Chapter 542 of the Texas Insurance Code requires insurance companies to follow certain procedures and meet certain deadlines when it receives, accepts, rejects or pays an insurance claim. The purpose of Chapter 542 is to promptly pay claims made by their insureds. Thus, Chapter 542 only applies to what is known as first party claims. Chapter 542 applies to most types of insurance claims except workers compensation, title insurance and marine insurance as well as a few others.
If an insurance company fails to comply with Chapter 542, it can be held liable for the statutory damages pursuant to Section 542.060 of the Texas Insurance Code which provides that if an insurer that is liable for a claim under an insurance policy is not in compliance with Chapter 542, the insurer is liable to pay the holder of the policy or the beneficiary making the claim under the policy, in addition to the amount of the claim, interest on the amount of the claim at the rate of 18 percent a year as damages, together with reasonable attorney’s fees.
However, the amount of the claim used to calculate the statutory damages depends on whether the insurance company tendered any partial payment of the claim. If the insurance company did not tender any partial payment, statutory damages are calculated on the full amount of the jury verdict. If the insurance company tenders a partial payment then statutory damages are calculated on the difference between the amount of the claim as determined by the jury and the amount tendered.
Because the 18 percent is a yearly rate of interest, the corresponding monthly rate would be 1/12 of 18 percent or 1.5 percent per month. The daily rate is 1/365 of 18 percent or .0005 percent per day. This means that an insurance company who missed the deadline by one day would only be liable for .0005 percent interest on the claim as opposed to the full 18 percent.
Also, the statutory damages are computed as simple interest as opposed to compound interest. Simple interest is calculated as follows: Principle (the amount of the claim) x the applicable interest rate (yearly, monthly or daily) x the relevant time period. For example, if the insurance company is found liable for a $100,000.00 claim which it paid 3 years late, the statutory damages would be $100,000.00 x 18% x 3 = $54,000.00. Texas law is unclear whether multiple violations of the Chapter 542 deadlines can result in multiple statutory damage awards. Most commentators believe that courts will probably limit statutory damages to one award per rejected claim.
The statutory damages begin accruing on the date the insurance company violates the statute and end on the date the court enters a judgment.
At the Law Office of Stephen O’Rear, P.C. we help people with their insurance claims.