By: Fred Shuchart
The insured and its first-party carrier have a dispute over the amount of the covered loss. The carrier makes an initial payment or determines that the loss is under the deductible. The insured asserts that the carrier mishandled the claim and the covered loss has not been fully paid. As a result, the insured sues the carrier and alleges both contractual and extra-contractual claims. The parties participate in the appraisal process, and the carrier timely pays the appraisal award. Are the insured’s extra-contractual claims still viable?
On April 18, 2018, the Texas Supreme Court issued its opinion on rehearing in USAA Texas Lloyds Co. v. Menchaca, 545 S.W.3d 479 (Tex. 2018). In its opinion, the Court attempted to clarify the relationship between a breach of contract claim and violation of the Texas Insurance Code or breach of the duty of god faith and fair dealing claim and the types of damages recoverable under both theories. The Court set forth five rules that it believed governed the relationship: 1) an insured cannot recover policy benefits under an extra-contractual theory if the insured does not have the right to benefits under the policy; 2) if the insured is entitled to policy benefits, the benefits may be recovered under an extra-contractual theory if the violation caused the loss of the benefits; 3) an insured can recover benefits as damages, even though there is no contractual right to the benefits, if the extra-contractual violation caused the insured to lose the contractual right; 4) an insured can recover damages apart from policy benefits if the extra-contractual violation is so extreme and causes an injury that is independent and does not arise from the loss of policy benefits; and 5) an insured cannot recover any damages unless it establishes a right to policy benefits or an independent injury.
Menchaca does not provide a direct answer to our hypothetical. Insured’s counsel argues that, because the insured is entitled to the policy benefits (as evidenced by the payment of benefits), the insured can recover those benefits again under an extra-contractual theory. Counsel for the carrier argues that, because the owed policy benefits have been fully paid, the only extra-contractual recovery is for an independent injury.
The Texas Supreme Court has not addressed the issue; however, other courts that have addressed the issue almost unanimously have concluded that the timely payment of an appraisal award forecloses any extra-contractual exposure, except for an independent injury. See, e.g., Gonzales v. Allstate Vehicle and Prop. Ins. Co., 2019 WL 699137 (S.D. Tex. 2019); Braden v. Allstate Vehicle and Prop. Ins. Co., 2019 WL 201942 (N.D. Tex. 2019); Hinojos v. State Farm Lloyds, 2019 WL 257883 (Tex. App.—El Paso 2019, no pet. h.); Byrd v. Liberty Ins. Corp., 2018 WL 7021591 (S.D. Tex. 2018); Perry v. USAA, 2018 WL 6442050 (Tex. App.—Amarillo 2018, pet. filed); Biasatti v. GuideOne Nat. Ins. Co., 560 S.W.3d 739 (Tex. App—Amarillo 2018, pet. filed); Meisenheimer v. Safeco Ins. Co. of Indiana, 2018 WL 3869573 (N.D. Tex. 2018).
The Hinojos decision typifies the courts’ handling of the issue. In Hinojos, the insured made a hail damage claim on his homeowners’ policy. State Farm inspected the property and determined that the loss did not exceed the deductible. After the insured retained a public adjuster, State Farm re-inspected the home and made a payment based on the re-inspection. The insured was still not satisfied and sued State Farm, alleging both contractual and extra-contractual claims.
State Farm then invoked the appraisal provision and paid the appraisal award. In the lawsuit, State Farm moved for summary judgment on all claims, which the trial court granted. The court of appeals affirmed, rejecting the insured’s argument that he was entitled to extra-contractual damages because the claim was covered. The court noted that, because all the policy benefits had been paid, there were no wrongfully withheld benefits; therefore, the only extra-contractual claim available would be an independent injury. Hinojos, 2019 WL 257883 at *10.
In sum, the case law appears relatively clear that the timely payment of an appraisal award forecloses any extra-contractual exposure for the carrier unless the insured can demonstrate an injury independent from, and which does not arise out of, the “loss” of policy benefits. In two of these cases, the parties have sought review by the Texas Supreme Court; so, we continue to monitor these for any further development.