By: Bryan Giribaldo
Just a few weeks ago, in Randel v. Travelers Lloyds of Tex. Ins. Co., 20-20567, 2021 WL 3560910 (5th Cir. Aug. 12, 2021), the Fifth Circuit issued an opinion that attempted to shed light on appraisal payment scenarios that run afoul of the Texas Prompt Payment of Claims Act (“TPPCA”). Unfortunately, the Fifth Circuit chose to punt on a key issue of how close a pre-appraisal payment needs to be to “roughly correspond” with the final amount owed, a standard recently expressed by the Supreme Court of Texas in Hinojos v. State Farm Lloyds, 619 S.W.3d 651, 658 (Tex. 2021). Randel, 2021 WL 3560910, at *4. It is hard to blame the Fifth Circuit for this decision, as the Supreme Court of Texas does not expand upon the factors that would cause a pre-appraisal payment to “roughly correspond” with the final amount owed on an insurance claim. While the Fifth Circuit did provide a data point where a court found a payment differential to not meet this nebulous standard, we are still left with more questions than answers as to what thresholds and considerations help one determine whether a payment “roughly corresponds” with the amount ultimately owed on a claim in order to avoid TPPCA liability.
Before discussing Randel, it is important to start with Hinojos. In Hinojos, Louis Hinojos reported a claim to State Farm for damage to his home after a summer wind and hail storm in 2013. Hinojos, 619 S.W.3d at 654. State Farm initially adjusted the claim and valued it at an amount below the applicable policy deductible, and thus paid nothing for the claim. Id. After Mr. Hinojos requested a second inspection, State Farm found additional damage and issued a payment just shy of $2,000.00 after applying the remainder of the deductible and depreciation. Id. Mr. Hinojos sued State Farm and its adjuster, alleging a number of causes of action, among them a cause of action against State Farm for violating Chapter 542 of the Texas Insurance Code for delaying payment on the claim. Id. Nearly two years after the claim was first submitted, State Farm invoked the policy’s appraisal clause, which resulted in an additional payment of nearly $23,000.00 based on the appraisal award less prior payment, the deductible, and depreciation. Id. State Farm moved for summary judgment as to the appraisal award precluding prompt payment damages under Chapter 542 of the Texas Insurance Code, which the trial court granted, and which the court of appeals affirmed on appeal. Id. at 654-55.
The Supreme Court of Texas addressed whether an insurer can avoid liability under Chapter 542 as a matter of law even though it paid amounts it owed to satisfy the claim after Chapter 542’s deadline had passed. Id. at 655. In finding that an insurer can still be liable under Chapter 542 for payment of an appraisal award outside the statutory deadline, the Supreme Court of Texas looked at recent decisions in Barbara Techs. Corp. v. State Farm Lloyds, 589 S.W.3d 806 (Tex. 2019) and Alvarez v. State Farm Lloyds, 601 S.W.3d 781 (Tex. 2020), which rejected the insurer’s attempts to avoid Chapter 542 liability through an appraisal payment. Id. at 656. The Supreme Court of Texas in Hinojos also rejected the notion that Chapter 542 only required “a reasonable payment” within the sixty-day statutory limit, not full payment, as Chapter 542’s language did not discharge prompt payment liability based on partial payment of the amount that must be paid. Id. The court reasoned that allowing partial payments would create the possibility that an insurer could pay a nominal amount toward a valid claim to avoid the prompt payment deadline imposed by the Texas Legislature. Id. at 656-57. In all, the court held that an insurer’s acceptance and partial payment of a claim within the statutory deadline does not preclude liability for interest on amounts owed but unpaid when the statutory deadline expires. Id. at 658. Thus, a timely partial payment would only “mitigate” the damage resulting from a Chapter 542 violation if there remained an unpaid portion of a claim. Id. As for the threshold for when a payment would preclude Chapter 542 liability, the court offered the following: “[a]though the statute says nothing about reasonableness, a reasonable payment should roughly correspond to the amount owed on the claim.” Id.
In Randel, a Fourth of July fire in the Randels’ garage caused damage to their home, resulting in an insurance claim with Travelers. Randel, 2021 WL 3560910, at *1. Travelers initially issued a payment of $10,000.00 to the Randels for damage to their personal property, and later paid $126,720.86 for the damage to the dwelling itself (among other payments). Id. However, the parties disagreed over the extent of the amount of damage to the dwelling, leading to the Randels invoking the policy’s appraisal provision and petitioning a Texas state court to compel appraisal. Id. Eventually, the parties submitted for appraisal the dwelling and personal property claims, resulting in an appraisal award of $317,030.70 actual cash value in dwelling damage and $100,331.02 actual cash value in personal property damage. Id. at *2. Travelers paid the award within five business days, leading to post-appraisal payouts of $164,435.23 for the dwelling and $21,098.22 for personal property. Id.
