Statutory Interest Penalties
The Prompt Payment of Claims Act imposes heavy financial penalties on insurance firms who fail to comply with it in the state of Texas. Statutory interest, computed from the day payment was due until it is actually paid, is charged at 18% per annum on the claim amount and serves as the principal penalty. An enormous incentive for on-time payments is created by this rate, which is significantly higher than the market rate. Interest is calculated daily and is applied to the full amount due for the claim, not simply the portion that was delayed. There is no maximum on the amount of penalty interest that can accumulate in Texas, unlike several other states.
Compensation for Legal Expenses
Insurers found to have violated the Texas Prompt Payment of Claims Act are subject to fines, including interest and, in extreme cases, policyholders' reasonable legal fees. This clause eliminates a potential financial hurdle that policyholders may face when pursuing delayed claims, which improves the economics of doing so. In cases where the dispute drags on for a long time, the cost of hiring an attorney can easily surpass the interest penalty. Instead of capping these fees at a percentage of the recovery, courts usually award them based on actual reasonable costs.
Triggering Violations
Specific actions by insurance companies trigger these penalties under Texas law. Failing to acknowledge a claim within 15 days of receipt constitutes a violation. Not accepting or rejecting a claim within 15 business days after receiving all necessary documentation (or 30 days for more complex claims) also triggers penalties. Once a claim is accepted, payment must be issued within 5 business days, with penalties accruing after this deadline. Notably, the law applies even to partial underpayments—if an insurer pays less than the full amount owed, penalties may apply to the unpaid portion.
Business Insurance Distinctions
While the Prompt Payment Act applies broadly across insurance types, certain provisions differ for business insurance claims. Commercial policies may have different statutory timeframes depending on the complexity of the claim. Additionally, certain specialized business insurance policies may fall under different regulatory frameworks with alternate penalty structures. Business policyholders should verify which specific prompt payment provisions apply to their particular policy type when facing payment delays.