Two decisions from the Texas Supreme Court addressed what effect an insurer’s timely payment of an appraisal award has on an insured’s claims for breach of contract, bad faith insurance practices, and violations of the Texas Prompt Payment of Claims Act. Prior to these decisions, Texas state and federal courts had all but universally held that an insurer’s timely payment of an appraisal award estops not only an insured from pursuing a claim for breach of contract but also effectively precludes extra-contractual exposure. These new opinions make clear that an insurer’s extra-contractual exposure is not necessarily eliminated by the timely payment of an appraisal award.
The first decision, Barbara Technologies Corporation v. State Farm Lloyds, No. 17-0640 (Tex. Jun. 23, 2019), concerned a claim where the insurer inspected the property and denied coverage on the basis that the covered damage observed did not exceed the policy deductible. The insured sued the insurer, which subsequently invoked appraisal. Approximately seven months after the appraisal invocation, the appraisers agreed to an award for replacement cost value. The insurer promptly (the next day) paid the award, less deductible and depreciation. The insured then moved for summary judgment on the ground that the insurer failed to pay its claim within the 60-day deadline provided in the Prompt Payment of Claims Act. The insurer filed a cross-motion for summary judgment, citing Texas precedent that timely payment of an award precludes recovery under the Act. That motion was granted, and the insured appealed. The appellate court affirmed.
The insurer’s position was that its invocation of appraisal served as a request for additional information from the insured needed to secure final proof of loss, which statutorily extends prompt payment deadlines under the Act until such information is provided by the insured. The Supreme Court rejected this argument, and pointed out that the appraisal invocation was not a part of the claim investigation and was not invoked until well after the claim determination was made. It held that the “use of the appraisal process to resolve a dispute has no bearing on any deadlines or enforcing any missed deadlines” under the Act. The Court then noted, however, that an insurer’s payment of an appraisal award is not sufficient to establish liability for failure to timely pay the claim under the Act. The Court made clear that because appraisal only sets the amount of loss, and does not answer any questions of liability, payment of an appraisal award is neither an acknowledgement nor a determination of liability under the Act. The question of whether an insurer is liable for the claim still remains, and must be proven or admitted, before recovery under the Act can be pursued by an insured.
The second decision, Oscar Ortiz v. State Farm Lloyds, No. 17-1048 (Tex. Jun. 28, 2019) also concerned a claim where the insurer inspected the property and determined that the observed covered damage did not exceed the policy deductible. The insured submitted a public adjuster’s estimate in excess of the deductible, and the insurer performed a second inspection and determined again that covered damage did not exceed the deductible. The insured sued, asserting claims for breach of contract, for statutory and common law bad faith insurance practices, and for violations of the Prompt Payment of Claims Act. The insurer answered and, two months later, invoked appraisal. An appraisal award for actual cash value was made, which the insurer paid and then moved for dismissal of all claims, which motion was granted. The insured appealed, challenging whether payment of the award precluded claims for breach of contract, bad faith, and violations of the Prompt Payment of Claims Act.
The Supreme Court affirmed dismissal of the breach of contract claim and also the claims of violations of the duty of good faith and fair dealing and violations of Chapter 541 of the Texas Insurance Code, i.e., “bad faith.” However, the Court affirmed dismissal of the bad-faith claims because the insured failed to establish injury “independent from the loss of [policy] benefits.” The insured had attempted to establish independent injury by claiming he was damaged by having to incur fees and expenses related to the pursuit of policy benefits. The Court rejected this argument, noting that attorney’s fees and costs of litigation are separate from “damages” both under Chapter 541 of the Texas Insurance Code and under the common law; thus, these amounts could not be used to establish “independent injury.” With respect to claims under the Prompt Payment Act, the Court echoed its holding in Barbara Technologies that the payment of an appraisal award does not resolve such claims and that the issue of liability remains.
These decisions will make appraisal a less appealing option for insurers in resolving claims. Appraisal awards in Texas typically trend toward a split of the parties’ respective damage estimates and are often higher than the value assessed by insurer. The trade-off for insurers is the assurance that extra-contractual exposure is, in effect, eliminated. Under these cases, an insurer no longer has that assurance. The bigger question perhaps is how insured’s counsel will use these opinions in handling claims.