The Supreme Court of Texas has ruled that an insurer's payment of an appraisal award barred the insured's breach of contract claim premised on failure to pay the amount of the covered loss and barred the insured's common law and statutory bad faith claims to the extent the only actual damages sought were lost policy benefits, but did not bar the insured's claim under the Texas Prompt Payment Act.
The Case
Oscar Ortiz had a homeowners' insurance policy with State Farm Lloyds and submitted a claim to State Farm for wind and hail damage to his home. State Farm sent an adjuster to inspect the property, and the adjuster estimated the amount of the damage caused by wind or hail to be $732.53, which was below the policy's $1,000 deductible. The adjuster observed additional damage that he concluded had not been caused by hail and, therefore, that was not covered by the policy.
In response to State Farm's request that Mr. Ortiz forward any estimates “related to this loss that exceed your deductible,” Mr. Ortiz sent State Farm an estimate he received from a public adjuster valuing the loss at $23,525.99. State Farm conducted a second inspection with the public adjuster present and revised the damage estimate to $973.94, again concluding the damage amount did not exceed the deductible.
Approximately six weeks after being notified of the results of the second inspection, Mr. Ortiz sued State Farm for breach of contract, violations of the Prompt Payment Act, and statutory and common law bad faith insurance practices.
State Farm answered and the trial court granted its motion to compel appraisal. The appraisal award set the replacement cost of the loss at $9,447.52 and the actual cash value at $5,243.93. State Farm paid the award, minus the deductible, approximately seven business days after receiving it.
State Farm then moved for summary judgment, arguing that its payment of the appraisal award resolved and disposed of all claims in the Ortiz lawsuit.
The trial court rendered final judgment in State Farm's favor on all claims and the court of appeals affirmed.
The dispute reached the Supreme Court of Texas.
The State Farm Policy
The State Farm policy provided:
Appraisal. If you and we fail to agree on the amount of loss, either one can demand that the amount of the loss be set by appraisal. If either makes a written demand for appraisal, each shall select a competent, disinterested appraiser. . . . The two appraisers shall then select a competent, impartial umpire. . . . The appraisers shall then set the amount of the loss. If the appraisers submit a written report of an agreement to [State Farm], the amount agreed upon shall be the amount of the loss. If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire. Written agreement signed by any two of these three shall set the amount of the loss. Each appraiser shall be paid by the party selecting that appraiser. Other expenses of the appraisal and the compensation of the umpire shall be paid equally by [Mr. Ortiz] and [State Farm].
The Texas Supreme Court's Decision
The Supreme Court of Texas affirmed the court of appeals' decision in part and reversed it in part.
The court held that State Farm's payment of the arbitration award barred Mr. Ortiz's breach of contract claim premised on failure to pay the amount of the covered loss; that the payment barred Mr. Ortiz's common law and statutory bad faith claims to the extent the only actual damages sought were lost policy benefits; and that Mr. Ortiz could proceed on his claim under the Prompt Payment Act.
In its decision, the court first ruled that an insurer's payment of an appraisal award in the face of allegations of pre-appraisal underpayment foreclosed liability on a breach of contract claim. According to the court, an appraisal award did not demonstrate that an insurer breached the policy by failing to pay the covered loss. If it did, the court reasoned, insureds would be incentivized to sue for breach every time an appraisal yielded a higher amount than the insurer's estimate (regardless of whether the insurer paid the award), thereby encouraging litigation rather than “short-circuit[ing]” it.
The court decided that, having invoked the agreed procedure for determining the amount of loss, and having paid that binding amount, State Farm had complied with its obligations under the policy.
Next, the court considered Mr. Ortiz's bad faith claims against State Farm. It noted that Mr. Ortiz sought no actual damages – for example, he did not claim the delay in payment resulting from State Farm's allegedly unreasonable investigation had caused additional property damage to his home and he did not seek either appraisal costs or sums related to pre-appraisal damage assessments – other than the policy benefits paid in accordance with the policy's appraisal provision. Given that, the court said, he could not maintain a common law or statutory bad faith claim against State Farm.
In this regard, the court also found that Mr. Ortiz was not entitled to recover his attorneys' fees and costs incurred in his action against State Farm. It reasoned that the only “actual damages” Mr. Ortiz sought were the policy benefits wrongfully withheld, which State Farm had paid. Moreover, the court ruled, the attorneys' fees and costs Mr. Ortiz incurred in prosecuting his lawsuit were not part of the “actual damages” he was entitled to recover because Texas law was clear that attorneys' fees and costs incurred in the prosecution or defense of a claim were “not damages” and were not recoverable under the American Rule in the absence of legislation to that effect.
Finally, the court ruled, as it decided in Barbara Technologies Corp. v. State Farm Lloyds, No. 17-0640 (Tex. June 28, 2019), that an insurer's payment of an appraisal award did not as a matter of law bar the insured's claims under the Prompt Payment Act, which imposes procedural requirements and deadlines on insurance companies to promote the prompt payment of insurance claims.
