New Texas Hail Law Restricts Property Policyholder Rights Far Beyond Hail Claims

New Texas Hail Law Restricts Property Policyholder Rights Far Beyond Hail Claims

By Katherine Hendler Fayne

On May 26, 2017, Gov. Greg Abbott signed into law House Bill 1774, a tort-reform bill that limits a policyholder’s ability to sue its insurer for mishandling property claims arising from natural disasters. Designed to curb the exploitation of storm victims and insurance companies by the plaintiff’s bar, the new law significantly undercuts incentives for insurers to act responsibly, while making it more difficult for policyholders to hold insurers accountable for improper delays and failing to pay claims.

Although popularly referred to as a “hailstorm” bill, the law applies more broadly to any “first-party claim . . . made by an insured” under a property insurance policy that “arises from damage to or loss of covered property caused, wholly or partly, by forces of nature, including an earthquake or earth tremor, a wildfire, a flood, a tornado, lightning, a hurricane, hail, wind, a snowstorm, or a rainstorm.” Tex. Ins. Code § 542A.001(2).

The law creates a new section of the Texas Insurance Code—section 542A (see PDF at the bottom)—that applies to actions alleging breach of contract, negligence, misrepresentation, fraud, or breach of a common law duty, or an action brought under Chapter 541 or 542 of the Texas Insurance Code or the Deceptive Trade Practices Act (“DTPA”). Tex. Ins. Code § 542A.002(a). The new law takes effect on September 1, 2017.

Although not as far-reaching as earlier drafts considered by the legislature, the new law restricts a policyholders’ ability to sue its insurer in three ways. First, it requires pre-suit notice of any claim, with enhanced consequences for noncompliance. Second, it limits a policyholder’s ability to bring suit against an insurer’s agent by allowing the insurer to elect to take responsibility for its agent. Finally, the law limits a policyholder’s ability to recover its attorney’s fees for prosecuting such a claim and reduces the interest recoverable in connection with delayed payments. 

When the new law goes into effect on September 1, 2017, it will impact both claims made and lawsuits initiated after its effective date. New section 542A, including its pre-suit notice requirements, limitations on recovering attorney’s fees, and provisions allowing an insurer to take responsibility for an agent, applies “only to an action filed on or after” September 1, 2017. The new law’s provision reducing the penalty interest rate, on the other hand, applies to any claim “made on or after” September 1, 2017. Claims made before September 1, 2017 are governed by the penalty interest provisions in the old law.

Pre-Suit Notice and Inspection

Section 542A.003 requires a claimant to give written notice to its insurer “not later than the 61st day before the date a claimant files an action.” This notice must include: “a statement of the acts or omissions giving rise to the claim; the specific amount alleged to be owed by the insurer on the claim for damage to or loss of covered property; and the amount of reasonable and necessary attorney’s fees incurred by the claimant.” Tex. Ins. Code § 542A.003(b). Such notice is not required if a claimant believes that the statute of limitations will run before notice can be given or for a claim asserted as a counterclaim. Tex. Ins. Code § 542A.003(d). This statutory notice does not relieve a claimant of any other obligation to provide notice. Tex. Ins. Code § 542A.003(f).

The new section also creates a statutory right for the insurer to “inspect, photograph, or evaluate” the property at issue. Tex. Ins. Code § 542A.004. The insurer’s request must be made no later than 30 days after the insurer receives written notice. Tex. Ins. Code § 542.004.

The policyholder’s failure to provide written notice as required by section 542A.003 or to allow a reasonable opportunity to inspect the property permits the insurer to file a plea in abatement after it files an answer in the action. Tex. Ins. Code § 542A.005. If abated, the court “may not compel participation in an alternative dispute resolution proceeding until after the abatement period” has expired. Tex. Ins. Code § 542A.005(f).

Section 542A.003, which includes the requirement that a suit be abated for failure to provide notice, is similar to Insurance Code section 541.0154, which requires pre-suit notice of claims under Chapter 541 of the Insurance Code, and Texas Business and Commerce Code section 17.505, which requires pre-suit notice of claims pursuant to the Deceptive Trade Practices Act. Unlike the provisions in the DTPA and Chapter 541, however, failure to comply with section 542A.003 can limit the attorney’s fees recoverable, as discussed below. 

