Does Texas Prompt Payment Penalty Interest Keep Accruing After a Final Judgment?

Overview of the TPPCA and its requirements

The Texas Prompt Payment of Claims Act (TPPCA) is codified in Chapter 542.051 of the Texas Insurance Code. The Texas legislature intended for the TPPCA to protect insureds by requiring insurance companies to promptly process and pay first-party claims. The Supreme Court of Texas has held that the TPPCA applies not only to first-party insurance claims, but also to an insurer’s duty to defend in the context of third-party claims (Lamar Homes, Inc. v Mid-Continent Cas. Co., 242 S.W.3d 1, 20 (Texas 2007)).

Among other obligations, the TPPCA sets certain deadlines by which most insurers are required to (i) acknowledge the receipt of an insured’s claim; (ii) begin investigating the insured’s claim; and (iii) request from the insured all necessary information reasonably required by the insurer to adjust the claim within 15 days. Surplus lines insurers, however, have 30 business days for these same milestones in the claim adjustment process.

Once an insurer receives all the information that they reasonably need to adjust the claim, they generally have 15 business days to accept or reject the claim in writing. However, if the insurer is unable for any reason to accept or reject the insured’s claim within 15 business days after receiving the requested documentation, the TPPCA provides the insurer an opportunity to explain to the insured in writing why they need additional time to accept or reject the claim. In that instance, the insurer then has 45 days to accept or reject the claim. If the insurer rejects the insurance claim, it must do so in writing and explain the reasons for the denial. If the insurer decides to accept the insurance claim, the insurer must pay the claim within five business days. Surplus lines insurers, however, have 20 business days to make payment to the insured.

If an insurer violates any of the TPPCA’s “promptness” deadlines described above, or otherwise wrongfully denies coverage for (and thereby wrongfully denies payment for) all or part of an insured’s claim, the insurer is not only liable for the amount of the claim, but the insurer is also liable to the insured for 18% annual interest on the amount of the claim, as well as the insured’s attorneys’ fees (Texas Insurance Code § 542.060; see also GuideOne Lloyds Ins. Co. v First Baptist Church of Bedford, 268 S.W.3d 822, 830-31 (Texas Appeals Court – Fort Worth 2008, no petition), wherein the elements of a TPPCA claim are listed as: (i) a claim under an insurance policy; (ii) where the insurer is liable for the claim; and (iii) where the insurer has failed to follow one or more sections of the TPPCA with respect to the claim).

This 18% prompt payment penalty interest is in addition to normal statutory pre-judgment and post-judgment interest, providing policyholders with a costly hammer to wield over their respective insurers. The TPPCA is also a strict liability statute, meaning a policyholder does not need to prove bad faith or wrongful conduct by the insurer to recover penalties (see, eg, Angell v GEICO Advantage Ins. Co., 67 F.4th 727, 741 (Fifth Circuit 2023)). The insurer owes the insured this 18% prompt payment penalty interest merely by wrongfully denying a claim, even if the insurer denies the claim in good faith and/or in a reasonable manner.

When does prompt payment interest start to accrue?

On the issue of when prompt payment penalty interest starts to run, there is little debate. Texas courts generally hold that the prompt payment penalty interest begins to accrue from the date an insurer violated the TPPCA or wrongfully refused to pay the claim. The penalty is calculated on the amount of the claim ultimately determined to be owed (see State Farm Life Ins. Co. v Martinez, 216 S.W.3d 799, 806 (Texas 2007)). If partial payment is made by the insurer, then the insurer receives a credit towards the ultimate amount owed, and the 18% penalty is not calculated on the amount that has been partially paid.

When does prompt payment interest stop accruing?

However, on the issue of when prompt payment penalty interest stops running, there is less clarity and, at present, this is an open question under Texas jurisprudence.

A. Insurer’s position – prompt payment interest stops running on the date of final judgment

Insurers argue that damages assessed as statutory penalty interest under Section 542.060 only accrue until the date of the final judgment, and do not continue to accrue post-judgment even if the insurer has not yet satisfied the judgment nor paid any money to the insured on the insurance claim. Insurers argue that once the court renders the judgment, standard post-judgment interest provides the insured the only compensation for any lost opportunity to invest the money awarded as damages in the judgment if those amounts remain unpaid while an appeal is pending. Arguably, the Supreme Court of Texas has supported the insurers’ position regarding the non-accrual of post-judgment prompt payment penalty interest.

For example, in Republic Underwriters Insurance Co. v Mex-Tex, Inc., which involved the predecessor of the current prompt payment statute, the Supreme Court of Texas stated that interest as “damages” awarded as a statutory penalty under Section 542.060 accrue “from the time [the amount of the claim] should have been paid until judgment” (150 S.W.3d 423, 427 (Texas 2004)). The United States Court of Appeals for the Fifth Circuit has likewise repeatedly declined to extend the potential accrual of penalty interest past the date of the judgment (see Great Am. Ins. Co. v AFS/IBX Fin. Servs., Inc., 612 F.3d 800, 809 (Fifth Circuit 2010) – “While Section 542.060 does not expressly state when the 18% interest stops accruing, the Supreme Court of Texas has noted that such interest only accrues until the date judgment is rendered in the trial court”, as well as Lyda Sinerton Builders, Inc. v Ok. Sur. Co., 903 F.3d 435, 454-55 (Fifth Circuit 2018) where it says that regardless of “[c]ompelling reasons” that may support a different outcome, the policyholder that sought to extend accrual of penalty interest past the date of judgment did not “identify any such change in Texas Law” or distinguish precedent dictating that “damages” awarded as statutory penalty interest only accrue through date of judgment).

