Prejudgment Interest 101

February 10th, 2017 By Todd Key

Any complete evaluation of consumer insurance litigation should include an estimate of potential prejudgment interest. Typical homeowners and business auto policies explicitly include prejudgment interest in coverage. Questions about prejudgment interest are generally overlooked until the eve of trial, but they represent a quantifiable financial impact to every insurance claim.

Under Texas law, prevailing parties generally receive prejudgment interest as matter of course, absent exceptional circumstances. Richter, S.A. v. Bank of America Nat. Trust and Sav. Ass’n, 939 F.2d 1176 (5th Cir. 1991). Prejudgment interest is therefore in play for a variety of common causes of action in Texas: breach of contract, quantum meruit, wrongful death, personal injury, and property damage claims. Tex. Fin. Code Ann. § 304.102. Texas courts define prejudgment interest as compensation for lost use of the money due to a claimant. The idea of prejudgment interest as compensation—not punishment—is important. Since an award of prejudgment interest is not a punitive sanction, prejudgment interest cannot be awarded on judgment for punitive damages. Similarly, prejudgment interest cannot be awarded on future damages. A claimant need not be compensated for any lost use of money in the future.

When evaluating a potential award of prejudgment interest, the first question to be answered is when does prejudgment interest begin to accrue? Generally prejudgment interest accrues beginning on the earlier of (1) the 180th day after the date the defendant receives written notice of the claim, or (2) the date the suit is filed. A “claim” is defined loosely as a demand for compensation or an assertion of a right to be paid. In many cases, the date of the claim will be obvious. In some cases, such as UM/UIM litigation, the “claim” is deemed to be made 180 days after the UM/UIM carrier receives written notice of the accident. State Farm Mut. Auto. Ins. Co. v. Norris, 216 S.W.3d 819, 820 (Tex. 2006). The accrual period ends on the day before the judgment is rendered. For an average lawsuit in Texas, prejudgment interest likely has been accruing for years.

Prejudgment interest is computed as simple interest with a rate equal to the postjudgment interest rate applicable at the time judgment is rendered. The applicable interest rate is published weekly by the Texas Office of Consumer Credit Commissioner. Any prejudgment settlements or other payments made to the claimant must be deducted from the award of prejudgment interest using the declining principal formula: credits are first applied to accrued interest, and then to principal. Prejudgment offers to settle the case can also affect the calculation of prejudgment interest.