The Fifth Circuit recently affirmed that timely payment of an appraisal award precludes contractual and extra-contractual claims under Texas law. In Mainali Corp. v. Covington Specialty Ins. Co., No. 17-10350, 2017 WL 4172518 (5th Cir. Sept. 21, 2017), a fire damaged a gas station owned by Mainali Corporation. Mainali filed a claim with its property insurer. The insurer paid the claims based on an independent adjuster's estimates, but the insured thought it was owed more and filed suit for breach of contract, breach of the duty of good faith and fair dealing, fraud, and violations of the Texas Insurance Code and Texas Deceptive Trade Practices Act.  After completing the appraisal process, the appraisal award was less than what the insurer already paid under the policy. Nevertheless, the insurer paid an additional sum to make sure its payments were consistent with the appraisal panel’s allocation of the losses. The district court in the Northern District of Texas granted summary judgment for Covington on all claims. The key issue considered by the appellate court is the application of the Prompt Payment of Claims Act to payments of an award pursuant to an appraisal process.

The court first addressed the breach of contract claim and the insured’s argument that the appraisal award should be set aside because it failed to include all covered items.  The insured made this argument despite the fact the award states that it “is inclusive of all FIRE damages sustained to the insured property”. The court stated simply that the insured pointed to no evidence in the record that shows covered items were not included and affirmed the summary judgment as to breach of contract.

The court then turned to the prompt payment claim under Chapter 542 of the Texas Insurance Code.  The insured argued that timely payment of an appraisal award should still be subjected to the penalties if paid after the statutory 60-day window.  The court correctly noted that “no reported Texas case has ever subjected such a payment to the statute.”  The court then referenced a Texas case from earlier this year that held that “full and timely payment of an appraisal award under the policy precludes an award of penalties under the Insurance Code's prompt payment provisions.”  Nat'l Sec. Fire & Cas. Co. v. Hurst, 523 S.W.3d 840 (Tex. App.—Houston [14th Dist.) 2017), reh'g denied (July 25, 2017). The insured’s only supporting authority was an aberrant district court decision in Graber v. State Farm Lloyds, 2015 WL 3755030 (N.D. Tex. June 15, 2015).  Finally putting the Graber rationale to rest, the court explained that Graber did not recognize an Erie court's duty to follow state courts' interpretation of state law rather than the interpretation the federal court thinks makes the most sense.  The court further reasoned that the primary authority Graber relied on was the rejection of a “good faith” defense to the Prompt Payment of Claims Act in a non-appraisal case that did not apply to appraisal cases.  The court concluded that the insurer was not trying to avoid payment of the claim; “it was invoking a contractually agreed to mechanism for assessing the amount it owed.”  The court concluded that the insurer did not violate the Prompt Payment of Claims Act and summary judgment was affirmed.

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