On Feb. 1, 2017, the Texas Department of Insurance published the results of its presentation to the Texas Legislature titled: “Interim Charges: The Cost of Weather-Related Property Claims and Related Litigation.” Notably, the results showed a 900 percent increase in the percentage of wind and hail claims involving attorneys or public adjusters since 2012 and a 1,400 percent increase in policyholder lawsuits — with over 50 percent attributable to the South Texas area.[1] Moreover, hail-related loss ratios (losses per dollar of premium) average 21 percent state-wide. But hail-related loss ratios in South Texas climbed to 268 percent in 2012 and loss ratios in the Texas Panhandle climbed to 314.8 percent in 2013.[2] These shocking statistics led to some insurers increasing homeowners’ rates or simply withdrawing from writing insurance policies in the state altogether.[3]

Many believed that the uptick in lawsuits was the result of “opportunistic lawyers using extreme weather events as a pre-text for exaggerating damages, suing innocent parties, and failing to give notice to insurers before filing lawsuits.”[4] In 2014, Zelle LLP attorney Steven Badger wrote an article describing some of the abuses that had become common in the Texas insurance claims and litigation process. Badger predicted that without legislative change it was inevitable that Texas property owners would see restrictions on their available insurance coverage.[5] An insurance affordability and availability crisis loomed on the horizon. In 2015, the first “Hailstorm Bill” was introduced to address the crisis. Opponents denied the existence of a crisis and argued that the legislation was unnecessary as there existed other ways to address improper conduct by the so-called “bad actors.” That legislation died in the House Calendars Committee.

Unfortunately, the abuses continued unchecked. And with no other proposed solutions presented, another “Hailstorm Bill” was introduced in the 2017 Texas legislative session.

The 2017 “Hailstorm Bill” was introduced with broad support of state legislative leadership. After numerous meetings of interested stakeholders from both sides of the issue, the legislation was amended to address various legitimate concerns about its scope and possible unintended consequences. This week, the Texas Legislature finally passed the amended legislation (HB1774/SB10). All that remains is for Governor Abbott to sign the legislation into law. That is expected to occur any day now.

Effective Sept. 1, 2017, the “Hailstorm Bill” creates a new section of the Texas Insurance Code, Section 542A, which applies to first-party property insurance claims involving the “forces of nature” including earthquake or earth tremor, wildfire, flood, tornado, lightning, hurricane, hail, wind, snowstorm or rainstorm. All other types of claims — such as fire, explosion, water damage and theft — remain covered by existing Section 542 of the Texas Insurance Code.

The bill contains three major components which proponents believe will have a direct positive impact on minimizing abuses in all weather-related litigation matters, while still providing insureds with protection from improper claim denials.

Presuit Notice

The new legislation mandates that an insured making a claim against a carrier must provide written pre-suit notice to the carrier at least 61 days before filing the lawsuit with penalties for failing to comply. The presuit notice letter must state a specific amount of damages and incurred attorneys’ fees to date. This provision authorizes the insurer to conduct a presuit inspection of the property. If notice is not given, the plaintiffs’ attorney is prohibited from recovering attorneys’ fees.

The legislation also provides for limitations on attorneys’ fees if the presuit demand proves to be excessive as compared to the damages recovered at trial. If the plaintiff recovers only a portion of the presuit damages figure, the claimed attorneys’ fees will be adjusted accordingly. The scale is as follows:

• Recovery of at least 80 percent of presuit damages demand — 100 percent of attorneys’ fees recoverable
• Recovery of 20 to 79 percent of presuit damages demand — corresponding percent of attorneys’ fees recoverable
• Recovery of less than 20 percent of presuit damages demand — no attorneys’ fees recoverable

With mandatory presuit notice, the insurance company will become aware of the specific nature of the insured’s allegations and will now have a legitimate opportunity to investigate and resolve matters before suit is filed. This should be good for all parties involved — most importantly, policyholders.

As opposed to relying upon grossly inflated damage estimates intended to be used as a negotiating tactic, policyholder attorneys will now be motivated to provide the carrier with accurate presuit estimates consistent with what was allegedly underpaid and can be proven at trial. Otherwise, policyholder attorneys will be at risk of not recovering their attorneys’ fees at trial. Further, since a large number of lawsuits are based on the original claim process estimates prepared by the public adjuster or contractor (since the lawyer typically doesn’t want to incur the expense of a new expert), the adoption of this provision will likely impact the quality of estimates provided to the carriers during the claims process. Initial estimates setting forth only what is legitimately damaged and based on accurate pricing should allow for more claims to be resolved without the need for lawyer involvement. That is good for all involved parties.

Prompt Payment Penalties

Current law (Tex. Insurance Code § 542.060) permits an insured to recover interest in the amount of 18 percent per annum in the event the insurer violates Chapter 542 of the Texas Insurance Code. The 18 percent prompt-payment penalty was first enacted in 1991 as part of The Omnibus Insurance Reform Bill signed into law by Governor Ann W. Richards. The 18 percent per annum penalty was a significant increase from the previous 12 percent flat interest penalty [6] for claim payment delay.

