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.

The Payment Of Appraisal Awards – Not Quite A Bar

Kelly McKee | Kane Russell Coleman Logan

A frequently encountered question in the insurance world is whether payment of an appraisal award forecloses or bars first party claims against an insurer by the insured, and if so, under what circumstances. The Texas Supreme Court has taken this matter up in numerous cases in the last several years, but which claims are barred by payment of an appraisal award is still partially unresolved. Three recent decisions from the Texas Supreme Court have provided guidance on the correct interpretation of Texas Prompt Payment of Claims Act (“TPPCA”) claims, but questions still remain.

Texas Prompt Payment of Claims Act

In three recent decisions, the Texas Supreme Court reiterated its prior position, that payment of an appraisal award does not automatically entitle an insurer to summary judgment on an insured’s TPPCA claims.1  In short, the TPPCA requires insurance claims under certain types of policies to be investigated, and paid or denied, within a certain prescribed period. If they are not, those claims can be subject to the award of an eighteen percent statutory interest rate from the time of accrual, prejudgment interest, and attorney’s fees.2  

In both Alvarez & Lazos, the dispute started when the insurer’s initial inspection led them to provide an estimate to the insured indicating that the insured’s residential wind and hail damage claims fell below their deductibles. Later, the insurers conducted a second inspection, which included additional damages, resulting in an increased estimate, and made payment.  However, the insureds still believed the estimates undervalued their damages, and each filed suit. In both suits, an appraisal was ordered by the trial court. These appraisals valued the damages higher than any prior estimate in each respective case, which the insurer in each case promptly paid. After making the payments, the insurers each moved for summary judgment, arguing that their contractual obligation to pay had been satisfied.

In both cases, the trial court granted summary judgment for the insurer, and the court of appeals affirmed.3 The Texas Supreme Court, reversing and remanding both decisions, found that the claims for damages under the TPPCA were not barred by payment of appraisal award.4  Interestingly, the Court found that these claims were not barred despite the fact that the insureds had not pled a specific claim for damages arising under the TPPCA.5  The Court found that each insured’s demand in the petition for the 18% statutory interest provided under the TPPCA, combined with their assertions in response to summary judgment (that they were not barred from the TPPCA cause of action), was sufficient to preserve the TPPCA claims for review and remand.

Other Claims

In most first party cases, the insured includes additional causes of action for contractual and extra-contractual claims (i.e., breach of contract, statutory and common law bad faith).  The Lazos and Alvarez holdings did not provide any guidance on those other claims, because in both cases the insureds amended their petitions for review to remove all contractual and extra-contractual causes of action, and only petitioned the Texas Supreme Court on the TPPCA.6  However, in the third case, Steven Biasatti and Paul Gross D/B/A Topdog Properties v. Guideone National Insurance Company, the insured did not drop the contractual and extra-contractual claims in its petition for review to the Court.7  

In Topdog, the insureds for several properties underwent two separate insurer inspections to their properties for wind and hail damage, both of which resulted in an insurer’s estimate that was below the deductible. 8 The insurer declined to perform a third inspection and refused to invoke the policies unilateral appraisal clause requested by the insured, finding that it was unnecessary.

The insureds then sued for breach of contract, common-law and statutory bad faith, and violations of the TPPCA.9  Eight months after suit was filed, the insurer demanded an appraisal, but the insured refused to agree. The insurer then moved to compel an appraisal, which was granted by the court.  The appraisal award found the insureds’ losses to be about thirty-three times over the deductible, which the insurer promptly paid (less the deductible and depreciation).10

As in the other two cases, the trial court granted summary judgment in favor of the insurer, based on the payment of the appraisal award.  The court of appeals affirmed, finding:

(1) Insureds failed to raise a fact issue on damages for breach of contract because Insurer paid all benefits available under the policy when it paid the appraisal award, and (2) Insureds’ bad-faith and TPPCA claims failed because it did not allege an injury independent from the policy benefits and did not demonstrate policy benefits were withheld after the appraisal award was paid.11

The Texas Supreme Court cited its earlier opinion in the Barbara case and noted that in Barbara they had declined to “decide whether an acknowledgement or determination of liability was necessary to obtain damages under the section 542.058 delay of payment–TPPCA.” 12  They offered no further guidance on that issue in this opinion.  Instead, the Court again held that the payment of the appraisal award did not foreclose the insureds’ TPPCA claims.

