Texas Legislation Filed to Relieve Contractors of Liability Resulting From Design Defects

Brian Comarda andAllison K. Wells | Gordon Rees Scully Mansukhani

Currently, Texas is one of only two states where a contractor may be held liable for defects related to construction designs, plans, or specifications – even if provided by the hiring party (i.e., the owner, owner’s agent or design professional). However, new legislation in Texas (SB 219 and HB 1418) has been filed to square Texas in line with other states, to grant contractors protection, and to reverse, in part, the 2012 Texas Supreme Court holding in El Paso Field Services, L.P. v. MasTec North America,[1] which led to this current situation.

The Texas Supreme Court, in MasTec, held that parties enter into contracts freely and voluntarily, and risk of any construction defect should be allocated pursuant to the agreement between the parties. The Court further held that if it chose to become involved in the dispute between the contractor and hiring party, it would essentially render the applicable risk allocation agreement pointless, and essentially prevent sophisticated parties from apportioning risk as they saw fit. As a result of this holding, contractors have been held responsible for the defects that resulted from work performed in accordance with designs, plans, and specifications provided by the hiring party.

This new legislation would effectively overrule the Court’s holding in MasTec. More specifically, SB 219 and HB 1418, would relieve a contractor of responsibility for the consequences of defects in plans, specifications, or other design or bid documents provided to the contractor by the person with whom the contractor entered into the contract. The bill specifies further that the contractor does not warranty the accuracy, sufficiency, or suitability of such plans. The bill requires the contractor to disclose in writing the existence of any known defect discovered by the contractor before or during the construction or lose the liability protection for the consequence of known, undisclosed defects. This protection cannot be waived by contract. It should be noted that similar legislation failed to pass in 2017 and 2019 over opposition from owners, designers, and architects.

Obscure But Important Surety and Guarantee Rules

Joe Virene | Gray Reed & McGraw

Texas surety law contains obscure procedural rules that can have outsized consequences. Chapter 43 of the Civil Practice and Remedies Code is an important example.

Applicability

This chapter applies to everything that is a “surety” as defined by the statute. The statute’s definition includes “an endorser, a guarantor, and a drawer of a draft that has been accepted; and …every other form of suretyship…” This means sureties on payment and performance bonds and even personal guarantees.

Notice and Discharge

A surety on a contract may send a written notice requiring the obligee to bring a suit on the contract. If the obligee fails to do so within the “first term of court” or fails to do so within the “second term of court if good cause is shown for delay” then the surety is discharged of liability. “Term of court’ is antiquated. However, that has since been construed to mean a “reasonable time.”

The Priority of the Execution

If a judgment is entered against a principal and a surety, then Chapter 43 requires the sheriff to first levy the principal’s property until the judgment is satisfied. If the principal does not have enough property in the county to satisfy the judgment, then the surety’s property may be levied.

Subrogation

The surety may also subrogate to the judgment creditor’s rights to extent the surety makes or is complelled to make payment(s) to satisfy the judgment.

Waiver

These rights may be waived by agreement. For this reason, these rights are often, directly or indirectly, waived.

Texas Appraisal Allows Determination of Causation and Upholds Zero Award

Chip Merlin | Property Insurance Coverage Law Blog

Texas has a lot of insurance claims decided by appraisal. Maybe the appraiser for one insured should have gone to Steve Patrick’s appraisal class because the umpire and insurer’s appraiser came to a zero award, which was upheld on appeal.

The court quoted from,1 stated the following as Texas appraisal law:

(1) appraisals necessarily include a causation element because setting the amount of loss requires appraisers to decide between damages for which coverage is claimed from damages caused by everything else, and (2) appraisers may separate loss due to a covered event from a property’s pre-existing condition….

Federal courts have likewise interpreted Johnson as holding that appraisers act within their authority when they distinguish damage caused by pre-existing conditions from damage caused by the storm. See TMM Investments, Ltd. v. Ohio Cas. Ins. Co., 730 F.3d 466, 474–75 (5th Cir. 2013) (reversing an order setting aside the appraisal award because, under Johnson, it was entirely appropriate for the appraisers to consider whether damage was caused by pre-existing conditions, as they did); MLCSV10 v. Stateside Enterprises, Inc., 866 F. Supp. 2d 691, 705 (S.D. Tex. 2012) (The appraiser’s causation evaluation of the damage to the roof ‘involved no more than ‘separating loss due to a covered event from a property’s pre-existing condition.’ Under Texas law, such a causation determination relates to damages and is properly addressed by the appraisers.’)

