FIFTH CIRCUIT COURT OF APPEALS CLARIFIES THAT, WHILE AN INSURED’S ACCEPTANCE OF AN APPRAISAL AWARD PRECLUDES A BREACH OF CONTRACT CLAIM, AN INSURER MAY STILL BE LIABLE UNDER THE TEXAS PROMPT PAYMENT OF CLAIMS ACT IF THE APPRAISAL PAYMENT WAS NOT TIMELY
The Fifth Circuit Court of Appeals recently affirmed in part and reversed in part a district court’s ruling on an insurer’s motion for summary judgment, holding that the acceptance and payment of an appraisal award bars an insured from suing an insurer for breach of contract but not from making a claim under the Texas Prompt Payment of Claims Act. Randel v. Travelers Lloyds of Tex., No. 20-20567 2021 WL 3560910 (5th Cir. Aug 12, 2021) involved a claim under a homeowners’ insurance policy by insureds whose garage had caught fire during a Fourth of July celebration. The insureds notified their insurer, who responded by acknowledging receipt of the claim, issuing a $10,000 advance for personal property damage, and inspecting the property with the insureds and their restoration contractor. A few weeks after work began, the insureds fired their restoration contractor due to a disagreement.
The next month, the insurer provided the insureds with its estimate of the damage to the dwelling and paid the insureds an amount accounting for the deductible and depreciation costs. Two months later, the insurer completed its personal property estimate, and over the next few months, made three loss-of-use payments to the insureds.
The insureds public adjuster provided an estimate of the damage to the dwelling that was much higher than that of the insurer. When the insurer completed a reinspection to complete the personal property claim, it found that, after the insureds fired their restoration contractor, repairs ceased and so any additional damage was due to the insureds’ failure to mitigate their damages. As a result, the insurer declined coverage for additional damage to the property.
After completing the appraisal process, an award was issued to the insureds, and the insurer paid the award within five business days. Several weeks later, the insureds sued the insurer in state court, alleging a breach of contract by the insurer for underpaying their claims, bad faith, and a violation of the Texas Prompt Payment of Claims Act. The insurer then removed the case to federal court and successfully moved for summary judgment on all claims. The insureds followed with the appeal.
On appeal, the Court held that, although the mere issuance of an appraisal award does not bar a breach of contract claim premised on a failure to pay the amount of a covered loss, payment by the insurer and acceptance by the insured of the award does. This, the Court stated, is exactly what happened here. Thus, the Court affirmed the trial court’s ruling on the breach of contract claim.
That said, the Court was clear that, even if an insurer pays a insured in full, the insurer may still be found to have violated the Texas Prompt Payment of Claims Act if the payment was not made timely. Due to the precedent in place at the time the district court ruled on the prompt-payment claim, the district court held that the insurer did not violate the statue because the early payments the insurer made, although not in full, were in an amount the insurer deemed reasonable at the time. However, the Court relied on a Texas Supreme Court case that was decided subsequent to the district court’s ruling, which changed the law. In that case, Hinojos v. State Farm Lloyds, 619 S.W.3d 651 (Tex. 2021), the Texas Supreme Court held that, even a pre-appraisal payment that appeared reasonable at the time it was issued does not bar a prompt-payment claim if the payment does not “roughly correspond” to the amount ultimately owed. Without ruling on the issue of how close pre-appraisal payments need to be to “roughly correspond” with the final amount owed, due to the fact that the gap in this case between the pre-appraisal dwelling and personal property payments and the appraisal award was much greater than the underpayment in Hinojos, the insurer’s pre-appraisal payment is not a defense to liability under the Texas Prompt Payment of Claims Act. The Court therefore remanded the prompt-payment issue to the district court.