Winter Storm Uri Claims :: Significant Hurdles Imposed by Chapter 542A

Winter Storm Uri Claims :: Significant Hurdles Imposed by Chapter 542A

Chapter 542A of the Texas Insurance Code limits a policyholder’s ability to sue its insurer for mishandling property insurance claims arising from natural disasters. Designed to curb the exploitation of storm victims and insurance companies by the plaintiff’s bar, Chapter 542A 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. Importantly, this statute impacts the avalanche of Winter Storm Uri claims being pursued by policyholders across the Lone Star State.

Although popularly referred to as a “hailstorm” bill at the time it took effect on September 1, 2017, Chapter 542A 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."The Chapter 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”).2

Chapter 542A 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’s conduct. 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.

Chapter 542A impacts both claims made and lawsuits initiated after its effective date. The law’s pre-suit notice requirements, limitations on recovering attorney’s fees, and provisions allowing an insurer to take responsibility for an agent’s conduct, apply “only to an action filed on or after” September 1, 2017. The 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 18% 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.”This pre-suit notice requirement is intended “to discourage litigation and encourage settlements” by allowing the defendant-insurer “a right and opportunity to make a settlement offer.”4 Although the notice and abatement provisions of Chapter 542A present procedural requirements, some courts have found that “their relationship to Texas’s substantive policy for claims brought under the Texas Insurance Code requires that they be applied in federal court.”5

A notice letter containing specific factual allegations supporting the policyholder’s causes of action “or at least enough information to imply those facts,” satisfies the notice requirement.6 Supporting documentation is not required for the pre-suit notice.7

Pre-suit notice is not required for an action asserted as a counterclaim or if giving notice is “impracticable” because the claimant has a reasonable basis for believing the statute of limitations will run before notice can be given. The policyholder must plead and offer some proof to establish this statutory-limitations exception to the pre-suit notice requirement.9 Simply stating that the impending expiration of the limitations period made the notice impracticable is insufficient.10

Courts are split on whether sending notice can be rendered “impracticable” based on the timeframe in which the policyholder obtains legal representation, since the Texas Legislature anticipated that the notice could be sent by a representative of the claimant other than an attorney.11

Courts apply the notice provision of Chapter 542A strictly.12 For example, an attorney or other representative giving the notice is required to provide a copy of the notice to the policyholder and “include in the notice a statement that a copy of the notice was provided to the [policyholder].”13 Even if a copy of the notice was given to the policyholder, a notice lacking the statement that a copy of it was given to the policyholder fails, as a matter of law, to satisfy the statutory notice requirements.14

Chapter 542A requires the pre-suit notice to provide: “the amount of reasonable and necessary attorney’s fees incurred by the claimant, calculated by multiplying the number of hours actually worked by the claimant’s attorney, as of the date the notice is given and as reflected in contemporaneously kept time records, by an hourly rate that is customary for similar legal services.”15 Courts are split on whether the pre-suit notice must include both the amount of fees and the calculation performed in accordance with the statutory requirements.16

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 within 30 days of filing its answer in the action.17

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 policyholder’s recovery of attorney’s fees, as discussed below. Chapter 542A’s pre-suit notice does not relieve a claimant of any other obligation to provide notice.18

Chapter 542A also creates a statutory right for the insurer to “inspect, photograph, or evaluate” the property at issue.19 The insurer’s request must be made no later than 30 days after the insurer receives written notice.20

Agent Liability

Policyholders often sue both the insurer and a local agent in Texas state court to prevent the insurer from removing the case to federal court. Paving the way for insurers to avoid the state court forum, Chapter 542A 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.”21 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.”22 

Federal district courts have noted that, under Fifth Circuit precedent, they cannot apply the “with prejudice” requirement of this provision.23

As a practical matter, during the trial of an action in which the insurer elects to accept its agent’s liability, “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.”24 Once made, the insurer may not revoke its election nor can the court nullify it.25

The courts that have faced the issue appear to agree that when an insurer makes its election before an insured files suit in state court, no cause of action exists against the agent, and if the insured later names the agent as a non-diverse defendant, the court may disregard that agent’s citizenship for purposes of diversity jurisdiction.26

