Texas has finally enacted statutory reforms specifically designed to combat abusive insurance litigation. Enacted primarily in response to hailstorm lawsuits, the scope of the reforms are much broader. Effective September 1, 2017, Section 542A of the Texas Insurance Code governs all lawsuits arising out of insurance claims where the damage was caused, either directly or indirectly, by the weather or other “forces of nature.”
Importantly, Section 542A finally affords insurers the opportunity to amicably resolve disputed claims without protracted litigation. However, insurers need to be prepared to make quick strategic decisions to take advantage of the law’s protections. The practical effect of Section 542A is to give insurers 60 days to “get their house in order” and make decisions that can provide generous protections from both contractual and extra-contractual liabilities.
- Changes to the 60-Day Notice Requirement
The key tenet of Section 542A is the change that it made to the pre-suit notice requirements in insurance-related litigation. For years, the Texas Insurance Code required a potential litigant to notify an insurer of the basis of the insured’s dispute at least 60 days before filing suit. The original purpose of this requirement was always to give the insurer and insured an opportunity to resolve the dispute amicably and without litigation.
The pre-suit notice requirement, however, was often ignored in practice. The only real recourse an insurer had when it did not receive the requisite notice was to have the case automatically abated until 60 days after the insured provided the notice. Automatic abatement did little to discourage plaintiffs’ lawyers from filing suit first. The case law developed in such a way that an insured could file suit, and then give the required notice while the lawsuit was pending with little consequences.
Section 542A now imposes a powerful incentive to comply with the pre-suit notice requirements. With few exceptions, Section 542A prohibits an insured from recovering attorney’s fees if he or she did not give an insurer detailed notice of the claim at least 60 days before filing suit. Because Section 542A governs all the legal theories that an insured can likely assert against the insurer, this prohibition should be a sufficient deterrent to plaintiffs’ lawyers that have practically ignored the existing procedural requirements for many years.
Receipt of pre-suit notice letters in claims subject to Section 542A will likely become the norm. Thus, insurers should be prepared to respond quickly to these pre-suit notice letters because they should now have a full 60 days to take action to resolve the claim before a lawsuit is filed and, if not, take further action to protect themselves from extra-contractual liabilities.
- Re-evaluating the Claim
The first step an insurer needs to take in response to a notice letter under Section 542A will always be to take a second look at the claim. No matter how diligent the claims process may have been, there are always those instances where something may have been missed or incorrectly determined.
Importantly, the notice letter is required to state the specific amount the insured contends is owed. Notice letters often include detailed damage estimates for the insurer’s consideration even though they are not technically required. Insurers should quickly analyze the claimed amounts to determine the crux of the dispute. Whether the dispute centers on the amount of the loss, a coverage issue, inadvertent omissions during the adjustment of the claim, or something else entirely will dictate the strategic options that are available.
For instance, if the notice letter suggests that the claims handler might have missed certain damaged items during the investigation or otherwise underestimated the loss, Section 542A now provides an insurer the right to inspect the property again, so long as the insurer requests an inspection within 30 days of receiving the letter. The insured has to permit that re-inspection. Otherwise, the court must abate any lawsuit the insured files until after the re-inspection occurs.
Insurers, therefore, now have a second opportunity to evaluate specific claimed amounts to determine whether any further amounts are owed for previously covered items, whether there are additional items that should be paid, and an opportunity to make those payments before a lawsuit is filed.
The re-inspection also will allow the claims handler to further document the claimed damage and its cause, particularly with regard to any disputed items. Gathering additional evidence focused on disputed items will be tremendously helpful should the attempt to resolve the claim be unsuccessful.
- Analyzing the Acts and Omissions of the Adjusters and Other Agents
Re-evaluating the original adjustment of the claim also serves an entirely different purpose in light of another facet of the new law. Section 542A was designed, in part, to create additional opportunities for an insurer to remove a case to federal court. For years, plaintiffs’ lawyers had named local adjusters and others as defendants for the sole purpose of defeating diversity jurisdiction and keeping lawsuits in favorable state court forums. Although plaintiffs had no real intention of recovering from these individuals, recent jurisprudence made it increasingly difficult to remove the claims to federal court on the basis of fraudulent joinder.