The Court also discussed Ortiz, in which the Court held that “payment of an appraisal award forecloses an insurer’s liability for breach of contract and common-law and statutory bad faith unless the insured suffered an independent injury.”13  The insured in Topdog argued that the Court should create an exception to the independent injury rule for breach of contract and bad faith claims under the unique facts of this case.

The Supreme Court overturned the appellate court ruling.  First, it held that the Court of Appeals erred in holding that the insured’s claims under the TPPCA could not be maintained because the insurer had paid the appraisal, citing Barbara.  The Court then considered whether the breach of contract and bad faith claims were barred, noting that under Ortiz, it would appear so.  However, the Court punted on this issue, noting that it had not previously considered whether payment of any appraisal award under a unilateral appraisal clause would have the same effect.  Accordingly, the Court remanded all causes of action to the trial court for consideration.

Conclusion

            These three decisions clarified part of the law, and left open some questions as well:

  • It appears that any allegation in the petition that the insured is seeking recovery of the 18% statutory interest award provided under the TPPCA, assuming it is not later waived, will be treated as a TPPCA claim, even if the TPPCA is not specifically pled in the original petition;
  • Payment of an appraisal award does not bar a TPPCA claim, but payment of the award is also not an automatic acknowledgment of liability or determination of the same, so the claim will still have to be litigated;
  • Payment of an appraisal award bars claims for breach of contract and common-law and statutory bad faith, unless the insured suffered an independent injury;  
  • Payment of an appraisal award MAY not bar claims for breach of contract and extra-contractual claims if the appraisal award was based on a unilateral appraisal clause (this issue was left unresolved and remanded to the trial court for determination); and
  • The Topdog case also left open for the parties to brief whether unilateral appraisal clauses are illusory and thus unenforceable.

Therefore, despite this trilogy of cases by the Texas Supreme Court, litigation on these matters will continue.

Footntoes

1 Alvarez v. State Farm Lloyds, No. 18-0127 (Tex. April 17, 2020); see alsoLazos v. State Farm Lloyds, No. 18-0205 (Tex. April 17, 2020) (reciting essentially the same information and holdings); Steven Biasatti And Paul Gross D/B/A Topdog Properties v. Guideone National Insurance Company, No. 18-0911 (Tex. April 17, 2020).

2 Tex. Ins. Code §§ 542.051–.061.The statutory interest rate is subject to a calculation, if the claim arises from damages to certain real property caused by forces of nature. Tex. Ins. Code §§ 542A.001–007.

3 Alvarezsupra note 1; Lazossupra note 1.

4 Alvarez, supra note 1 (citing Barbara Technologies Corp. v. State Farm Lloyds, 589 S.W.3d 806, 820 (Tex. 2019) (“payment in accordance with an appraisal is neither an acknowledgment of liability nor a determination of liability under the policy for purposes of TPPCA damages under section 542.060.” ); Ortiz v. State Farm Lloyds, 589 S.W.3d 127, 135 (Tex. 2019) (“an insurer’s payment of an appraisal award does not as a matter of law bar an insured’s claims under the Prompt Payment Act.”)). See also, Lazossupra note 1 (citing the same).

5 Alvarezsupra note 1; Lazossupra note 1.

6Alvarezsupra note 1 (noting the original petitions was for “breach of contract, breach of the duty of good faith and fair dealing, unjust enrichment, negligence, negligent misrepresentation, and violations of Chapters 541 and 542 of the Insurance Code”); See also, Lazossupra note 1 (noting the same).

7 No. 18-0911 (Tex. April 17, 2020).

8 Id.

9 Id.

10 Id.

11 Id. (citing Steven Biasatti And Paul Gross D/B/A Topdog Properties v. Guideone National Insurance Company, 560 S.W.3d 739, 743–44 (Tex. App.—Amarillo 2018)).

12 Id. (citing Barbara Technologies Corp., 589 S.W.3d at 823–24).

13 Id. (citing Ortiz, 589 S.W.3d at 129,133,135).

Payment of An Appraisal Award: Is There More?

