The Payment of Appraisal Awards - Not Quite a Bar

A frequently encountered question in the insurance world is whether payment of an appraisal award forecloses or bars first party claims against an insurer by the insured, and if so, under what circumstances. The Texas Supreme Court has taken this matter up in numerous cases in the last several years, but which claims are barred by payment of an appraisal award is still partially unresolved. Three recent decisions from the Texas Supreme Court have provided guidance on the correct interpretation of Texas Prompt Payment of Claims Act (“TPPCA”) claims, but questions still remain.

Texas Prompt Payment of Claims Act

In three recent decisions, the Texas Supreme Court reiterated its prior position, that payment of an appraisal award does not automatically entitle an insurer to summary judgment on an insured’s TPPCA claims.[1]  In short, the TPPCA requires insurance claims under certain types of policies to be investigated, and paid or denied, within a certain prescribed period. If they are not, those claims can be subject to the award of an eighteen percent statutory interest rate from the time of accrual, prejudgment interest, and attorney’s fees.[2]  

In both Alvarez & Lazos, the dispute started when the insurer’s initial inspection led them to provide an estimate to the insured indicating that the insured’s residential wind and hail damage claims fell below their deductibles. Later, the insurers conducted a second inspection, which included additional damages, resulting in an increased estimate, and made payment.  However, the insureds still believed the estimates undervalued their damages, and each filed suit. In both suits, an appraisal was ordered by the trial court. These appraisals valued the damages higher than any prior estimate in each respective case, which the insurer in each case promptly paid. After making the payments, the insurers each moved for summary judgment, arguing that their contractual obligation to pay had been satisfied.

In both cases, the trial court granted summary judgment for the insurer, and the court of appeals affirmed.[3] The Texas Supreme Court, reversing and remanding both decisions, found that the claims for damages under the TPPCA were not barred by payment of appraisal award.[4]  Interestingly, the Court found that these claims were not barred despite the fact that the insureds had not pled a specific claim for damages arising under the TPPCA.[5]  The Court found that each insured’s demand in the petition for the 18% statutory interest provided under the TPPCA, combined with their assertions in response to summary judgment (that they were not barred from the TPPCA cause of action), was sufficient to preserve the TPPCA claims for review and remand.

Other Claims

In most first party cases, the insured includes additional causes of action for contractual and extra-contractual claims (i.e., breach of contract, statutory and common law bad faith).  The Lazos and Alvarez holdings did not provide any guidance on those other claims, because in both cases the insureds amended their petitions for review to remove all contractual and extra-contractual causes of action, and only petitioned the Texas Supreme Court on the TPPCA.[6]  However, in the third case, Steven Biasatti and Paul Gross D/B/A Topdog Properties v. Guideone National Insurance Company, the insured did not drop the contractual and extra-contractual claims in its petition for review to the Court.[7]  

In Topdog, the insureds for several properties underwent two separate insurer inspections to their properties for wind and hail damage, both of which resulted in an insurer’s estimate that was below the deductible. [8] The insurer declined to perform a third inspection and refused to invoke the policies unilateral appraisal clause requested by the insured, finding that it was unnecessary.

The insureds then sued for breach of contract, common-law and statutory bad faith, and violations of the TPPCA.[9]  Eight months after suit was filed, the insurer demanded an appraisal, but the insured refused to agree. The insurer then moved to compel an appraisal, which was granted by the court.  The appraisal award found the insureds’ losses to be about thirty-three times over the deductible, which the insurer promptly paid (less the deductible and depreciation).[10]

As in the other two cases, the trial court granted summary judgment in favor of the insurer, based on the payment of the appraisal award.  The court of appeals affirmed, finding:

(1) [Insureds] failed to raise a fact issue on damages for breach of contract because [Insurer] paid all benefits available under the policy when it paid the appraisal award, and (2) [Insureds’] bad-faith and TPPCA claims failed because it did not allege an injury independent from the policy benefits and did not demonstrate policy benefits were withheld after the appraisal award was paid.[11]

            The Texas Supreme Court cited its earlier opinion in the Barbara case and noted that in Barbara they had declined to “decide whether an acknowledgement or determination of liability was necessary to obtain damages under the section 542.058 [delay of payment–TPPCA].” [12]  They offered no further guidance on that issue in this opinion.  Instead, the Court again held that the payment of the appraisal award did not foreclose the insureds’ TPPCA claims.

