In Katie Realty, Ltd. d/b/a The Landry Building v. Louisiana Citizens Property Ins. Inc., 2012 La. LEXIS 2710 (La. Oct. 16, 2012), the Louisiana Supreme Court reversed the First Circuit Court of Appeals and held that a written settlement agreement does not constitute a “proof of loss” under La. Rev. Stat. § 22:1892 (A)(1) and, therefore, an insurer’s failure to timely pay settlement funds does not trigger the penalties set forth in La. Rev. Stat. § 22:1892 (B). As discussed further below, however, the court found that the failure to pay the settlement within 30 days constituted a violation of another Louisiana bad faith statute, § 22:1973, which provides for a penalty of up to two times actual damages or $5,000, whichever is greater.

In Katie Realty, a commercial property owned by the plaintiff suffered property damage following Hurricane Gustav. Unable to agree on the amount of claim, the plaintiff brought suit against its insurer. Ultimately, the parties submitted to mediation and settled the lawsuit for $250,000. The settlement agreement required the insurer to pay the plaintiff the settlement funds within thirty days of the execution of the settlement agreement. Despite several reminders from the plaintiff, the insurer failed to make timely payment of the settlement funds and, as a result, forty-five days passed before the plaintiff received the settlement check. Seeking to capitalize on the insurer’s late payment, the plaintiff moved for penalties and attorney fees pursuant to La. Rev. Stat. § 22:1892 and La. Rev. Stat. § 22:1973.

Notably, the penalties available under La. Rev. Stat. § 22:1892 and La. Rev. Stat. § 22:1973 differ significantly. For instance, La. Rev. Stat. § 22:1892 provides, in relevant part, that the failure to “pay the amount of any claim due any insured within thirty days after receipt of satisfactory proof of loss . . . when such failure is found to be arbitrary and capricious, or without probable cause, shall subject the insurer to a penalty, in addition to the amount of the loss, of fifty percent damages on the amount found to be due from the insurer to the insured . . . as well as reasonable attorney fees and costs.” (Emphasis added.) La. Rev. Stat. § 22:1973 provides that “a claimant may be awarded penalties . . . in an amount not to exceed two times the damages sustained or five thousand dollars, which ever is greater,” if the insurer knowingly “fail[s] to pay a settlement within thirty days after an agreement is reduced to writing.” (emphasis added.)

In ruling on the plaintiff’s motion, the District Court concluded that La. Rev. Stat. § 22:1892 was the applicable statute and ordered the insurer to pay a penalty of $125,000. On appeal, the First Circuit affirmed the District Court in a two-to-one opinion. In doing so, the majority expressly concluded that La. Rev. Stat. § 22:1892 (A)(1) is applicable because, in its view, a signed settlement agreement between an insured and insurer constitutes a “proof of loss” under the “generally prevailing meaning of the term.”

In reversing the First Circuit, the Louisiana Supreme Court concluded that a written settlement agreement is not the equivalent of a proof of loss and, therefore, La. Rev. Stat. § 22:1892 does not apply to an insurer’s failure to issue a timely settlement payment. Specifically, the Supreme Court interpreted “proof of loss” as “proof sufficient to establish the amount due on an insurance claim” and explained that a written settlement agreement constitutes proof of the amount due on the settlement of the claim, not the amount due on the insurance claim itself. Consequently, the Supreme Court concluded that a written settlement agreement is not sufficient to establish proof of a claim within the meaning of La. Rev. Stat. § 22:1892 (A)(1). Additionally, the court noted that by settling the insurance claim, plaintiff was precluded from bringing a subsequent action based on that claim. The Supreme Court concluded, however, that La. Rev. Stat. § 22:1973 was applicable in this case and held that a penalty award of $5,000 was appropriate and warranted based on the insurer’s conduct.

As this case demonstrates, insurers in Louisiana will still need to continue to ensure timely payments of settlement proceeds under settlement agreements in order to avoid violations of La. Rev. Stat. § 22:1973, although the penalty for such violations is less severe than for violations of § 22:1892.