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Jul 3, 2019

Appraisal and Extra-Contractual Claims - Texas Supreme Court's Analysis

By: Fred Shuchart

On June 28, 2019, the Texas Supreme Court issued two opinions addressing the issue of appraisal and extra-contractual claims: Ortiz v. State Farm Lloyds, 2019 WL 2710032 (Tex. June 28, 2019) and Barbara Technologies Corporation v. State Farm Lloyds, 2019 WL 2710089 (Tex. June 28, 2019).  Although the Court concluded that payment of an appraisal award eliminates any exposure for policy benefits under the Insurance Code or DTPA, the Court held that the payment does not, as a matter of law, eliminate exposure under the Texas Prompt Payment of Claims Act (“TPPCA”).

In Ortiz, the insured filed a claim under his homeowner’s policy for damage allegedly caused by wind and hail storm. After State Farm first determined that the claim was under the deductible, upon request from the insured, State Farm re-inspected the home and concluded that the damage was still under the deductible.  The insured then filed suit alleging breach of contract, breach of the duty of good faith and fair dealing and violations of the Texas Insurance Code and DTPA. After being served, State Farm invoked the appraisal provision and timely paid the appraisal award.  State Farm then moved for Summary Judgment on the breach of contract and statutory claims, which was granted by the trial court.

The Supreme Court affirmed the decision with respect to the breach of contract and statutory violations except for the TPPCA.  In reaching its conclusion, the Court stressed that the insured was only seeking to recover attorney fees incurred in bringing the lawsuit and treble damages and those damages were not caused by a Code violation. The Court declined to address whether a claim that the delay caused other problems with the home would constitute an independent injury which would be recoverable under Menchaca.  Although not as strong as it could be, Ortiz appears to make clear that, if an appraisal award is fully and timely paid, there is no 541 exposure unless the insured can demonstrate an independent injury.

In Barbara, the insured made a claim under its business property policy for damage resulting from a hail storm.  State Farm timely inspected the property and determined that the damage was under the deductible.  Upon the request of the insured, State Farm performed a second inspection but its opinion with respect to the damage did not change.  The insured filed suit and State Farm invoked the appraisal provision.  The appraisers determined that the amount of the loss was $195,345.63 which was timely paid by State Farm minus the deductible and depreciation.  After payment, the insured dropped all its claims with the exception of the TPPCA claim.  Both parties moved for summary judgment.  The trial court granted State Farm’s and denied the insured’s, which was affirmed by the appellate court.

In a 6-3 decision, the Court reversed the judgment in favor of State Farm, determined that Barbara’s Motion for Summary Judgment was correctly denied and remanded the case back to the trial court.  The Court held:

… that the “invocation of the contractual appraisal provision to resolve a dispute as to a claim rejected in accordance with the TPPCA’s procedural requirements neither subjects an insurer to TPPCA damages or insulates the insurer from TPPCA damages.  An insurer will become liable for TPPCA damages under section 542.060 only if it 1) accepts liability or it is adjudicated liable under the policy and 2) violated a TPPCA deadline of requirement.  

In reaching its conclusion, the majority noted that the TPPCA did not contain any mention or reference to the appraisal process and therefore the appraisal process is not exempt from the Act, excused from compliance with the Act or treated differently with respect to the time deadlines.  The Court reasoned that it was up to the Legislature to amend the Act if it wanted appraisal to be treated differently.

The Court then considered both sections 542.060 and 542.058 to determine if the Act was violated.  With respect to 542.060, the Court noted that State Farm’s original handling of the claim up to the determination that damages were under the deductible complied with the Act.  Accordingly, the issue was whether the payment of the appraisal award established that State Farm was “liable” for the claim.  The Court concluded, based on prior case law, that payment of an appraisal award is not an admission of liability nor a determination of liability but only an agreement as to the scope of damages. 

With respect to 542.058, the Court rejected State Farm’s argument that it had not received all the requested information until the appraisal award was issued.  The Court reasoned that State Farm already possessed all the information when it concluded that the damages were under the deductible.  Although the Court acknowledged that a carrier could request additional information, that request had to occur prior to a decision.

The dissent concluded that State Farm’s Motion should have been granted.  The dissent reasoned that, if appraisal was invoked prior to any decision, the award would clearly be necessary information and there should be no difference based on the timing of the appraisal request. Accordingly, the time requirement should start from the issuance of the award.  The dissent also noted that the majority opinion effectively requires application of TPPCA penalties to all appraisals which would reduce the effectiveness and use of appraisals.  The dissent further noted that the majority’s opinion runs counter to the previous lower court decision even though the Legislature had numerous opportunities to amend the Act after those decisions and failed to do so.

Although the Court did not hold that payment of an appraisal award always violates the TPPCA that may be the practical effect.  Now, the insured must only establish that the claim was covered and the TPPCA’s penalties will apply to the appraisal payment.