The Court also discussed Ortiz, in which the Court held that “payment of an appraisal award forecloses an insurer’s liability for breach of contract and common-law and statutory bad faith unless the insured suffered an independent injury.”[13]  The insured in Topdog argued that the Court should create an exception to the independent injury rule for breach of contract and bad faith claims under the unique facts of this case.

The Supreme Court overturned the appellate court ruling.  First, it held that the Court of Appeals erred in holding that the insured’s claims under the TPPCA could not be maintained because the insurer had paid the appraisal, citing Barbara.  The Court then considered whether the breach of contract and bad faith claims were barred, noting that under Ortiz, it would appear so.  However, the Court punted on this issue, noting that it had not previously considered whether payment of any appraisal award under a unilateral appraisal clause would have the same effect.  Accordingly, the Court remanded all causes of action to the trial court for consideration.

Conclusion

            These three decisions clarified part of the law, and left open some questions as well:

• It appears that any allegation in the petition that the insured is seeking recovery of the 18% statutory interest award provided under the TPPCA, assuming it is not later waived, will be treated as a TPPCA claim, even if the TPPCA is not specifically pled in the original petition;
• Payment of an appraisal award does not bar a TPPCA claim, but payment of the award is also not an automatic acknowledgment of liability or determination of the same, so the claim will still have to be litigated;
• Payment of an appraisal award bars claims for breach of contract and common-law and statutory bad faith, unless the insured suffered an independent injury;  
• Payment of an appraisal award MAY not bar claims for breach of contract and extra-contractual claims if the appraisal award was based on a unilateral appraisal clause (this issue was left unresolved and remanded to the trial court for determination); and
• The Topdog case also left open for the parties to brief whether unilateral appraisal clauses are illusory and thus unenforceable.

Therefore, despite this trilogy of cases by the Texas Supreme Court, litigation on these matters will continue.

[1] Alvarez v. State Farm Lloyds, No. 18-0127 (Tex. April 17, 2020); see also, Lazos v. State Farm Lloyds, No. 18-0205 (Tex. April 17, 2020) (reciting essentially the same information and holdings); Steven Biasatti And Paul Gross D/B/A Topdog Properties v. Guideone National Insurance Company, No. 18-0911 (Tex. April 17, 2020).

[2] Tex. Ins. Code §§ 542.051–.061.The statutory interest rate is subject to a calculation, if the claim arises from damages to certain real property caused by forces of nature. Tex. Ins. Code §§ 542A.001–007.

[3] Alvarez, supra note 1; Lazos, supra note 1.

[4] Alvarez, supra note 1 (citing Barbara Technologies Corp. v. State Farm Lloyds, 589 S.W.3d 806, 820 (Tex. 2019) (“payment in accordance with an appraisal is neither an acknowledgment of liability nor a determination of liability under the policy for purposes of TPPCA damages under section 542.060.” ); Ortiz v. State Farm Lloyds, 589 S.W.3d 127, 135 (Tex. 2019) (“an insurer’s payment of an appraisal award does not as a matter of law bar an insured’s claims under the Prompt Payment Act.”)). See also, Lazos, supra note 1 (citing the same).

[5] Alvarez, supra note 1; Lazos, supra note 1.

[6]Alvarez, supra note 1 (noting the original petitions was for “breach of contract, breach of the duty of good faith and fair dealing, unjust enrichment, negligence, negligent misrepresentation, and violations of Chapters 541 and 542 of the Insurance Code”); See also, Lazos, supra note 1 (noting the same).

[7] No. 18-0911 (Tex. April 17, 2020).

[8] Id.

[9] Id.

[10] Id.

[11] Id. (citing Steven Biasatti And Paul Gross D/B/A Topdog Properties v. Guideone National Insurance Company, 560 S.W.3d 739, 743–44 (Tex. App.—Amarillo 2018)).

[12] Id. (citing Barbara Technologies Corp., 589 S.W.3d at 823–24).

[13] Id. (citing Ortiz, 589 S.W.3d at 129,133,135).