However, courts are split on whether an insurer’s election of its agent’s liability after suit is filed can render a case removable on the basis of diversity jurisdiction. One line of cases holds that an election made after a lawsuit is filed but prior to removal renders the agent improperly joined and the agent’s citizenship irrelevant for diversity jurisdiction purposes.27 Other courts have remanded such disputes for lack of subject-matter jurisdiction, holding that post-suit election does not by itself establish improper joinder.28

Chapter 542A 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.29 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.”30

Attorney’s Fees and Reduced Interest

Chapter 542A 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 the Chapter.

First, and importantly, the failure to provide the required pre-suit notice may limit the policyholder’s recovery of 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.31 In view of this provision, policyholders and their counsel may consider calendaring not only the date by which suit must be brought, but also the deadline for providing pre-suit notice—at least 60 days earlier—to avoid missing the notice deadline.

Second, the court may reduce the attorney’s fees awarded to a policyholder based upon the alleged damages set forth 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.32 If a jury finds at least 80% of the damages alleged in the pre-suit notice, the policyholder can recover its full attorney’s fees33 If a jury finds 20% or less of the damages alleged in the pre-suit notice, a policyholder is precluded from recovering any attorney’s fees.34 If a jury finds between 20% and 80% of the damages alleged in the pre-suit demand, a policyholder may recover only that percentage of attorney’s fees—at least with respect to claims brought under Chapter 542A.35 This provision effectively conditions recovery of attorney’s fees on an accurate prediction of the damages a jury will find following trial.

Notably, some courts have construed this formula as effectively precluding any recovery of attorney’s fees when an insurer timely pays an appraisal award, extinguishing the policyholder’s claim for policy damages.36

Finally, Chapter 542A 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. Claims brought pursuant to Chapter 542A are limited to interest in the amount of the current interest rate plus 5%.37 Based on the judgment interest rate in August 2021, penalty interest on Chapter 542A claims is 10%, substantially less than the 18% penalty applicable to other first-party claims under Chapter 542.

Chapter 542A Reaches Far Beyond Hail Claims

Although Chapter 542A ostensibly was introduced to curtail abuse related to hailstorm litigation, its restrictions apply much more widely and likely extend to the many claims in progress arising from Winter Storm Uri and recent tornados. Policyholders pursuing property and business interruption claims arising from any natural disaster are well served by careful consideration of the hurdles imposed by Chapter 542A and advance planning to avoid the timing traps. Policyholders who fail to prepare for cautious compliance with the pre-suit written notice provision may 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 penalty interest.

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Tex. Ins. Code § 542A.001(2).

Tex. Ins. Code § 542A.002(a).

Tex. Ins. Code § 542A.003(b).

4 Carrizales v. State Farm Lloyds, No. 3:18-CV-0086, 2018 WL 1697584, at *2 (N.D. Tex. Apr. 6, 2018); see also Kiwi Hosp.—Houston, LLC v. Mt. Hawley Ins. Co., No. H-19-3173, 2020 WL 6278694, at *2 (S.D. Tex. May 8, 2020); Vuong Huynh Corp. v. Certain Underwriters at Lloyd’s, London, No. 1:19-CV-00373, 2019 WL 11268988, at *2 (E.D. Tex. Dec. 23, 2019); Davis v. Allstate Fire and Cas. Ins. Co., No. 4:18-CV-00075, 2018 WL 3207433, at *1 (E.D. Tex. Jun. 29, 2018).

5 Carrizales, 2018 WL 1697584, at *4; Davis, 2018 WL 3207433, at *3; Hospitality Ops., LLC v. AmGuard Ins. Co., No. 1:19-CV-00482, 2019 WL 11690209, at *1 (E.D. Tex. Dec. 2, 2019); Vuong Huynh, 2019 WL 11268988, at *2.