Prior to payment of the appraisal award(s), the Randels sued Travelers in state court alleging that it underpaid their claims in violation of the insurance policy and violated the TPPCA, among other claims. Id. After removing to federal court, Travelers successfully moved for summary judgment on all claims: the district court concluded that the Randels’ acceptance of the appraisal payment precluded a breach of contract claim and that Travelers avoided liability on the property damage claims by making “reasonable pre-appraisal payments.” Id. On appeal, the Fifth Circuit agreed with the district court in that the payment and acceptance of an appraisal award does bar a breach of contract claim. Id. at *3. However, the court concluded that the payment of an appraisal award does not automatically prevent a statutory prompt-payment claim, citing to Barbara Technologies. Id. The Fifth Circuit looked at the district court’s rationale of dismissing the prompt-payment claim—that the early payments were reasonable even though they were less than the amount ultimately owed, a principle consistent with the Fifth Circuit’s Erie guess in Mainali Corp. v. Covington Specialty Ins. Co., 872 F.3d 255, 259 (5th Cir. 2017)—and compared this rationale to Hinojos. Randel, 2021 WL 3560910, at *3-4. The Fifth Circuit acknowledged that Mainali’s reasonableness standard was too broad in light of Hinojos, and thus attempted to apply Hinojos’ threshold that the pre-appraisal payment must “roughly correspond” to the amount ultimately owed. Id. at *4. However, the Fifth Circuit simply chose not to decide how close a pre-appraisal payment needs to be to “roughly correspond” with the final amount owed, and merely stated that there was a “substantial gap” of $185,000.00 between the pre-appraisal payments and the appraisal award, and that this difference was much greater than the underpayment in Hinojos. Id. In light of this gap, the Fifth Circuit remanded the case as Travelers’ pre-appraisal payment was not a defense to liability under the TPPCA. Id. It is worth noting that Travelers conceded after the issuance of Hinojos that its pre-appraisal payment was not reasonable given the guidance laid out in Hinojos. Id.
While the Fifth Circuit refrained from dissecting what thresholds exist with the “roughly correspond” terminology utilized by the Supreme Court of Texas in Hinojos, the Fifth Circuit at least gives us a data point for an pre-appraisal amount that does not roughly correspond to the final claim amount. In Randel, a “significant gap” differential of $185,000.00 did not roughly correspond to the final claim amount of approximately $417,000.00, and the differential in Randel was higher than that in Hinojos. Randel, 2021 WL 3560910, at *2, 4. However, simply looking at differentials cannot tell the full story. This is evident when you consider that a pre-appraisal payment differential of $185,000.00 looks and feels far different when the final claim amount is greater amount than that in Randel.
For instance, if a claim’s final value was $1,000,000.00 but the pre-appraisal payment was $815,000.00, rudimentary math principles tell us that while the differential is the same as Randel, the ratio of what was paid and what was owed is vastly different from that in Randel. In Randel, the differential of $185,000.00 accounted for approximately 44% of the claim, whereas in our hypothetical the percentage drops to 18.5%, a precipitous drop. Does a pre-appraisal payment 18.5% less than an appraisal award “roughly correspond” with that award so as a defense to a TPPCA claim? Neither Randel nor Hinojos provide enough guidance to answer this question. Other cases that have followed Hinojos have also failed to provide any guidance on this threshold. See, e.g., Shin v. Allstate Tex. Lloyd's, 848 Fed. Appx. 173, 174 (5th Cir. 2021) (involving a “final appraisal amount ($25,944.94) was 5.6 times greater than the pre-appraisal payment of $4,616.63,” which equals a differential of approximately $21,000.00); First United Methodist Church v. Church Mut. Ins. Co., 13-18-00048-CV, 2021 WL 3776728 (Tex. App.—Corpus Christi Aug. 26, 2021, no pet. h.) (involving a differential of approximately $22,400.00 based on a claim total of roughly $28,000.00). These other cases only offer additional data points to consider, but do not refine what analysis is required to determine whether a pre-appraisal amount “roughly corresponds” to the final amount of a claim.
The above example reflects a need for both federal and state courts to look at claim amounts and differentials in the context of percentages, which are derived from simple math, rather than looking at just the differential itself. For unexplained reasons, the court in Randel chose to just compare the differential amount to that in Hinojos, and determined that because the differential amount in Randel was greater than that in Hinojos, then such a differential could not render the initial payment to roughly correspond to the final amount owed. Randel, 2021 WL 3560910, at *4. Such a simplistic analysis leaves insurers at a severe disadvantage when it comes to large losses. An insured would theoretically be able to use Randel and Hinojos to argue that an insurer is not entitled to a TPPCA defense in a claim involving a payment of $9,000,000.00 but a differential of $185,000.00 when compared to an appraisal award of $9,185,000.00. However, if you qualitatively analyze the proportion of what was originally paid to what was eventually owed, $185,000.00 seems minor, if not nominal, as it merely amounts to roughly 2% of the total amount. An argument that this payment roughly corresponded to the final amount appears to hold much more weight as the payment was only 2% off, but given the current status of the law, the viability of whether this argument is accepted by a court is uncertainty given the lack of case law since Hinojos.
In sum, while Hinojos has clarified that TPPCA claims are still viable as to the unpaid portions of claims not paid within the statutory window, there remains questions as to what threshold does some amount “roughly correspond” to another amount in order to create a defense to liability under the TPPCA. The Fifth Circuit had an opportunity to clarify this issue for everyone, yet chose not to. Until further clarification is provided by state and federal courts, insurers must be reticent to consider that TPPCA liability may still accrue when pre-appraisal indemnification is numerically close to a subsequent appraisal award but still does not “roughly correspond” to the appraisal amount to provide a defense to TPPCA liability. The percentage of a differential as to the final amount should be an important factor for courts to consider, or otherwise almost all large losses will allow for TPPCA liability to accrue against an insurer even though the pre-appraisal payment was qualitatively reasonable and close to the ultimate appraisal award.