Agent Liability

Policyholders often sue both the insurer and a local agent, which may prevent an insurer from removing the lawsuit to federal court. House Bill 1774 allows an insurer to “elect to accept whatever liability an agent might have to the claimant for the agent’s acts or omissions related to the claim by providing written notice to the claimant.” Tex. Ins. Code § 542A.006(a). If the insurer makes such an election before a policyholder files an action against the insurer and the agent, “no cause of action exists against the agent” and “the court shall dismiss that action with prejudice.” Tex. Ins. Code § 542A.006(b). 

If an election is made after the action is filed, “the court shall dismiss the action against the agent with prejudice.” Tex. Ins. Code § 542A.006(c). As a practical matter, during the trial of an action in which the insurer makes such an election, “evidence of the agent’s acts or omissions may be offered at trial and . . . the trier of fact may be asked to resolve fact issues as if the agent were a defendant, and a judgment against the insurer must include any liability that would have been assessed against the agent.” Tex. Ins. Code § 542A.006(g). Once made, the insurer may not revoke its election nor can the court nullify it. Tex. Ins. Code § 542A.006(f).

The law does provide some limitations on the insurer. If an insurer elects to assume liability for an agent but fails to make the agent available for deposition, in most cases, the law’s restrictions on attorney’s fees, described below, do not apply. Tex. Ins. Code § 542A.006(d). An insurer’s election is ineffective if it “is conditioned in a way that will result in the insurer avoiding liability for any claim-related damage caused to the claimant by the agent’s acts or omissions.” Tex. Ins. Code 542A.006(e).

Attorney’s Fees and Reduced Interest

Finally, the new bill substantially limits the amount of attorney’s fees a policyholder can recover against its insurer, ties the recovery of attorney’s fees to compliance with the pre-suit notice provisions and an accurate prediction of the damages that are ultimately awarded, and reduces the amount of statutory interest available for claims that fall within Section 542A.

First, the failure to provide the new required pre-suit notice may prevent the policyholder from recovering any attorney’s fees. The court “may not award to the claimant any attorney’s fees incurred after” the date on which the insurer files a pleading stating that it was entitled to, but did not receive, the pre-suit notice. Tex. Ins. Code § 542A.007(d) (emphasis added).

Second, the court may reduce the attorney’s fees awarded to a policyholder based upon the damages included in the pre-suit notice. A claimant is entitled to the “lesser of” its reasonable fees or the amount determined by a formula comparing the actual damages awarded to the amount alleged in the pre-suit notice. Tex. Ins. Code § 542A.007(a). 

If a policyholder recovers at least 80% of the damages alleged in the pre-suit notice, it can recover its full attorney’s fees. Tex. Ins. Code § 542A.007(b). If the amount recovered in the suit is 20% or less of the amount included in the pre-suit notice, a policyholder is precluded from any recovery of attorney’s fees. Tex. Ins. Code § 542A.007(c). If the damages fall in between 20% and 80% of the damages included in the pre-suit demand, a policyholder may recover only that percentage of attorney’s fees—at least in connection with claims brought under the new law. Tex. Ins. Code § 542A.007(a)(3). This provision effectively conditions recovery of attorney’s fees on an accurate prediction of the damages a jury will ultimately award following trial.  

Finally, the new law amends Texas Insurance Code section 542.060, which allows a policyholder to recover 18% interest on a claim if the insurer has failed to comply with Chapter 542. Under the new bill, claims brought pursuant to Chapter 542A are limited to interest in the amount of the current interest rate plus 5%. Tex. Ins. Code 542.060(c). Under the current judgment interest rate, this would reduce the interest on covered claims from 18% to 10%.

Effects of HB 1774 Reach Far Beyond Hail Claims

While HB 1774 ostensibly was introduced to curtail abuse related to hailstorm litigation, its restrictions will apply much more widely. Any property claim arising from a natural disaster and brought under the Texas Insurance Code will be governed by these new rules. Policyholders who fail to comply with the pre-suit written notice provision place their claims at risk. And the consequences faced by insurers for delays and improper or unfair claims handling are substantially diluted by the limitations on an aggrieved policyholder’s ability to recover attorney’s fees and interest.

As with any revision to the Texas Insurance Code, policyholders should take care to understand the new law’s impact on their claims. By understanding their rights and remedies against insurers who fail to act appropriately in the aftermath of a storm or other natural disaster, policyholders will be better equipped to make informed decisions to protect their interests.

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