Gripping tight to the literal statutory language of Chapter 542 of the Texas Insurance Code, the Supreme Court of Texas released a 37-page opinion that addressed whether an insurer can be liable for Texas Prompt Payment of Claims damages for a claim it initially rejected but later paid in full according to the amount of loss determined through the policy’s appraisal process. The Court held 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 Texas Prompt Payment of Claims Act’s statutory damages, nor does it insulate the insurer from the damages. However, an insurer may be liable for statutory damages under the Texas Prompt Payment of Claims Act after payment of an appraisal award if it 1) accepts liability or is adjudicated liable under the policy, 2) and it violated a statutory deadline or requirement.
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 Texas Prompt Payment of Claims Act 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 Texas Prompt Payment of Claims Act, and then moved for summary judgment with statutory penalties. State Farm filed a cross-motion for summary judgment asserting that it did not violate the Texas Prompt Payment of Claims Act 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 prompt-payment act.
The Supreme Court of Texas determined that State Farm’s appraisal demand was based on its contractual right to engage in a specific dispute-resolution process under the policy. The Court explained 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 Court effectively distinguished an insurer’s request for an appraisal from the obligations an insurer is required to timely request/perform under the Texas Prompt Payment of Claims Act. The Court determined that the State Farm’s invocation of the appraisal process is outside the scope of § 542.054 et seq. because it is not a request for items, statements, or forms from the insured to secure a final proof of loss. Under the Texas Prompt Payment of Claims Act., an insurer’s use of the appraisal process to resolve a dispute has no bearing on any deadlines or enforcing any missed deadlines. The Court stated that the Texas Prompt Payment of Claims Act requires an insurer to base its rejection of a claim on all information the insurer deemed necessary, as well as the insurer’s investigation; “later invocation of the policy’s appraisal provision does not somehow start the investigation period anew.”
The Court explained that the absence of any mention of appraisals or how the invocation of an appraisal process affects the application of Act 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 Texas Prompt Payment of Claims Act, the Court explained that an insurer can only be “liable” on the claim within the meaning of § 542.060 when it (1) has completed its investigation, evaluated the claim, and come 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.
The Court stated that when an insurer rejects a claim, it has concluded that it does not owe benefits under the policy. Accordingly, under the Texas Prompt Payment of Claims Act, “until an insurer is determined to owe the claimant benefits and thus is liable under the policy—either by accepting the claim and notifying the insured that it will pay, or through an adjudication of liability—the insurer is required to pay nothing, is subject to no payment deadline, and is not subject to damages for delayed payment.” However, if an insurer later accepts the insured’s claim after initially rejecting it, or if an insurer is adjudicated liable for a claim it previously rejected, the statutory deadlines and prompt-pay requirements will apply.
Therefore, State Farm’s payment of the appraisal value neither established liability under the policy nor foreclosed damages under § 542.060. Further, State Farm’s invocation of the contractual appraisal process did not supplant its earlier rejection of the claim in accordance with the Texas Prompt Payment of Claims Act. The court explained that an appraisal award does not vitiate the insurer’s earlier determination of a claim based on investigation and final proof of loss, but rather represents a contractual mechanism to resolve a dispute on a loss.
Invoking a contractual appraisal provision after having already rejected the claim does not determine liability on a claim. Further, 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. It does not represent actual damages for payment on the claim unless an insurer either accepted liability or is adjudicated liable. Consequently, the Court held that the invocation of the policy’s appraisal clause and its payment of the appraisal award did not exempt State Farm from Texas Prompt Payment of Claims Act damages. However, the Court further held that, without State Farm accepting liability under the policy or having been adjudicated liable, Barbara Technologies was not entitled to damages under the act as a matter of law.
Today, 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. The Court also held that an insurer’s payment of an appraisal award bars an insured’s common law and statutory bad faith claims to the extent the only actual damages sought are lost policy benefits. The Supreme Court however, held that an insured may proceed on a claim under the Texas Prompt of Claims Payment Act after an insured’s payment of an appraisal award.
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 an 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, noting 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 no independent injury resulted without a breach of the contract. The court of appeals affirmed the trial court’s holding.
The Supreme Court 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. 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 evaluated 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. The Court held that since Ortiz did not seek actual damages other than the policy benefits paid under the Policy’s appraisal provision, his bad faith claim under either the common law or chapter 541 of the Texas Insurance Code. Moreover, the attorney’s fees and the cost incurred in the prosecution of Ortiz’s claim, although compensatory in that they help make him whole, were not damages under Texas law.
Lastly, the Court held that an insurer’s payment of an appraisal award does not as a matter of law bar an insured’s claim under the Texas Prompt of Claim Payment Act under its decision in Barbara Technologies—released contemporaneously with its opinion in Ortiz.