Last Friday, the Supreme Court of Texas issue two new opinions that addressed post-appraisal claims in first-party insurance matters. Texas insurance practitioners should not read these opinions in a vacuum. The Supreme Court of Texas is nudging trial courts to evaluate post-appraisal causes of action under the structured analysis it outlined in its Menchaca decision—determining the existence of a cause of action under the five factors it previously set forth. While the Court confirmed the bar on post-appraisal breach of contract and bad faith claims deriving from an insurer’s failure to pay policy benefits, the court opened up the possibility that the payment of an appraisal award does not foreclose damages under the Texas Prompt Payment of Claim Act (“TPPCA”).
Applying the mechanics of Menchaca, in Oscar Ortiz v. State Farm Lloyds, the Supreme Court of Texas confirmed that an insurer’s payment of an appraisal award bars an insured’s breach-of-contract claim based on failure to pay the amount of the covered loss. An insurer’s payment of an appraisal award also bars an insured’s common law and statutory bad faith claims to the extent the only actual damages sought are lost policy benefits. While Menchaca was not an appraisal case, the Supreme Court of Texas applied the rules it previously set forth and held that the payment of the appraisal award satisfies plaintiff’s right to receive benefits under an insurance policy (Menchaca rules 1 and 2) and, therefore, there can also be no “loss of benefits” (Menchaca rule 3). 
Ortiz sued State Farm and alleged that it breached the insurance policy and asserted extra-contractual claims after State Farm valued Ortiz’s hail-and-wind damages at less than his deductible. State Farm successfully moved to compel appraisal after Ortiz refused to participate. The appraisers awarded Ortiz almost ten times more than State Farm’s original damage assessment. State Farm timely paid the appraisal award, and the trial court granted State Farm’s motion for summary judgment. The trial court noted that State Farm’s prompt payment of the appraisal award eliminated barred Ortiz’s breach of contract claim, and his common law and statutory bad faith damages failed because he did not suffer an independent injury (Menchaca rule 4) outside of Ortiz’s breach of the contract claim. The court of appeals affirmed the trial court’s holding.
The Supreme Court of Texas rejected the insured’s contention that an appraisal award can serve as a basis to establish an insurer’s liability for breaching the insurance policy by failing to pay a covered loss—entitled to benefits rule. The Court said if it held otherwise, “insureds would be incentivized to sue for breach of contract every time an appraisal yields a higher amount than the insurer’s estimate, thereby encouraging litigation rather than ‘short-circuiting’ it as intended.”
The Court also dismissed Ortiz’s extra-contractual claims that included State Farm wrongfully denied his claim, failed to settle the claim in good faith, failed to conduct a reasonable investigation, and the alleged breach of the common law duty of good faith and fair dealing. The Court noted that the only actual damages Ortiz sought were policy benefits that State Farm wrongfully withheld, and State Farm paid those benefits under the policy’s appraisal provision. Consequently, without an independent injury (Menchaca Rule 4), the Court held that since Ortiz did not seek actual damages other than the benefits paid under the Policy’s appraisal provision, and his bad faith claims did not derive from actions outside the policy benefits.
The Court did remand the case to the trial court for further determination of Ortiz’s TPPCA claim. The Court held that an insurer’s payment of an appraisal award does not necessarily bar an insured’s claim under the TPPCA under its decision in Barbara Technologies—released contemporaneously with its opinion in Ortiz.
Along with its decision in Ortiz, the Supreme Court of Texas released a 37-page opinion that addressed whether an insurer can be liable for TPPCA damages for a claim it initially rejected but later paid in full through the policy’s appraisal process. After the Court thoroughly addressed what appraisal clauses and the TPPCA are not, the lengthy analysis concludes with a resounding ‘maybe’ as to whether a policyholder can maintain TPPCA claims post-appraisal.
In Barbara Technologies v. State Farm Lloyds, State Farm determined that a wind-and-hail damage claim did not exceed the Policy’s $5,000 deductible and timely rejected the insured’s claim within the Texas Insurance Code’s deadlines. Barbara Technologies sued State Farm Lloyds and alleged violations of the TPPCA and other claims. Nearly six months into litigation, State Farm invoked appraisal under the policy’s terms. Seven months later, an appraisal panel awarded Barbara Technologies $195,345.63 on its claim, which State Farm paid one week later.
Barbara Technologies accepted the appraisal payment, amended its petition to include only claims for violations of the TPPCA, and then moved for summary judgment on its statutory penalties. State Farm filed a cross-motion for summary judgment asserting that it did not violate the TPPCA because it timely paid the appraisal award and was not liable under the Policy. The trial court granted summary judgment in favor of State Farm. The court of appeals affirmed the trial court’s summary judgment, holding that State Farm’s appraisal-award payment precluded Barbara Technologies claim for violating the TPPCA.
The Supreme Court explained that an insurer’s invocation of a contractual appraisal provision to resolve an insurance claim dispute it previously rejected, neither subjects an insurer to the TPPCA’s statutory damages nor does it insulate the insurer from the damages. Like most property policies, State Farm’s demand for appraisal was a contractual right to engage in a specific dispute-resolution process. The Court explained that the TPPCA’s absence of any mention of appraisals or how the invocation of an appraisal process affects the application of TPPCA means that the Texas Legislature intended neither to impose specific deadlines for the contractual appraisal process nor to exempt the contractual appraisal process from the deadlines provided by the Act.
