Publications

Introduction
On August 26, 2017, Hurricane Harvey made its second landfall in Texas after having decimated Rockport and other areas of the south Texas coast. Over a three-day period, Harvey dumped a record-level rainfall on Houston, Beaumont and surrounding areas, equaling typical annual totals in some locations. According to conservative estimates, more than 203,000 homes were damaged by the storm, of which 12,700 were completely destroyed, and more than 70 percent of them were not covered by flood insurance. In the final analysis, storm-related damages from Harvey are expected to have a hefty price tag of about $190 billion, making it the costliest storm in U.S. history.

On May 27, 2017, Texas Governor Abbott signed into law the Texas “Hailstorm Bill.” This new law reformed parts of Texas’s “Prompt Payment of Claims” statute (Chapter 542 of the Texas Insurance Code) and its “Bad Faith” insurance law statute (Chapter 541 of the Texas Insurance Code). The new legislation created section 542A of the Code, which is related to first-party claims − those claims payable to insureds as opposed to third parties − caused by “forces of nature,” including earthquakes, wildfires, floods, tornados, hurricanes, lightning, hail, wind, snow or rain.

Significant Changes
Section 542A introduces four significant changes to the Code that will affect claims made as a result of Harvey.

First, for claims under section 542A, insureds may recover interest and attorneys’ fees from insurers that do not comply with statutory deadlines for responding to, adjusting and paying such claims. The statutory interest rate is (1) simple not compound (applied to principal only) and (2) reduced from the 18 percent recoverable under Chapter 542 to 5 percent above the prejudgment interest rate. For most claims from Hurricane Harvey, the statutory interest rate is reduced from 18 percent to roughly 10 percent, depending on the prime interest rate.

The second significant change is related to notice provisions. A claimant must give 60 days’ notice to its insurer before filing suit on any claim covered by section 542A. It is significant that the notice required is a prerequisite to initiating suit. Under Chapter 542, proper notice must include:

• Acts or omissions giving rise to the claim
• Specific amount of damages incurred
• Attorneys’ fees incurred by the claimant.

Attorneys’ fees sought in the pre-suit notice must be derived by calculating the number of hours worked as of the date of the notice evidenced by contemporaneously kept time records, multiplied by an hourly rate that is “usual and customary” in the area. Section 542A.007(d) provides that if a defendant in an action under this chapter pleads and proves that he was entitled to but not given appropriate pre-suit notice, the court may not award any attorneys’ fees incurred after the date on which the defendant files its pleading in opposition with the court.

Third, an insurer who is a party to a first-party action by its insured (claimant) may elect to assume its agent’s liability (including the liability of adjusters and adjusting companies) for alleged acts or omissions in claim handling by providing written notice to the claimant of such an election. If an insurer assumes liability of an agent pursuant to section 542A, no independent causes of action against the agent exist and any suit filed against the agent must be dismissed with prejudice. This section of the Code is significantly advantageous to insurers, many of whom are not corporate citizens of Texas, who want to have their cases removed to federal court.

Finally, the fourth significant change pursuant to section 542A involves recovery of attorneys’ fees. In many cases, the claim for attorneys’ fees by lawyers representing claimants in property damage cases is the biggest damage element of a case. Under the old law, even if the disputed claim was relatively small, all work done by the claimant’s lawyers would be recoverable no matter how disproportionate the dollar amount of the fee is to the recovered claim amount. For example, a Hurricane Rita trial resulted in a property damage award of approximately $31,000, and the claimant’s attorney recovered a fee award of $243,000. Recovery of fees provided significant leverage for claimants asserting first-party insurance claims.

Under the new law:

• If less than 20 percent of claimed pre-suit damages are awarded, then no attorneys’ fees are recoverable.
• If 20 percent to 79 percent of claimed pre-suit damages are awarded, then the same percentage of fees is recoverable.
• If more than 80 percent of claimed pre-suit damages are awarded, then all fees are recoverable.

These three scenarios highlight this change, assuming that the pre-suit demand for damages is $50,000:

• Verdict 3 is $7,500 (15 percent) – no fees would be awarded.
• Verdict 2 is $25,000 (50 percent) – 50 percent of fees would be awarded.
• Verdict 1 is $40,000 (80 percent) – all attorneys’ fees would be awarded.

This change to the law encourages early and accurate pre-suit investigation and damages calculation by claimants and their attorneys.

Takeaways
The Hailstorm Bill (Senate Bill No. 10 and House Bill No. 1774) imposes limitations on claims for loss and damage resulting from so-called “forces of nature” and on related attorneys’ fees. However, important protections remain for Texas policyholders seeking to recover in first-party claims.