SUMMER 2007 NEWSLETTER - INSURANCE LAW UPDATE

By David Hammond

Common Sense Prevails

UIM policies are intended to compensate injured parties "up to the limit specified in the policy, reduced by the amount recovered or recoverable from the insurer of the underinsured motor vehicle." Tex.Ins.Code art. 5.06-1(5) In a series of three decisions on December 22, 2007, The Texas Supreme Court clarified the issue of how to calculate pre-judgment interest on an uninsured motorist insurance (UIM) recovery and why attorney fees are not part of such an award unless the carrier delays payment.

The reasoning as to attorney fees is straightforward. The UIM claim of the insured is a matter of contract law, and most carriers’ contract language closely tracks the Texas statute which defines the coverage. Accordingly, the claim does not exist and cannot be a “just amount owed” until such time as a judgment is entered against the underinsured. The Texas statute defining the UIM claim requires that: 1. Judgment be entered against the underinsured; and 2. The judgment be because of property damage or personal injury.

Any attorney fees that have been awarded as part of the judgment against the underinsured are not included in the UIM claim. Since the UIM claim is based on the insurance contract, and not on the tort which resulted in the judgment, there must be a statutory basis for an award of attorney fees. A look at Chapter 38 of the Texas Civil Practice and Remedies Code to see if attorney fees can be awarded on this contract between the carrier and the insured results in finding that attorney fees are allowed only if the insurer does not tender payment within thirty days after the claim comes into existence (when the judgment is entered). Assuring that attorney fees are not paid on the UIM claim is within the carrier’s control.

By statute in Texas, the accrual of prejudgment interest starts 180 days following notice of the claim to the defendant, or when suit is filed, and runs to the day before the date of the judgment. UIM claimants’ on occasion have demanded interest on the full amount of a judgment even when prior settlements with others, PIP payments and UIM partial payments -- all of which are credits against the UIM claim -- have long since reduced, or even eliminated, the claim. The Supreme Court held that prejudgment interest accrues only on the “declining principal” of the claim. Interest is to be calculated only on the portion of the judgment against the underinsured that the claimant does not have the use of prior to entry of the judgment. For example, if an insured claimant collects $80,000 from another defendant prior to the judgment against the underinsured defendant, and his or her carrier pays $10,000 in PIP prior to judgment, and a judgment is then entered for $120,000, the UIM claim will be as follows for an uninsured and underinsured with a $15,000 policy:

The Supreme Court recognized that the function of prejudgment interest is to compensate for the loss of the use of money for a period of time, and is not to be a windfall for the claimant. In both examples above, it makes no sense to award prejudgment interest on the entire $120,000 from the start of interest accruing until judgment, because the UIM claimant has not been deprived of $ 120,000 for that entire period.

The Texas Supreme Court held that credits are to be credited to prejudgment interest accrued as of the date of the credit, and the balance of the credit is then used to reduce principal.

It is only necessary to know the dates of the credits to calculate the “declining principal”. Assuming the dates shown, the “declining principal” in the example becomes:

Date Event Principal x Days @ 8.25% = Prejudgment Interest


Mar 1, ‘05 Suit filed or 180 days after
notice – interest starts
on full amount of $ 120,000 judgment $ 120,000.00 x 122 days @ 8.25% = $ 3,308.64
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July 1, ‘05 $10,000 PIP paid

$10,000.000 credit applied first to $3,308.64
interest leaves $6,691.36 to reduce principal ($ 6,691.36)

New “Declining Principal” $ 113,308.64 x 335 days @ 8.25% = $ 8,578.60
----------------------------------------------------------------------

June 1, ‘06 Co-defendant settles for $ 80,000
policy limits

$80,000.000 credit applied first to $8,578.60
interest leaves $71,421,40 to reduce principal ($ 71,421,40)

New “Declining Principal” $ 41,887.24 x 214 days @ 8.25% = $ 2,025.83

----------------------------------------------------------------------

Jan 1, ‘07 Judgment entered for $ 120,000
Prejudgment interest ceases day before judgment signed


Judgment to Include Total Prejudgment Interest of $ 13,913.07

The interest rate of 8.25% per annum (0.0226% per diem), is determined in accord with Tex.Fin.Code §304.003. The rate to be used is the rate in effect on the date of the signing of the judgment, and can be found at www.occc.state.tx.us under the tab “Interest Rates.” Prejudgment interest is simple interest, and so there is no calculation required for compounding as is the case with interest upon the judgment itself.

If the insured’s settlement with an additional defendant is for less than that party’s policy limits, prejudgment interest is paid only upon the amount of the settlement, not on the amount of the policy’s limit, because the claimant has not lost the use of the difference between the policy limits and the settlement. Rather, the claimant has released any claim of entitlement to the difference.

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

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