Basic Energy Services, Inc. v. Liberty Mutual Ins. Co., #08-CV-78 (W.D. Tex. September 18, 2009)
In my last post, I called this case a potential harbinger of how Texas courts might interpret CGL policies that revoke the duty to defend (see Court Applies 8 Corner Rule to Loss-Indemnity Policy). The case also addresses another open issue under Texas law by prescribing a methodology for calculating penalties an insurer must pay under Texas' delay statute for denial of the duty to defend (or refusal to advance defense costs under a loss-indemnity policy).
Section 542.051 of the Texas Insurance Code (formerly Art. 21.55) imposes a penalty of 18% per annum on the amount of a 1st-party claim that an insurer delays or refuses to pay. The Lamar Homes decision in 2007 resolved in favor of policyholders a long-standing controversy over whether the statute applies to the defense-payment compoment of a 3rd-party liability policy (see my post Delay Penalty Held Applicable to Defense Costs). However, Lamar Homes did not spell out the way the penalty should be calculated. The statute keys payment of the penalty on the insurer's delay or failure to pay a "first-party claim." Lamar Homes held that the policyholder's claim for defense is a first-party claim but did not define when and how that claim is made for purposes of calculating the 18% penalty.
Does the penalty begin to accrue from the time the insured demands a defense? From the time defense fees are first incurred? From the time defense-cost invoices are submitted to the insurer? Not until the insurer is adjudged liable? If the insured submits defense bills monthly, is each bill a new "claim" starting its own 18% calculation (implied in Primrose Operation Co. v. National Am. Ins. Co., 382 F.3d 546, 555 (5th Cir. 2004))?
The Basic Energy case elects the latter option and holds that the "penalties apply at the time an insurer improperly denies a first-party claim and, thus, fails to meet its obligation within the ... statutory deadline." The court noted that Basic Energy tendered notice of the underlying lawsuit and claims for insurance on November 12, 2007. The insurer denied the claim on February 13, 2008. "Thus, the Court finds that the date that Defendant improperly denied Plaintiff's first claim was February 13, 2008." In a footnote, the Court stated that Basic Energy would have to provide further evidence of its defense invoices for the court to determine "the precise damages and from what date interest may apply."
Although the Court could have elaborated the method in greater detail, I see no other way to read the footnote than to follow the method suggested in Primrose Operations: a new interest calculation begins on each separate invoice from the time it is submitted through final judgment against the insurer. The denial date, February 13, 2008, may or may not be the date to begin accrual of the penalties. If the insured submitted invoices before the denial date, the penalty should being to accrue as early as the 15th business day after the insurer received the invoice or any "items, statements, or forms required by the insurer to secure final proof of loss." (See Tex. Ins. Code Sec. 542.056 stating that the insurer must accept or reject a claim within 15 business days after receiving required items). Once the insurer denies the claim, then presumably the insurer has waived any right to delay accrual by requesting "items statements or forms."
The key point for policyholders: for greatest recovery, submit each separate defense invoice to the insurer for payment as soon as possible.
A number of open issues regarding Sec. 542.051 remain that future courts will need to resolve. (For example, other than the invoice itself, what "items, statements, or forms" could an insurer require before accepting or rejecting a claim?) However, by following the suggestion of the Primrose Operation case, this court has put the invoice-accrual method for calculating delay damages on a more solid footing.
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