The case is Ortiz v. State Farm Lloyds, No. 17-1048 (Tex. June 28, 2019). Attorneys involved include: For American Property Casualty Insurance Association, Amicus Curiae: Jay Thompson, Thompson, Coe, Cousins, & Irons, L.L.P., Dallas, TX; Wade C. Crosnoe, Thompson, Coe, Cousins & Irons, LLP, Austin, TX. For Central Mutural Insurance Company, Amicus Curiae: Russell J. Bowman, Bowman & Stella, Irving, TX. For Independent Bankers Association of Texas, Amicus Curiae: Brendan K. McBride, The McBride Law Firm, San Antonio, TX; Jonathan C. Lisenby, Gravely & Pearson, L.L.P, San Antonio, TX; Marc E. Gravely, Gravely & Pearson, LLP, San Antonio, TX; Matthew R. Pearson, Gravely & Pearson, L.L.P., San Antonio, TX. For Insurance Counsel of Texas, Amicus Curiae: Jay Thompson, Thompson, Coe, Cousins, & Irons, L.L.P., Dallas, TX; Wade C. Crosnoe, Thompson, Coe, Cousins & Irons, LLP, Austin, TX. For National Association of Mutual Insurance Companies, Amicus Curiae: Jay Thompson, Thompson, Coe, Cousins, & Irons, L.L.P., Dallas, TX; Wade C. Crosnoe, Thompson, Coe, Cousins & Irons, LLP, Austin, TX. For Texas Association of Community Schools, Amicus Curiae: Brendan K. McBride, The McBride Law Firm, San Antonio, TX; Jonathan C. Lisenby, Gravely & Pearson, L.L.P, San Antonio, TX; Marc E. Gravely, Gravely & Pearson, LLP, San Antonio, TX; Matthew R. Pearson, Gravely & Pearson, L.L.P., San Antonio, TX. For Texas Automobile Dealers Association, Amicus Curiae: Brendan K. McBride, The McBride Law Firm, San Antonio, TX; Jonathan C. Lisenby, Gravely & Pearson, L.L.P, San Antonio, TX; Marc E. Gravely, Gravely & Pearson, LLP, San Antonio, TX; Matthew R. Pearson, Gravely & Pearson, L.L.P., San Antonio, TX. For Texas Hospital Association, Amicus Curiae: Brendan K. McBride, The McBride Law Firm, San Antonio, TX; Jonathan C. Lisenby, Gravely & Pearson, L.L.P, San Antonio, TX; Marc E. Gravely, Gravely & Pearson, LLP, San Antonio, TX; Matthew R. Pearson, Gravely & Pearson, L.L.P., San Antonio, TX. For Texas Hotel & Lodging Association, Amicus Curiae: Brendan K. McBride, The McBride Law Firm, San Antonio, TX; Jonathan C. Lisenby, Gravely & Pearson, L.L.P, San Antonio, TX; Marc E. Gravely, Gravely & Pearson, LLP, San Antonio, TX; Matthew R. Pearson, Gravely & Pearson, L.L.P., San Antonio, TX. For Texas Independent Automobile Dealers Association, Amicus Curiae: Brendan K. McBride, The McBride Law Firm, San Antonio, TX; Jonathan C. Lisenby, Gravely & Pearson, L.L.P, San Antonio, TX; Marc E. Gravely, Gravely & Pearson, LLP, San Antonio, TX; Matthew R. Pearson, Gravely & Pearson, L.L.P., San Antonio, TX. For Texas League of Community Charter Schools, Amicus Curiae: Brendan K. McBride, The McBride Law Firm, San Antonio, TX; Jonathan C. Lisenby, Gravely & Pearson, L.L.P, San Antonio, TX; Marc E. Gravely, Gravely & Pearson, LLP, San Antonio, TX; Matthew R. Pearson, Gravely & Pearson, L.L.P., San Antonio, TX. For Texas Organization of Rural & Community Hospitals, Amicus Curiae: Brendan K. McBride, The McBride Law Firm, San Antonio, TX; Jonathan C. Lisenby, Gravely & Pearson, L.L.P, San Antonio, TX; Marc E. Gravely, Gravely & Pearson, LLP, San Antonio, TX; Matthew R. Pearson, Gravely & Pearson, L.L.P., San Antonio, TX. For Ortiz, Oscar, Petitioner: Joshua P. Davis, Davis Law Group, Houston, TX; Katherine Mary James, Davis Law Group, Houston, TX. For State Farm Lloyds, Respondent: Melissa A. Lorber, Enoch Kever PLLC, Bridgepoint Plaza, Austin, TX; Amanda Louise Hazleton, Allen, Stein & Durbin, P.C., San Antonio, TX; Craig T. Enoch, Enoch Kever PLLC, Austin, TX; Jennifer Gibbins Durbin, Allen, Stein & Durbin, P.C., San Antonio, TX.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].