Insurer’s Failure to Promptly Pay a Claim

Introduction.

An insurer's obligation to promptly pay a claim is found in the Texas Insurance Code, which states that if an insurer fails to pay claims in a timely manner, it must pay for any actual damages that result from this delay. This obligation is considered breached when the insurer fails to equitably and promptly pay a claim once liability becomes reasonably clear.

When Duty to Promptly Pay is Triggered.

In Texas, the duty to promptly pay a claim is triggered by a series of events that are specified in the Insurance Code and interpreted in case law. The Texas Prompt Payment of Claims Act (TPPCA) outlines these specific deadlines and requirements for insurers in processing and paying claims.

In terms of third-party claims, the insurer's liability is considered reasonably clear and triggers the duty to settle when four elements are satisfied:

• (1) the policy covers the claim;

• (2) the insured's liability is reasonably clear;

• (3) the claimant has made a proper settlement demand within policy limits; and

• (4) the demand's terms are such that an ordinarily prudent insurer would accept it.

For first-party claims, insurers have specific deadlines imposed by the TPPCA. Within 15 days of receiving notice of a claim, the insurer should acknowledge receipt of the claim, commence an investigation, and request all required items, statements, and forms from the claimant. The insurer then has 15 business days from receiving these documents to notify the claimant of the acceptance or rejection of the claim. If the claim is accepted, the insurer must pay the claim within 5 business days of notifying the claimant of the acceptance, or within 60 days of receiving all of the items, statements, and forms requested from the claimant, unless the payment of the claim is conditioned on the performance of an act by the claimant.

Establishing a Violation of the TPPCA.

In order to establish a violation of the TPPCA, a party must demonstrate three elements:

1. A claim under an insurance policy;

2. The insurer's liability for the claim; and

3. The insurer's failure to follow one or more sections of the statute with respect to the claim.

However, in the context of uninsured/underinsured motorist (UM/UIM) claims, an insurer's liability does not arise until the date a trial court enters a final judgment establishing the liability and uninsured status of the other motorist.

Keep in mind that an insurer will not be found to have violated the duty to promptly pay a claim if it had a reasonable basis to deny payment of the claim. A bona fide dispute about the insurer's liability on the contract does not rise to the level of bad faith. An insurer also has the right to deny questionable claims without being subject to liability for an erroneous denial.

The TPPCA has specific penalties for violations, including 18% annual interest on the claim and reasonable attorney's fees.

Examples of Failures to Promptly Pay a Claim

For instance, the case of Lyda Swinerton Builders, Incorporated v. Oklahoma Surety Company reiterates that under the Prompt Payment of Claims Act (PPCA), an insurer that fails to promptly respond to, or pay, the claim in accordance with the statute becomes liable to the policyholder or beneficiary for the amount of the claim, as well as an 18 percent per annum statutory penalty and reasonable attorney's fees. To recover under the PPCA, an insured must establish that: "(1) a claim was made under an insurance policy, (2) the insurer is liable for the claim, and (3) the insurer failed to follow one or more sections of the prompt-payment statute with respect to the claim" [4, 5].

Examples of failures to promptly pay a claim are seen in the cases of Grilletta v. Lexington Ins. Co., where the insurer's failure to timely pay the claim was deemed arbitrary and capricious under Louisiana law, and Mag-Dolphus, Inc. v. Ohio Cas. Ins. Co., where the insurer was accused of failing to promptly pay, acknowledge receipt of, and commence investigation of the claim, as well as failing to notify the claimant of its acceptance within the stipulated time frame.

Exceptions to the Prompt Payment of Claims Doctrine

However, insurers are not always obliged to promptly pay claims. For example, in State Farm Lloyds, Inc. v. Polasek, it was held that if a genuine controversy exists, the insurer has the right to deny or delay payment and take the issue to court without being liable for a bad faith failure to promptly pay the claim. Furthermore, the obligation to promptly pay a claim also extends to providing a reasonable explanation for the insurer's denial of a claim or offer of a compromise settlement of a claim in relation to the facts or applicable law, as outlined in the Texas Mut. Ins. Co. v. Ruttiger and Bryant v. Progressive County Mutual Insurance Company cases. Failure to do so would constitute a violation of the insurer's obligation to promptly pay a claim.

Lastly, the case of Mid-Continent Cas. Co. v. Eland Energy, Inc. elaborates on unfair settlement practices, which include refusing to pay a claim without conducting a reasonable investigation, and failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim when the insurer's liability has become reasonably clear.