Kay Morgan | Property Insurance Coverage Law Blog | September 19, 2019

The answer to the above question came, in part, on June 28, 2019, with the issuance of twin Texas Supreme Court opinions: Barbara Technologies Corporation v. State Farm Lloyds,1 and Ortiz v. State Farm Lloyds.2 The specific issue in these two decisions was what effect did an insurer’s full and timely payment of an appraisal award have on the insured’s various causes of actions and damages?

The answer to that issue was found to depend on the particular cause of action analyzed. In Barbara Technologies, the Texas high court held that following an insurer’s payment of an appraisal award, an insured can still pursue a violation for delay in payment under Chapter 542 of the Texas Prompt Payment of Claims Act (“TPPCA”).3 In Ortiz, the court held that an insurance company’s payment of an appraisal award bars the insured’s breach of contract claim and the insured’s common law and statutory bad faith claims to the extent that the only actual damages sought are lost policy benefits.4

Recently, in light of Barbara Technologies, a Federal Southern District trial court granted a reconsideration in Shin v. Allstate Texas Lloyds.5 There, the trial court had granted summary judgment on plaintiff’s Prompt Payment Act claim on the ground that under Texas law, “full and timely payment of an appraisal award under the policy precludes an award of penalties under the Insurance Code’s prompt payment provisions as a matter of law.”6 That ruling in Shin preceded Barbara Technologies by just a couple of days which again, as noted above, held that an insurer’s payment of the appraisal award did not foreclose TPPCA damages.7 In granting the reconsideration, the court requested supplemental briefing on two issues: whether the “reasonableness” exception in Mainali Corp. v. Covington Specialty Insurance Company,8 survived Barbara Technologies; and, in particular to the Shin case, whether the initial payment before appraisal — pre-appraisal payment — was “reasonable.”

In Mainali, the Fifth Circuit Court of Appeals held that there is no statutory violation of the Prompt Payment Act if the insurer’s pre-appraisal payment was “reasonable.” The pre-appraisal amount in Mainali was found to be undeniable reasonable because it exceeded the appraisal award amount found by the appraisal panel. Finding that Barbara Technologies actually cited Mainali with approval, and therefore, Mainali had not been overruled, the court in reconsideration in Shin held; reading the two cases in conjunction with each other, they stand for the proposition of law that to avoid a Prompt Payment Act violation, an insurer must have made a “reasonable” pre-appraisal payment within the statutorily-provided period.9

Applying the above, the court in Shin looked at the appraisal award amount of $25,944.94 which was 5.6 times greater than the initial pre-appraisal payment of $4,616.63, but nonetheless, found that the pre-appraisal payment was “reasonable” for two reasons.10 First, Allstate had complied with the Prompt Payment Act requirements of responding to the claim and requesting additional information, evaluating and investigating the claim. Second, the difference between Allstate’s pre-appraisal and appraisal payments was no larger than the difference in other cases in which courts had made a similar “reasonableness” finding.11 Based on this analysis, the court in Shin affirmed its prior ruling of granting summary judgment for Allstate on Plaintiff’s Prompt Payment Act claim.

After Shin, the answer to the title question of “After Payment of an Appraisal Award: Is there More?” is a “maybe” under the Prompt Payment Act depending on how each individual court determines or finds “reasonableness” of the pre-appraisal payment.

A new question, however, that may follow this holding is: Will insurers outright deny claims for a zero-pre-appraisal payment which under Shin, no doubt, would be found to be “unreasonable” when compared to any amount of an appraisal award and thereby subject insurers to possible violations under the Prompt Payment Act or will insurers low-ball pre-appraisal payments, move for appraisal, and roll-the-dice on “reasonableness”? Time will tell.
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1 Barbara Technologies Corp. v. State Farm Lloyds, No. 17-0640, 2019 WL 2710089 (Tex. June 28, 2019).
2 Ortiz v. State Farm Lloyds, No. 17-1048, 2019 WL 2710032 (Tex. June 28, 2019).
3 Barbara Technologies, 2019 WL 2710089, * 12.
4 Ortiz, 2019 WL 2710032, *8.
5 Shin v. Allstate Texas Lloyds, No. 4:18-cv-01784, 2019 WL 4170259 (S.D. Tex. Sept. 3, 2019).
6 Nat’l Sec. Fire & Cas Co. v. Hurst, 523 S.W.3d 840, 847 (Tex. App.—Houston [14th Dist.] 2017) (emphasis in original).
7 Barbara Technologies, 2019 WL 2710089, *12.
8 Mainali Corp. v. Covington Specialty Ins. Co., 872 F.3d 255, 259 (5th Cir. 2017).
9 Mainali, 872 F.3d at 259.
10 Id.
11 Id.

