Three Significant Ways New Insurance Laws Affect Texas Policyholders

On May 26, 2017, Governor Greg Abbot signed House Bill 1774. The new amendments weaken consumer protection provisions in the Texas Insurance Code. The amendments go into effect on September 1, 2017. All lawsuits filed prior to September 1, 2017 will be govern under the law as it exists prior to the amendments.


The scope of the amendments affect insurance claims related to the forces of nature. These would include the following types of insurance claims: earthquakes, ground movement, wildfires, tornado, lightning, hurricanes, hail, wind, rain, and snow. Unaffected would be insurance claims for fire, explosion, water, vandalism, theft, etc. Flood insurance claims under the National Flood Insurance Program are unaffected because this particular flood insurance program is governed by federal law.

Insurance claims within the scope of the amendments are affected in three primary ways: (1) there are new complicated presuit notification and demand requirements; (2) there is a reduction in the penalty interest to be awarded on insurance claims; and (3) there is authorization for insurance carriers to assume liability for “agents."

I. Presuit Notification and Demand Requirements

The amendments restrict policyholders rights to recover attorney’s fees, unless they notify their insurance carriers at least 61 days before filing a lawsuit. The presuit notice letter must state a specific amount of damages and incurred attorney’s fees to date. The amendments also allow insurers to conduct a presuit inspection of the insured’s property. Failing to provide the notice precludes the recovery of attorney’s fees.

There are also new limitations on attorney’s fees if the presuit notice is deemed “excessive.” A court will compare the presuit notice of damages with the damages recovered at trial. If the damages recovered at trial are less than the presuit demand, the attorney’s fees awarded will be placed on a sliding scale. For example, if the damages awarded at trial are 80 percent of the presuit demand or more all attorney’s fees awarded may be recovered. If the damages awarded at trial are less than 80 percent, but more than 20 percent of the presuit demand, the attorney’s fees awarded may be recovered on a percentage basis equal to the percentage of presuit damages awarded. Finally, if the damages awarded at trial are less than 20 percent of the presuit demand, no attorney’s fees awarded may be awarded.

The new amendments force the policyholder to do the insurer’s job for it. It is now the policyholder’s responsibility to accurately measure and documents the loss and incur the cost of necessary professionals to generate this information. Traditionally, insurance carriers are responsibility for accurately measuring and documenting the loss and paying claims related expenses relating to the hiring of experts.

Furthermore, policyholders now bear the loss of attorney’s fees when their presuit estimates are not recovered at trial. This is significant for a number of reasons. First, it is difficult to accurately access damages at the beginning stages of a lawsuit. In particular, it is not uncommon for policyholders and their advisors to overestimate the loss due to errors in judgment. Second, events, both good and bad, occur during litigation over which the policyholder has no control. For example, the policyholder’s damage expert could be disqualified from testifying for some reason or his opinion could be excluded from evidence. These decisions are made by a court and may be incorrect. The only remedy would be an expensive appeal. These amendments will also have a chilling effect on post-suit partial settlement discussions. The insurance carrier after having the benefit of discovery in a lawsuit may decided to make a pre-trial offer of settlement; however, the policyholder may be reluctant from accepting the settlement because it would adversely affect the recovery of attorney’s fees incurred. Finally, it is common for insurance carriers to file suit against their insured upon receipt of a notice/demand letter. If the policyholder is prevented from filing suit first because it must comply with the presuit notification provisions upon pain of losing attorney’s fees, the policyholder will lose the right to frame the case for the jury and to open and close argument. These are valuable rights granted to a plaintiff since the plaintiff must assume the burden of proof.

II. Penalty Interest

Another area adversely affected by the amendments is penalty interest. The Prompt Payment of Claims Act was passed to encourage insurance companies to promptly pay claims. If the insurance carriers miss statutory claims deadlines, they are required to pay 18% simple interest per annum on the claim and reasonable and necessary attorney’s fees. The amendments will reduce the amount of penalty interest paid to 10% simple interest on the claim (under the current interest rate structure). Thus, the actually penalty for insurers for delaying payment of valid claims is reduced by 8% simple interest per annum. The impact of the amendment only encourages insurer to delay payments for valid claims.

III. Assumption of Agent Liability

The new amendments allow insurance companies to irrevocably assume agent liability. Agents are defined as “an employee, agent, representative, or adjuster who performs any act on behalf of the insurer.” If the insurance company assumes the liability of the agent, the court will dismiss with prejudice the policyholder’s lawsuit against the agent. However, the insurance company is required to make the agent available for deposition.

Often insurance agents are sued to defeat the diversity jurisdiction of the federal courts. Diversity jurisdiction requires that all defendants be citizens of different states from the plaintiff and that the amount in controversy exceed $75,000.00. Plaintiffs sue insurance agents to defeat diversity jurisdiction if the insurance agents live in the same state as the plaintiff. The effect of suing an insurance agent ensures that the lawsuit is decided in state courts. The conventional wisdom is that state courts are more favorable than federal courts for plaintiffs.

The impact of these amendments will increase the number of lawsuits lodged in federal courts. But with the additional caseload, more delay is likely because there are fewer federal courts than state courts. Another effect is that there are fewer “sources of recovery.” Insurance agents have errors and omissions policies. If an insurance carrier assumes the agent’s liability, errors and omission insurers will not be required to contribute to any loss even if the loss was caused by the agent. Thus, there are fewer contributors to any settlement.

In conclusion, the new insurance amendments contained HB 1774 are harmful to both residential and commercial policyholders in Texas. The legislature gutted existing consumer protection laws to the detriment of policyholders and in favor of insurance carriers. The new law becomes effective on September 1, 2017. Any policyholder with a potential weather related claim would be well advised to file suit prior to September 1, 2017 to avoid the impact of the new law.