Insurers Beware! Any Violation of Texas Prompt Payment of Claims Act Incurs Statutory Penalties

Insurers Beware!

Any Violation of Texas Prompt Payment of Claims Act

Incurs Statutory Penalties

By: Olga Fofanova

Cox Operating, L.L.C. v. St. Paul Surplus Lines Ins. Co., No. 13-20529, 22015 U.S. App. LEXIS 13318; 2015 WL 4590252 (5th Cir. July 30, 2015). Following the Hurricane Katrina, Cox Operating, L.L.C., spent millions of dollars cleaning up pollution and debris that caused extensive damage to its oil and gas facilities. After reimbursing Cox for over $1.4 million of its costs, Cox’s liability insurer, St. Paul Surplus Lines Insurance Co., filed the law suit in the district court, seeking a declaration that the remainder of Cox’s costs were not covered by the policy. Cox counterclaimed and, after a five-week jury trial, the district court entered judgment awarding Cox, among other amounts, $9,465,103.22 in damages for breach of the policy and $13,064,948.28 in penalty interest under the Texas Prompt Payment of Claims Act (“the Act”) for failure to promptly and properly respond to Cox’s claims. On appeal, St. Paul first argued that the damages award must be reduced because it included costs that Cox did not report to St. Paul within one year of the clean-up work in accordance with the excess policy’s one-year reporting requirement and not covered by the policy. The Court disagreed and found that the district court did not error in awarding pollution clean-up costs because the reporting requirement was merely a condition precedent to coverage – i.e., a provision in an insurance policy that avoids coverage unless an insured does something – which St. Paul waived when it denied Cox’s claim. St. Paul further argued that the district court erred in awarding $9,465,103.22 in damages for costs that already had been reimbursed by the removal-of-wreckage-and-debris (“ROWD”) insurers. In particular, St. Paul contended that at least $2,179,580.27 of the damages awarded against it were for costs that were submitted to the ROWD insurers as ROWD costs and were included in the $5 million settlement from the ROWD insurers. The court rejected this argument and held that St. Paul insufficiently demonstrated that the finding of the lower court should be displaced because approved ROWD costs could not be used to represent the costs the ROWD insurers ultimately paid. Last, St. Paul challenged the district court’s award of over $13 million in penalty interest when it held that St. Paul’s violation of § 542.055 of the Act triggered the 18% interest penalty set out in § 542.060. St. Paul contended that penalty interest under §542.060 is triggered only when an insurer fails to pay a claim within 60 days of receiving sufficient information upon which it could adjust the claim, and not any other provisions of the Act. Finding no Texas Supreme Court precedent the court made an Eire guess and rejected the insurers argument stating that the plain language of the Act provides that a violation of any of the Act's deadlines—including St. Paul's violation of the § 542.055(a) deadline here—begins the accrual of statutory interest under § 542.060.