Post-Lawsuit Payment of Appraisal Awards

Shane Smith | Property Insurance Coverage Law Blog | June 15, 2019

A recent Florida 4th District Court of Appeal decision, Bryant v. Geovera Specialty Insurance Company,1 addressed the issue of whether an insurance carrier’s payment of an appraisal award above a sublimit constituted a “confession of judgment.”

The purpose of the confession of judgment doctrine, which allows an insured to seek statutory attorney fees, is to prevent insured parties from needing to resort to litigation to collect benefits to which they are entitled under their insurance contracts.

In this case, the insureds suffered damage to their residence due to a pipe leak. Their surplus lines homeowners’ insurance policy from GeoVera Specialty Insurance Company (“GeoVera”) contained an endorsement with a $5,000 sublimit for mold and a $1,000 combined sublimit for a covered loss caused by water seepage or leakage that occurs over a period of 14 days or more. After the loss, the insureds spent $6,600 on emergency water-remediation services. A few weeks later, the insureds reported the loss to their insurance carrier, GeoVera. Two days later, the adjuster inspected the property and issued a repair estimate of $21,372.31, allocating $3,597.11 as subject to the ensuing water loss endorsement and $17,775.20 as subject to the mold endorsement. GeoVera paid the insureds $6,000 due to the policy’s sublimits.

The insureds filed suit against GeoVera asserting three causes of action: (1) breach of contract; (2) petition for appraisal and (3) statutory bad faith in violation of section 624.155, Florida Statutes. The insureds argued the sublimits did not apply. GeoVera moved to stay the claims for breach of contract and petition for appraisal and to abate the bad faith claim. The trial court entered an agreed order, staying the case, pending an appraisal. The order required, in part, that the appraisal award would include an itemization of any damages coming within the leakage sublimit, any damages coming within the mold sublimit, and any covered damages that did not fall within those sublimits.

The appraisal award itemized the following damages: $30,963.62 for “dwelling,” $14,477.99 for “mold” and $6,600 for “EMS.” The appraisal award did not identify any damages subject to the $1,000 leakage sublimit.

GeoVera paid $29,963.62 to the insureds and $6,600 to the water mitigation company for the EMS. The total amount paid was the balance due under the appraisal award after deducting the $6,000 prior payment and $5,000 mold sublimit.

GeoVera filed a motion for summary judgment arguing it was not liable for breach of contract or bad faith, in part, because the insureds never disputed GeoVera’s adjustment of the loss pre-suit. (GeoVera also sought a summary judgment ruling that the insureds failed to comply with GeoVera’s demand for a sworn proof of loss. That issue will not be addressed in this blog post.)

The court granted final summary judgment in favor of GeoVera. The insureds appealed and argued GeoVera’s payment of the appraisal award constituted a confession that it breached the policy by erroneously invoking the $1,000 leakage sublimit.

The appellate court agreed, holding that GeoVera’s payment of the appraisal award demonstrated an abandonment of its pre-suit coverage position that the claim was subject to the sublimit for long-term water leakage:2

GeoVera’s response to the claim invoked coverage defenses. And there was a pre-suit refusal by the insurer to pay a portion of the claim—that is, any amount of water damage (aside from mold) that exceeded the $ 1,000 leakage sublimit. By invoking the $ 1,000 leakage sublimit, GeoVera raised a coverage issue that only a court could resolve. This coverage issue went beyond a mere dispute about the valuation of the loss, so the insureds could not have simply invoked the policy’s appraisal provision before filing suit.

Because GeoVera invoked the $1,000 leakage sublimit to deny coverage for a portion of the claim, it was of no consequence whether the insureds notified GeoVera pre-suit that they were disputing GeoVera’s coverage position or damage valuation. Once GeoVera incorrectly invoked the $ 1,000 leakage sublimit and notified the insureds that it would not pay any non-mold-related water damage above that amount, GeoVera committed an anticipatory breach of the policy and created an immediate right of action for the insureds, even though GeoVera’s repudiation took place before the time prescribed for the promised performance under the policy’s loss-payment provision. See Peachtree Cas. Ins. Co. v. Walden, 759 So.2d 7, 8 (Fla. 5th DCA 2000) (holding that an insurer’s notice that it would no longer pay benefits constituted an anticipatory breach of its agreement to provide those benefits).

