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Accrual of Interest under Texas Prompt Payment of Claims Act

Brent Cooper | October 30, 2015

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Hurricane damage to homes

On September 3, 2015, the Fifth Circuit Court of Appeals denied St. Paul Surplus Lines Insurance Company's motion for rehearing in Cox Operating LLC v. St. Paul Surplus Lines Ins. Co., 795 F.3d 496 (5th Cir. 2015), leaving intact a significant ruling on accrual of interest under the Texas Insurance Code. Under Cox, penalty interest under the Texas Prompt Payment of Claims Act—at the rate of 18 percent—begins to accrue when the insurer violates the Texas Insurance Code, regardless of when the insured actually incurs the damages upon which the interest is calculated. 1

In Cox, the insured incurred substantial expenses cleaning up pollution and debris after Hurricane Katrina caused significant damage to its oil-and-gas facilities. On October 17, 2005, Cox notified St. Paul Surplus Lines Insurance that it had a pollution cleanup claim. On October 27, St. Paul retained an adjusting firm to adjust the claim, and a representative contacted Cox's representative. Cox alleged that, between November 8, 2005, and March 13, 2006, no adjuster or St. Paul representative communicated with any Cox representative. On July 24, 2006, a request for documents and invoices was made.

St. Paul reimbursed Cox for over $1.4 million of its costs. Thereafter, St. Paul filed suit in the district court to obtain a declaration that any remaining costs were not "pollution cleanup costs" that would be covered by the policy. Cox counterclaimed alleging St. Paul had breached the policy in bad faith and, because St. Paul had failed to commence an investigation or request documents within 30 days of receiving notice of its claim, St. Paul owed penalty interest under the Texas Prompt Payment of Claims Act.

During the course of the litigation, Cox submitted invoices to St. Paul in the amount of nearly $11 million for the balance of its cleanup costs. Following a jury trial, Cox was awarded some $9.4 million in cleanup costs, along with nearly $15 million in fees and penalty interest under the Texas Prompt Payment of Claims Act.

The Appeal

On appeal, St. Paul contended that the damages award must be reduced because (1) it included costs that Cox did not report to St. Paul within 1 year of the cleanup work and thus were not covered by the policy; and (2) the award constituted a double recovery because it included costs that were already reimbursed by other insurers. St. Paul also argued the Prompt Payment penalty interest award should be reduced or eliminated because the district court calculated the amount of penalty interest based on an incorrect date when penalty interest began to accrue.

Relying on the Fifth Circuit Court of Appeals' decision in Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir. 1999), St. Paul argued that a notice provision appearing in a policy's "insuring language" defines the scope of coverage and therefore could not be waived. The court disagreed, finding that the holding in Matador stressed it was the parties "objective intent" that determined whether a policy's provision could be waived. In this case, because of the nature of the provision and St. Paul's actions, the court did not conclude that the parties intended that the provision be on that could not be waived.

Finally, St. Paul challenged the district court's conclusion that interest began accruing 60 days after the date Cox provided St. Paul with notice of its claim. The jury found that it failed to commence an investigation or request information within 30 days of that date and, as a result, the jury found St. Paul violated § 542.055 of the Act.

The Fifth Circuit began its analysis by noting that the Texas Supreme Court has not yet explained whether, and when, an insurer's violation of § 542.055 triggers the accrual of penalty interest under § 542.060. Making an Erie guess 2 , the Fifth Circuit held that the violation the § 542.055 acknowledgment of claim notice deadline under the Prompt Payment of Claims Act starts the accrual of interest under § 542.060. The court explained that the statute provides that the statutory interest applies to an insurer that is not in compliance with the subchapter, which includes any of the three prompt pay deadlines. Holding otherwise, the court explained, would make the other deadlines inconsequential.

The Fifth Circuit concluded that the plain language of the Act provides that a violation of any of the Act's deadlines begins the accrual of statutory interest under § 542.060.

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1 The author would like to thank and acknowledge the contributions to this Commentary by Elliott T. Cooper, an associate with Cooper & Scully's Dallas office.
2 An Erie guess is when a federal court must "guess" what rule the state court would follow.