In a lawsuit involving a claim due to “forces of nature” - to which the new Chapter 542A applies — the insurer’s penalty is calculated at “the rate determined on the date of judgment by adding five percent to the interest rate determined under Section 304.003, Finance Code.” Because the current judgment rate in Texas is 5 percent[7], the penalty interest pursuant to Chapter 542A would total 10 percent.

Prejudgment interest under existing law can also still be recovered.

The reduction in interest from 18 percent to 10 percent could prove to be significant under certain limited circumstances. For example, in Weiser-Brown Operating Co. v. St. Paul Surplus Lines Insurance Co., 801 F.3d 512, 515 (5th Cir. 2015), St. Paul was ordered to pay Weiser–Brown $2,290,457.03 in damages for breach of contract and $1,232,328.14 in penalty interest to Weiser–Brown under the Texas Prompt Payment of Claims Statute. A reduction of the interest penalty from 18 percent to 10 percent in that case would have reduced the insured’s recovery by approximately $550,000.

The statutory penalty interest remains sufficiently high that no insurance company can benefit from “playing the float” and intentionally delaying the payment of claims. Conversely, the reduction will hopefully prevent the common practice employed by some policyholder attorneys of delaying the filing suit as long as possible to increase the recoverable statutory penalty interest.

Assumption of Agent Liability

Chapter 542A also includes a provision which enables an insurer to assume the liability of any “agent” — defined as “an employee, agent, representative, or adjuster who performs any act on behalf of the insurer” — given presuit notice. If liability is assumed, the court will dismiss the action against the agent with prejudice. The insurer, however, is precluded from revoking the election, and the insurer is (with some exceptions) required to make the agent available for deposition.

The obvious intent of this provision is to eliminate the common act of gamesmanship employed by some plaintiffs’ attorneys in adding a nondiverse adjuster as a defendant for the sole purpose of preserving state court jurisdiction. The legislation will allow properly removable matters to be adjudicated in federal court consistent with diversity of jurisdiction requirements. Most importantly, insurance adjusters will no longer be victims of countless lawsuits brought against them solely so that the plaintiffs’ lawyer can gain a more advantageous forum.

Conclusion

The “Hailstorm Bill” does not eliminate a single cause of action presently available to consumers under Texas law. Every statutory and common law remedy remains available when a consumer’s insurance company wrongly denies a claim. All damage remedies also remain available, including the recovery of policy benefits, treble damages, additional damages caused by the breach, prejudgment interest, statutory penalty interest, and attorney’s fees. Conversely, the legislation addresses several abuses that have become commonplace in the claims and litigation process. Plaintiffs’ attorneys will no longer be able to file suit without first advising the insurance company of what it allegedly did wrong.[8] Mandatory presuit notice supported by a real estimate of damages should result in more matters getting resolved without the time and expense of litigation. The days of the grossly inflated $100,000 presuit damage estimate that results in the trial verdict of $8,000 in unpaid damage and a $150,000 attorneys’ fees award are over. The plaintiffs’ attorney will now be forced to demand only those damages that it can actually prove at trial, or otherwise risk not recovering attorneys’ fees. There can be no disputing that a dispute supported by an accurate $8,000 estimate is more likely to be settled than one with a grossly inflated and baseless $100,000 estimate.

By enacting the “Hailstorm Bill,” the Texas Legislature effectively worked to strike the proper balance between protecting its citizens and ending abuses in the insurance claims and litigation process — abuses that if not addressed by the Legislature were certain to create an insurance availability and affordability crisis in Texas.

[1] Texas Department of Insurance Final Presentation to the Texas Legislature, February 1, 2017 (located at http://www.tdi.texas.gov/reports/documents/weatherrelatedpropertyclaims.pdf)

[2] Id., Supplemental Exhibit II (located at http://www.tdi.texas.gov/reports/documents/supplementalexhibits.pdf).

[3] See Stephanie K. Jones, Author of Texas ‘Hailstorm’ Bill Says ‘Significant Changes’ Made, INSURANCE JOURNAL, March 15, 2017.

[4] House Research Organization, HB 1774 Bill Analysis at page 4.

[5] See Steven Badger, Author of The Emerging Hail Risk: What The Hail Is Going On?, CLAIMS JOURNAL, May 2, 2014.

[6] Tex. Prac. Guide Insurance Litig. § 17:2.

[7] Judgment rate located at http://occc.texas.gov/publications/interest-rates.

[8] The loudest objections to the legislation came from “hail lawyers” upset about having to accurately quantify their alleged damages before filing suit. Some even admitted that their pre-suit damages were inflated as a “negotiating tactic.” This was a curious objection. An insurance policy is a contract. How can an insurance company breach the contract if it was never made aware of the alleged unpaid damages? This objection clearly illustrated the abusive nature of the lawsuits being filed. One could even take the position that intentionally inflating a pre-suit estimate in support of an insurance claim constituted criminal insurance fraud. Now, insurance companies will actually know what they allegedly underpaid before being sued and have an opportunity to resolve disputed claims prior to litigation.