Texas Supreme Court Finds Payment of Appraisal Award Does Not Absolve Insurer of Statutory Liability

Allison Griswold and Sarah Smith | Lewis Brisbois

The Texas Supreme Court recently published its long-awaited decision in the Hinojos v. State Farm Lloyds. In it, the court affirmed its holding in Barbara Technologies, finding that payment of an appraisal award does not absolve an insurer of statutory liability when the insurer accepts a claim but pays only part of the amount it owes within the statutory deadline, and a policy holder can proceed with an action under the Texas Prompt Payment of Claims Act.

In 2013, Louis Hinojos made a claim for storm damage to his home. State Farm’s initial inspection resulted in an estimate below the deductible, but Hinojos disagreed and requested a second inspection. At the second inspection, the adjuster identified additional damage resulting in a payment to Hinojos of $1,995.11. Hinojos then sued State Farm – and State Farm invoked appraisal approximately 15 months after suit was filed. The appraisal resulted in State Farm tendering an additional payment of $22,974.75. State Farm moved for summary judgment, arguing that timely payment of an appraisal award precluded prompt payment (or Chapter 542) damages. The trial court granted summary judgment and Hinojos appealed (notably Barbara Technologies had not yet been decided). The Court of Appeals affirmed State Farm’s victory on the basis that “State Farm made a reasonable payment on Hinojos’s claim within the sixty-day statutory limit….” Hinojos petitioned the Texas Supreme Court for review.

In front of the high court, State Farm again relied on the argument that its prior payment was reasonable – a position the court found “unavailing.” The court focused on Chapter 542’s definition of “claim”, which referred to an amount that “must be paid by the insurer”, and noted that nothing in Chapter 542 absolved an insurer of prompt payment liability based on partial payments because the amount that “must be paid” referred to the amount ultimately determined to be owed. The court opined that to find partial payments to exempt insurers from prompt payment liability would encourage insurers to pay a nominal amount toward a valid claim to avoid prompt payment liability.

Justice Blacklock dissented, joined by Justice Guzman. The dissent notes that Barbara Technologies’ holding repeatedly states it is applicable to claims that have initially been rejected or denied. Justice Blacklock suggests the holding does not apply to situations like Hinojos in which an insurer makes an initial timely payment but there is a disagreement as to the amount. He suggests the majority decision places the insurer “in no man’s land” because “it has no way of knowing whether it has paid the claim or delayed paying the claim until the insured accepts a settlement or an amount owed is fixed through appraisal or litigation.”

In a separate dissent by Justice Guzman (who joined the majority in Barbara Tech), she argued further that the Hinojos majority did not comport with the statute as written. Justice Guzman wrote that while she understood the majority’s concern that an insurer could easily avoid prompt payment liability by low balling the insured, the court was without authority to expand or contract statutory text, and the legislature has enacted other remedies to address such bad faith conduct.

Florida Appellate Court Determines Faulty Workmanship Exclusion in Homeowner’s Policy Is Not Ambiguous and Thus Damage Caused by Contractor’s Conduct Is Not a Covered Loss

Matthew Lewis | PropertyCasualtyFocus

The Florida Third District Court of Appeal recently ruled that an insurer did not waive its right to appraisal after choosing to cover only part of a property damage loss claimed by its insured. The case, People’s Tr. Ins. Co. v. Farua Portuondo, No. 3D20-266 (Fla. 3d DCA Oct. 7, 2020), involved a property damage claim regarding alleged damage sustained to the insured’s home following Hurricane Irma in September 2017.

In December 2018, Farua Portuondo first reported roof and interior damage to his property insurance carrier, People’s Trust Insurance Company (“People’s Trust”). Following an inspection of the purported damage, People’s Trust agreed to cover only the interior damage and not the claim for roof damage.

On July 30, 2019, Portuondo filed suit against People’s Trust based on the insurer’s denial of coverage related to the roof damage claim. On August 26, 2019, People’s Trust demanded appraisal, as allowed under its policy with Portuondo, and proceeded with the appraisal process.

On September 16, 2019, People’s Trust was served with the lawsuit filed by Portuondo. Following service of the lawsuit, People’s Trust halted the appraisal process and filed a motion to compel appraisal, along with several other motions to compel related to the claim. The trial court denied the motion to compel appraisal. As such, People’s Trust appealed the ruling to the Third District Court of Appeals.