Applying the literal statutory language of the TPPCA, the Court explained that an insurer cannot be “liable” on the claim within the meaning of the TPPCA until it (1) has completed its investigation, evaluated the claim, and came to a determination to accept and pay the claim or some part of it, or (2) been adjudicated liable by a court or arbitration panel. It is within these two occurrences that a policyholder must establish liability independent and not barred from the appraisal award.
As insurance practitioners are aware, the TPPCA imposes several obligations and deadlines on insurers. Insurers must acknowledge receipt of the claim, notify the claimant of its acceptance or rejection of its claims once it receives all necessary items to secure final proof of loss, and must timely pay after it accepts a claim or it is responsible for TPPCA damages. However, when an insurer initiates the appraisal process after it rejects a claim—that is, after the insurer fulfills its obligations under Chapter 542, (i.e., has received all requested information from the claimant, conducted an investigation, evaluated the claim, and concluded that it is not liable under the policy)—the issue generally becomes a contractual dispute-resolution matter rather than a statutory matter of prompt payment of a claim.
The Supreme Court explained that the TPPCA requires an insurer to base its rejection of a claim on all information the insurer deemed necessary, as well as the insurer’s investigation. The later invocation of the policy’s appraisal provision does not restart the investigation period—those deadlines are past. When an insurer rejects a claim, it has concluded that it does not owe benefits under the policy. Under the expressed terms of the TPPCA, an insurer is not required to pay anything until it is determined it owes the claimant benefits either by accepting the claim and notifying the insured that it will pay or through adjudication of liability. Until then, the insurer is not subject to TPPCA’s payment deadlines, and it is not subject to damages for delayed payment.
To illustrate its point, the Court offered three scenarios an insurer may choose if it invokes contractual appraisal after it acknowledged receipt of the claim, investigated the claim, and then rejected the claim: (1) an insurer may refuse to pay the appraisal amount and maintain its denial of liability for the claim; (2) pay the appraisal amount without accepting liability; or (3) accept the claim, essentially admitting it was incorrect to deny liability initially, and then pay the claim in accordance with the appraisal amount. In scenario (1), if the insurer refuses to pay the appraisal amount, continues to deny liability and the insured obtains a judgment through litigation, the insurer is liable on the claim and would owe the amount of the appraisal award and TPPCA damages for its failure to timely pay the claim. In scenario (3), if the insurer accepts the claim and admits that it was initially incorrect, the insurer may also be subject to TPPCA damages for the failure to pay within the TPPCA deadlines.
Under scenario two, the issue in Barbara Technologies, the Court stated that an insurer’s participation and payment of an appraisal award was not an admission of liability. While an insurer’s invocation of the contractual appraisal process does not supplant its earlier rejection of the claim or restart the TPPCA’s deadlines, the Court explained that it represents a contractual mechanism to resolve a dispute. An insurer’s decision to use the policy’s appraisal process generally represents its willingness to resolve a dispute outside of court—often without admitting liability—similar to a settlement. An insurer’s payment of an appraisal award, although binding for the amount on the claim, is not a determination of the insurer’s liability. The award does not represent actual damages for payment on the claim unless an insurer either accepts liability or is adjudicated liable.
Nevertheless, an insurer’s prompt payment of an appraisal award can foreclose a policyholder’s ability to adjudicate their liability to support its causes of action. As outlined in Ortiz, the timely payment of an appraisal award would likely eliminate an insured’s breach of contract, common law, and statutory bad faith damages claims that are not the result of an independent injury under Menchaca. This effectively forecloses a policyholder’s ability to adjudicate liability under the TPPCA absent an independent injury or an admission of liability. It is arguably not possible to adjudicate a liability after the timely payment of an appraisal award because a breach of contract and extra-contractual claims premised on the insurer’s failure to pay a covered loss are barred.
The Supreme Court remanded Barbara Tech to state court for further consideration regarding the Insured’s TPPCA claims as neither party met their burden on summary judgment. Since the TPPCA limits liability to an admission by the insurer or adjudication, trial courts will likely evaluate whether an insurer suffered an independent injury not related to the payment of an appraisal award in order to survive the bar on breach of contract and bad faith claims related to the payment of policy benefits. Further, trial courts will likely entertain arguments regarding claims handling and the semantics of appraisal clauses as to whether an insurer’s participation in appraisal is an acceptance of liability. Trial courts will need to address these issues on a case-by-case basis and provide further guidance to insurance practitioners.
The General Rule “…an insured cannot recover policy benefits as damages for an insurer’s statutory violation if the policy does not provide the insured a right to receive those benefits.”
The Entitled-to-Benefits Rule “…an insured who establishes a right to receive benefits under the insurance policy can recover those benefits as actual damages under the Insurance Code if the insurer’s statutory violation causes the loss of the benefits.”
The Benefits-Lost Rule “...even if the insured cannot establish a present contractual right to policy benefits, the insured can recover benefits as actual damages under the Insurance Code if the insurer’s statutory violation caused the insured to lose that contractual right.”
The Independent Injury Rule “…if an insurer’s statutory violation causes an injury independent of the loss of policy benefits, the insured may recover damages for that injury even if the policy does not grant the insured a right to benefits.”
The No Recovery Rule “…an insured cannot recover any damages based on an insurer’s statutory violation if the insured had no right to receive benefits under the policy and sustained no injury independent of a right to benefits.”