Last week, a federal court in San Antonio granted summary judgment in favor of an insurer and dismissed a claimant’s claims for breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas Insurance Code, the Texas Prompt Payment of Claims Act, and the Deceptive Trade Practices Act. Kahlig Enterprises, Inc. v. Affiliated FM Ins. Co., No. SA-20-CV-01091-XR, 2023 WL 1141876 (W.D. Tex.—San Antonio Jan. 30, 2023) arose out of an insurance coverage dispute between the claimant, Kahlig Enterprises, Inc., which was the named insured for multiple commercial properties (Kahlig”), and Kahlig’s insurer, Affiliated FM Insurance Company (“AFM”).

After a hail and windstorm caused substantial damage to Kahlig’s properties, representatives of AFM met with the insured’s public adjuster and sent a letter to notify Kahlig of potential coverage and to inform Kahlig that it was still investigating the scope and amount of the claim. Kahlig’s public adjuster then sent a sworn proof of loss with supporting documentation to AFM and a letter calculating the replacement cost value at $885,936.59 and $856,547.54 as the actual cash value of the claim. AFM applied the $100,000 deductible and issued payment of $756,543.54 to Kahlig, which later contended that the estimate and payment were not enough to repair the damage to the properties, and demanded appraisal. But believing appraisal was premature, AFM declined to participate. Kahlig followed with pre-suit demand letter seeking an additional payment of $1,632,444.78 plus 10% per annum interest. A few months later, Kahlig filed its lawsuit in state court, which AFM removed to federal court.

AFM filed a motion to compel appraisal, which the court granted. Including $75,674.24 for code upgrades, the replacement cost value off appraisal award was $1,383,608.48 and the actual cash value was $1,245,215.63.

They day after the appraisal award was rendered, AFM tendered two payments to Kahlig: one for the replacement cost value of the appraisal award ($1,383,608.48) minus the code upgrades ($75,674.24), depreciation ($137,852.85), prior payments ($756,547.54), and the deductible ($100,000) for a total of $313,533.85; and another for the prompt payment penalties it calculated in the amount of $62,706.77.

Kahlig responded by immediately requesting $725,358.18, which it claimed represented the unpaid policy benefits from the replacement cost, the code upgrades, statutory and prejudgment interest, and attorneys’ fees. Kahlig also amended its complaint to claim that AFM did not properly pay it for damages owed under the policy and the law for AFMs delays and “intentional low balling and delaying” of its claim. Kahlig therefore brought claims for breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas Insurance Code, Deceptive Trade Practices Act, and Prompt Payment of Claims Act. AFM’s motion for summary judgment on all of Kahlig’s claims followed.

As to Kahlig’s claim for breach of contract, the Court agreed with AFM that, because it paid the appraisal award that measured the actual cost value of covered damages, it could not have breached the policy. Under the terms of the policy at issue, AFM was only obligated to pay the actual cash value when the property was not repaired within two years from the date of loss. In this case, Kahlig had not commenced repairs on the properties, so the Court held that Kahlig had paid all the damages owed under the policy, and there was no breach of contract. In doing so, the Court rejected Kahlig’s argument that AFM had the burden to prove whether any repairs had been completed prior to the two-year deadline, instead agreeing with AFM that the insured bears such burden, which Kahlig failed to do. The Court also disagreed that the doctrine of “prevention,” which excuses the performance of condition in a contract where one party wrongfully prevents the condition from occurring, applied in this case because courts have refused to apply this doctrine when an insurer has already paid the insured actual cash value or where the dispute occurred in a commercial setting with relatively sophisticated parties—which the Court determined to be the case here. Having concluded there was no breach of contract, the Court also quickly disposed of Kahlig’s claims for breach of the duty of good faith and fair dealing and prejudgment interest.

The Court also quickly dismissed Kahlig’s claims for breach of the Texas Insurance Code and Deceptive Trade Practices Act based on its conclusion that AMF’s conduct did not cause Kahlig to lose any benefit under the policy, and Kahlig did not present any evidence of an independent injury (i.e., an injury other than the loss of policy benefits).

As to Kahlig’s prompt payment claim, the Court emphasized that AFM presented evidence that it paid Kahlig the maximum amount of interest to which Kahlig would be entitled if AFM were found liable for violating the prompt payment statute. That is, based on Kahlig’s sworn proof of loss as the date from which the clock began to tick for AFM’s prompt payment obligations, AFM’s payment for $62,706.77 satisfied AFM’s obligations, and summary judgment was therefore proper.

Finally, the Court dismissed Kahlig’s claim for attorneys’ fees because the Insurance Code provides that a claimant can only recover attorneys’ fees if it either recovers at least 20% of the amount it alleges to be owned under the claim, and since AFM paid the full amount of policy benefits and interest owed under the prompt payment statute, the amount to be awarded in a judgment on Kahlig’s prompt payment claim was zero—which was less than 20%. Even if the Court applied the approach used by other courts, which considered the amount of the pre-suit demand letter instead of the amount of a judgment, and it used the appraisal award ($313,533.85) as the numerator and Kahlig’s pre-suit demand ($1,631,444.78) as the denominator, the result is still less than 20%. Consequently, Kahlig was not entitled to recover attorneys’ fees under either approach.

Having found that AFM was entitled to summary judgment on all of Kahlig’s claims, the Court granted AFM’s motion in full and ordered that all of Kahlig’s claims be dismissed.

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