Statutory penalty interest can be a significant exposure for insurers in some jurisdictions. A court’s recent ruling in Alticor Global Holdings Inc., et al. v. American International Specialty Lines Insurance Co., et al., Case No. 1:17-cv-388, 2022 U.S. Dist. LEXIS 130101 (W.D. Mich. June 8, 2022), illustrates the potentially steep cost.
In Alticor, the insured sought coverage for the defense and settlement of claims alleging copyright infringement and breach of contract. The court entered orders finding that the insurer had incorrectly denied coverage for the claims and holding that the insured was entitled to reimbursement of more than $24 million for its defense costs and settlement payments. The court also entered an order imposing penalty interest under Michigan Compiled Laws § 500.2006, which can require payment of 12 percent penalty interest to the insured if benefits are not paid on a timely basis. The penalty interest for the five-year coverage dispute in Alticor added approximately $10.5 million to the judgment against the insurer.
Michigan is not the only state with a penalty interest statute. See also Tennessee Code Ann. § 56-7-105(a) (imposing “sum not exceeding twenty-five percent (25%) on the liability for the loss” where insurer refuses in bad faith to pay a claim within 60 days after demand has been made); Texas Ins. Code § 542.060(a) (imposing “interest on the amount of the claim at the rate of 18 percent a year as damages, together with reasonable and necessary attorney’s fees” on insurer who does not accept or reject claim within 15 business days of receipt of documents that show final proof of loss); Louisiana Rev. Stat. Ann. § 22:1892(B)(1)(a) (imposing “fifty percent damages on the amount found to be due from the insurer to the insured, or one thousand dollars, whichever is greater” where insurer fails to make a payment under a claim within 30 days of receiving satisfactory proof of loss “when such failure is found to be arbitrary, capricious, or without probable cause…”). Important details regarding penalty interest statutes vary from jurisdiction to jurisdiction. For example, some statutes impose penalty interest only if the insurer failed to pay a claim in bad faith, see Tenn. Code Ann. § 56-7-105(a), whereas others do not, see Tex. Ins. Code § 542.060(a).
Statutory penalty interest can be a multi-million dollar issue in some coverage actions, so it is important to consider at the outset of any case whether it might apply.