6.4 Texas Unfair Claims Settlement Practices & Prompt Payment (TIC 542)

Texas Unfair Claims Settlement Practices & Prompt Payment (TIC 542)

Quick Answer: This is the most important statute for a Texas adjuster. Texas Insurance Code Chapter 542 (the Prompt Payment of Claims Act) sets hard deadlines for acknowledging, investigating, accepting, rejecting, and paying claims. Missing them triggers 18% penalty interest. Separate unfair-claims practices rules govern how you handle the claim.

This section maps directly to Domain III's claims-methods block (TIC 542.001-.014, 542.051-061; TAC 21.201-.205) and the adjuster-practices block (TIC 4101.001-.002, 4102.163).

The Prompt Payment of Claims Act (TIC Chapter 542)

Chapter 542 imposes a strict timeline. The exam tests the day counts and whether they are calendar or business days.

Step 1 — Acknowledgment and Investigation (TIC 542.055)

Within 15 calendar days (30 business days for eligible surplus lines) after receiving notice of a claim, the insurer MUST:

1. Acknowledge receipt of the claim.
2. Commence investigation of the claim.
3. Request from the claimant all items, statements, and forms it reasonably believes will be required to secure final proof of loss.

If acknowledgment is not in writing, the insurer must make a record of the date, manner, and content of the acknowledgment.

Step 2 — Accept or Reject (TIC 542.056)

After receiving all requested items (the completed proof of loss), the insurer must notify the claimant in writing within 15 business days whether it accepts or rejects the claim. The period may extend:

• To 30 days if the insurer suspects arson.
• To 45 days with written notice explaining the delay.

Step 3 — Payment (TIC 542.057)

If the insurer accepts the claim, it must pay within 5 business days of notifying the claimant of acceptance.

Catastrophe Extension (TIC 542.059(b))

After a declared catastrophe or major natural disaster, the Commissioner may extend each deadline by an additional 15 days.

The 18% Penalty (TIC 542.060)

If an insurer violates the Chapter 542 deadlines, the insurer is liable to the claimant for the claim amount plus 18% per annum penalty interest on the unpaid amount, plus reasonable attorney's fees. This penalty is the enforcement teeth of the Act—and a frequent exam topic.

Unfair Claims Settlement Practices (TIC 542.001-.014; TAC 21.201-.205)

Beyond timing, Texas prohibits specific unfair claims handling practices, including:

1. Misrepresenting pertinent facts or policy provisions relating to coverage.
2. Failing to acknowledge or act reasonably promptly on communications about a claim.
3. Failing to adopt and implement reasonable standards for the prompt investigation of claims.
4. Refusing to pay a claim without conducting a reasonable investigation based on all available information.
5. Failing to affirm or deny coverage within a reasonable time after proof of loss.
6. Not attempting in good faith to effectuate prompt, fair, and equitable settlements where liability is reasonably clear.
7. Compelling the insured to litigate by offering substantially less than amounts ultimately recovered (low-balling).
8. Failing to provide a written explanation of the factual and contractual basis for denial when a claim is denied.

Adjuster Prohibited Conduct (TIC 4102.163)

An adjuster may not, among other things:

• Knowingly misrepresent the terms of a policy.
• Fail to communicate claim decisions promptly.
• Accept or share in any fee or benefit beyond the agreed compensation.
• Adjust a claim in which the adjuster has a conflict of interest without disclosure.
• Commit any act of fraud, deceit, or misrepresentation in the adjusting of a claim.

A violation is grounds for administrative penalties and license suspension or revocation (TIC 4101.202-203).

Chapter 541 vs. 542 — A Final Distinction

A question about failing to pay a claim on time is Chapter 542 (adjuster/insurer claim handling). A question about offering a kickback to sell a policy is Chapter 541 (marketing). The exam will deliberately mix the two—anchor each practice to the correct chapter.

The 60-Day Payment Default (TIC 542.058)

If no other deadline in Chapter 542 applies, an insurer that has accepted liability and received all requested information must pay the claim within 60 days. Missing the 60-day default also triggers the 18% penalty under §542.060. This is the backstop provision the exam uses when a fact pattern does not fit the 5-business-day post-acceptance window.

Calculating the 18% Penalty (Worked Example)

The 18% penalty is simple, non-compounding interest calculated on the unpaid claim amount from the date the violation occurs until the date of payment or judgment.

Example: An insurer accepts a $100,000 fire claim and notifies the insured on June 1. Payment is due within 5 business days (by about June 8). The insurer instead pays on August 1—roughly 53 days late. Penalty interest = $100,000 × 18% × (53 ÷ 365) ≈ $2,614, plus reasonable attorney's fees. If the insurer had made a partial, unconditional payment of $40,000, the 18% would run only on the $60,000 balance.

Partial Payments and the Mex-Tex Rule

Under Republic Underwriters Ins. Co. v. Mex-Tex, Inc. (Tex. 2004), an unconditional partial payment reduces the base on which the 18% runs; a conditional partial payment (for example, "payment as an advance, reserving all rights") does not reduce the base, and interest runs on the full claim until the condition is resolved.

Written Denial Requirement

When an insurer denies a claim, it must give the claimant a written explanation of the factual and contractual basis for the denial. A bare "denied—no coverage" letter that omits the policy provision relied upon and the factual basis is itself an unfair claims practice under TAC 21.203. Adjusters must ensure every denial letter states both why (the facts) and where (the policy language).

Appraisal and the Prompt Payment Act

The Texas Supreme Court held in Hinojos v. State Farm Lloyds that an insurer's payment of an appraisal award does not automatically erase liability for 18% interest on amounts that should have been paid earlier. The prompt-payment remedies and the appraisal process are separate; invoking appraisal does not insulate an insurer from §542.060 penalties for delay that preceded the appraisal demand.

Exam Trap

A question will state that an insurer paid an accepted claim in full, but ten business days after the 5-business-day deadline. Because the 18% penalty is strict liability—no proof of bad faith required—the insurer owes penalty interest for the overrun even though the claim was ultimately paid. The penalty exists precisely to remove any financial incentive for delay.

Exam Trap

A question will state that an insurer received all requested proof-of-loss items on Day 1 and paid an accepted claim on Day 8. Because payment is due within 5 business days of acceptance and Day 8 falls outside that window, the insurer owes 18% penalty interest under §542.060—despite eventually paying the claim in full.