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1 Bryant v. Geovera Specialty Ins. Co., No. 4D18-189, 2019 WL 2017972 (Fla. 4th DCA May 8, 2019).
2 Id. at *5.

After an Appraisal Award is Signed, Can One Side Unilaterally Change It?

J. Ryan Fowler | Property Insurance Coverage Law Blog | April 2, 2019

With appraisal becoming more popular in first-party insurance cases, I often get asked: When is the appraisal completed? As most answers for a first party insurance case – it depends on the policy. Recently a Federal District Court in Florida was asked to determine which of two appraisal awards was final and enforceable.1

The insureds filed a claim for hurricane damage with their insurance company. The claim eventually let to a lawsuit in federal court where the parties didn’t contest coverage and agreed to an appraisal under the insurance policy.

Each side appointed an appraiser: Kunzman (for the insurer) and Thomas (for the insureds), and the trial court appointed Leiby to serve as an umpire. The Appraisers and Umpire performed a property inspection in August of 2018. The trial court then outlined the following e-mail exchanges:

September 5, 2018:

1:54 p.m. – Umpire Leiby circulated an appraisal award (the “Disputed Award”) in the amount of $121,800.30 that included his electronic signature. The email stated, “See attached for review and comment. If one or both of you find this agreeable, please sign, scan, and return to me. I will then get out the originals.”

2:27 p.m. – Appraiser Kunzman expressed his objection to the Disputed Award, asked for a breakdown and itemization of the award amount and a copy of Appraiser Thomas’ estimate.

2:35 p.m. – Appraiser Thomas emailed Umpire Leiby and Appraiser Kunzman a signed copy of the Disputed Award that Umpire Leiby had circulated at 1:54 p.m., stating, “Please see the attached award signed by me.”

3:59 p.m. – Umpire Leiby responded to Appraiser Kunzman’s 2:27 p.m. email, requesting Appraiser Thomas forward him the missing documents and indicating that he would “hold off on the final until [Appraiser Kunzman] gets that.”

September 6, 2018:

9:37 a.m. – Umpire Leiby advised Appraiser Kunzman to provide any input based upon Appraiser Thomas’ estimate within five days. Umpire Leiby then indicated that the “the award [was] not yet final.”

September 17, 2018:

12:10 p.m. – Umpire Leiby sent the parties’ appraisers a revised appraisal award (the “Revised Award”) in the amount of $90,704.27.

12:59 p.m. – Appraiser Kunzman executed the Revised Award and returned it to Umpire Leiby.

The insurance company paid the insureds $90,704.27, the amount of the Revised Award.
The insureds then asked the court to confirm the First Award in the amount of $121,800.30, executed by the Umpire and the insured’s appraiser as the binding appraisal award. The insurance company argued that the insureds’ motion should be denied because the First Award was preliminary or, if the award was final, it was timely modified by the Umpire.

The court looked at the underlying insurance policy which stated:

The appraisers will state separately the value of the residential property and the amount of loss. If they fail to agree, they will submit their difference to the umpire. A decision agreed to by any two will be binding.

(Emphasis in original.)

The court granted the insureds’ motion, finding that the Umpire did not have the authority to unilaterally change the award after it was signed by two parties. In its order, the court explained that the express terms of the policy stated that a “decision agreed by any two [appraisers] will be binding.” Here, the court continued, the evidence supported the conclusion that the Disputed Award was final and there was a decision agreed to by any two. The court ruled that once the First Award was forwarded and signed by Appraiser Thomas it “became binding by the express and unambiguous terms of the insurance policy.”

The court pointed out that no party had moved to correct or clarify the award and there was no basis for modifying it. The court said that although subsequent emails reflected the Umpire’s statement that the Disputed Award was not intended to be final, those later emails “had no effect” on the Disputed Award’s “earlier binding effect under the express terms of the policy.”

In this case, the disputed (first in time) award was final and enforceable based on the insurance policy language.
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1 Guzman v. American Security Ins. Co., No 18-cv-61195 (S.D. Fla. March 27, 2019).