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Mar 21, 2022

Confusion Over Preclusion: Insurance Code Chapter 542A and Pre-Suit Notice Deficiency Remedies

By: Bryan Giribaldo

Enacted in 2017, the Legislature constructed Chapter 542A of the Texas Insurance Code in a certain way that allows insurers to potentially obtain abatements of litigation, preclusion of attorney’s fees, or both, when insureds provide deficient pre-suit notice in claims that arise out of forces of nature (i.e. earthquakes, earth tremors, wildfires, floods, tornados, lightning, hurricanes, hail, wind, snowstorms, or rainstorms).  Generally speaking, abatement of a lawsuit involving a “force of nature” claim can occur under Section 542A.005 if the insured fails to provide the appropriate pre-suit notice. 

From a conceptual standpoint, abatement is a procedural remedy raised and used to allow the insurer to have the appropriate time to evaluate its position on a given claim.  As for the preclusion of attorney’s fees, it is a substantive remedy to the insurer for the insured’s failure to provide appropriate pre-suit notice of the amount of damage the insured claims resulted.  Both devices have their uses depending on the facts of a claim, its adjustment, and the potential exposure from said claim, and both can create settlement leverage.

Earlier this year, a judge asked me at a hearing whether any case law existed on whether abatement was the proper remedy on a motion to preclude attorney’s fees under Chapter 542A of the Texas Insurance Code.  At the time the judge asked, I knew only of tangential circumstances where courts had actually addressed the question of whether abatement would be more appropriate than a preclusion of the insured’s attorney’s fees from a date certain.  I attributed this to the relative infancy of the statute.  However, in the last few weeks, the U.S. District Court for the Northern District of Texas issued an opinion directly addressing the question.  See Rahe v. Meridian Sec. Ins. Co., No. 3:21-CV-545-E, 2022 WL 614995 (N.D. Tex. Feb. 28, 2022). 

In Rahe, an insured claimed wind and hail damage to her property, to which the insurer opened partial coverage, issued partial payment for the loss, and denied the remainder of the insured’s claim. Id. at *1.  On January 8, 2021, the insured’s counsel sent pre-suit notice Chapter 541 and Section 542A.003 of the Texas Insurance Code, but filed suit on February 9, 2021, which was only 31 days after pre-suit notice (and therefore less than the required full 60 days under Chapter 542A). Id. at *2.  In litigation, the insurer timely pled and filed a motion to deny attorney’s fees. Id. at *1.  The insured responded by challenging the necessity of needing to wait the full sixty days before filing suit, and also arguing that abatement was the appropriate remedy rather than preclusion of attorney’s fees.

The court disagreed with the insured in both respects, finding the insured met no exception to the pre-suit notice period, and that abatement was not appropriate under the facts. Id. at *2-3.  With respect to the abatement, the court plainly stated that “[i]n 2017 the Legislature revised the Insurance Code to provide defendant-insurers with a choice of remedies for situations where plaintiffs fail to wait the full duration prior to filing suit, such as limiting attorney's fees (Tex. Ins. Code § 542A.007(d)) or abating the proceedings (Tex. Ins. Code § 542A.005).” Id. at *3 (emphasis added).  Because the insurer chose preclusion over abatement, and with no plea in abatement filed, abatement was inappropriate and the court granted the motion to preclude attorney’s fees. Id.

The court’s opinion in Rahe is simple yet succinct, and that is because the issue was (and should be) resolved in a straightforward manner: since Chapter 542A’s sections for abatement and preclusion are separate and distinct, they are not dependent upon or exclusive of each other. Tex. Ins. Code § 542A.007(d); Tex. Ins. Code § 542A.005 (“In addition to taking any other act allowed by contract or by any other law…”).  Had the Legislature intended the two remedies to be dependent or conditional on each other, it presumably would have crafted Chapter 542A that way.  This lack of connection suggests that the court in Rahe correctly interpreted the statute, and is likely that other state and federal courts will follow suit.

The takeaway from Rahe is that it reaffirms that insurers have a choice of remedies between abatement and fee preclusion in situations involving deficient pre-suit notice with respect to the amount of damage alleged or the time between notice and suit being filed. This choice can be for either remedy or both remedies. See Vuong Huynh Corp v. Certain Underwriters at Lloyd's, London, No. 1:19-CV-00373, 2020 WL 6992868, at *1-3 (E.D. Tex. Sept. 22, 2020) (granting a motion to preclude attorney’s fees after a prior motion to abate).  Depending on the facts, either or both remedies may be available and/or useful to create favorable leverage positions for insurers. 

Insurers should evaluate whether abatement and/or fee preclusion is available immediately upon receiving service of a lawsuit involving a “force of nature” claim. However, insurers also can start that process upon receipt of the pre-suit notice, as most substantive deficiencies in pre-suit notices can be identified upon receipt.  Ultimately, whether to abate or preclude fees (or both) is an important strategic question, as a claim may justify the use of the effects of either or both of these remedies.  Rahe reinforces that the insurers actually have that choice.