The district court reviewed the transcript of the hearing from the trial court and determined that the motion to compel appraisal was denied by the lower court because People’s Trust only provided partial coverage to the Portuondo claim. In support of the denial of the motion to compel appraisal, Portuondo had argued that People’s Trust waived its right to appraisal by choosing to cover only part of the loss.

The district court disagreed with Portuondo’s argument, holding that a motion to compel appraisal should be granted when an insurer has agreed to repair a covered loss, but the parties disagreed as to the scope of the repairs. The district court cited to a case it decided earlier in 2020, Baptiste v. People’s Tr. Ins. Co., 299 So. 3d 1148 (Fla. 3d DCA 2020), which involved the same policy language in a similar situation where the insurer and insured disagreed on the “amount of loss” and “scope of repairs.” Because People’s Trust did not wholly deny coverage for Portuondo’s claim, the district court held that the trial court should have granted the motion to compel appraisal as allowed under the policy.

In addition, the district court rejected arguments made by Portuondo that People’s Trust waived its right to appraisal by abating the original appraisal and filing the motion to compel with the trial court. Because People’s Trust did not “actively” participate in the lawsuit or engage in conduct inconsistent with its right to appraisal, the district court held that People’s Trust did not waive its right to appraisal. Once People’s Trust received service of the lawsuit, it merely paused appraisal and sought an order from the trial court to require the parties to go through the appraisal process.

The district court reversed the order of the trial court and remanded back to the trial court with instructions to grant the motion to compel appraisal.

Federal District Court Declines Invitation to Set Scope of Appraisal

James M. Eastham | Traub Lieberman

In Mt. Hawley Ins. Co. v. Harrods Eastbelt, Ltd., No. CV H-20-2405, 2020 WL 7632250 (S.D. Tex. Dec. 22, 2020), the United States District Court for the Southern District of Texas addressed a request to set the scope of an appraisal by requiring the appraisers to use a specific format for the appraisal. At issue was a claim for damages to three insured buildings allegedly damaged during Tropical Storm Imelda. The insurer had denied coverage based on the asserted lack of wind-created openings as required for coverage under the policy. Rather, the insurer took the position that the interior leaks were caused by a number of excluded causes including long-term weathering, wear and tear, age-related deterioration, ponding, and long-term leaks.

In response to the denial of coverage, the insured invoked the appraisal provision of the policy which provided, among other things, that the “appraisers will state separately the value of the property and amount of loss.” Despite the language of the appraisal provision, the Insurer sought an order requiring the appraisers to state the amount of loss separately for each portion of the property in dispute and for each major building component including separate amounts of loss for roofs, exterior walls, windows, and interior water damage.

Referencing the Texas Supreme Court’s prior stated emphasis on the propriety of avoiding judicial involvement pre-appraisal, the Court declined the Insurer’s invitation to set the scope of the appraisal and held that the request was beyond the policy requirement that the appraisers “state separately the value of the property and amount of loss.” While the Court did not forbid the appraisers from using any form which enabled them to “state separately the value of the property and the amount of loss”, the Court refused to require any particular approach.

Property Valuations In Uncertain Times

Adam Levine | Ostrow Reisin Berk & Abrams

Valuation plays a critical role in real estate, from appraisals for residential mortgages to the sales of commercial real estate. But the COVID-19 crisis and resulting economic uncertainty pose some challenges for valuation experts across the country.

Limited physical access

Site visits have long been an integral part of the valuation process, but stay-at-home orders blocked access to many properties earlier this year throughout the country.

Fannie Mae and Freddie Mac have recognized this hurdle by temporarily permitting exterior-only and desktop appraisals for eligible mortgages. Banking regulators allowed certain commercial and residential loans to close without having an appraisal completed, though appraisals have been required within 120 days of closing.

Savvy valuators quickly turned to technologies, like Google Earth, Street View and drones, to help fill in the gaps created by the inability to physically access properties. They are also taking advantage of online databases of municipality property assessment records to obtain necessary information.

Lack of comparable sales

Under the comparable sales method, valuators look at the sales prices of similar properties in recent transactions, making adjustments for differences between those properties and the subject property. It is debatable whether pre-COVID-19 sales can be considered comparable with post-pandemic sales, though. Moreover, deal volume for certain types of properties has fallen in many areas.