Regarding the facts underlying the causation, the court noted that the Umpire and insurer’s appraiser found the following:

AllStar [LeBlanc] met with the Appraisers and inspected the roof and exterior of risk. AllStar found NSR [no storm-related] damages to the risk due to hail or wind that would warrant replacement. Note that the area damaged by water intrusion is due to the flashing that has been improperly installed. The flashing is loose and not caulked properly, allowing water intrusion when it rains. We also documented the rear slope on garage, showing damages due to tree rub. AllStar documented the interior of the risk and found damage due to water intrusion around chimney crown cap (mortar cracked due to age) and improper flashing. We also noted settlement issues within the home.

The lesson from this case is that with Texas hailstorm cases, the appraisal panel can consider what damages are from the hailstorm and what have nothing to do with the windstorm. I would strongly suggest that policyholders help their appraisers by getting experts to help clarify and explain what is hailstorm related damage so the entire panel can be educated on the causation issue.

Texas Supreme Court Holds that Invoking Appraisal Provision and Paying Appraisal Amount Does Not Insulate an Insurer from Damages Under the Texas Prompt Payment of Claims Act

John C. Eichman and Grayson L. Linyard | Hunton Andrews Kurth | July 3, 2019

In two cases decided June 28, 2019, the Texas Supreme Court held that an insurer’s invocation of a contractual appraisal provision after denying a claim does not as a matter of law insulate it from liability under the Texas Prompt Payment of Claims Act (“TPPCA”). But, on the other hand, the court also held that the insurer’s payment of the appraisal award does not as a matter of law establish its liability under the policy for purposes of TPPCA damages.

In Barbara Techs. Corp. v. State Farm Lloyds, No. 17-0640, 2019 WL 2666484, at *1 (Tex. June 28, 2019), State Farm Lloyds issued property insurance to Barbara Technologies Corporation for a commercial property. A wind and hail storm damaged the property, and Barbara Tech filed a claim under the policy. State Farm denied the claim, asserting that damages were less than the $5,000 deductible.

Barbara Tech filed suit against State Farm, including for violation of the TPPCA. Six months later, State Farm invoked the appraisal provision of the policy. More than a year after the suit was filed, appraisers agreed to a value of $195,345.63. State Farm then paid that amount, minus depreciation and the deductible. Barbara Tech amended its petition to include only TPPCA claims.

In the trial court and court of appeals, State Farm successfully argued that because it invoked the contractual appraisal process and then paid Barbara Tech in accordance with the appraisal, as a matter of law it could not be liable for TPPCA damages. The Supreme Court rejected that argument, noting that the TPPCA was silent with respect to the role of any appraisal process. The court held that an insurer’s use of the policy’s appraisal process and payment of the appraisal amount does not absolve it from liability for TPPCA damages. Conversely, the court also held that an insurer’s payment of an appraisal award “is neither an acknowledgment of liability nor a determination of liability under the policy for purposes of TPPCA damages under Section 542.060.” The court therefore concluded that neither Barbara Tech nor State Farm was entitled to summary judgment on the TPPCA claims.

Similarly, in Ortiz v. State Farm Lloyds, No. 17-1048, 2019 WL 2710032, at *1 (Tex. June 28, 2019), State Farm sold Oscar Ortiz (“Ortiz”) homeowner’s insurance. After his home was damaged by wind and hail, he submitted a claim which State Farm rejected as being below the deductible amount of $1,000. Ortiz ultimately sued state farm for TPPCA violations, among other claims.

State Farm demanded an appraisal which the court ultimately compelled. The appraisal set the cash value of the loss at $5,243.93, which State Farm paid about a week later. One issue on appeal was whether the payment of the appraisal amount barred claims under the TPPCA. Citing its decision in Barbara Tech, the court held that “the payment of an appraisal award does not as a matter of law bar an insured’s claims under [the TPPCA],” and remanded for further proceedings in light of Barbara Tech.

These two opinions will aid policyholders whose insurers wrongfully deny claims and then try to use a policy’s appraisal procedure to shield themselves from TPPCA damages.  But the decisions also teach policyholders that they typically must establish liability under the policy to obtain damages under Section 542.060 of the TPPCA.

Texas Supreme Court Clarifies Bad Faith in Appraisal Process

Jim Sams | Claims Journal | July 2, 2019

An insurer’s payment of the appraisal value after disputing a claim does not establish that it was liable, nor does that payment prevent a policyholder from pursuing penalties under the Prompt Payment of Claims Act, a split Texas Supreme Court ruled in a pair of decisions released Friday.