6 Davis, 2018 WL 3207433, at *3; see also Perrett v. Allstate Ins. Co., 354 F. Supp. 3d 755, 758 (S.D. Tex. 2018) (notice letter sufficiently gave insurer a basis from which to imply the facts giving rise to the policyholder’s claims); White v. State Farm Lloyds, No. 7:18-CV-359, 7:18-CV-411, 7:18-CV-412, 7:18-CV-413, 2018 WL 8803380, at *3 (S.D. Tex. Dec. 27, 2018) (notice’s scant factual information and boilerplate recitations of legal standards was insufficient to even imply a statement of acts or omissions that could form the basis of insureds’ claims); HHH Properties, Inc. v. State Farm Lloyds, No. H-18-3183, 2018 WL 8787542, *1-2 (S.D. Tex. Nov. 30, 2018) (notice letter minimally satisfied requirements of statute, despite its fluff and large amount of self-serving, conclusory, and argumentative statements, some even mocking the statute itself).

7 Vuong Huynh, 2019 WL 11268988, at *1.

8 Tex. Ins. Code § 542A.003(d).

Hospitality Ops., 2019 WL 11690209, at *2.

10 Id. (“For performance to be truly impracticable, the duty must become much more difficult or much more expensive to perform, and this difficulty or expense must have been unanticipated.”); Vuong Huynh, 2019 WL 11268988, at *3 (“genuine belief” that limitations might run sooner than 60 days from date of notice does not constitute the pleading and proof required to establish the statutory-limitations exception to the pre-suit notice requirement); Nexxt Holding Inc. v. Travelers Cas. Ins. Co. of Am., No. H-20-817, 2020 WL 5702095, at *1 (S.D. Tex. Sept. 24, 2020) (error in calculating expiration of statute of limitations held insufficient to demonstrate impracticability under notice requirement); Tadeo as Trustee of John E. Milbauer Trust v. Great N. Ins. Co., No. 3:20-CV-00147, 2020 WL 4284710, at *8 (N.D. Tex. Jul. 27, 2020) (“A finding of impracticability … ought to be reserved for those instances in which pre-suit notice genuinely cannot be provided.”).

11 Tex. Ins. Code § 542A.003(c); compare Elevia, Inc. v. AmGuard Ins. Co., No. H-19-4028, 2019 WL 10894131, at *1 (S.D. Tex. Dec. 20, 2019) (rejecting insured’s argument that notice was impracticable based on when it obtained legal representation) and J.P. Columbus Warehousing, Inc. v. United Fire and Cas. Co., No. 5:18-CV-00100, 2019 WL 453378, at *5-7 (S.D. Tex. Jan. 15, 2019), report and recommendation adopted by J.P. Columbus Warehousing, Inc. v. United Fire and Cas. Co., No. 5:18-CV-100, 2019 WL 450681 (S.D. Tex. Feb. 4, 2019) (same) with Tipton v. State Farm Lloyds, 4:18-CV-00339, 2018 WL 10561527, at *2 (N.D. Tex. June 19, 2018) (exception to notice requirement established where, at time retained, attorney had good faith belief limitations would expire less than 60 days).

12 Davis, 2018 WL 3207433, at *3.

13 Tex. Ins. Code § 542A.003(c)(2).

14 See, e.g., Perrett, 354 F. Supp. 3d at 759; Hospitality Ops., 2019 WL 11690209, at *3; Davis, 2018 WL 3207433, at *3.

15 Tex. Ins. Code § 542A.003(b)(3).

16 Compare Perrett, 354 F. Supp. 3d at 758 (calculations need not be included in notice) and Tipton, 2018 WL 10561527, at *3 (same) with White, 2018 WL 8803380, at *4 (Under “a plain reading of the statute,” pre-suit notice must include both fee amount and underlying calculations).

17 Tex. Ins. Code § 542A.005. See Moncivais v. Allstate Texas Lloyds, No. 5:18-CV-525, 2018 WL 7288580, at *2 (W.D. Tex. Aug. 31, 2018) (denying motion to compel inspection where insurer failed to raise abatement issue within 30 days of filing answer). 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).

