Appraisals, Breach of Contract and Bad Faith: Is There a Connection?
One of the axioms of Texas bad faith law has always been that there is no bad faith where a carrier has not breached its duties to the insured. If you act reasonably and make a mistake, it is not bad faith.
In almost all circumstances, bad faith entails a breach by the carrier of its duties under the policy’s terms and conditions or, in other words, a breach of contract. This long established understanding has recently become suspect as there has been at least one occasion where a court interpreting Texas insurance law has suggested that an insured may assert a bad faith claim even when the carrier has made timely payments of an appraisal award.
Intermodal
In a recent federal district court case, Intermodal Equipment Logistics, LLC and Seatrain Logistics, LLC v. Hartford Accident Indemnity Company, from the Galveston division on May 24, 2012, the court adopted the magistrate judge’s opinion that even though the carrier did not breach its contract, the insurers’ conduct from the date the claim was asserted until the payment of the appraisal still raised a question for the fact finder to consider and determine whether there was bad faith by the carrier.
Specifically, the court ruled that a bad faith claim can survive in the absence of a finding of a breach of contract in at least three separate circumstances.
First, an insured may prove that a carrier denied or delayed the payment of the insured’s claim when it knew or should have known that it was reasonably clear that the claim was covered.
Second, an insured may sue under the Texas Insurance Code as well as Deceptive Trade Practices Act to establish that the insurer unduly delayed payment of its claim after liability was reasonably clear.
And third, the insured may demonstrate that the insurer committed some extreme acts that caused injury to the insured independent of the policy claim.
In the Intermodal case, the insured made claims to Hartford Accident and Indemnity Company for loss of business income caused by Hurricane Ike, which took place in 2008. The carrier initially evaluated the claim and paid the insured more than $200,000.00.
The insured then filed suit in September 2010 alleging that the carrier had undervalued the losses, thus breaching the policy’s terms and, due to this behavior, had also committed bad faith.
While the parties agreed to mediate, that process failed in May 2011. The carrier then invoked the appraisal process and successfully obtained an appraisal in accordance with the appraisal provision in the insurance policy. The appraisal concluded in early 2012 and awarded approximately $700,000 to the insured. The carrier timely paid the appraisal amount.
The district court appropriately determined that the timely payment of the appraisal award prevented there being any viable breach of contract claim.
In ruling for Hartford on the breach of contract issue, the court reconfirmed that an insured may not use the difference between the amount originally paid by the carrier and the subsequent appraisal award as evidence of breach of contract. The court also found the payment of the appraisal award negated the insured’s prompt payment claims.
However, the court did allow the bad faith claim to proceed citing the three exceptions to the general rule identified above. In other words, the court held that the insured could develop evidence to create a fact issue as to whether any one of these three potential exceptions were met so as to allow a bad faith finding even though the carrier had acted properly under the policy terms. This means that a carrier can act in complete accordance with the appraisal clause and still run a risk of bad faith.
In Re Southern Insurance Company
Courts have also found that obtaining an appraisal award may not be the end of the claim when causation or coverage issues remain.
Citing language in State Farm Lloyds v. Johnson, courts have indicated that that the parties can receive an award as to damages and then litigate whether those damages are covered.
For instance, in In Re Southern Insurance Company from the Beaumont Court of Appeals in 2011, an insurer denied a homeowners claim seeking coverage for damage allegedly caused by Hurricane Ike. The carrier denied the claim as caused by long-term leakage and not the hurricane.
After the suit was filed, the carrier moved to invoke appraisal, which the trial court refused. The carrier took the issue on a writ to the Beaumont Court of Appeals, which observed that the policy provides “no provision of this policy may be waived unless the terms of this policy allows the provision to be waived.” The court went on to say that the “appraisal clause did not allow for forfeiture of that right.”
The insured argued that the insurer must agree that the loss was covered before it may “fail to agree” on the amount of the loss. The court concluded that appraisal can go forward and the parties can litigate causation after the amount of loss is determined through appraisal. Accordingly, the court allowed the appraisal to go forward.
Nevertheless, the underlying principle of the decision is that a carrier who is wrong does not necessarily commit bad faith, but a fact issue can arise as to whether there were undue delays or denies the claim once liability is reasonably clear even after the appraisal process.
Different Facts, Different Rulings
While these two cases involve very different facts and rulings, they both show that obtaining or paying an appraisal award may not completely resolve the claim.
The Intermodal opinion is problematic and undercuts general understandings of bad faith and potentially provides a crack in which insureds can seek to criticize carrier behavior from the day that the claim is presented until the payment of the appraisal award, leaving a fact finder the opportunity to find that the carrier did not act reasonably under the circumstances. This should give pause to carriers invoking the appraisal process.