relates to an insurer’s deadline to communicate a claim decision under Section 542.056, there is no bright line rule. Rather “the information and documentation ‘required by the insurer to secure final proof of loss’ under section 542.056 will depend on the facts and circumstances involved in a given case.”^[35]

Second, the fact that some RFIs remain outstanding does not automatically absolve an insurer of its duties under Section 542.056. Rather, if enough information has been provided for an insurer to reach a claim determination (or to allow one of its consultants to reach a coverage-determinative opinion), then the deadline under Section 542.056 may have begun to accrue. Follow-ups to RFIs should make clear the importance of the outstanding information in reaching a final claims decision to minimize any arguments that this deadline began to accrue despite the outstanding RFIs.

In contrast, the accrual deadline for issuing a claim payment under Section 542.057 is clearer if a contractually required POL remains outstanding. If a policy conditions payment on the completion of a POL, then Section 542.057’s deadline to issue payment should accrue when the properly executed POL is returned to the insurer. Future cases will undoubtedly continue refining when an insurer’s TPPCA’s deadlines begin to run as courts consider various circumstances surrounding requests for information and proofs of loss.

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[1] Tex. Ins. Code §§ 542.055–060.

[2] Weiser-Brown Operating Co. v. St. Paul Surplus Lines Ins. Co., 801 F.3d 512, 518–19 (5th Cir. 2015) (internal citations omitted); Tex. Ins. Code §§ 542.055–058.

[3] See e.g. GuideOne Lloyds Ins. Co. v. First Baptist Ch. of Bedford, 268 S.W.3d 822, 830–31 (Tex. App.—Fort Worth 2008, no pet.). (“(1) a claim under an insurance policy; (2) that the insurer is liable for the claim; and (3) that the insurer has failed to follow one or more sections of the [TPPCA] with respect to the claim.”)

[4] Tex. Ins. Code §542.060(a).

[5] Id.

[6] Tex. Ins. Code § 542.056(a). (emphasis supplied.)

[7] Id.

[8] Weiser-Brown Operating Co,.801 F.3d at 515.

[9] Id. at 516.

[10] Id.

[11] Id.

[12] Id. at 516.

[13] Id.

[14] Id.

[15] Id.

[16] Id. at 516–517.

[17] Id. at 519.

[18] Id.

[19] Id. at 519–525.

[20] Id. at 524.

[21] Id.

[22] Kahlig Auto Group v. Affiliated FM Ins. Co., No. 5:19-CV-1315-DAE, 2021 WL 5227093, at *2–*3 (W.D. Tex. May 20, 2021).

[23] Id. at *10.

[24] Id. at *11

[25] Id.

[26] Tex. Ins. Code. § 542.057.

[27] Id.

[28] Tex. Ins. Code. § 542.057(c).

[29] Kahlig Enterprises, Inc. v. Affiliated FM Ins. Co., No. 23-50144, 2024 WL 1554067, at *4 (5th Cir. Apr. 10, 2024).

[30] Id.

[31] Lakeside FBBC, LP v. Everest Indem. Ins. Co., 612 F. Supp. 3d 667, 669 (W.D. Tex. 2020).

[32] Id. at 684.

[33] Id.

[34] Id.

[35] Weiser-Brown Operating Co., 801 F.3d at 522