Clear Lake flooding

Flooding in a Clear Lake neighborhood from heavy rains after Hurricane Harvey on Aug. 27, 2017.

Courtesy Mia Mullins

A new law set to take effect Friday aims to crack down on frivolous insurance lawsuits. But House Bill 1774 also reduces the penalty interest rate insurance companies face for late payments if the policyholder files a lawsuit.

If insurance companies are late in paying claims as a result of a lawsuit, they must pay an additional penalty to policyholders. Under current state law, that penalty comes in the form of a fee that totals 18 percent of the claim. For claims filed after Friday, that rate will be determined by a market-based formula that is capped at 20 percent. Currently, the rate would be 10 percent.

While people filing claims by Friday would benefit from the higher penalty payouts in lawsuits, those same cases would be subject to provisions in the new law. Those provisions would decrease the chances insurance companies will have to pay the plaintiff’s attorneys fees in full and protect agents from being personally sued. 

Jeff Raizner, a member of the Texas Trial Lawyers Association, which opposed HB 1774, said the law is a mixed bag.

“I want to be completely fair, there were some bad actors,” said Raizner, a Houston trial lawyer who has worked on insurance cases for 25 years. He added that some of what the new law requires addresses that problem – like the strengthened rules on communications regarding claims issues and the structure for paying attorneys' fees.

But he calls the penalty changes an overreach.

“Much of this new law is a money grab by the insurance industry,” Raizner said.

“The intent of the bill was to cut off this ‘cottage industry’ that was happening around hailstorms after Hurricane Ike; lawsuits that didn’t need to be filed,” said Lucy Nashed, a spokesman for Texans for Lawsuit Reform. TLR supported the bill and argues that because the bulk of Harvey insurance claims will be flood-related, nothing will change.

For one, most homeowners' policies in Texas don't cover flooding. And for those that do, the policies are often with the National Flood Insurance Program through the Federal Emergency Management Agency, which aren’t subject to state regulations.

In a statement posted to Facebook Monday afternoon, HB 1774's author, Rep. Greg Bonnen, R-Friendswood, cited the “false information” circulating on social media about the legislation. He wrote that the new law won't change the claims process and that he filed the bill in response “to a growing trend around the state of lawsuits being filed without pre-suit notice, in some instances before an insurance claim had even been filed, and often without the property owner knowing they had even signed a contract with an attorney.”

The law requires an attorney notify an insurance company that if it doesn't resolve the issues with a claim within 60 days, the company will be sued.

At least 29 lawmakers who represent areas hit particularly hard by Harvey voted for the bill. 

Among those supporters was state Rep. Briscoe Cain, R-Deer Park.

“I believe that Texans have the strongest consumer protections in the nation against insurers” that don't deliver on claims, Cain said.

He said people who are harmed by bad actors in the insurance industry will still have protections under this law.

“There’s a lot of misinformation and fearmongering going on right now” regarding the legislation, he said, adding that it's "premature to speculate" how it would affect people filing claims related to Harvey.

Jim Malewitz contributed to this report.

Disclosure: Texans for Lawsuit Reform and the Texas Trial Lawyers Association have been financial supporters of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.

Clarification: This story was updated to note that the penalty payments only happen when policyholders file a lawsuit.

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