The rulings reverse previous Court of Appeals decisions that held plaintiffs cannot sustain prompt payment claims if the insurer paid the appraisal award. The court however, did not state in what circumstances insurers can be held liable after paying an appraised value.

Of three attorneys who were asked to comment on the decision — one who represents insurers and two who represent policyholders — none were completely satisfied with the outcome.

“I feel that this was a very measured, very right down-the-middle decision,” said attorney Jeffrey L. Raizner of Houston, who represented Barbara Technologies Corp. in its suit against State Farm Lloyds.

Both claims decided on Friday involved hail damage to properties insured by State Farm Lloyds.

Barbara Tech’s commercial property in San Antonio was damaged by wind and hail in 2013. The company filed a claim with State Farm Lloyds, but the carrier denied it. State Farm said the damage was only $3,153.57, less than Barbara Tech’s $5,000 deductible.

Barbara Tech filed suit. State Farm demanded an appraisal. The appraisers agreed that the property damage was valued at $195,345.63. State Farm paid that amount — less depreciation and the deductible — a week later.

But Barbara Tech didn’t drop its lawsuit. The company amended the complaint claiming that the carrier had violated the Prompt Payment and Claims by violating to comply with statutory deadlines for acknowledging receipt of the claim, commencing an investigation and paying the claim.

Both State Farm and Barbara Tech filed motions for summary judgment. State Farm asserted that it did not violate the prompt payment statute as a matter of law because it paid the appraisal award.

Barbara Technologies asserted that State Farm was liable for prompt payment damages because payment of the appraisal award was an acknowledgment that State Farm was liable for the claim, but it had not complied with the statutory payment deadlines.

The trial court dismissed Beverly Tech’s claim and the Fourth District Court of Appeals affirmed the decision, relying on previous rulings that insurers that paid appraisal values could not be held to be in violations of the prompt payment statute.

The Supreme Court found that that decision was error. The Prompt Payment of Claims Act does not excuse an insurer from liability for damages if it delays payments beyond the statutory deadline regardless of whether it used the appraisal process, according to the majority opinion written by Justice Paul W. Green.

But the court did not find that Beverly Tech had proven that State Farm had violated the statutory deadlines. It remanded the case back to the trial court to rule on that question according to the facts of the case.

Raizner, a founding partner of the Raizner Slania law firm in Houston, said the ruling may dissuade insurers who otherwise would “weaponize the appraisal” process by using it to delay payments of reasonable claims. He said the decision also corrects a series of appellate court decisions that insurers were using to argue that they were immune from late-payment penalties because they paid the appraised value.

On the other hand, Raizner said he would have preferred that the high court rule that State Farm Lloyds was liable for violating the statutory deadlines.

San Antonio Attorney Brendan K. McBride, of counsel for the Gravely & Pearson law firm, filed an amicus curie brief on behalf of Beverly Tech. He said he would have liked to have seen a more comprehensive decision.

“I would have like for them to to more clearly stated that the appraisal process is not part of the claims adjusting process,” he said.

On the other hand, McBride said he was happy to see the Supreme Court correct a long line of cases that followed a 2004 ruling in Breshears v. State Farm Lloyds by the 13th District Court of Appeals in Corpus Christi. He said carriers have been using those ruling to delay payments by calling for appraisals when they don’t want to pay claims.

“They were so emboldened by this decision that some insurers put a unilateral appraisal process in their policies,” McBride said.

Steven J. Badger, an attorney with Zelle LLP in Dallas, said he thinks the Supreme Court’s ruling invites more litigation because it doesn’t answer essential questions.

“I think the court could have provided more description of the situations that would not subject the insurer to prompt-payment penalties,” he said.

Badger said the decision did not address whether an appraisal can be used to address what caused damage, such as a hail storm, or must stick to the narrower issue of the cost of the damage.

“The decision leaves and much open questions as it resolves open issues,” Badger said. “The court has essentially ensured that almost every appraisal is followed by litigation.”

The second hail damage suit decided by the Supreme Court on Friday involved a homeowner’s insurance claimed filed by Oscar Ortiz. The carrier had denied Ortiz’s claim, asserting that the damage was not caused by hail. Ortiz sued alleging breach of contract, bad faith and violations of the Prompt Payment of Claims Act.

The Supreme Court ruled that the Fourth District Court of Appeals properly dismissed the breach of contract and bad faith claims, but erred in dismissing the claim for prompt payment act penalties.