18 Tex. Ins. Code § 542A.003(f).

19 Tex. Ins. Code § 542A.004.

20 Tex. Ins. Code § 542.004.

21 Tex. Ins. Code § 542A.006(a).

22 Tex. Ins. Code § 542A.006(b).

23 See, e.g., Mazhar Footsteps, LLC v. AmGuard Ins. Co., No. SA-20-CV-00955, 2020 WL 7670245, at *5 n.4 (W.D. Tex. Dec. 24, 2020) (“Although § 542A.006 provides for dismissal with prejudice following an insurer's election, under current Fifth Circuit precedent, where a federal district court lacks subject matter jurisdiction over an improperly joined party, it must dismiss that party without prejudice.” (citing Probasco v. Wal-Mart Stores Tex., L.L.C., 766 F. App'x 34, 36 (5th Cir. 2019))).

24 Tex. Ins. Code § 542A.006(g).

25 Tex. Ins. Code § 542A.006(f).

26 See, e.g., Shenavari v. Allstate Vehicle & Prop. Ins. Co., 448 F. Supp. 3d 667, 671 n.2 (S.D. Tex. 2020); Vyas v. Atain Specialty Ins. Co., 380 F. Supp. 3d 609, 612-13 (S.D. Tex. 2019); Bexar Diversified MF-1, LLC v. Gen. Star Indem. Co., No. SA-19-CV-00773, 2019 WL6131455, at *3 (W.D. Tex. Nov. 18, 2019).

27 See, e.g., Ramirez v. Allstate Vehicle & Prop. Ins. Co., No. 7:20-CV-00211, 2020 WL 5806436, at *4-9 (S.D. Tex. Sept. 29, 2020).

28 See, e.g., Stowell v. United Prop. & Cas. Ins. Co., No. 3:20-CV-0527, 2020 WL 3270709, at *3 (N.D. Tex. June 16, 2020); see also Morgan v. Chubb Lloyds Ins. Co. of Tex., No. 4:21-cv-00100-P, 2021 WL 2102065, at *6-10 (N.D. Tex. May 25, 2021) (post-filing election does not by itself convert a properly joined defendant into an improperly joined defendant).

29 Tex. Ins. Code § 542A.006(d).

30 Tex. Ins. Code § 542A.006(e).

31 Tex. Ins. Code § 542A.007(d) (emphasis added). See, e.g., J.P. Columbus, 2019 WL 453378, at *7 (denying attorney’s fees incurred by policyholder after date insurer filed motion to deny fees due to lack of pre-suit notice); Gateway Plaza Condo v. Travelers Indem. Co. of Am., No. 3:19-CV-01645, 2019 WL 7187249, at *3 (N.D. Tex. Dec. 23, 2019); see also PMG Int’l, Ltd. v. The Travelers Indem. Co. of Am., No. 20-CV-00148, 2020 WL 1164116 (W.D. Tex. Mar. 11, 2020) (same); Kiwi Hosp.—Houston, 2020 WL 6278694; Vuong Huynh Corp. v. Certain Underwriters at Lloyd’s, London, No. 1:19-CV-00373, 2020 WL 6992868, *2-3 (E.D. Tex. Sept. 22, 2020).

32 Tex. Ins. Code § 542A.007(a).

33 Tex. Ins. Code § 542A.007(b).

34 Tex. Ins. Code § 542A.007(c).

35  Tex. Ins. Code § 542A.007(a)(3).

36 See Trujillo v. Allstate Vehicle and Prop. Ins. Co., No. H-19-3992, 2020 WL 6123131, at *6 (S.D. Tex. Aug. 20, 2020); Pearson v. Allstate Fire & Cas. Ins. Co., No. 19-CV-693, 2020 WL 264107, at *4 (N.D. Tex. Jan. 17, 2020) (“Because Plaintiff chose to exercise the appraisal clause only after filing this lawsuit and Defendant has satisfied its obligation under the clause, the [formula] provision [applies and] results in the lowest fee award possible—zero dollars—because there is no money judgment in Plaintiff’s favor.”).

37 Tex. Ins. Code § 542.060(c).