Moreover, as noted above, the statute expressly states that the statutory penalty is in addition to pre-judgment interest (see Texas Insurance Code § 542.060(a) where it notes that “[n]othing in this subsection prevents the award of prejudgment interest on the amount of the claim, as provided by law”). Thus, the Texas legislature clearly intended to ensure that there was no confusion over which interest can be awarded pre-judgment. The Texas legislature made it clear that both standard pre-judgment interest and statutory prompt payment penalty interest can accrue before the date of judgment.

If the Texas legislature intended for both interests to accrue after a judgment, one would expect a similar clarification. However, that legislative clarification does not exist regarding post-judgment and penalty interests both accruing after a judgment. Thus, one can infer from that absence that the legislature intended to award only one type of interest post-judgment – that interest being standard and traditional post-judgment interest on all amounts owed.

In further support of the position that penalty interest runs only until the date of judgment and not after, the Supreme Court of Texas has declined to extend relief to an insurer beyond final judgment under similar Texas Insurance Code provisions. In particular, the Supreme Court of Texas in Mid-Century Insurance Company of Texas v Boyte held that a final judgment extinguished the relationship between insured and insurer and thus eliminated any further duties that the insurer owed to the insured under the Texas Insurance Code in connection with the claim (80 S.W.3d 546, 548-49 (Texas 2002)). Presumably, those extinguished duties would include the TPPCA and prompt payment obligations and related penalty interest. The Supreme Court explained that once a dispute over a claim has been “reduced to judgment”, the relevant sections of the Texas Insurance Code are “no longer applicable” and cannot create additional liability post-judgment. While Mid-Century involved a different chapter of the Texas Insurance Code pertaining to an insurer’s duty of good faith, the same reasoning holds that, after a judgment is rendered, the insured’s “cause of action” under the Texas Insurance Code is “replaced by traditional judgment enforcement mechanisms” and “all judgment creditors stand in the same position relative to their judgment debtors upon appeal”.

B. Insured’s position – prompt payment interest continues to run past the date of final judgment until the claim is paid

Insureds argue that the penalty interest runs until the date the insurer actually pays the claim and, the insured’s argument continues, a final judgment is not payment of a claim; payment of a claim is payment of a claim.

Supporters of this position often highlight that the purpose of the Prompt Payment of Claims Act – as the title of the statute emphasises – is to promote the actual payment of claims. Thus, from the insured’s perspective, the TPPCA’s purpose is not fulfilled until that payment is made and, accordingly, it makes sense that the statutory penalty interest would continue to run until the purpose is met via actual payment.

Moreover, the courts have noted that the TPPCA is to be “liberally construed to promote the prompt payment of insurance claims” (see, eg, Hinojos v State Farm Lloyds, 619 S.W.3d 651, 653 (Texas 2021)). Under the TPPCA, “the insurer shall pay damages and other items as provided by Section 542.060” (Texas Insurance Code § 542.058). Section 542.060 states only that the insurer is liable for “interest on the amount of the claim at the rate of 18 percent a year as damages”. There is no mention of an early end to the penalty interest while the amount owed is still outstanding. Accordingly, a liberal construction indicates that the insurer continues to be liable for prompt payment penalty interest until payment is made to the insured.

The Fifth Circuit case Lyda Swinerton Builders, Inc. v Oklahoma Surety Company supports the insureds’ reading of the statute despite holding otherwise (903 F.3d 435, 454 n.7 (Fifth Circuit 2018)). In that case, the court appears to have imposed the penalty interest only through the date of judgment due to what the court implied was a prior Fifth Circuit panel’s incorrect – albeit binding – interpretation of Texas law. The court noted that there was “no rational basis nor any basis in the language of the statute for stopping the penalty on the date of judgment, when the violation is a failure to pay. The insured remains unpaid on the date of judgment. The insurer has been penalized during the time it may have been challenging the claim in good faith. Why does it make sense to stop the penalty once the insurer’s liability is recognized by a judgment? It doesn’t.” Certainly, the insureds’ position is not without logic.

Current trend

Some courts have agreed (or, at least, implied) that the 18% prompt payment penalty interest should continue to accrue until it is actually paid. See, for example, Puente v State Farm Lloyds, No CV B-15-190, 2016 WL 1729532, at *5 (S.D. Texas 28 March 2016), report and recommendation adopted under the name Puente v Lloyds, No CV B-15-190, 2016 WL 1733472 (S.D. Texas 29 April 2016), which notes that “the insurer is subject to a mandatory 18 percent interest penalty until it is paid”; Nautilus Ins. Co. v Int’l House of Pancakes, Inc., No CIV. A. H-03-2182, 2009 WL 5061767, at *5 (S.D. Texas 15 December 2009), which notes that “[f]or each day [...] that the [...] defense costs remain unpaid, the 18% interest penalty will continue to accrue [...]”. Other courts have held otherwise – see, for example, United Nat. Ins. Co. v AMJ Investments, LLC, 447 S.W.3d 1, 15 (Texas Appeals Court – Houston [14th District] 2014, petition dismissed).

However, while the federal courts still appear to be in conflict on this issue, the developing trend of cases in the state courts appears to favour the insurers’ position. Ultimately, Republic Underwriters is still the Supreme Court of Texas’ last word on the issue. And just recently, a Harris County, Texas, district court agreed via a final judgment that the penalty interest accrued only until the date of the judgment rather than until the day the insurer pays the claim. That Harris County case is bound for appeal, so there may in future be additional appellate guidance on this issue.