In Review of Hail Claims Cases, Texas High Court Clarifies Bad Faith in Appraisal Process

An insurer’s payment of the appraisal value after disputing a claim does not establish that it was liable, nor does that payment prevent a policyholder from pursuing penalties under the Prompt Payment of Claims Act, a split Texas Supreme Court ruled in a pair of recent decisions.

Both cases involved hail damage to properties insured by State Farm Lloyds.

The rulings reverse previous Court of Appeals decisions that held plaintiffs cannot sustain prompt payment claims if the insurer paid the appraisal award. The court, however, did not state in what circumstances insurers can be held liable after paying an appraised value.

Barbara Tech’s commercial property in San Antonio was damaged by wind and hail in 2013. The company filed a claim with State Farm Lloyds, but the carrier denied it. State Farm said the damage was only $3,153.57, less than Barbara Tech’s $5,000 deductible.

Barbara Tech filed suit. State Farm demanded an appraisal. The appraisers agreed that the property damage was valued at $195,345.63. State Farm paid that amount — less depreciation and the deductible — a week later.

But Barbara Tech didn’t drop its lawsuit. The company amended the complaint claiming that the carrier had violated the Prompt Payment and Claims Act by failing to comply with statutory deadlines for acknowledging receipt of the claim, commencing an investigation and paying the claim.

Both State Farm and Barbara Tech filed motions for summary judgment. State Farm asserted that it did not violate the prompt payment statute as a matter of law because it paid the appraisal award.

Barbara Technologies asserted that State Farm was liable for prompt payment damages because payment of the appraisal award was an acknowledgment that State Farm was liable for the claim, but it had not complied with the statutory payment deadlines.

The trial court dismissed Beverly Tech’s claim and the Fourth District Court of Appeals affirmed the decision, relying on previous rulings that insurers that paid appraisal values could not be held to be in violations of the prompt payment statute.

The Supreme Court found that decision was in error. The Prompt Payment of Claims Act does not excuse an insurer from liability for damages if it delays payments beyond the statutory deadline regardless of whether it used the appraisal process, according to the majority opinion written by Justice Paul W. Green.

But the court did not find that Beverly Tech had proven that State Farm had violated the statutory deadlines. It remanded the case back to the trial court to rule on that question according to the facts of the case.

Of three attorneys who were asked to comment on the decision — one who represents insurers and two who represent policyholders — none were completely satisfied with the outcome.

“I feel that this was a very measured, very right down-the-middle decision,” said attorney Jeffrey L. Raizner of Houston, who represented Barbara Technologies Corp. in its suit against State Farm Lloyds.

Raizner, a founding partner of the Raizner Slania law firm in Houston, said the ruling may dissuade insurers who otherwise would “weaponize the appraisal” process by using it to delay payments of reasonable claims. He said the decision also corrects a series of appellate court decisions that insurers were using to argue that they were immune from late-payment penalties because they paid the appraised value.

On the other hand, Raizner said he would have preferred that the high court rule that State Farm Lloyds was liable for violating the statutory deadlines.

San Antonio Attorney Brendan K. McBride, of counsel for the Gravely & Pearson law firm, filed an amicus curie brief on behalf of Beverly Tech. He said he would have liked to have seen a more comprehensive decision.

“I would have liked for them to more clearly state that the appraisal process is not part of the claims adjusting process,” he said.

On the other hand, McBride said he was happy to see the Supreme Court correct a long line of cases that followed a 2004 ruling in Breshears v. State Farm Lloyds by the 13th District Court of Appeals in Corpus Christi. He said carriers have been using those ruling to delay payments by calling for appraisals when they don’t want to pay claims.

“They were so emboldened by this decision that some insurers put a unilateral appraisal process in their policies,” McBride said.

Steven J. Badger, an attorney with Zelle LLP in Dallas, said he thinks the Supreme Court’s ruling invites more litigation because it doesn’t answer essential questions.

“I think the court could have provided more description of the situations that would not subject the insurer to prompt-payment penalties,” he said.

Badger said the decision did not address whether an appraisal can be used to address what caused damage, such as a hailstorm, or must stick to the narrower issue of the cost of the damage.

“The decision leaves and much open questions as it resolves open issues,” Badger said. “The court has essentially ensured that almost every appraisal is followed by litigation.”

The second hail damage suit decided by the Supreme Court involved a homeowner’s insurance claimed filed by Oscar Ortiz. The carrier had denied Ortiz’s claim, asserting that the damage was not caused by hail. Ortiz sued alleging breach of contract, bad faith and violations of the Prompt Payment of Claims Act.

The Supreme Court ruled that the Fourth District Court of Appeals properly dismissed the breach of contract and bad faith claims, but erred in dismissing the claim for prompt payment act penalties.