Valuators are looking beyond comparable sales and considering individual circumstances on a more granular level. This approach acknowledges that generalities are of limited value when COVID-19 may have different effects on different properties in the same neighborhood.

Tumultuous conditions

Essential data inputs for valuations are shifting constantly, sometimes daily. Unemployment numbers have been at historical highs, while interest rates have been at notable lows.

Businesses that were healthy months earlier have boarded up threatening the continued vitality of neighborhoods and increasing expected vacancy rates. Struggling tenants may have fallen behind on monthly payments. Governments are not only mandating rent relief, but also providing financial support to prop up troubled companies. Plus, operating costs may be higher to comply with health and safety concerns, as well as to adapt property use and features for changes in demand.

Valuators must address all these factors in their reports. But users of those reports must understand the limitations and consider obtaining fresh appraisals when fewer uncertainties exist.

Heart of the matter

2020 has not been kind to the values of many types of properties. But it is always better to have an accurate, data-based assessment of value than rosy, speculative estimates that do not pan out.

Appraisal May Be a Viable Option for Policyholders When Damages Calculations Are Contested

Janine Stanisz | Policyholder Pulse Blog

Even if an insurance company attempts to deny its coverage obligations, there are still processes that a policyholder can explore, short of litigation, that could resolve a coverage dispute.  Appraisal is an alternative dispute resolution process designed to efficiently resolve measurement disputes between policyholders and their insurers. Appraisal can streamline a coverage lawsuit and narrow the disputed issues—it may even limit the need for expert reports and depositions. There is a strong public policy favoring appraisals throughout the country, not only because they may provide a less expensive alternative to litigation, but also because appraisal rulings are enforceable and strictly applied in court. Some states even require that form standard insurance policies include an appraisal clause requiring either party to, on demand, submit a dispute over the amount of a loss to an appraisal panel. (See Virginia Code § 38.2-2105; Cal. Ins. Code § 2071; McKinney’s Ins. Law§ 3404; N.J.S.A. § 17:36-5.20.) That panel typically consists of two appraisers, who select an umpire.

Different policies may contain different appraisal language and set forth different requirements and standards of review. In some policies, either party can invoke appraisal at any time after a disagreement arises, and the process is mandatory. Such policies often state that a decision by two members of the appraisal panel “will set the amount of loss” and “will be binding on both parties.” Importantly, appraisal provisions typically provide that where the appraisers agree, those agreements are binding, and only disagreements are submitted to an umpire, who then calculates the damage categories that remain in dispute. The umpire’s findings are also binding on the parties.

Despite clear language in many policies, insurers have nevertheless sought to skirt appraisal requirements, perhaps in the interest of delaying payments owed under the policy. For example, insurers have argued that appraisal may be premature because there are outstanding “coverage disputes,” that an insured’s request for appraisal improperly seeks a determination of “coverage issues” by the appraisal panel, or that the request for appraisal is untimely or has been waived. Such arguments are specious. As the Second Circuit Court of Appeals explained in one coverage case:

[T]he presence of a coverage dispute does not preclude an appraisal demand. Only a coverage dispute that precedes the valuation of damages will prevent such a demand. Coverage disputes that are independent of the valuation of damages can stand in abeyance pending the appraisal.

Accordingly, parties can submit their damage calculations to appraisal and still litigate the outstanding coverage issues and an insurer can still submit to appraisal even though a court may later determine that those elements of damages are not covered.

What does this mean for a policyholder as a practical matter? While appraisal may not foreclose all disputes between a policyholder and its insurer, when used effectively, it provides a process for the parties to better understand the amounts in dispute and narrow the areas of disagreement. With quantum of loss undisputed, parties are in a better position to mediate or discuss settlement because they are equipped with binding dollar amounts. Even if litigation continues, the process will be streamlined. Damage expert witnesses may no longer be necessary, and trials may be shortened because damage information need not be presented to a jury.

Review your policy to determine if it contains an appraisal provision. While only a general appraisal framework and process may be included in your policy, consider whether you may benefit from developing a written appraisal protocol, which provides specific deadlines and includes an appraisal award form that sets forth the various damage categories that the appraisers and/or umpire will quantify.