The Appraisal Provision and Extracontractual Exposure
By: Fred Shuchart
Texas property coverage policies have contained an appraisal provision since the 1800s. Remarkably, until 2005, there were only a handful of decisions dealing with the interpretation and effect of the appraisal provision. It was not until the last few years, as a result of the hurricane and hail litigation, that we have seen a flurry of decisions involving the appraisal provision.
The United States District Court for the Eastern District of Texas, Beaumont Division, recently addressed the relationship between the appraisal provision and the carrier’s liability in Quibodeaux v. Nautilus Ins. Co., 2015 WL 1406375 (E.D.Tex. March 25, 2015). The Nautilus lawsuit arose out of an insurance coverage and the claims handling dispute related to alleged damage to the insured’s commercial properties as a result of Hurricane Ike. After the claim was adjusted and Nautilus made a partial payment, the insureds filed their Original Petition in September 2010 alleging that Nautilus breached their contracts by underpaying the claims and violated the duty of good faith and fair dealing, Sections 541 and 542 of the Texas Insurance Code and the Texas Deceptive Trade Practices-Consumer Protection Act. After a protracted motion practice with respect to the removal of the case and attempts to remand, several continuances, and two unsuccessful mediations, the court granted Nautilus’ Motion to Compel Appraisal on September 18, 2012, four years after Hurricane Ike. After the appraisal process was completed, Nautilus paid the appraisal award minus its previous payment and deductible.
As a result of the payment of the appraisal award, Nautilus filed a motion for summary judgment contending that the insureds could not establish any of their claims. The insureds argued that the appraisal award was not binding, because it did not include their claim for content damage, and Nautilus failed to investigate the content claim.
As set forth by the Court, an insured is estopped as a matter of law from asserting a breach of contract claim where the insurer can establish that there is an appraisal award which is binding and enforceable; that the company timely paid the appraisal award and the insured accepted the payment. The Court concluded that Nautilus had established there was a binding and enforceable appraisal award. The Court rejected the insured’s contention that the appraisal award’s failure to address the content claim made the award unenforceable. The Court noted that the insureds failed to present the content claim until after the appraisal award. The Court further found that Nautilus complied with the terms and conditions of the policy of insurance and paid the claim within the time set forth in the policy. Accordingly, the Court held the insureds were estopped from asserting a breach of contract claim.
The Court then proceeded to discuss the insured’s extracontractual claims. The Court started its discussion with a reference to Liberty National Fire Ins. Co. v. Akin, 927 S.W.2d 627 (Tex. 1976), wherein the Supreme Court recognized that, in most circumstances, an insured may not prevail on a bad faith claim without first showing the insurer breached the contract. The only recognized exception to the rule is where the insurer commits some act, so extreme, that would cause injury independent of the policy claim or fails to timely investigate the insured’s claim. The Court, in relying upon numerous decisions, then concluded that claims brought under the Texas Insurance Code and DTPA require the same predicate for recovery as a common law claim for bad faith. The Court further noted the previous decisions rarely applied the “extreme act” exception. The Court reviewed the evidence and concluded there was no evidence that Nautilus engaged in an extreme act, nor did it fail to timely investigate the claim, and therefore the Court concluded there was no extra contractual liability. It is important to note the Court also concluded there was no violation of the Prompt Payment of Claims Act where an insurer pays a portion of the claim first then the remainder based upon an appraisal award.
The United States District Court for the Southern District of Texas, Houston Division, addressed similar issues in United Neurology, B.A. v. Hartford Lloyds Ins. Co., 2015 WL 147296 (S.D.Tex. March 31, 2015). As with Nautilus, the insured in Hartford filed a claim for damage to its building as a result of Hurricane Ike. After a couple of inspections, Hartford partially denied the claim on April 16, 2009 based upon non covered damage. The remainder of the damage was less than the deductible. As a result, plaintiff filed suit on September 13, 2010 and Hartford invoked the appraisal provision on November 10, 2010. The insured did not comply with the appraisal provision and therefore Hartford filed a motion to compel, which the Court granted in February 2012. After the appraisal process, Hartford paid the full appraisal award.
Like Nautilus, the issues before the Court were whether Hartford’s timely payment of the appraisal award estopped the insured from asserting any breach of contract claim and also eliminated any extra contractual exposure. As with Nautilus, the insured argued that the appraisal process did not include all the damages and therefore did not constitute a binding award. The Court rejected the insured’s position noting that the additional claim, loss profits, was not submitted to Hartford until an expert was designated in connection with the litigation. After that argument was rejected, the insured then argued it did not accept payment of the award because it did not cash the checks and therefore it was not estopped from asserting a breach of contact claim. Without any real discussion, the Court concluded that once the insurer tenders full payment, estoppel applies and the insured does not have to negotiate the payment in order for estoppel to apply.
Although not a unanimous trend, the above two decisions appear to be in the majority trend with respect to the appraisal provision and extra contractual liability. Based upon the trend, it appears that invocation of the appraisal provision may eliminate any exposure for extracontractual liability and breach of contract if the appraisal provision is timely invoked and the award is timely paid in full.