Section 542A now provides an opportunity for an insurer to make it conclusive that the insured has no possibility of recovering against an adjuster or another one of its agents. Section 542A requires that the notice letter give a statement of the acts or omissions giving rise to the claim. Section 542A further permits an insurer to assume all liability that the insurer’s agent might have for his or her acts and omissions. The insurer can then elect to assume that liability either before the lawsuit commences or within 30 days of filing an answer. Section 542A explicitly states that there is no cause of action against the individual once the insurer makes that election.
These changes make it more likely that an insurer will be able to litigate in a federal forum. Yet, the election also requires a quick and thorough analysis of the entire claims process and all the evidence to ensure that the benefits of litigating in a particular forum is worth the risk of assuming the liability of another.
- Evaluating the Appraisal Option
Insurers also now have an opportunity to significantly lessen the risk of extra-contractual liabilities. If the analysis of the notice letter and claim file establishes that the dispute is centered on the amount of loss and not coverage, insurers can evaluate the benefits of exercising the right to appraise the loss. Texas law places significant limitations on an insured’s ability to pursue an insurer for breach of contract and other extra-contractual claims if the insurer timely pays the amount of a valid appraisal award.
Thus, insurers can significantly limit the possibility of further litigation in those circumstances where an appraisal is appropriate. A valid appraisal award conclusively establishes the amount of loss. Timely payment of the award then disposes of any claims for breach of contract and, based on an overwhelming body of supporting case law, limits the insured’s extra-contractual claims in all but the most egregious circumstances.
Further, if the insurer demands appraisal before the insured files the lawsuit, Texas law considers compliance with the appraisal demand a condition precedent that requires the lawsuit to be abated until the appraisal is completed. When the appraisal demand was issued after the insured files suit, the abatement is discretionary. The 60-day notice period, therefore, provides one last opportunity to evaluate the loss to determine whether appraisal is the best course of action.
- Evaluating the Coverage Dispute
Re-evaluating the claim also will provide one last opportunity to address the coverage issues involved before it goes to litigation. If the notice letter involves a claim that primarily focuses on a coverage dispute, insurers should re-evaluate the coverage position to ensure that the original decision is adequately supported. Depending on the contents of the notice letter, the insured may point to other causes that were not addressed or provide new information that should be considered.
Regardless, insurers should take this 60-day period to verify the original coverage issues and all the evidence. A second review of the claim file may show that there is a need to address outstanding coverage questions that were not originally address, newly provided information and theories, or reiterate the original coverage decision with further detail.
Knowing the claim will likely proceed to ltigation if it is not settled, prudence dictates that the 60-day period be used to not only make certain that the coverage decision was correct, but also that sufficient evidence exists to prove it. Thus, an insurer should use the next 60-day notice period to gather additional information from the insured, including examinations under oath, requesting additional documentation and using Section 542A’s right to re-inspect the property.
- Developing a Resolution Strategy
There should be no doubt that Section 542A is a revolutionary change in Texas insurance-related litigation. By prohibiting an insured from recovering attorney’s fees if the insured files a lawsuit without giving 60 days prior notice, Section 542A may finally achieve what the pre-suit notice requirement was designed to do – allow an insurer and insured a chance to reach a resolution before engaging in costly litigation.
To take advantage of the new law, however, a thorough analysis of the entire claim is needed. That analysis must be done quickly so that a comprehensive resolution strategy can be formulated based on the unique facts of the claim. Whether that resolution strategy involves demanding an appraisal, issuing additional undisputed payments, engaging in early mediation, making a settlement offer, or making a conscious decision to litigate the dispute, insurers should finally have the opportunity to make informed decisions on these issues before a lawsuit is filed, if they take advantage of the 60-day notice period to analyze and re-evaluate all facets of the claim.