5th Circuit Reasserts That Bad Faith Not Necessary to Win Interest Penalty Against Texas Insurers

By Jim Sams | September 18, 2020

A Houston plaintiff’s attorney defeated State Farm Lloyd’s for the fourth time on the same issue, this time coming away with a federal appellate court ruling that policyholders don’t have to prove that their insurer acted in bad faith in order to collect 18% interest on late claim payments.

The Texas Supreme Court ruled essentially the same way last year in another lawsuit, but Wednesday’s decision by the 5th Circuit Court of Appeals “puts a fine point” on the precedent, clarifying that interest is owed starting from the date a final ruling is issued, said attorney Joshua P. Davis.

Davis said the lawsuit he filed on behalf of San Antonio homeowners Jesus and Margaret Agredano marked the fourth time he has taken State Farm to court seeking penalties under the Texas Prompt Payment of Claims Act, or TPPCA.

“We did fairly well for ourselves and hopefully they will finally get the picture,” Davis said Thursday.

“We did fairly well for ourselves and hopefully they will finally get the picture.” -- Joshua Davis

The Agredanos filed a claim with State Farm seeking repairs to the roof of their ranch-style home in northeast San Antonio, which had been damaged by hail on Aug. 11, 2014. State Farm gauged the damage at $615.17, well below the amount of the deductible on the policy.

The Agredanos hired a public adjuster who estimated the damage would cost $45,270.33 to repair. The also hired Davis, who wrote a demand letter seeking $83,084.51. In addition to the cost of the repairs, Davis threw in $5,000 for mental anguish, court costs, attorney fees and 18% interest for State Farm’s alleged late payment of a valid claim. When State Farm refused to pay, the Agredanos filed a lawsuit, which was removed to the U.S. District Court for Western Texas in San Antonio.

Joshua Davis

At trial, Davis said he submitted a “more reasonable” damage estimate of $13,661. He acknowledged that public adjuster estimates can be “expansive.” The jury awarded Agredanos that amount after a trial.

The Agredanos asked the district court to add attorney fees and an interest payment to the judgment because of State Farm’s alleged violation of Texas’ prompt payment law. Judge Royce C. Lamberth refused, citing an unpublished decision by the 5th Circuit in 2018, titled Chavez v. State Farm Lloyds, that held the 18% interest penalty called for under Texas statute 542.060 is owed only when the plaintiff shows that their insurer acted in bad faith when denying a claim.

Since the district court had previously dismissed the Agredanos’ bad faith claim, the penalty statute did not apply, Lamberth decided. Davis filed an appeal.

After Lamberth issued his ruling in March, the Texas Supreme Court ruled in Barbara Technologies Corp. v. State Farm Lloyds that plaintiff’s don’t have to prove bad faith in order to collect an interest penalty under the prompt payment law. A dissenting justice said that the 6-3 decision was “contrary to two dozen decisions of a dozen courts.”

Nonetheless, the Texas Supreme Court is the final arbiter of the meaning of Texas state law. When Davis’ appeal of the Agredano decision came before the 5th Circuit Court of Appeals, the panel ruled that the Chavez decision, which Judge Lamberth relied on to bar an interest penalty, no longer applies.

“The statute requires only liability under the policy and a failure to comply with the timing requirements of the TPPCA,” the 5th Circuit ruled.

Davis said the $13,661 awarded by the jury will now amount to about $140,000 after he tallies interest and attorney fees. He said he won similar judgments in three other cases against State Farm Lloyds. Each time the courts have ultimately ruled that State Farm had to pay 18 percent interest on valid claims that it refused to pay.

“The Texas legislature designed it that way because insurance companies have so much power over their policyholders,” Davis said. “They want it to hurt. They want the insurance companies to hurt when they don’t pay claims.”

Davis said he took on the Agredano’s claim because he didn’t like the way they were being treated by State Farm.

“To me, the Agredanos are a very nice couple,” he said. “They were taking care of their mom in their home. There was no reason for State Farm to that them the way that they did.”

The attorney who represented State Farm, Katherine M. Willis, could not be reached for comment on Thursday.

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